Has Capital Gains Tax Amendment (23-07-2024) Reduced FII Interest in Indian Equity Markets

[Fahiyaz Ahmmed]

Has Capital Gains Tax Amendment (23-07-2024) Reduced FII Interest in Indian Equity Markets? – Discussion

Post the Finance Act amendment dated 23-07-2024, Long-Term Capital Gains on listed equity are taxable at 12.5% u/s 112A on gains exceeding Rs. 1,25,000, whereas earlier the rate was 10% on gains exceeding Rs. 1,00,000.

At the same time:

• The Indian Rupee has weakened against the US Dollar, reducing dollar-denominated returns for Foreign Institutional Investors (FIIs).

• Competing markets such as China and Taiwan reportedly do not levy capital gains tax on equity investments for foreign investors.

• Recent data indicates net FII outflows from Indian equity markets.

Points for discussion:

1. To what extent has the increase in LTCG tax rate and reduction of exemption threshold contributed to declining FII interest in Indian equities?

2. How significant is currency depreciation risk compared to capital gains taxation in influencing FII investment decisions?

3. Is India becoming less tax-competitive compared to markets like China and Taiwan from an FII perspective?

4. Should India consider tax policy reforms (e.g., lower LTCG rates for FIIs, higher exemption limits, or currency-adjusted taxation) to attract and retain long-term foreign portfolio investment?

What tax or policy changes should India consider to improve FII participation while balancing revenue considerations?

AI Summary

Capital gains tax amendment raised LTCG and STCG for foreign investors, coinciding with FII equity outflows and currency headwinds.
The 23-07-2024 amendment increased LTCG on listed equity to 12.5% above Rs. 1,25,000 and raised STCG for FIIs under section 111A from 15% to 20%; these tax changes are cited alongside rupee depreciation and competing markets' tax regimes as coincident factors in net FII equity outflows and prompt consideration of tax or policy reforms to restore FII participation.