Why should foreign investors be taxed on stock market gains?
Countries such as the US, the UK and Singapore, and indeed nearly all countries in the world do not tax foreign investors for gains made in the stock market. Then why does our finance ministry believe that we should tax foreign investors for stock market gains?
Helios Capital Management Fund Manager Samir C Arora
Since December 2009, the market has risen approximately 2 per cent per annum at a time when fixed income deposits and other products are offering 9 per cent to 15 per cent per annum returns. The market could easily see a 20 per cent type rally if a few building blocks are in place.
High fiscal deficit is the biggest issue for our economy and our equity markets. In the short term, there is nothing much that can be expected from the government in this regard.
The only credible step that the government can take in the immediate term is to increase diesel/LPG/kerosene prices to bring down subsidies in this area.
Although we do not believe that this government has the willingness to decontrol fuel prices, it can definitely increase prices by 10 per cent plus and then put a limit on the subsidy/litre or subsidy/cylinder (in case of LPG).
The government can also resort to creeping price rises where prices are increased by (say) Re 1 per fortnight for diesel till the point the subsidy level shrinks to the desired level.
The government can also try to raise funds by selling shares that it holds in Axis Bank, Larsen & Toubro and ITC. These shares came to the government when one of UTI schemes was restructured and their acquisition was not part of any strategy or master plan.
Still, the government now finds it difficult to sell these shares as if these are akin to what it owns in some public sector undertaking. The government's ownership in these companies is valued over $7 billion and it will be relatively easy to sell these shares in the market.
India's high current account deficit is also a key negative for investors and the major reason for our weak currency, which impacts us via higher fiscal deficit (since oil/other commodities are mostly imported), higher inflation and weaker buying power for our money.
To reverse this the government must encourage/facilitate foreign investment under current rules and further open sectors to FDI.
It is ironic that in such an environment, where our currency has weakened by 25 per cent in a year, the government has introduced harsh rules against FII and FDI investments.
Countries such as the US, the UK and Singapore, and indeed nearly all countries in the world do not tax foreign investors for gains made in the stock market. Then why does our finance ministry believe that we should tax foreign investors for stock market gains?
In reality, since the Indian markets have not gone anywhere in the past five years, it cannot even be the government's case that foreign investors have made massive short-term gains on which taxes have not been paid. Since the markets are down over the past five years, at a macro level it must be the case that foreign (or indeed local investors) have not made any gains-short-term or long-term-at an aggregate level.
A more elegant solution for the government would be to scrap shortterm capital gains completely for all investors and to make up the shortfall by increasing the securities transaction tax (STT). This would provide a big boost to the markets (which would then make PSU divestments more attractive for the government), raise taxes, reduce the effort in collecting taxes, make many investors come directly to India (instead of through Mauritius/Singapore etc) and bring domestic and foreign investors on par.
For attracting FDI the government needs to take some high-profile steps. Reversing the retrospective amendment which tried to bring in Vodafone-type transactions under the tax net would be such a step. The government should go all out to convince high-profile companies to invest in India for there is a herding effect in this too-companies will want to invest in India if they see their peers/competitors investing here. In this connection, the government should be flexible with companies like IKEA and accept their reasonable demands even if it requires changes in policy.
The government should work and be seen to work in facilitating large projects which are stuck due to various (governmental) reasons. The government in a transparent manner needs to put the issues slowing these investments in public domain and the steps they are taking to help these projects.
Markets are worried about a number of issues-expected downgrade of India by rating agencies if fiscal deficit is not brought under control, continuing depreciation of the rupee which directly hurts returns of foreign investors, growing non-performing loans of the banking sector, etc. To reverse this sentiment, the government needs to take some high-profile steps (FDI in multi brand retail etc) which will reverse the negative sentiment affecting investments.
If our government does not exhibit bold leadership in the next few months, the markets will still have a major directional move. Our only fear is that in that case the direction will be down instead of up.
SAMIR C ARORA
Fund Manager, Helios Capital Management
High fiscal deficit is the biggest issue for our economy and our equity markets. In the short term, there is nothing much that can be expected from the government in this regard.
The only credible step that the government can take in the immediate term is to increase diesel/LPG/kerosene prices to bring down subsidies in this area.
Although we do not believe that this government has the willingness to decontrol fuel prices, it can definitely increase prices by 10 per cent plus and then put a limit on the subsidy/litre or subsidy/cylinder (in case of LPG).
The government can also resort to creeping price rises where prices are increased by (say) Re 1 per fortnight for diesel till the point the subsidy level shrinks to the desired level.
The government can also try to raise funds by selling shares that it holds in Axis Bank, Larsen & Toubro and ITC. These shares came to the government when one of UTI schemes was restructured and their acquisition was not part of any strategy or master plan.
Still, the government now finds it difficult to sell these shares as if these are akin to what it owns in some public sector undertaking. The government's ownership in these companies is valued over $7 billion and it will be relatively easy to sell these shares in the market.
India's high current account deficit is also a key negative for investors and the major reason for our weak currency, which impacts us via higher fiscal deficit (since oil/other commodities are mostly imported), higher inflation and weaker buying power for our money.
To reverse this the government must encourage/facilitate foreign investment under current rules and further open sectors to FDI.
It is ironic that in such an environment, where our currency has weakened by 25 per cent in a year, the government has introduced harsh rules against FII and FDI investments.
Countries such as the US, the UK and Singapore, and indeed nearly all countries in the world do not tax foreign investors for gains made in the stock market. Then why does our finance ministry believe that we should tax foreign investors for stock market gains?
In reality, since the Indian markets have not gone anywhere in the past five years, it cannot even be the government's case that foreign investors have made massive short-term gains on which taxes have not been paid. Since the markets are down over the past five years, at a macro level it must be the case that foreign (or indeed local investors) have not made any gains-short-term or long-term-at an aggregate level.
A more elegant solution for the government would be to scrap shortterm capital gains completely for all investors and to make up the shortfall by increasing the securities transaction tax (STT). This would provide a big boost to the markets (which would then make PSU divestments more attractive for the government), raise taxes, reduce the effort in collecting taxes, make many investors come directly to India (instead of through Mauritius/Singapore etc) and bring domestic and foreign investors on par.
For attracting FDI the government needs to take some high-profile steps. Reversing the retrospective amendment which tried to bring in Vodafone-type transactions under the tax net would be such a step. The government should go all out to convince high-profile companies to invest in India for there is a herding effect in this too-companies will want to invest in India if they see their peers/competitors investing here. In this connection, the government should be flexible with companies like IKEA and accept their reasonable demands even if it requires changes in policy.
The government should work and be seen to work in facilitating large projects which are stuck due to various (governmental) reasons. The government in a transparent manner needs to put the issues slowing these investments in public domain and the steps they are taking to help these projects.
Markets are worried about a number of issues-expected downgrade of India by rating agencies if fiscal deficit is not brought under control, continuing depreciation of the rupee which directly hurts returns of foreign investors, growing non-performing loans of the banking sector, etc. To reverse this sentiment, the government needs to take some high-profile steps (FDI in multi brand retail etc) which will reverse the negative sentiment affecting investments.
If our government does not exhibit bold leadership in the next few months, the markets will still have a major directional move. Our only fear is that in that case the direction will be down instead of up.
SAMIR C ARORA
Fund Manager, Helios Capital Management
