Bangalore: These days the financial market seems to be squashing water but there are three issues that are of major concern for any investor in Indian equities.

The first issue alarms the implications of the latest all-purpose anti-avoidance rules (GAAR) for foreign institutional investors (FIIs) and how these investors scrutinize India and trade from April 1 onwards. There is still terrific confusion over these tax provisions, and no one is keen to explain them. Several brokers with a Mauritius entity are discontinuing all participatory-note (P-note) transactions, so as to not boost potential tax exposure. Other brokers (those having a Singapore-based structure) appear keen to write P-notes but are uncertain whether tax should be deducted at source at 15 percent or not. Brokers lacking strong on-the-ground presence in Mauritius are nervous about not being able to prove residence and hence attracting tax.

Counterparties with a strong on-the-ground presence in either Singapore or Mauritius are not bothered about proving their residence; they are concerned about the income tax authorities "looking through" the P-note issuer and testing the tax residence of the actual end-user of the instrument. Funds that have their own FII license are also puzzled. Most of them do not know if they will be able to prove tax residence, and thus have no idea how to transact business from April 1 onwards.

The majority of these funds have investors coming in and out of the funds on a regular basis; and how, then, do you we calculate the net asset value (NAV)? Do we preserve cash for potential tax liabilities when you are paying out redeeming investors? Will investors agree to this? Are your fund administrators ready to track and calculate the tax implications of all transactions post-April 1? Since the tax proposition of any transactions done today will only be apparent in 2014-15, how do we account for that doubt?

Investors in these funds will also need time to merge the possibility of now paying a 15 per cent tax on short-term gains. This apparently lessens the expected return profile for Indian equities. The gloom is even greater for positions in futures and options (F&s), in which there is the added obstacle of calculating business income versus capital gains.