Manufactured crisis: FM

Although after the battered stock markets closed for the day, Finance Minister P Chidambaram sought to calm fears over the impact of the CBDT circular by saying that no FII had been assessed as a trader for purposes of paying tax as they had no permanent establishment in India.

The buzz in the market was that if FIIs were to be treated as traders, they would have to pay a tax of 41 per cent on their earnings.

At present, FIIs only need to pay ten per cent short-term capital gains tax.

"Uninformed reports led to a manufactured crisis," the FM said in response to a report which claimed that the government was amending guidelines to check tax evasion by Foreign Institutional Investors.

Chidambaram said the London Metal Exchange had witnessed a decline, an event that caste its shadow on the Indian markets. "That is understandable. What is not understandable is the reaction to uninformed reports," he added.

"The question here is whether an assessee is an investor or a trader. The matter was decided by the Supreme Court and following that there have been several judgments since 1989. The government's intention was to update the circular and the Central Board of Direct Taxes followed a very democratic procedure of putting the draft circular in public domain," he said.

Chidambaram added that retail investors should arrive at an informed judgment or alternately use Mutual Funds to invest in the stock market. Finance Ministry officials said volatility in the Indian stock market had, in fact, marginally declined.

"If one does a standard deviation and examines the returns on a weekly basis, volatility has actually come down. There is some volatility only on intra-day highs and lows," an official said.

Earlier in the day, when the markets had fallen over 600-points, Chidambaram said that every movement in the bourses did not require a comment. "Everyday movement in the stock markets does not require a comment," he told reporters.

Two days back, the FM had termed the 440-point fall in the BSE Sensex a correction triggered by factors which included a fall in metal prices and increase in the US Fed rate.

Following his comments then, markets had staged a recovery to post marginal gains on May 16.