NEW DELHI/MUMBAI India's move to amend a controversial set of tax proposals for overseas funds failed to gain traction with investors, leaving several measures ambiguous and punting the specifics for later.
Though investors initially welcomed the concessions unveiled on Monday on the General Anti-Avoidance Rule (GAAR), the market fell sharply and the rupee weakened on Tuesday, as investors decried a continued lack of concrete details.
That was seen extending a period of uncertainty until at least the end of May, when a committee is expected to provide the clarity that foreign investors have demanded but not received since the rule was first unveiled in mid-March.
Additional amendments reducing taxation on foreign borrowings and private-equity investments, though seen as well-intentioned, were also criticised as too vague and thus unlikely to provide relief to markets.
The continued lack of definition is exacerbating perceptions of India as prone to vague pronouncements and sudden changes in rules, a weakness for a country already facing deep economic and fiscal challenges and a general election in 2014.
"India changes rules too quickly. They don't realise it hurts them in debt capital markets and hurts flows on a long-term basis," said Adil Chaudhry, head of regional credit markets for Scotiabank in Singapore.
India made concessions on Monday to address a foreign investor outcry over the GAAR proposals that have hurt markets across the board and led to outflows.
The changes included delaying the implementation of GAAR provisions by a year and shifting the burden of proving tax evasion on tax authorities.
Still, foreign investors sold a net 10.3 billion rupees in Indian stocks on Monday and Tuesday, according to provisional data from the National Stock Exchange.
Investors must wait until a committee convened by the finance ministry gives rules and guidelines for the GAAR provisions. The committee report is due by the end of May.
"Not all potential concerns in regard to GAAR are completely addressed. We still have to be clear how exactly it is going to be implemented," said Pranav Sayta, a tax partner at Ernst & Young.
India's proposed amendment to halve capital gains tax on private equity to 10 percent, also fell short of soothing investors.
Private-equity players said it appeared to open the prospect that taxes would be applied regardless of whether the investment was being routed through a country with a tax exemption treaty with India, effectively constituting a tax increase.
"We enjoy zero tax as many of the investments are routed through tax-free zones like Mauritius. If this comes above the tax-treaty arrangements, it will be negative to the industry," said Rahul Bhasin, managing director at Baring Private Equity Partners.
The proposal to lower withholding taxes on funds raised abroad to 5 percent across "all businesses" also raised questions about how it would be applied.
"Lowering withholding tax is a step in the right direction to encourage firms to access foreign funds but there is still a lot of ambiguity in the provisions," said Nitin Jain, managing director and co-head of fixed income at Nomura India.
The nearly two-month wait for clear rules on taxation have already taken a toll on markets and investors worry India has missed an opportunity to provide much-sought clarity.
The BSE Sensex dropped 2.2 percent on Tuesday, while the rupee weakened against the dollar and remains at near a record low hit in December.
India saw net portfolio outflows of $540 million in March and April, compared with $13 billion in inflows in January-February.
(Addition reporting by Archana Narayanan, Subhadip Sircar and Indu Lal in MUMBAI, and Arup Roychoudhury in NEW DELHI; Editing by Tony Munroe and Aradhana Aravindan)
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