"FIIs fear that the new tax rules could subject this foreign investment to double or triple taxation. Such onerous taxation or even the risk of such taxation could threaten this important source of capital for India's businesses," the two entities said in a letter.
The Asia Securities Industry & Financial Markets Association (ASIFMA) along with Securities Industry and Financial Markets Association (SIFMA) has written the letter to Finance Minister Pranab Mukherjee.
Noting that FIIs are carefully evaluating these new tax risks, the letter said the proposals are too broadly worded.
FIIs have assets under custody of more than Rs 10 lakh crore or 17 per cent of the capitalisation of India's equity markets. Further, these entities also invest in Indian government and corporate debt, as per the letter.
The proposals in the Finance Bill 2012 relate to taxation of indirect transfers of assets and GAAR.According to the letter, it appears that market participants have already begun to reduce their positions in India.
"The financial services industry is concerned that these tax proposals may inhibit the efficient operation of the Indian debt and equity markets.
"We believe that many of these consequences are unintended, and we urge the Finance Ministry to clarify the scope of the tax proposals and thereby avert unnecessary disruption to the Indian capital markets," ASIFMA CEO Nicholas de Boursac said.
On Monday, stock market slumped two per cent amid concerns that short term capital gains made by FII and Pnote investments would be taxed. However, Finance Ministry sources had said that taxation would only be for those investments made by PNotes and FIIs which are intended to avoid tax.
"I will examine and modify GAAR as and when required. This is essential for anti-avoidance," Mukherjee said in the Parliament on Tuesday. (PTI)