Reducing capital gains tax alone is insufficient to attract foreign investors. The government must also focus on economic reforms, policy stability, and other measures alongside tax breaks.
Helios Capital: The return of Foreign Institutional Investors (FIIs) to the Indian stock market is a subject of intense discussion. Some experts believe that reducing or eliminating capital gains tax would make the Indian market more attractive to FIIs, while others argue that broader policy reforms are necessary.
Tax breaks alone won't bring back FIIs
Analysts suggest that it's difficult to definitively say that simply lowering capital gains tax will entice FIIs back to the Indian market. Nilesh Shah, Managing Director of Kotak Mahindra AMC, notes that while tax breaks would certainly increase post-tax returns for investors, this alone isn't a guaranteed factor for their return.
He suggests the government could take other steps to attract foreign investors. These include special quotas for FIIs in IPOs and OFS, priority in the secondary market, guaranteed returns on FPI investments, and exemptions from KYC and ITR filing.
Calls to abolish capital gains tax
Samir Arora, Founder and CIO of Helios Capital, believes that abolishing capital gains tax for foreign investors would make the Indian stock market more stable and attractive. He argues that in 199 out of 200 countries worldwide, foreign investors don't pay any tax on stock market investments.
He also points out that FIIs suffer from fluctuations in exchange rates because they pay taxes in Indian Rupees and convert them back to dollars. This significantly impacts their returns.
History and current status of capital gains tax
Capital gains tax was first imposed in India in 1946-47. It was made permanent in 1956, with capital gains up to ₹15,000 being tax-exempt. The 2024-25 budget introduced changes, increasing short-term capital gains (STCG) tax from 15% to 20% and long-term capital gains (LTCG) tax from 10% to 12.5%. Changes were also made to F&O related taxation.
Reasons behind the downturn in the Indian market?
The Indian stock market has recently witnessed significant selling. Jitendra Gohil, Chief Investment Strategist at Kotak Alternate Asset Managers, attributes this not solely to taxes, but also to high valuations, dollar strength, and a lack of significant economic reforms.
He states that while political and economic risks in India are decreasing, attracting foreign investors requires labor, land, and agricultural reforms. Furthermore, the government's pace of privatization and disinvestment has slowed, impacting investor sentiment.
