India‘s markets regulator has recommended the government remove the long–term capital gains (LTCG) tax imposed on foreign investors, two people with direct knowledge of the matter said, as India looks to galvanise its underachieving equity markets.
The Securities and Exchange Board of India (SEBI) has also proposed tax relief for domestic mutual fund investors, suggesting they be exempt from LTCG if they are selling existing holdings to invest in new ones, the sources said.
The recommendations, which come months before the annual federal budget in February, are not binding and a final call rests with the government.
India‘s equity market has lagged emerging market peers over the past two years. Foreign investors have sold a record $31 billion in Indian stocks this year and overseas investments by retail investors have surged as returns have stagnated.
SEBI’s recommendations follow scores of meetings held by the regulator with foreign investors over the last two years as selling persisted, putting pressure on the Indian currency.
One consistent piece of feedback from investors has been the need to change how India taxes them, the people said.
“The proposals are aimed at reducing the upfront tax burden on foreign investors,” one of the two said.
The people declined to be named as the recommendations, which have not been reported previously, are part of pre-budget representations and are private.
Email queries sent to SEBI and the federal finance ministry were not answered.
“Scrapping the long term and short term capital gains tax would be a clear positive, improving post tax returns and removing a longstanding friction in allocating capital to India,” said Gary Tan, Portfolio Manager, Active Equity, Allspring Global Investments. However, the move would not remove concerns that AI could erode India’s labor cost arbitrage growth model, he added.
WOOING FOREIGN INVESTORS
SEBI has said that transaction costs associated with investing in equities in India are among the highest across jurisdictions.
Investors currently pay long–term capital gains tax of 12.5% for securities held for more than a year and short-term capital gains tax of 20%, in addition to securities transaction taxes on trades and withholding taxes on dividends.
Brokerage firm Jefferies in a note earlier this week said any reduction in capital gains taxes could improve the market’s attractiveness for foreign investors and support portfolio inflows.
Brokerage firm IIFL estimates scrapping capital gains tax could lift foreign investors‘ returns by 2.3 percentage points.
Samir Arora, founder and fund manager of Singapore-based Helios Capital Management, noted India was one of the very few countries where foreign investors pay taxes on capital gains.
“Correction of this anomaly will be welcomed by all investors, Arora said.
RELIEF FOR DOMESTIC MUTUAL FUND INVESTORS
India‘s benchmark Nifty 50 .NSEI has declined 4.8% in the last two years while the MSCI emerging market index is up 40%.
Returns from diversified domestic equity mutual funds — now a common way of saving for retail investors — have also stagnated over this period. Average returns from funds investing in large-cap stocks are down 1.6%, according to data from fund research firm Morningstar.
To encourage investors to stay invested in domestic mutual funds, SEBI has recommended that switching from one mutual fund scheme to another should not be treated as a taxable sale if the units have been held for more than a year, the sources said.
Indian mutual funds hold 82.6 trillion rupees ($870.80 billion) in assets under management, with an average of 30 billion rupees flowing in each month via monthly investment schemes.
Vivek Rajpal, Asia macro strategist at JB Drax Honore said that this is probably the best time to undertake such tax reforms.
“With global capital becoming more selective, removing long–term capital gains tax would help align India with other emerging markets and improve its relative attractiveness to foreign investors,” Rajpal said.
Reuters
