Mumbai: The government has withdrawn the additional surcharge on capital gains, providing major relief to foreign portfolio investors (FPI). The move may help reverse some of the foreign investment outflows seen after the contentious measure was announced in the budget and will likely strengthen the rupee, analysts said.
“India will exempt foreign investors from the super-rich tax. An additional surcharge on domestic investors will also be withdrawn. The government may lose about ₹1,400 crore from the move," said Nirmala Sitharaman, finance minister.
She added that the enhanced surcharge levied by Finance (no 2) Act, 2019 on long- and short-term capital gains, arising from share sales and units referred in Section 111A and 112A, respectively, has been withdrawn to encourage investment in the capital markets.
Analysts said the move will boost sentiments. “Removal of surcharge on FPIs will see reversal of foreign money into Indian markets. Also, the stimulus package is likely to push the economy ahead of festival session that starts next week," said Gautam Shroff, co-head of institutional equities, Edelweiss Securities.
According to Rusmik Oza, head, fundamental research, Kotak Securities, the move “should also help in rupee appreciation".
In the 5 July Union budget, the finance minister had proposed an increase in surcharge on income tax for the ultra-rich, which had led to a steep rise in the tax incidence for investors. The effective tax rates on equities increased from 11.96% to 14.25% for long-term capital gains, and from 17.94% to 21.37% on short-term capital gains. Short-term capital gains on derivatives and debt securities were taxable at 42.74%.
The higher tax surcharge on super-rich tax payers sent foreign portfolio investors (FPIs) into a selling spree. In the past two months, FPIs have sold Indian shares worth over $3 billion, while they were net buyers of shares worth $11.33 billion till June. In July, Sensex and Nifty shed 4.86% and 5.69%, respectively, while, in August, both indices are down over 2% each.
Analysts said India’s macro headwinds also prompted FPIs to sell shares. Year to date, the MSCI World Index has risen 13.2% and the MSCI Emerging Markets Index 1.02%, while India’s benchmark Nifty fell 3.03% in dollar terms.
V.K. Vijayakumar, chief investment strategist, Geojit Financial Services, said: “The market is likely to look up from here on. However, a sustained rally in the market will happen only when we have visibility on good earnings growth. This requires more reforms."
Meanwhile, markets regulator Securities and Exchange Board of India (Sebi) on Wednesday eased the regulatory and compliance framework for foreign portfolio investors (FPIs) by broad-basing their classification and simplifying their registration, entry and know-your-customer (KYC) norms in a bid to boost investments.
Meanwhile, the finance minister also said that the Depository Receipt Scheme 2014 is expected to be operational soon be SEBI. This will give Indian companies increased access to foreign funds through American depository receipt (ADR) and global depository receipt (GDR).
“In order to improve market access for the domestic retail investors, Aadhar-based KYC to be permitted for opening of demat account and making investment in mutual funds. Necessary notification for amendments in Prevention of Money-laundering (PMLA) rules to be issued," said the ministry.
She also added to bring offshore rupee market to domestic stock exchanges and permit trading of USD-INR derivatives GIFT IFSC, Ministry of Finance is working with RBI to introduce this measure shortly.