Market sees sunshine as GAAR clouds disappear

The festive season could come early for the markets, as experts say the Parthasarathi Shome committee report on General Anti-Avoidance Rules (GAAR) is just what the doctor ordered for boosting sentiment on the Street.

The panel had recommended the postponement of GAAR by three years and abolition of short-term capital gains tax, and the general consensus is the new regime in the finance ministry would be favourably disposed towards accepting these.

Nishith Desai, international corporate and tax lawyer, says the panel has done a wonderful job and the report is "hugely positive" for foreign institutional investors. According to him, the recommendation to abolish the tax on gains arising from transfer of listed securities, whether in the nature of capital gains or business income, to both residents as well as non-residents is another sentiment booster.

Others agree. "The government is trying to send a signal it wants to stimulate the economy and the stock market. The Shome panel report is as positive as one could expect," says Saurabh Mukherjea, head-institutional equities, Ambit Capital. "This draft report along with the Fed chairman's speech on Friday could give a meaningful lift to the Indian market in the coming week. However, just on the back of this draft report, it would be unreasonable to expect a roaring rally," he adds.

Mukherjea expects the Sensex to be in the region of 18,000-19,000 over the coming months.

Federal Reserve Chairman Ben Bernanke on Friday indicated the US central bank was open to a further easing of monetary policy, but didn't provide any clear signal of imminent action.

Vikas Khemani, president and head-institutional equities, Edelweiss, says the recommendations would give clarity and comfort to the market.

The committee has also suggested removing short-term capital gains tax, 15 per cent at present, and increasing the securities transaction tax (STT) to make it tax-neutral for the government. "To make relief regarding transfer of listed securities tax neutral, an increase in STT should be reasonable. A sharp increase in STT will create problems as this tax is not seen as a creditable tax in the home country of investors," adds Desai.

At present, stock market investors don't pay any tax if they hold shares for over a year. However, if they sell shares within a year, they have to pay 15 per cent tax on gains made through such transactions. Investors pay STT of Rs 1,700 for non-delivery and Rs 2,500 on delivery for trades worth Rs 1 crore.

"Increasing STT will be a fine idea in the absence of any other tax," says Deven Choksey, managing director of KR Choksey Shares and Securities. "There will be a short-covering rally in the coming week. This will also boost the rupee," he adds. Experts, however, say other local and global developments will continue to weigh on investor sentiment.

"The market had taken quite a lot of beating due to the lingering concerns over GAAR," says Motilal Oswal, CMD, Motilal Oswal Financial Services. "The market outlook will be determined more by what is happening globally. Also, other domestic factors, like the Parliament logjam, slowing growth and policy inaction, could weigh on the market."