FPI lobby seeks scrapping of LTCG tax, say it makes market uncompetitive

One of the key demands of the broking community is a cut in the domestic distribution tax and securities transaction tax

An association of foreign portfolio investors (FPIs) has sought the scrapping of tax on long-term capital gains (LTCG), saying it makes the Indian markets uncompetitive and hurts inflows.

In a letter to Finance Min­ister Nirmala Sitha­raman, Asset Mana­gement Roundtable of India (AMRI), a lobby group, said the tax on LTCG distorted the investment climate for India. It has also created several operational challenges, which are dissuading genuine foreign investors, especially institutional investors, from investing in India, they said in the letter. 

“To mitigate any friction on account of taxation, we recommend that the government should revert to the earlier regime of exempting LTCG from any tax,” the letter said.

The long term capital gains tax was reintroduced in the February 2018 Union budget to shore up tax collection and curb the misuse of capital markets for evasion of taxes. Accordingly, the gains made on the selling of equities after more than a year are taxed at 10 per cent.

“Indian equity markets have delivered an average (annual) return of 5.5 per cent in the past five years in US dollar terms. If adjusted for capital gains tax, the returns reduced to less than 5 per cent. China delivered around 7 per cent ret­urns and the US around 18 per cent,” it said. AMRI said the LTCGT affe­cted exchange-traded funds (ETFs), which account for a large part of foreign flows into India. “Return on index funds and ETFs in India are unable to replicate the returns on the index because the index does not have any taxes on it. Thus, all India-index funds are underperforming their benchmark index, making them even more uncompetitive to their global counterparts,” the letter said.

The letter also sought a favourable tax regime for enco­uraging onshore fund management of offshore funds. AMRI’s letter to the finance minister comes close on the heels of a similar representation by the domestic broking community.  One of the key demands of the broking community was a cut in the domestic distribution tax (DDT) and securities transaction tax (STT). Changes to the LTCG structure did not feature in their demands.