FIIs unlikely to abandon India due to tax treaty changes: Centrum

FIIs are unlikely to abandon India due to the tax treaty revision with Mauritius and foreign investment flow can actually increase for a few months as investors may take tax advantage by investing more before March 31, 2017 deadline, says a report.

"FIIs are unlikely to abandon India and its great long-term buys just because of a new clause added to the Double Taxation Avoidance Agreement (DTAA) (with Mauritius). Worries on the same clause being added to the treaty with Singapore or other tax-havens are also not a big concern.

"It is the pedigree of the company rather than tax structure of the home country which makes a business a strong investment proposition," a report by Centrum Wealth Research said.

Mauritius and Singapore are among the top-most sources of foreign direct investments into India and together also account for a big chunk of total inflows into the country's capital markets.

"In the immediate term, India could see an increase in Foreign Institutional Investor (FII) investments as FIIs may want to take the tax advantage and invest in Indian securities before the sunset date of April 1, 2017. Practically, looking at the potential of returns offered by the Indian market, this clarity on taxation is likely to lead to higher inflows of longer term money, thus bringing in stability in flows," it said.

While the move is aimed towards significantly reducing instances of treaty abuse, round tripping of funds and curb tax evasion, it could change investment flows between the two nations, Centrum Wealth said.

The report further said the new India-Mauritius treaty is likely to impact hot money, which comes into India with an investment horizon of less than a year.

Though these short-term FII flows add to the corpus of foreign money in the country, these come from investors who make a quick exit once their money is made. Hot money tends to increase volatility in equity markets, although it does inject liquidity into the market which leads to higher depth.

India's capital market has some great stories playing out, which deserve attention and global investment. Global investors will not be deterred by a 7.5% or 15% tax (only on short-term capital gains) from investing into names which have the potential to offer great returns in the future, as per the report.

"It does not seem like the Indian equity market has much to worry about. There is enough time for the new rules to come into play. By then the development is likely to be well absorbed and market participants, both global and domestic, would be better prepared to deal with life after April 1, 2017.

"The changes to the treaty are definitely a step in the right direction and should do more good than harm," it said.