Nirmala Sitharaman, India's finance minister. (Bloomberg)
Nirmala Sitharaman, India's finance minister. (Bloomberg)

Opinion | Super-rich tax on FPIs axed

The depth of unease among FPIs over the enhanced surcharge could be gauged from the fact that about 23,000 crore was pulled out from Indian financial markets in July and August

After weeks of suspense and dithering, the government has rolled back the additional surcharge it had imposed on foreign portfolio and domestic investors. At a press conference, Union finance minister Nirmala Sitharaman said that the Centre has decided to withdraw the enhanced surcharge announced in this year’s budget on long and short-term capital gains from sale of shares.

This increased levy, she said, has been removed for both domestic and foreign investors. Actually, the budget had proposed to raise the surcharge for “super rich" individuals and had made no explicit mention of foreign portfolio investors (FPIs) in that context. FPIs became an unintended target of the additional surcharge, as they are registered either as associations of persons, or trusts. In either case, they are treated as individuals for taxation purposes. The additional surcharge prompted them to dump Indian assets. These outflows, which began with Sitharaman’s 5 July budget speech, had slowly intensified over the weeks.

The depth of unease among FPIs over the enhanced surcharge could be gauged from the fact that about 23,000 crore was pulled out from Indian financial markets in July and August. This not only caused bouts of volatility, but also betrayed a lack of confidence in India’s growth story. The outflows have also kept the domestic currency under pressure, with the rupee falling to an 8-month low yesterday.

Financial markets typically run on sentiment. With the latest move, FPI worries have been allayed. They have long argued that Indian taxation needs to be no higher than levies in rival investment markets. That may be hard to achieve. But their burden has been eased, and they can go back to doing what they were before 5 July: investing in Indian assets for the opportunity they represent.

Close