Indian tax office seeks to reassure foreign investors

The Indian tax department has moved to reassure foreign institutional investors (FII), following the news that Macquarie’s Asia Alpha Fund has exited all short positions in Indian stock futures in response to proposed tax regulations.

The $1.5bn Macquarie Asian Alpha Fund hedge fund has exited its short positions in Indian single stock futures. An investor letter has stated Macquarie will use futures contract linked to India’s 50-share NSE index Nifty on the Singapore Exchange to get its short exposure to India, according to Reuters. The fund also cut India long exposure in March.

Macquarie is the latest investor to make such a move. Earlier this month foreign broking major CLSA and some other FIIs announced their decision to stop offering participatory notes on India from Mauritius shifting their operations to Singapore under the provisions of India-Singapore bilateral tax treaty.

Foreign investors have raised concerns on two recent Indian provisions, which will give India power to retroactively tax the indirect transfer of assets, and target tax evaders via the General Anti-Avoidance Rule (GAAR), by putting the onus on investors registered in countries with special tax exemptions with India to prove they do not intend to explicitly avoid tax.

According to the Macquarie letter seen by Reuters, the fund could become liable for capital gains tax on unrealised gains and open positions in single stock futures, which roll monthly in India, might attract tax.

On April 25 officials in the tax department told the Times of India that foreign institutional investors would be protected from the provisions of the GAAR.

“We are assuring investors that there will not be any need to provide details of their clients if the FII decides to pay the short-term capital gains tax,” said an official.

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