While the government finally decided to waive retrospective imposition of minimum alternative tax (MAT) affecting foreign investors in September, senior officials feel that foreign institutional investors resorted to ‘blackmailing the government’ by pulling money out of the market and thereby bringing the stock markets down and forcing Centre to set up a committee and then roll it back.
In April, tax authorities had sent notices to foreign investors demanding MAT on capital gains arising out of book profits at the rate of 20 per cent after which FIIs started pulling the money out of India. Government officials say that this derailed Centre’s disinvestment programme and resulted in the loss of two critical months as the markets turned weak.
Having set a stiff target of Rs 69,500 crore to be raised through minority stake sales and strategic sales this year, the government had raised Rs 12,701 crore in the first seven months. “I think the FIIs blackmailed the Indian markets by offloading their holding and pulling the markets down. The government lost two critical months following the MAT issue. The dependence on FIIs need to be reduced by increasing depth of our own domestic markets,” said a senior government official who did not wish to be named.
Admitting that FIIs play a key role in the direction the market moves, the official said that during April-June the FIIs took money out and put pressure on the government. In the four month period between May and August, the FIIs sold Indian debt and equity holdings worth Rs 27,000 crore.
The official called for tapping domestic institutions and even deepening the retail market by giving tax incentives so that the dependence on FIIs can be reduced.
“Our economy is in good shape because our domestic consumption fires our economy. The global meltdown has not affected us that much because our own domestic consumption fuels our economy. If our domestic institutions have enough money to fuel our stock markets, we will not be so vulnerable to outsiders and even if they go, they will not be able to hold us to ransom. I think the MAT issue was not such a big issue but government was unnecessarily made a villain,” said the official.