Indian stocks fell for the first time in three days on concern a reworked tax agreement with Mauritius may curb inflows from some foreign investors.
Bharti Airtel, the nation’s biggest mobile-phone company, was the worst performer on the S&P BSE Sensex. Drugmakers Dr Reddy’s Laboratories and Lupin lost at least 1.3%. Bharat Heavy Electricals, a power- equipment maker, dropped to a one-week low. Tata Motors, owner of Jaguar & Land Rover, fell to a one-month low.
The 30-share Sensex closed 0.68%, or 175.51 points,  lower at 25,597.02 yesterday. The nation redrew its tax treaty with Mauritius to prevent investors using the island nation as a shelter to avoid levies. At least 10% of the Rs22.25tn ($333bn) global funds had in stocks, bonds and derivatives at the end of March came via tax shelters including Mauritius, data from the regulator show.
Holders of these derivatives issued abroad, known as participatory notes, “are the most at risk,” Andrew Holland, chief executive officer of Ambit Investment Advisors, said in an interview with Bloomberg TV India in Mumbai. “There won’t be a major impact on the rest of the market at this moment. Investors need clarity on how this is going to work since the move was not expected.”
The changes mean companies routing funds into India through Mauritius after March 31, 2017, will have to pay short-term capital gains tax at half the rate prevailing during the 24-month transition period. The full rate, currently at 15%, will kick in from April 1, 2019, the Finance Ministry said after markets closed on Tuesday.
While the Sensex retreated at the start of the session, it came within a whisker of erasing losses around noon amid optimism the new treaty won’t impact foreign investment flows. Investor focus shifted back to earnings and global equities, which showed signs of stabilising in recent days after a selloff last week that erased some $1.3tn of value.
“The market has put aside Mauritius concerns for now as the change will happen over four years,” Chakri Lokapriya, Mumbai- based chief investment officer at TCG Advisory Services, said by phone. “Earnings in the world’s fastest-growing major economy seem to be recovering after the worst run since the global financial crisis. Seven out of 13 Sensex firms that have posted March- quarter results so far beat or matched estimates.
Asian Paints climbed to a nine-month high after group sales beat analyst estimates. Fourth-quarter sales rose to Rs39.2bn, compared with the 38.6bn rupees estimate in a Bloomberg News survey.
Foreigners bought $58mn of shares on Tuesday, taking the year’s purchases to $1.8bn. They purchased $585mn of shares in April, adding to the $1.4bn inflow in March, which was the most in three years.
The Sensex has slid 2% this year and trades at 15.8 times 12-month projected earnings versus 11.4 for the MSCI Emerging Markets Index. Meanwhile the rupee yesterday erased all the losses to close stronger against the US dollar, ahead of the key inflation and index of industrial production (IIP) data today.
The home currency closed at 66.57, up 0.17% from its previous close of 66.68. The rupee opened at 66.83 a dollar and touched a high of 66.56 a dollar. In morning trade, the rupee fell as much as 0.24% and touched a low of 66.84, a level last seen on April 26, on concerns over India-Mauritius tax treaty. India will shut the door on investors using Mauritius and Singapore to avoid paying taxes in India, starting in the next fiscal year, in order to curb tax evasion, in a move that could also impact capital inflows.
The amendment to the 1983 India-Mauritius tax treaty, which will come into force on April 1, 2017, will also apply to the India-Singapore treaty, shutting two lucrative investment routes preferred by foreign investors. The India-Singapore treaty links the capital gains tax regime to   that provided in the India-Mauritius treaty, the report added.
The changes will have an impact on foreign investors who route their investments from these two countries to avoid paying capital gains tax in India.
“This government is serious about tax reforms and clarity to address the ease of doing business. Yes it would push tax costs for investors but there is certainty and clarity. India in the medium to long term will contribute to attract acting investments, and a stable environment will augur well for the India rupee which would make the tax cost look insignificant,” said Mukesh Butani, managing partner of BMR legal.