Govt to clarify foreign fund taxation issue soon

suspended dealings in its $1 billion Fleming India Fund, until its liability for past or future capital gains tax in India was clarified.

Indian share prices fell sharply on Tuesday on selling triggered by a steep overnight fall on the Nasdaq and on fears over additional taxes being slapped on foreign funds operating out of Mauritius.

The benchmark Bombay Stock Exchange top-30 share index registered its second-biggest point fall in history on that day, ending 7.19 per cent, or 361.48 points lower at 4,689.82.

The index ended with gains on Thursday after a volatile session, helped by foreign and local fund buying of select technology and cyclical shares.

The index ended 2.31 per cent or 109.67 points higher at 4,866.73 off an intra-day high of 4,899.45 and low of 4,608.11.

After markets closed on Tuesday, the government said it had suspended tax-related inquiries against foreign institutional investors (FIIs) and Finance Minister Yashwant Sinha stressed that there was no question of modifying or amending the tax treaty with Mauritius.

On Thursday, Sinha reiterated that a solution to the tax issue would be worked out within the framework of the Indo-Mauritius tax treaty. There are 506 FIIs registered in India and they are either based in countries that have double-taxation avoidance treaties with India, or set up as subsidiaries in countries like Mauritius that have such agreements, to save on capital gains and income taxes.

Amongst other things, the Indo-Mauritius treaty provides that any Mauritius resident investing in Indian shares will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India.

Foreign funds have invested a net amount of around $11.35 billion in Indian markets since they started investing in 1993 and are a major force, giving direction to the market.