The Hindu Business Line : A draft that drew ire

The Finance Minister, Mr P. Chidambaram, is known for his measured words. But his recent ticking off of the Central Board of Direct Taxes has raised many an eyebrow.

In an apparent bid to calm the jittery stock market, which many enthusiasts mistakenly believe can maintain a unidirectional upward course for ever, he came in open support of Foreign Institutional Investors vis-à-vis their tax liability. He said no FII has ever been assessed in India as a trader and that they are, in fact, investors without being aware of the fact that the investor-trader imbroglio is as involved and complicated as the Indo-Pak relationship. For, courts themselves are divided on the issue.

The tax administration has been at its wits end in pigeonholing as traders institutions masquerading as investors. Apparently, the CBDT came up with a set of draft guidelines only to break this impasse. One may have apprehended whether the effort would bear fruit but there was no question about the sincerity of the effort.

In the event, Mr Chidambaram's shrugging off of the entire exercise as `uninformed' was rather harsh. In fact, as the Finance Minister he ought not have prejudged such an important issue hanging fire for decades so nonchalantly. He went on to say that the FIIs have no permanent residence in India so as to be liable to tax as traders. If they have no permanent residence how do they operate in India? Surely, one hopes, not through faxes and other missives sent from Mauritius!

Share markets are important for a nation. But to treat the FIIs as holy is simply not on. There is a view that if their feathers are ruffled, they may desert India. That they desert every market when the time comes for booking profits is known to everyone.

More seriously, this view smacks of ignorance of the prime drivers of investment. Investors in share market look for capital gains. That is the prime driver.

Of course, every exercise culminates in analysing the post-tax return. It can be said without the fear of contradiction that even with tax liability as traders, the post-tax returns for the FIIs would be much higher than they what they earn in their own countries. In short, they are here to partake of the superior profits offered by emerging market that is India.

In the event, the fear that tax considerations would act as a dampener is a trifle difficult to stomach.

Rather than losing sleep over the fortunes of the FIIs, energies would be perhaps better spent in attracting Foreign Direct Investment, which is more permanent, and a potent catalyst for growth.

(The author is a Delhi-based chartered accountant.)

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