Proposal spooks markets with benchmark BSE Sensex losing about 1430 points or 3.6% since announcement
India’s budget proposal for a steep hike – up to 22 percent - in extra tax on wealthy individual tax payers as well as non-corporate Indian and foreign portfolio investors have spooked the markets, with benchmark BSE Sensex losing about 1430 points or 3.6 percent since the announcement on Friday.
Rupee also came under pressure, with the Indian currency weakening by 22 paisa against US dollar to 68.77 in the morning trading hours on Tuesday, from 68.45 on Friday morning prior to the Budget presentation.
“Intentions aside, in a market economy higher tax rates mean lower incentives, more crowding out and lower GDP and tax collection. Policy makers need to appreciate it sooner than later,” Porinju Veliyath, a leading Indian fund manager and top executive of fund management firm Equity Intelligence India Private Limited, has said.
The budget has proposed increasing personal tax surcharge on top-end income brackets – for incomes between $290,990 and $727,475 (Rs 2 crore and Rs 5 crore) to 25 percent and for incomes above $727,475 (Rs 5 crore) to 37 percent from the existing 15 percent.
Tax experts said the increase in surcharge will be applicable to funds and foreign portfolio investors (FPIs), who are not registered in India as corporate entities, as well.
Several institutional investors from Middle East are among a large number of FPIs registered in India. It could not be immediately ascertained whether they are registered as corporate entities or as Trusts (non-corporate entity).
Finance Minister Nirmala Sitharaman has so far refused to clarify on applicability of the increased tax surcharge on FPIs.
“The market was waiting for a reason for correction after BSE Sensex crossing the 40,000 level – an all time high for the Indian market – and proposals on increase in tax surcharge and imposition of tax on share buy-backs have given the reasons for it,” Ajay Kedia, managing director of Kedia Comtrade and Research, told Arabian Busness.
“The Rupee could further weaken to 69.50 in the short-term, in line with the current overall sentiment in the market,” he added.
Market analysts said the steep hike in tax surcharge on FPIs may lead to a slow down in investment inflow into India in the near term.
“The proposed hike in tax surcharge is quite steep and is bound to impact investments by foreign portfolio investors in the Indian market,” a market research analyst with a Kochi-based stock broking firm, who did not wish to be identified, told Arabian Business.
"With valuations in mid and small caps down by more than 50 percent from their peaks, a correction in the valuation of large caps was also due," he added.