Benchmarks snap two-day winning streak; Nifty ends below 7850 level

Indian benchmark indices snapped two days winning streak and ended lower on Wednesday, on concerns that the government may amend tax treaties with countries, including Singapore, after it agreed to tax capital gains on foreign investments from Mauritius. The tax, which will be effective April 2017, would be at 50 per cent of the domestic rate for two years, and at the full rate thereafter, the government had said on Tuesday. According to reports, Mauritius accounted for 34% of foreign direct investments in India between 2000 and 2015.  Besides, weak trend in Asian and European stocks coupled with Indian depreciation in rupee value also weighed on the sentiment. Indian rupee depreciated by four paise to trade at 66.71 against the US dollar at the time of equity markets closing, due to fresh buying of the American currency by banks and importers. However, market participants got some comfort with the report that India's real agriculture Gross value added (GVA) growth is projected to rise 1.1 per cent in 2015-16, despite below-normal monsoon last year. According to the report, the ongoing diversification in the agriculture sector has reduced volatility in agriculture output and farm incomes.  Some support also came with Skymet’s report, stating monsoon would reach Kerala earlier than its due date on June 1. The agency said that the southwest monsoon will arrive over the Andaman and Nicobar Islands between May 18 and 20. It is likely to reach Kerala between May 28 and 30. Thereafter, it will cover other parts of the country. Present weather conditions are indicating a promising beginning of monsoon 2016, which is likely to usher in with a bang.

On the global front, Asian markets made mixed closing on Wednesday as investors shrugged off an overnight rally in global stocks and looked to bonds in the absence of signs of a sustainable recovery in China and other emerging markets. Furthermore,  the stocks on the European bourses also snapped previous rally and turned back into the red zone, as the price of oil turned lower, weighing on shares in the energy sector. Oil prices turned south, with Brent crude, the international benchmark, down 0.4 per cent at $45.34 a barrel and West Texas Intermediate, the US marker, down half of a percentage point at $44.43. Besides, mixed trading was witnessed in the Asian indices, as the Japanese stocks drifted lower on yen’s comeback, further adding to the downbeat moods around the European equities. The traders remained unimpressed by the UK factories data, which showed that the total industrial production picked up to 0.3% m/m from a fall of 0.2% a month before, but less than expected.

Back home, the benchmark got off to a weak start as the indices breached the psychological 7,800 and 25,450 levels in the early moments of trade since investors largely remained influenced by the pessimistic sentiments prevailing in Asian markets. However, the key gauges got solid support around the intraday low levels, as they convalesced from thereon. The indices tried hard to move back into the positive territory and even got there but only for a brief period as investors took the opportunity to cash in on the bounce back. The selling pressure accentuated in the noon trades after weak European opening, post which the indices found it hard to claw back into the green terrain and eventually settled in the negative zone. Finally the NSE’s 50-share broadly followed index Nifty, suffered around half a percent cut to settle below the crucial 7,850 support level, while Bombay Stock Exchange’s Sensitive Index, Sensex slipped by over one hundred and seventy points and closed below the psychological 25,600 mark. On the BSE sectoral space, selling was witnessed across the board as not even a single sectoral index went home in the positive territory. The PSU pocket remained among top laggards in the space as they got lacerated by around a percent, while sectors like Realty, Power and information technology (IT) too got pounded heavily in the session. The market breadth remained pessimistic as there were 1095 shares on the gaining side against 1464 shares on the losing side, while 160 shares remained unchanged.

Finally, the BSE Sensex declined by 175.51 points or 0.68% to 25597.02, while the CNX Nifty dropped 38.95 points or 0.49% to 7,848.85. 

The BSE Sensex touched a high and a low 25762.49 and 25409.24, respectively. The broader indices made a mixed closing, the BSE Mid cap index ended up by 0.17%, while Small cap index was lower by 0.03%.

