Stubborn Stand On Super Taxing FPIs To Damage India Market

There may be 1000 odd corporate honchos with big fat annual pay of Rs 2 crore and above, who are considered 'super rich' in the 'Bahi Khaata' (traditional Indian ledger book) of Finance Minister Nirmala Sitharaman, but these guys were left with a fait accompli. They need to pay as much as 42.7% tax on their earnings after the surcharge on their income was hiked in a manner that the benefits accrue only to the Central exchequer and not to the states. No grudging on this count would make a difference to the Narendra Modi Government, which is fast converting itself to the socialist format. Too much tax on super rich only bolsters this image among those who have been backing Modi despite jerks to the Indian economy, which is more in a fire-fighting mode on different frontiers - bad debts of banks, non-banking finance companies suffering payment defaults and investor distrust and agri stress. 

With indirect tax options going largely away to the Goods and Services Council and the market pressure to keep the fiscal gap within the limit of 3.3-3.4% of the GDP, the Finance Minister went in for a political easy option (at this point of time) of raising petrol and diesel prices, and taxing super duper rich. So far so good! 

But the guys in the Budget making exercise did not calculate, apparently, the collateral damage on the stock market and principal participants - the Foreign Portfolio Investors (FPIs) who have organised themselves into different models of business while operating in India. Association of Persons (AoPs) is one such model, which gets caught in the so-called super tax surcharge net. What makes things worse is that the government did not seem to be in a mood to issue any clarification or coming to the rescue of the AoPs; instead Sitharaman said she would disclose her further course of action only in Parliament. 

In the mean time, the market continues to bleed with global brokerages downgrading one after the other listed company. If the thinking in the Finance Ministry is that of sticking to a stubborn stand, it is highly unwise. There are analysts who brag about how the Indian market is no more dependent solely on the FPIs and how the domestic fund houses can always chip in. Yes, it is true that the domestic funds (DFs) have acquired a size good enough to ward off FPIs' outflows, but not always.  

The DFs, themselves, are battling the blues from the NBFC crisis and are no in mood to be trend-setters, being oblivious of moderate corporate earnings, global slowdown, declining domestic consumption and lack of good stocks at reasonable valuations. At the end of the day, the DFs are in the game of making and not losing money. 

The stubborn stand with regard to the coverage of FPIs under the super tax can cost the government heavy. The immediate casualty would be the disinvestment target of Rs. 1.05 lakh crore which has to be realised from the market in the next 8-9 months only if there are buyers of government equity.  In any case, not many best of the class public sector undertakings (PSUs) with high premium in the marketplace are left; including the oil marketing companies (OMCs) giants, which do not command the kind of awe anymore.  You cannot expect much from BHEL, NBCC, NTPC, while the valuations are lower than optimal for BPCL, HPCL and ONGC. Then there are sick companies like MTNL and BSNL, not to speak of the big fat white elephant Air India.  

Besides the government, retail investors operating directly or through the mutual funds, would be suffering the jolts, shaking their confidence in the marketplace . There is a strong argument made for more of the domestic savings going into the stock and debt market, but the unexpected tax and policy moves keep riling up the market players.  With the entire focus on lowering the cost of borrowing and no emphasis on encouraging savings, the household investors are left with limited choices. The high beta mutual fund campaign does not seem to be inspiring investors either. Real estate industry is in a great mess and the gold is not an easy option to get into.   

If at all any further damage is to be avoided, it is high time, the Finance Ministry came out with a clarification, rather than signalling the FPIs to re-organise themselves into a new tax dispensation. That is hardly ease of doing business.     

The author is a New Delhi based journalist.