India’s market regulator has recommended the government to remove long-term capital gains (LTCG) tax imposed on foreign investors. This information has been given by two sources with direct knowledge of the matter. India wants to boost its equity markets, which are currently not performing as per expectations. According to sources in a Reuters report, SEBI has also proposed tax relief for domestic mutual fund investors. It has been suggested that if investors sell their existing holdings and invest in new holdings, they should be exempted from LTCG. The recommendations come a few months ahead of the annual Union Budget in February. However, these recommendations are not binding and the final decision has to be taken by the government.
Foreign investors sold $31 billion
India’s equity market has lagged behind other emerging markets over the past two years. Foreign investors have sold a record $31 billion in Indian stocks this year. Also, the stability in returns has increased the inclination of retail investors towards foreign investment. These SEBI recommendations come after several meetings held between the regulator and foreign investors over the past two years. During this period, there was continuous selling, which put pressure on the Indian currency (rupee). Sources said investors are constantly being told that there needs to be a change in the way they are taxed in India. One of the two sources said the proposals are aimed at reducing the initial tax burden on foreign investors.
Attracts foreign investors
Sebi says that the transaction costs associated with investing in equities in India are the highest compared to other markets in the world. Currently, investors have to pay long-term capital gains tax of 12.5% and short-term capital gains tax of 20% on securities held for more than one year. Apart from this, securities transaction tax is also levied on trades and withholding tax on dividends. Any cut in capital gains tax could make the market more attractive to foreign investors and boost portfolio inflows, brokerage firm Jefferies said in a note earlier this week. Brokerage firm IIFL estimates that foreign investors’ returns could increase by 2.3 percent if the capital gains tax is removed.
Relief for domestic mutual fund investors
India’s benchmark Nifty 50 index has fallen 4.8 percent over the past two years, while the MSCI Emerging Markets Index has gained 40 percent. During this period, returns from diversified domestic equity mutual funds – which have now become a common source of savings for retail investors – have also remained flat. According to data from fund research firm Morningstar, the average return from funds investing in large-cap stocks fell by 1.6 percent. According to sources, in a bid to encourage investors to retain investments in domestic mutual funds, SEBI has suggested that switching from one scheme to another should not be treated as ‘taxable sale’ if the units of a mutual fund scheme are held for more than one year. Indian mutual funds have Rs. 82.6 trillion ($870.80 billion) in assets (AUM) and monthly investment plans average Rs. 30 billion comes.
