Dr Ashwani Mahajan
Recently Prime Minister Narendra Modi made a statement that those who are trading in stock markets will also be made to pay tax. After this statement foreign portfolio investors started lobbying against this decision, intimidating the Government that this may vitiate the investment climate and foreign investors may pullout their investment. Their argument is that total portfolio investment in India is reaching nearly US$ 350 billion and this is approximately equal the size of foreign exchange reserves of the country. As per this logic if they withdraw from India our foreign exchange reserves may evaporate. In the meanwhile these portfolio investors met the Prime Minister along with a group of economists and discussed the long term impact of government’s decision to demonetise Rs. 500 and 1000 currency notes. It is notable that after prime minister made this statement that foreign institutional investors are being brought into the tax net, argument is being given that in view of the instability in the economy in wake of demonetisation, Government should not tax FIIs, as it may cause another kind of instability in the economy.
Foreign Investors’ Tricks
If we look at the activities of FIIs in the recent past we find that they have withdrawn nearly US$6.5 billion from debt market recently. It is possible that this act may be repeated in equity market as well and they may sell some part of equity holding in the stock market and transfer funds abroad. However we must understand that this is no new trick. In the past also they have been indulging in similar acts. In April 2015, when in order to collect nearly Rs. 40,000 crores as tax, due from FIIs, income tax department issued notices for nearly Rs. 600 crore, they adopted similar kind of blackmailing tactics and started making huge withdrawals from Indian stock markets, to blackmail Indian government to desist from any action.
Year End Effect
Since in December, portfolio investors face problems in settlements in their respective countries of origin, they send huge money to their mother countries and this year was no exception. It is notable that during months of November and December 2015 also, FIIs transferred nearly US$6.4 billion outside India. Therefore Indian government should not come into their trap, because they are transferring money out due to their own compulsion; and they are trying to make an argument that collecting tax from them would multiply problems being faced by the economy in the wake of demonetisation.
Foreign Investors are also Dependent on India
For a long time, demand has been there to tax foreign portfolio investors; and every time they are successful in pressurising the Government against any such move. However we must keep in mind that, although investment made by portfolio investors does supplement the supply of foreign exchange in the country and fill the deficiency of foreign exchange arising out of disequilibrium in the balance of trade and balance of payment. This way our rupee is also saved from further depreciation; need of FIIs is no small, as they also need markets which can provide them with good returns. These FIIs have not only made huge buck from Indian stock markets and have transferred gigantic amounts abroad. A sizable portion of Indian stocks have also been cornered by these FIIs. Their love for Indian stocks is evident from the fact that FIIs investments have reached to the maximum in different sectors, as per the caps imposed by the government.
On the one hand these FIIs are trying to blackmail Government of India under the pretext of demonetisation, and on the other hand their compulsion to invest in India also continues. International rating agencies are playing a dubious role by adopting negative attitude towards India, whereas most of the global fund managers are looking at emerging economies including India as their favourite destination of investment in 2017, in view of post election scenario emerging in USA. In the past also foreign portfolio investors have made big booty from Indian stock markets and cannot make a blunder of deserting Indian markets.
Why Tax on FIIs is Essential?
Whenever foreign portfolio investors indulge in stock selling and transferring money abroad, that is always momentary. After a few days they return back with huge money again and by adopting these tactics they bring upheavals in the stock markets and make huge profits using their financial muscles. For instance when they make selling (from the stocks held by them), market tanks hugely and later on the basis of their financial strength they once again procure stocks at low prices and start taking the market up. And then starts their fresh selling spree. This cycle goes on. If a tax is imposed on the profits of FIIs, they will refrain from making huge withdrawals so frequently and would rather be discouraged to transfer their investments abroad. This will help reducing upheavals in stock markets and markets will show healthy growth. As a side effect, rupee will also be saved from frequent upheavals and this will help our importers and exporters, by minimising their risks.
Need for a Firm Approach
Need of the hour is to stop upheavals and uncertainties in the share markets and their healthy growth, stop instability in the value of rupee, increase revenue of the government. Government need not cave into threats and blackmailing of FIIs and continue with its resolve to impose tax on FIIs with the same vigour with which it implemented its decision to demonetise rupees 500 and 1000 currency notes. We need to understand that red carpet welcome for FDI and FIIs and giving them undue advantages and such acts are not real economic reforms. Minimising uncertainties and upheavals in markets, helping them have healthy growth; and bringing stability in the domestic currency is actually a step towards economic reforms.
(The author is Associate Professor, PGDAV College, University of Delhi,)
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