"Some tax avoidance arrangements have come to notice and I propose to plug the loophole. Some unlisted companies have avoided dividend distribution tax by arrangements involving buyback of shares," Finance Minister P. Chidambaram had said in his budget speech.
According to analysts, this was one of the main reasons why the markets dipped Thursday, as the fine print of the budget said foreign funds can no longer escape the tax net by merely producing a tax residency certificate from countries like Mauritius.
"The certificate of being resident in a specified territory outside India shall be necessary but not a sufficient condition for claiming any relief under the agreement referred to therein," said an amendment proposed in the Finance Bill.
This led the sensitive index (Sensex) of the Bombay Stock Exchange to sink 290 points.
Later, after the markets closed, clarifications started pouring in from the government. "If there is an apprehension that even if you give a tax residency certificate, the tax officer will not accept that, it is not correct," a top finance ministry official said.
Even the finance minister assured during his post-budget press conference that if the language of the amendment proposed by the Finance Bill sought to give that impression, the same would be changed.
"The finance minister, post budget, explained that the substance of the amendment was that not only residency but also beneficial ownership was necessary to claim benefits under double taxation avoidance agreements," said research firm Angel Broking.
"But the government has done everything to attract dollars into the country in order to plug the precarious current account gap. So it needs to be seen whether in the coming days, there may be clarifications to calm investors' nerves on this issue."