India’s $900-billion asset management industry wants the government to scrap capital gains tax for foreign investors to boost market appeal. Global funds pulled out $27 billion this year, prompting calls for change. "We need to showcase to the foreigners we want them," said Edelweiss Chairman Rashesh Shah on Friday.
Asset managers argue removing capital gains levies could help improve after-tax returns for foreigners, a key factor in their calculations for portfolio allocation | Image: Bloomberg
By Advait Palepu and Ranjani Raghavan
India's $900-billion asset management industry wants the Narendra Modi administration to scrap capital gains tax for foreign investors, seeking to make the nation's markets more attractive and spur investment in stocks and fixed-income securities.
A higher levy on debt funds has also been a deterrent, fund managers say, who are seeking parity with stocks. Besides, uncertainty over the tax laws has created a headache for many firms -- including private equity giants from Wall Street -- who sometimes invest through overseas entities to efficiently manage their tax bills.
The growing chorus comes at a time when local stocks have languished most of their emerging-market peers over the past two years, notwithstanding a rally last week. Global funds are on track to pull money out of equities for an unprecedented third-straight year, with outflows nearing a record $27 billion this year alone.
Asset managers argue removing capital gains levies could help improve after-tax returns for foreigners, a key factor in their calculations for portfolio allocation. The metric has taken more prominence in light of the rupee's sharp depreciation against the dollar in recent years.
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"We need to showcase to the foreigners we want them," Edelweiss Financial Services Ltd. Chairman and Managing Director Rashesh Shah said in an interview to Bloomberg Television Friday. For India to be a "good permanent" allocation, "removing capital gains tax for foreigners might be an easier answer," he said.
Long-term gains on listed equities held for more than a year are taxed at 12.5%, while short-term returns are levied 20%. Finance Minister Nirmala Sitharaman has said she will consider tax changes on stocks, but stopped short of confirming whether the government was looking at revisions to capital gains or transaction taxes.
A recent selloff in global artificial intelligence stocks and a decline in oil prices has offered a breather, with foreigners investing more than $3.5 billion last week through Thursday and helping drive the stock market's best week in more than five years. India's lack of meaningful exposure to the AI trade coupled with slowing earnings growth drove foreign selling in favor of tech-heavy markets in North Asia.
Nevertheless, the treatment of foreign portfolio investors is increasingly out of step with global practice, Saurabh Mukherjea, founder and chief investment officer at Marcellus Investment Managers, wrote in a note recently. The US, the UK, Germany, Japan and every major emerging-market including South Korea, Brazil, China and Taiwan exempt such inflows from tax, he said.
The levy was introduced in 2018, and Sitharaman did flag that India attracted strong capital inflows in 2023 and 2024 when it was in place.
But that doesn't reflect the accurate picture, according to Ananth Narayan, former whole-time member at India's markets regulator. The country has seen net outflows from foreign portfolio investors since 2019, he told the CNBC TV18 channel.
The fund management industry also wants long-term gains on debt mutual funds taxed in line with equities, rather than at investors' applicable income-tax rates.
The government and regulators should encourage more flows into fixed income and bond markets, said Mihir Kapadia, chairman at Sun Global Investments, a London-based investment bank and wealth adviser. There is a "wall of capital available" if some restrictions on debt markets are removed or Indian corporates and state-run firms are encouraged to raise capital through dollar and masala bonds, he said.
Masala bonds are rupee-denominated debt securities sold abroad by issuers.
Srinivas Jain, joint CEO at SBI Funds Management Ltd., said investors need a compelling reason to allocate to debt. Taxing gains at a higher rate "weakens that incentive and makes it harder to build balanced portfolios," he said.
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