The buzz around removal of long-term capital gains (LTCG) tax on equities is gaining traction, with the market regulator also urging the government to scrap it. The Securities and Exchange Board of India (SEBI) has reportedly requested the government to consider scrapping LTCG tax levied on foreign investors.The proposal comes as authorities look for ways to revive India’s equity markets, which have been performing below the level of their emerging market counterparts.According to a Reuters report, SEBI has also suggested extending tax relief to domestic mutual fund investors. Under its proposal, investors switching from existing mutual fund holdings to other schemes would not have to pay LTCG tax on the transaction, sources quoted in the report said.The recommendations have been submitted ahead of the annual Union Budget scheduled for February. However, they are advisory in nature, and the final decision on whether to accept them rests with the government.
Stock market turmoil
Indian equities have underperformed other emerging markets over the past two years. Foreign investors have withdrawn a record $31 billion from Indian stocks so far this year, while retail investors have increased their overseas investments as domestic market returns have remained subdued.SEBI’s proposals follow numerous discussions the regulator has held with foreign investors over the past two years, even as continued selling by overseas funds has put pressure on the Indian currency.A recurring concern raised during these interactions has been India’s tax treatment of foreign investors, the sources said.“The proposals are aimed at reducing the upfront tax burden on foreign investors,” one of the two sources told Reuters.SEBI has pointed out that the costs of investing in Indian equities are among the highest when compared with other markets.At present, investors are required to pay LTCG tax of 12.5% on securities held for more than a year. Short-term capital gains are taxed at 20%. These levies are in addition to securities transaction taxes on trades and withholding taxes on dividend income.In a note issued earlier this week, brokerage firm Jefferies said lowering capital gains taxes could make Indian equities more appealing to overseas investors and help attract portfolio inflows.Brokerage IIFL has estimated that doing away with capital gains tax could increase foreign investors’ returns by 2.3 percentage points.The underperformance of Indian equities has also affected domestic investors. The benchmark Nifty 50 has fallen 4.8% over the past two years, whereas the MSCI emerging markets index has gained 40%.Returns from diversified domestic equity mutual funds, which have become a popular investment avenue among retail savers, have remained weak during the same period. Data from fund research firm Morningstar shows that large-cap mutual funds have delivered average returns of minus 1.6%.SEBI wants to encourage investors to continue investing in domestic mutual funds. To achieve this, it has been proposed that moving investments from one mutual fund scheme to another should not trigger a tax liability, provided the original units have been held for more than a year, the sources said.The domestic mutual fund industry currently manages assets worth Rs 82.6 trillion ($870.80 billion). Monthly investment schemes bring in an average of Rs 30 billion every month.
