The Securities and Exchange Board of India (SEBI), the country’s markets regulator, has recommended that the government scrap the long-term capital gains tax on foreign investors, The Hindu BusinessLine reported. The newspaper cited two people with direct knowledge of the matter.
SEBI also proposed relief for domestic mutual fund investors. Under the recommendation, investors who switch from one fund to another would not owe the tax on units held for more than a year.
Photo: Jimmy vikas, CC BY-SA 3.0, via Wikimedia Commons
The recommendations are not binding, and the final decision rests with the government. They arrive months before the annual federal budget in February.
This is a long-standing request from global investors and will accelerate capital inflows that India needs to funds it rapid infrastructure growth plans, in my view.
Foreign investors currently pay a 12.5% long-term capital gains tax on securities held for more than a year, and a 20% short-term tax on shorter holdings. They also pay securities transaction taxes on trades and withholding taxes on dividends.
The proposal comes as foreign money leaves the market. Foreign investors have sold a record $31 billion of stocks in India this year, according to the report. The Nifty 50, India’s benchmark stock index, has fallen 5% over the past two years, while the MSCI emerging market index has gained 40%.
SEBI has held many meetings with foreign investors over the past two years as the selling continued. One consistent message from investors was that India needs to change how it taxes them. SEBI has also said that transaction costs for equity investors in India are among the highest across jurisdictions. One brokerage estimates that scrapping the tax would lift foreign investors’ returns by 2.3 percentage points.
For global funds weighing India, the tax is a direct cost of owning stocks there. Scrapping it would raise after-tax returns, and the decision now rests with the Finance Ministry
