Why did the Sensex bounce back by 900 points on Thursday and Friday?

The Sensex saw a sharp rally on Thursday and Friday after there were expectations that the Finance Minister may intervene and resolve the FPI tax issue. As of now these are just in the realm of expectations and there is no concrete outcome but the following are the main expectations based on which the markets bounced back last week.

· The FPI tax as a result of surcharge has been applicable on FPIs that are structured as trusts or as AOPs. The expectation is that either this surcharge on the super rich could be totally withdrawn or there may be a special exemption given to these FPIs registered as trusts which is possible under Section 119 of the Income Tax Act.

· One option that Nirmala Sitharaman had given to the FPIs was that they reconstitute themselves as corporates rather than just remaining trusts or AOPs. However, the worry about the applicability of the GAAR provisions in such where cases where the shift is purely for tax purposes. The government may offer a one-time exemption from GAAR for those FPIs that want to convert their structure from trust to corporate.

· There is also an expectation that the long term capital gains tax may be scrapped since the STT is already being charged and the LTCG tax has not yielded positive results for the government. However, the government may look to dilute this provision by making either LTCG beyond 3 years exempt or wait for a year and review the same.

· Lastly, the FM has assured the industry participants that corporate tax rate would be reduced to 25% for all corporates although the precise time frame for the same has not been mentioned.

It was the expectation on these lines that kept the markets buoyed on Thursday and Friday. However, whether the enthusiasm continues next week remains to be seen.