The minimum alternate tax on capital gains that has been sought from foreign funds could lead to further exodus from the Indian stock markets if the government does not resolve the matter soon, global ratings agency Fitch has said.
"The long-term impact on investor inflows of the retroactive tax on capital gains is not yet clear," Thomas Rookmaaker, director of sovereign ratings with the agency, said a day after Finance Minister Arun Jaitley assured that he will seek expert advice on this from a committee.
"It may lead foreign portfolio investors to think twice in the future, although India's strong growth outlook compared to many of its peers may attract them anyway," Rookmaaker said in a statement e-mailed to IANS.
"There have been some net foreign investor outflows in equities in recent weeks, but not so much in bonds," he said, adding India's external balances were strong and could well withstand the outflow.
Finance Minister Arun Jaitley had told parliament on Friday that the issue of minimum alternate tax dispute with foreign funds had been referred to a committee led by Law Commission chairman A.P. Shah, with a request for early suggestions.
"I have received a large number of representations on minimum alternate tax applicable to foreign institutional investors as well as a few other tax issues that are mainly legacy issues," Jaitley said.
"We have decided to refer it to a committee headed by Justice A.P. Shah, the chairman of the Law Commission," Jaitley said, adding the courts hearing various cases had also been told that the government had no objection to an early hearing.
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"We are also keen on a final settlement of the issue."
In the interim, the stock markets went into a tailspin, losing ground on three straight days till Thursday, which took a key markets index to its lowest level in 28 weeks, as foreign funds turned net sellers.
With a fall of 0.18 percent on Tuesday, 2.63 percent on Wednesday and 0.44 percent the day after, the 30-share sensitive index (Sensex) had closed at its lowest level since Oct 21, 2014.
Foreign funds, during the week starting May 5 2015 sold stocks worth Rs.6,553.44 crore or $1.02 billion.
The data furnished by the National Securities Depository Limited (NSDL) showed that FPIs pumped-in only Rs.18.77 crore or $3.01 million into primary and other markets for the week under review.
Fitch had reaffirmed its stable outlook on India in its latest outlook, due to the country's improved prospects for growth, inflation and the external balances.
"The drive to improve the investment climate is clearly the central element in the government's policy agenda. The government seems to be pointing its arrows at the right target in this regard," said Rookmaaker, but found the ease of doing business wanting.
"Now, the impact will depend on actual implementation of the policies."
He said the business climate improvement went beyond improving issues related to World Bank's Ease of Doing Business indicators -- which is difficult enough in itself -- and included a predictable tax regime.