New Delhi: Foreign brokerages have asked the government to exempt overseas investments in the Indian stock market from the proposed general anti-avoidance and indirect transfer rules or risk disorderly unwinding of FII holdings.
"Exemption of cross-border portfolio investments would permit FIIs to continue to play their supportive role in the Indian economy uninterrupted, while also continuing to pay taxes in line with internationally accepted practice," industry group ASIFMA said in a letter to Finance Minister Pranab Mukherjee on Tuesday.
Asia Securities Industry & Financial Markets Association (ASIFMA) is a grouping of over 40 entities that are involved in Asian capital markets.
The proposals of General Anti Avoidance Rule (GAAR) and indirect transfer norms in the Finance Bill 2012 has raised concerns among Foreign Institutional Investors (FIIs).
According to the letter, there is a risk of a disorderly unwinding of significant FII holdings in the Indian capital markets if the issues are not resolved.
Noting that proposed indirect transfer rules cause particular confusion for international portfolio investors, the letter said a straightforward reading of the "draft legislation leads us to believe that double or even triple taxation of the same profits is very possible".
The latest letter is a follow-up to the one written by the body on March 28.
ASIFMA pointed out that since the Budget on March 16, net FII inflows have slowed down.
"FII net inflows from the start of 2012 till March 16 were Rs 43,700 crore, while between March 17 and April 16, they stood at a mere Rs 800 crore, an effective daily average drop of 95 percent," it noted.
As on March 16, FIIs had assets under custody of more than Rs 10 lakh crore or 17 per cent of the capitalisation of India's equity markets.
The industry body stressed that no major economy in the world has chosen to collect taxes from cross-border portfolio investments in the listed securities markets.
"The cross-border portfolio investments that will be caught up under India's proposed legislation are typically subject to tax in the home jurisdiction of the investors in accordance with international standards.
"This is the same rule that applies to Indian investors involved in capital markets abroad," ASIFMA CEO Nicholas de Boursac said in a statement.
ASIFMA said it welcomes recent government assurances that adverse consequences would be avoided. "Such verbal assurances are insufficient, however, in the face of warnings from leading Indian legal and tax advisors on the negative consequences of the proposed legislation," it added.