Finance Minister Nirmala Sitharaman on Tuesday kept the possibility of changes to capital gains taxation open, saying the government would carefully consider the issue amid concerns over foreign capital outflows and demands from investors for a more competitive tax regime.
Speaking at the Bloomberg New Economy Forum in New Delhi, Sitharaman said preparations for the next Union Budget had begun and that she would be cautious about commenting on possible tax changes. However, she acknowledged that long-term capital gains tax, securities transaction tax and the taxation of different asset classes remained important issues for investors in India and abroad.
“We are very close to the Budget, and the preparation for the Budget has started. It may not be the best time for me to say what I will or whatever. So I'll tread cautiously on that,” she said.
The remarks come amid concerns over foreign portfolio investors pulling money out of domestic equity markets, even as India continues to attract investments in manufacturing, infrastructure and emerging technology sectors.
Responding to a question about investor demands to remove capital gains tax and rationalise taxes before committing more money to India, Sitharaman said the debate also included the securities transaction tax (STT) levied on transactions in the securities market.
She said the taxation of different asset classes had also been discussed extensively. Two years ago, the government had brought different asset classes on a more uniform tax footing, a move that some investors had perceived as an increase in taxation.
The Finance Minister also acknowledged that foreign capital was leaving India after investors booked profits, but said the trend needed to be seen in the context of a global reallocation of funds towards the US, particularly companies and projects involved in frontier artificial intelligence (AI).
“Although it doesn't help me to say it's happening elsewhere also, I need to have capital being here,” she said, adding that global hyperscalers were attracting substantial investments.
Sitharaman argued that India could attract and retain more capital by developing AI applications that help businesses improve productivity and transition to AI-based operations, rather than focusing exclusively on frontier AI.
She said India was attracting investments in semiconductor manufacturing and chip design, data centres, renewable energy, green hydrogen, green ammonia and electric vehicles. The country was also seeing interest in transmission infrastructure needed to meet the growing power requirements of data centres and AI applications.
Defending India's semiconductor ambitions, she said the country was pursuing a realistic strategy by targeting chips used in everyday applications, including automobiles, household appliances and Internet of Things devices, alongside more advanced chips.
On the rupee's weakness and its possible role in triggering capital outflows, Sitharaman said the currency's depreciation over the past one-and-a-half to two years had been significant, despite India's sound macroeconomic fundamentals and healthy foreign exchange reserves.
She said the Reserve Bank of India (RBI) was taking measures to contain volatility in the currency market rather than attempting to fix the rupee at a particular level.
“They are not trying to fix the rupee. They are trying to stop the volatility,” she said, adding that recent RBI measures had helped the currency recover some ground.
Sitharaman attributed much of the pressure on the rupee to external factors, while asserting that the government would maintain fiscal discipline and continue to protect spending on welfare, health and education.
She said fiscal prudence remained a priority for Prime Minister Narendra Modi and that the government had maintained discipline without compromising essential expenditure.
The Finance Minister also said domestic private investment was gathering momentum, with companies investing in renewable energy, semiconductors, pharmaceuticals, medical research and maintenance, repair and overhaul facilities for aircraft.
She said reforms to ease sectoral investment restrictions, simplify laws and regulations, improve transparency and strengthen the ease of doing business had helped improve India's investment climate.
India had also expanded its infrastructure investment pipeline and established institutions to mobilise long-term capital for infrastructure projects, she said.
Sitharaman pointed to opportunities in renewable energy, chip manufacturing and design, biosimilars, generic drug manufacturing and aircraft maintenance facilities. She said the expansion of India's civil aviation sector, in particular, was creating investment opportunities, with domestic airlines placing orders for new aircraft.
