mumbai there is no smoke without fire the finance minister may have played down the instruction proposed to be issued by the central board of direct taxes to assist revenue authorities to determine if profit from stock trading constitutes business income but two days after the issue first surfaced there are already concerns that the new rules may send wrong signals to fiis and stunt the growth of the indian capital markets even as it is about to take off in the last two years many investors and traders have walked away with hundreds of crores in profits as stock prices rose sharply if they had held these shares for more than a year the current rules exempt them from paying taxes if they had held these shares for less than a year they had to pay a meagre 10 tax the finance ministry now wants to tax some of these profits at a higher tax rate of 40 applicable to business income if the trading in shares cannot be classified as investment the controversy is about how the department will classify a trade as an investment or not importantly since the biggest traders in the indian markets have been fiis who pumped in over 10 billion last year the moot question is will the new proposal drive the fiis away since the proposals became public the finance ministry and cbdt have categorically stated that they are not aimed at fiis as they are taxed in their country of origin with which india has double taxation avoidance treaties but a large crosssection of market observers feel that the new proposals are nevertheless illtimed and will slacken the flow of investmentsemerging markets like india are often classified as risky and its sovereign ratings are not good enough to attract the highly risk averse investors like large pension funds so the only takers tend to be those willing to take on higher risk in lieu of the greater returns that emerging markets promise many of these investors behave like traders often hedging their funds in futures and turning over their portfolio quickly to mitigate the emerging market risk the lack of enough large market cap stocks with adequate liquidity also prompts them to rapidly churn their portfolios since many of these fiis also originate from countries like hong kong with which india has no taxation pacts leading brokers feel that cbdts proposal would definitely make them rethink their india strategy if that happens the consequences could be disastrous after all fiis have been the bulwark of the indian stock markets in the last two years and have substantially increased the market capitalisation