Investors Lose Rs 2.9 Lakh Crore In Market Value Since Budget

It's an old saw of India's budget documents -- the devil lies in details of the fine print.

A higher surcharge on wealthy Indians in the budget has spooked non-resident and overseas funds enough to erase Rs 2.9 lakh crore ($42 billion) in market value from companies in the S&P BSE Sensex in the four sessions since budget on July 5.

The reason: the realization that the new tax rate applies not just to the super rich but also to trusts -- a structure of choice for a large number of foreign funds that invest in the nation.

The proposal "seems to have inadvertently" dragged foreign portfolio investors into the tax net and must be clarified by the government, said K.R. Sekar, a partner at Deloitte Touche Tohmatsu India LLP.

Finance Minister Nirmala Sitharaman in her budget speech Friday proposed to increase the surcharge from 15 per cent to 25 per cent for those with taxable incomes of between Rs 2 crore and Rs 5 crore, and to 37 per cent for those earning more than Rs 5 crore. This takes the effective tax rate for those two groups to 39 per cent and 42.74 per cent, respectively.

Global investors usually participate in India through non-corporate trusts and the so-called association of persons or AOPs. Problem is, the structures are treated on par with individuals for tax purposes. That's led to concerns about the levy being applicable to foreigners just when the nation has emerged as Asia's biggest destination for equity money in 2019.

"An investment vehicle -- such as a category III alternative investment or an FPI -- taxed at a fund level is likely to get affected as the income may easily exceed Rs 5 crore," said Vaibhav Sanghavi, co-chief executive officer at Avendus Capital PBC Markets Alternate Strategies LLP in Mumbai. Alternative investments, such as hedge funds, which use complex trading strategies, are classified as category III by the markets regulator.

Foreigners and alternative investment funds can opt to convert their trust structure into a corporate entity to avail of a lower tax rate available to such category, BloombergQuint reported Wednesday, citing Central Board of Direct Taxes Chairman P.C. Mody.

The conversion isn't easy, Deloitte's Mr Sekar said. Besides, global funds also look for stability in tax rates while assessing an investment destination, he said. Foreign investors have sold a net $176 million of shares this week, data compiled by Bloomberg show.

"The clarification from the government isn't encouraging and India should relook at FPI taxation not only from the market angle, but also from the perspective of stability," Mr Sekar said.