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ABRACADABRA

Killing the goose that lays the golden egg


2000-2006

Shubhrangshu Roy

WEALTH, LIKE a whore, is not for keeps. Confine it within the rigid walls of your mind, and it will slip away to the next attractive suitor. That, in short, sums up Thursday’s bloodbath on the Street, with over Rs 225,000 crore shaved off BSE, triggering the biggest slide of the Sensex to date...a huge 856 points.

Mr Chidambaram, the time you got the signal right.

What’s there in the meltdown? Look again. It’s countervailing forces at work. The laws of attraction and distraction make a 25-year-old fund manager on Wall Street say f***, and it’s all gone, off his screen. “The choice, Mr FM, is entirely ours,” he says, “and no apologies for that.”

Here’s how it works: The central board of direct taxes (CBDT) posts a draft circular on the net inviting public opinion on what’s traded in stocks and what’s an investment. In the process, the government reveals its mind to empower the country’s junior-most taxman to decide how much to tax whom on the stock market, and thereby, impose his suzerainty over somebody else’s cash.

FIIs, that, till now, have been enjoying a near-tax holiday because of their investor status, say, India no longer looks hot. It’s time to fly out. So the junior-most fund manager at an FII says, “Beg your pardon, minister, it’s my money, and I’ll do exactly as I want. Please leave my sovereignty to me alone. The returns, right now, in the US and other developed markets look more promising than what you promise. And your circular reveals your intention. So, here I go.”

Why this loss of faith?

It’s because two years ago when Mr Chidambaram levied an STT on stock transactions in his Budget, he implicitly assured foreign institutional investors that their cash would be safe in this country. The FM assured that as investors, they would no longer pay a long-term capital gains tax. Instead, they would only be levied a 10% tax for short-term capital gains if they traded in their shares in less than a year. Thursday’s circular betrays the government’s intention to renege on that assurance by posing whether the tax assessment officer should decide if a particular FII is an investor or trader, and then impose a 33% corporate tax on his profit by labelling him a trader.

That’s not the way it works with money, Mr FM. While you sure have the right to tax whoever you want, whichever way you desire, the FIIs are asking you to be transparent with their cash. That’s just about it.

Having invited the FIIs to invest on a ‘zero-tax’ promise, which, incidentally, no other country has offered so far, the CBDT’s intentions betray daylight robbery of the bank.

Of course, Mr Chidambaram, you may well suggest you are looking at reigning in hot money flow into the country. That’s perfectly within your sovereignty to decide whether you want to make India a destination for hot or cold cash. But then, why pretend that hot FII cash is FDI when it’s perfect to invite cold FDI cash?

Yet, should the FM prefer cold over hot, he should also be prepared to hear the CEO of a fund say it’s well within his sovereignty as well to decide whether to pump his cash into a hot or cold destination.

Just as it’s the sovereign instinct of the state to decide the colour of the money it wants to clean up its purse, it’s also the sovereign instinct of an FII to pour hot money into markets to earn bigger returns for its investor. That’s where the junior-most fund manager walks out smarter than the junior-most taxman. With only a click of his computer keypad.

Just think about it, Mr FM, what happens if Thursday’s slide leads to a 30-40% fall of Sensex only because you want to charge the investor a 33% tax? Your golden goose will refuse to lay a golden egg again.

Just get it. Right?

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