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Higher taxes spark panic among FPIs

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Higher taxes spark panic among FPIs
The government’s decision to reintroduce the long-term capital gains (LTCG) tax has spooked foreign portfolio investors (FPIs), who rushed to the finance ministry on Friday to seek relief. Sources said FPIs were concerned about the escalation in the costs for investing in India vis-àvis other Asian and emerging markets (EM). Overseas investors were also worried whether the ‘grandfathering’ relief would be extended to them.
While news about the LTCG tax has been doing the rounds for a while, FPIs were hopeful of status quo on the tax benefit on shares held for the longer term. At the most, foreign funds had braced for an increase in the time period from one year to two years or three years for availing of the LTCG exemption.
Most foreign funds are peeved over the reintroduction of the tax without the abolition of the securities transactional tax (STT). In 2004, the STT was introduced as a substitute for the LTCG tax. In the Union Budget on Thursday, Finance Minister Arun Jaitley proposed to charge the LTCG tax without any change to the STT regime, making India the only market to levy both.
“The imposition of the LTCG tax is the real negative from the Budget. It is wrong to assume that its imposition does not affect investors,” said Samir Arora, founder, Helios Capital, adding that India could lose out to other markets as investors would have to temper down their net returns. In the recent past, overseas investors had asked for an increase in the STT instead of imposing the LTCG tax, which creates administrative and compliance difficulties for FPIs, which are poolinvestment vehicles like domestic mutual funds.
“The introduction of a tax on LTCG will be a deterrent for foreign investors and could potentially result in a movement of trading activity away from India to other offshore jurisdictions such as Singapore, which offer better tax rates and sophisticated financial products,” said Nishith Desai, founder of Nishith Desai Associates.
The Business Standard, New Delhi, 03rd February 2018

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