The government's remarks added to the weak FII sentiment, already dampened by lack of clarity on the issue of General Anti Avoidance Rule (GAAR) and huge depreciation in the rupee.
The 30-share index opened lower in the morning on weak global cues. Soon across-the-board selling emerged, pulling down the key index to below 17,000 level and it finally ended at 16,831.08, a drop of 320 points or nearly 2 per cent.The index was last seen at this level in the last week of January.
Brokers said the Mauritius issue returned to haunt investors after Minister of State for Finance S S Palanimanickam said in the Lok Sabha that the government is considering a review of tax treaty with Mauritius to raise revenues from these foreign investments.
Most FIIs route their investments into Indian stock markets through Mauritius taking advantage of the existing double taxation avoidance treaty.
"The renewed concerns over Mauritius tax treaty spooked market which was already hanging in balance with the GAAR issue, a increasingly weak rupee and negative global cues," Dipen Shah, Fundamental Research Head, Kotak Securities, said.
In addition, there is nothing much to cheer about in the ongoing results season which otherwise would have supported the markets, said D K Aggarwal, CMD, SMC Investments.
The bearish undertone of the markets have been pronounced in the last three sessions with Sensex losing close to 500 points due to uninspiring FII fund flows, a weak rupee and insipid January-March quarter earnings.
"Overall it