The top losing sectoral indices on the BSE were PSU down by 0.98%, Realty down by 0.88%, Power down by 0.75%, IT down by 0.72% and TECK down by 0.65%, while there were no gainers on BSE sectoral indices.

The top gainers on the Sensex were Axis Bank up by 2.16%, Maruti Suzuki up by 1.12%, Asian Paints up by 0.97%, Larsen & Toubro up by 0.41% and Tata Steel up by 0.32%. On the flip side, Bharti Airtel down by 2.55%, SBI down by 2.30%, Tata Motors down by 2.26%, Dr. Reddys Lab down by 2.02% and BHEL down by 1.87% were the top losers.

Meanwhile, India has finally concluded the long-negotiated amendments to the existing Double Tax Avoidance Convention with Mauritius. The changes will have an impact on foreign investors who route their investments from these two countries to avoid paying capital gains tax in India. The tax department has said that India will get the right to tax capital gains on investments channelled through Mauritius under an amended tax treaty it signed with the island republic on 10 May in Port Louis.

The amendment to the 1983 India-Mauritius treaty, which will come into force on 1 April 2017, seeks to tax short-term capital gains on investment from the small island nation. Till now, companies, many of which were just shell companies, were exempt from such a levy. The new clause will also be applicable to the India-Singapore treaty. However, in a relief to existing investors, shares acquired before 1 April 2017 will not be taxed by Indian authorities.

The amended treaty has also provided a two-year transitionary phase wherein the capital gains will be taxed at concessional tax rate of 50% of the existing tax rate; the full domestic tax rate will be applicable from 2019-20, provided the limitation of benefit clauses have been adhered to. But, under the amended treaty, only those Mauritius-based companies that have a total expenditure of more than Rs 27 lakh in the preceding 12 months will be able to benefit from the tax treaty. Interest arising in India to Mauritian resident banks will be subject to withholding tax in India at the rate of 7.5 per cent in respect of debt claims or loans made after March, 31, 2017. However, interest income of Mauritian resident banks in respect of debt-claims existing on or before this date will be exempt from tax in India.

Union Revenue Secretary Hasmukh Adhia has said that though no estimate is available of how much additional tax revenue can be raised following the amendment, but it will be significant. He further said that the amendment has been designed to curb treaty abuse, tax evasion and round-tripping of funds-the practice of money stashed away overseas by Indians returning home through tax havens such as Mauritius in the garb of foreign capital.

Though, the new amendments will shut the door on investors using Mauritius and Singapore to avoid paying taxes in India, but as per the data available over the years, the Mauritius route has become less preferred and the share in the total assets held by foreign institutional investors of those from Mauritius has been continuously falling, so is the case with participatory notes, another popular mode used for round-tripping.

The CNX Nifty traded in a range of 7,893.10 and 7,780.90. There were 18 stocks advancing against 32 stocks decliners on the index.

The top gainers on Nifty were Zee Entertainment up by 7.34%, Axis Bank up by 2.02%, Hindalco up by 1.61%, Asian Paint up by 1.58% and Bosch up by 1.54%. On the flip side, Bharti Airtel down by 2.63%, Tata Motors - DVR down by 2.60%, SBI down by 2.30%, Tata Motors down by 2.20% and Dr. Reddy's Laboratories down by 1.93% were the top losers.European markets were trading in red; Germany’s DAX decreased 59.13 points or 0.59% to 9,986.31, France’s CAC declined 39.63 points or 0.91% to 4,298.58 and UK’s FTSE 100 was down by 12.76 points or 0.21% to 6,143.89.

Asian equity markets ended mixed on Wednesday despite positive overnight cues from Wall Street and Europe. China stocks closed modestly higher after recent steep losses as the country's Cabinet approved measures to reverse an export decline. Japanese shares ended marginally higher but pared earlier gains as the yen firmed against the dollar, obscuring the profit outlook for exporters. However, Hong Kong shares fell as investors waited for more clues on whether a recent pick-up in China's economy was just a seasonal blip or something more sustainable.