SEBI Pushes to Scrap LTCG Tax for Foreign Investors to Boost Markets
SEBI recommends removing LTCG tax for foreign investors and offering relief for mutual fund switches to boost Indian equity markets.
In a strategic move to make Indian equity markets more alluring to global capital, the Securities and Exchange Board of India (SEBI) has recommended the removal of the long-term capital gains (LTCG) tax for foreign investors. According to a report by Reuters, the market regulator has also proposed significant tax relief for domestic mutual fund investors as part of its pre-budget representations to the government ahead of the February Union Budget.
Targeting the Foreign Investment Slump
The proposal specifically suggests exempting foreign investors from the 12.5 per cent LTCG tax, which currently applies to equity investments held for more than a year. This comes at a critical time when foreign investors have been offloading Indian stocks at an alarming rate, selling a record USD 31 billion worth of equities this year.
Currently, foreign investors face a complex tax structure:
- Long-term: 12.5 per cent tax on holdings over 12 months.
- Short-term: 20 per cent tax on holdings under 12 months.
- Additional Costs: Securities transaction tax (STT) on trades and withholding taxes on dividends.
Sources familiar with the matter indicate that SEBI's recommendations are a direct response to concerns raised by foreign investors during meetings over the last two years, where India's taxation framework was consistently highlighted as a deterrent.
Relief for Domestic Mutual Fund Investors
SEBI isn't just looking at global players; it is also seeking to ease the burden on domestic retail investors. The regulator has proposed that switching from one mutual fund scheme to another should not be treated as a taxable sale, provided the units have been held for more than a year.
This move is designed to encourage investors to stay within the domestic mutual fund ecosystem. By removing the tax liability associated with shifting between schemes, the regulator hopes to prevent investors from exiting the market entirely due to tax concerns.
The Urgency: Why Now?
The push for tax reform comes against a backdrop of subdued performance in the Indian markets compared to global peers. Data reveals a stark contrast in growth:
- Nifty 50: The benchmark index has declined by 4.8 per cent over the last two years.
- MSCI Emerging Markets Index: This index has surged by 40 per cent in the same timeframe.
- Large-cap Mutual Funds: Average returns have dipped by 1.6 per cent, according to Morningstar data.
Potential Impact on Returns
If the government accepts these recommendations, the financial impact could be substantial. Brokerage firm IIFL estimates that scrapping the capital gains tax could potentially boost returns for foreign investors by approximately 2.3 percentage points.
It is important to note that SEBI's recommendations are not binding. The final decision on whether to implement these tax cuts rests solely with the government in the upcoming Union Budget.