Yes, commodity prices tumbled, emerging markets went into a tailspin, the met department forecast a below-par monsoon, and the results of the state assembly elections brought out the bears. But if the foreign institutional investors (FIIs) were looking for a solid local justification for their $1 billion-plus (Rs 4,500 crore) sell spree last fortnight, they might have found it in a rather benign, dusted-out circular of the Central Board of Direct Taxes (CBDT) on capital gains. The draft circular, released on May 16, inviting public opinion, aims to distinguish between traders and investors for taxation purposes. So what's new about it? Not much. As Aseem Chawla, Director, Taxation, Amarchand Mangaldas, explains: "The board's (CBDT's) instruction does not lay down a new law; it merely is a collation of legal principles pronounced by different courts over a period of time." And Prithvi Haldea, avid market watcher, and Managing Director, Prime Database, sums up succinctly what followed after this rather benign "collation of legal principles." "The FIIs and some of the big players simply used this opportunity and booked profits."

The CBDT, in its original instruction issued way back in August 1989, had laid down certain tests to distinguish between shares held as stock-in-trade and shares held as investment. Just a few of these tests include whether the purchase and sale of securities of the assessee in question is allied to his usual trade or business or is incidental to it; and whether the purchase is made solely with the intention of resale at a profit or for long-term appreciation, and/or for earning dividends and interest. Despite their apparent rigorous nature, these countless tests failed to clearly distinguish as to whether a particular assessee is a trader in shares or an investor who has been holding the shares as capital assets. The issue often led to court room battles as the two categories (trader and investor) are taxed at different rates. While a stock trader has a tax liability of 30 per cent (33.66 per cent if the income exceeds Rs 10 lakh) an investor has to pay only 10 per cent on his capital gains. The fear, if ever there was one, was that some FIIs would be reclassified as traders, which would clearly ruin the stash of profits they'd be taking out of India. But rather than touch on that, the board has just proposed 15 supplementary tests in the draft circular.

Chawla of Amarchand Mangaldas points out that the differential tax structures on capital gains in India are very much in tune with the international practices. He adds that the Board's guidelines in no way affect the tax status of FIIs. "They prescribe a distinction between investment and business activity and do not affect the tax status of FIIs under the existing tax regime. Some wise men in the trade just decided to use the circular as an opportunity to book profits at the stock market," he says. Of course, what didn't help matters were comments made via the media about the ambiguous nature of the circular, rumours that FIIs were apprehensive about such a circular floating around, and that it was redrafted primarily with the foreign investing tribe in mind. Punters tend to buy on rumours and sell on fact, but this was clearly one rumour that called for a reverse strategy. Better to be opportunistic than sorry will always be a market mantra-not just for FIIs but for any trader worth his portfolio.