In the last two weeks, foreign institutional investors (FII) have poured in over $3.3 billion into Indian capital markets.

Much of it has come in response to the recent spate of reform measures, ranging from addressing fuel subsidies and allowing entry to foreign supermarket chains and airlines, to announcing a debt recast package for State power distribution companies and slashing withholding tax on interest paid on external commercial borrowings.

The surge in FII inflows has, in turn, led to the rupee strengthening as well, from a level of Rs 55.72-to-the-dollar at the start of September to Rs 52.7 by month-end.

SHOME PANEL REPORT

The coming week may see more action on the reform front to sustain the current investor optimism. On Monday, the Prime Minister-appointed Parthasarathi Shome Expert Committee, looking into retrospective amendments to the income tax law made in this year’s Budget and issues relating to non-resident (read FII) taxation, is expected to submit its report.

This is a report that is as awaited, if not more, as the panel’s first report relating to the General Anti-Avoidance Rules (GAAR). Shome version 2.0 is seen as laying the ground for further Government action on the vexed issue of taxing share transfer transactions taking place overseas, where the underlying assets are substantially located in India.

At stake here are revenue demands to the tune of Rs 40,000 crore that have been, or can potentially be, raised on account of deals such as Vodafone’s 2007 acquisition of Hutchison Whampoa’s Indian telecom assets. The 2012-13 Budget had allowed for taxation of such offshore-structured deals — which also includes the acquisition of Shantha Biotech by Sanofi Aventis and SABMiller’s takeover of Foster’s Indian operations — on a retrospective basis.

Following the outcry from foreign investors on the retrospective tax amendments, the scope of the Shome panel’s remit was expanded beyond GAAR to also suggest the path ahead on this front.

Whether it will recommend steps to effectively undo the retrospective changes — which means going back to Parliament — and how the Government would respond to any such suggestions is something that would obviously interest investors. Already, there is talk of some midway compromise such as waiver of interest and penalty on all cases relating to retrospective tax claims, which will somewhat assuage investors without the Government having to face flak for ‘selling-out’.

Of equal interest would be what the panel may say on taxation of FII investments. Although the Shome Committee, in its first report, had recommended abolishing of capital gains tax on listed securities for both resident and non-resident taxpayers, there is no clarity on whether the Revenue Department in future would go beyond the level of FIIs to tax holders of participatory notes issued by FIIs. The Shome panel’s recommendations on these matters are being keenly awaited.

RABI CROPS’ MSP

The coming week may also see the Union Cabinet taking a call on freezing the minimum support price (MSP) for wheat to be grown in the coming rabi season. This follows the Commission for Agricultural Costs & Prices (CACP) recommending the MSP to be fixed at the 2011-12 level of Rs 1,285 a quintal.

The CACP has, at the same time, apparently proposed a Rs 500 a quintal hike in the MSP for rapeseed-mustard (from the existing Rs 2,500 a quintal) and an increase from Rs 2,800 to Rs 3,000 a quintal in the case of gram or chana . If the recommendations are accepted, they would, apart from helping to get a fix on the Centre’s spiralling food subsidy bill, also encourage much-needed crop diversification.

Wheat stocks with the Food Corporation of India are estimated to be around 45 million tonnes as on October 1, which is more than three times the required buffer and strategic reserve of 14 million tonnes for this date. On the other hand, India’s import bill of edible oils and pulses amounted to roughly Rs 55,000 crore in 2011-12.

Announcing the MSPs now, before rabi sowing operations get under way from November, is being seen as sending the right signals to farmers to produce less of grains and more of pulses and oilseeds.