India's Asset Management Industry Seeks Tax Cuts to Attract Foreign Investors!

India’s $900 billion asset management industry has asked the government to remove capital gains tax on foreign investments as overseas funds continue to pull money out of the country’s stock market.  

As per news reports, fund managers have also raised concerns over the tax treatment of debt mutual funds and uncertainty surrounding investment structures used by foreign firms. 

Foreign Investors Reduce Exposure to Indian Equities 

Global funds are set to withdraw money from Indian equities for a third consecutive year. Outflows have approached $27 billion this year, close to a record annual figure. Indian stocks have also lagged behind most emerging markets over the past two years. 

The rupee’s depreciation against the US dollar has added to the pressure on foreign investors’ returns. Asset managers say capital gains tax further reduces the amount investors retain from their investments. 

Edelweiss Financial Services Chairman and Managing Director Rashesh Shah said removing capital gains tax for foreign investors could help make India a long-term allocation for global funds. 

Current Capital Gains Tax Rates 

Long-term gains on listed shares held for more than a year are taxed at 12.5%, while short-term gains attract a 20% tax. The industry wants these levies removed for foreign investors. 

Finance Minister Nirmala Sitharaman has said the government would consider changes to stock market taxation. However, she has not clarified whether the review would include capital gains tax or transaction taxes. 

The capital gains levy was introduced in 2018. While the government has pointed to strong foreign inflows in 2023 and 2024, former markets regulator member Ananth Narayan said India has recorded net outflows from foreign portfolio investors since 2019. 

Debt Mutual Funds Seek Tax Changes 

Fund managers have also asked for long-term gains on debt mutual funds to be taxed at the same rate as equity investments. These gains are currently taxed according to the investor's applicable income-tax slab. 

SBI Funds Management Joint CEO Srinivas Jain said the higher tax rate reduces the incentive to invest in debt funds. 

Sun Global Investments Chairman Mihir Kapadia has called for fewer restrictions on debt markets and greater issuance of dollar and masala bonds. Masala bonds are rupee-denominated securities issued in overseas markets. 

Tax Treatment in Other Markets 

The US, UK, Germany and Japan, along with emerging markets such as South Korea, Brazil, China and Taiwan, exempt foreign portfolio inflows from capital gains tax, according to Marcellus Investment Managers founder Saurabh Mukherjea. 

The industry's demands cover both equity and debt investments, with the government yet to announce any changes to the existing tax rules. 

Read More: Ministry of Communications Plans Second Telecom PLI Scheme with Focus on Local Manufacturing! 

Conclusion 

The proposals cover taxation of foreign equity investments and debt mutual funds. Any changes will depend on the government's decision on the existing tax structure. 

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