No move to tax FIIs, says finance minister

Dubbing as 'manufactured crisis,' the sharpest fall in the history of the Indian stock markets, Finance Minister P Chidambaram sought to bring back foreign funds, saying no foreign institutional investor has been assessed as a trader for tax purposes.

"No FII (foreign institutional investor) has been assessed as a trader as they are investors and this is a manufactured crisis based on uninformed reporting," he told reporters shortly after the stock market closed trading on Thursday after a fall of 826 points on reports of withdrawal by FIIs.

He said that the Central Bureau of Direct Taxes circular (See below) was not meant to bring FIIs into the tax net.

Calling it uninformed reporting, which led to the market crash, he said: "There is a lesson for everybody. Uninformed reporting and reaction to uninformed reporting is not a desirable thing."

Earlier in the day, Chidambaram had sought to play down the plunge saying that every movement and swing of the market did not require a comment.

Chidambaram said that a reflection of a decline in the London Metal Exchange on Indian market was understandable. "But what is not understandable is a reaction based on uninformed reports in newspapers," he added.

The finance minister said that the Central Board of Direct Taxes (CBDT) had adopted a 'democratic route' by putting up draft guidelines (relating to income tax) for eliciting views from stakeholders.

Taking a dig on commentary by experts on TV channels, he said: "I have heard experts' views on the channels, but to the best of my knowledge no FII has been assessed as a trader because they are investors. FIIs also do not have any permanent establishments."

He said that some large mutual funds told him 'a short while ago that they had purchased hundreds of crores of shares (a move to arrest the plunge).'

"My advice to retail investors is that they should take informed decisions," he said, adding that he had no advice for traders.

The CBDT circular

Following is the CBDT circular which apparently spooked the stock markets on Thursday.

Sub: Distinction between shares held as stock-in-trade and shares held as investment -- Tests For:

The Central Board of Direct Taxes in its instruction no.1827 dated 31-08-1989 had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. The following supplementary instructions in this regard will provide further guidelines for determining whether a person is a trader in stocks or an investor in stocks:

Whether the purchase and sale of securities was allied to his usual trade or business / was incidental to it or was an occasional independent activity.
Whether the purchase is made solely with the intention of resale at a profit or for long term appreciation and/or for earning dividends and interest.
Whether scale of activity is substantial.
Whether transactions were entered into continuously and regularly during the assessment year.
Whether purchases are made out of own funds or borrowings.
The stated objects in the Memorandum and Articles of Association in the case of a corporate assessee
Typical holding period for securities bought and sold
Ratio of sales to purchases and holding
The time devoted to the activity and the extent to which it is the means of livelihood.
The characterization of securities in the books of account and in balance sheet as stock in trade or investments.
Whether the securities purchased or sold are listed or unlisted.
Whether investment is in sister/related concerns or independent companies.
Whether transaction is by promoters of the company.
Total number of stocks dealt in.
Whether money has been paid or received or whether these are only book entries.

The Assessing Officers are also advised that no single criterion listed above is decisive and total effect of all these criteria should be considered to determine the nature of activity.

(F.No.149/287/2005-TPL from Central Board of Direct Taxes)

(Vandana Ramachandran)

Under Secretary (TPL-I)

16th May, 2006