As the stock markets continue their free fall, the pundits are demanding answers. Since September, the Sensex plunged 13,000 points, or 15 percent, from its peak of about 86,000. This wiped out ₹94 lakh crore from the market capitalisation of BSE-listed companies. Various reasons are offered for the meltdown. The slowing Indian economy, poorer company results and turbulent global signals make Indian equities seem overpriced. China, which earlier lost out to India as an investment destination, has regained its sheen after the economic stimulus and the easing of restrictions on the private sector. One of the main triggers for the falling markets is the stampede of foreign investors pulling out as much as ₹2.8 lakh crore over the five-month period.
The clamour has renewed for reducing or waiving taxes on capital gains made on Indian stocks to get the foreign money back. In last year’s budget, the government hiked short-term capital gains tax to 20 from 15 percent, while long-term capital gains went up to 12.5 from 10 percent. Market watchers argue that these are huge disincentives for foreign portfolio investors (FPIs), especially since India is one of the few large markets that tax FPIs for gains made on equities. Two years ago, when the market was at its peak, the government collected nearly ₹1 lakh crore in capital gains. For foreign investors, however, there is no set-off at home for these payments, as there is no parallel tax there.
While a waiver or reduced tax on capital gains could incentivise foreign funds to come calling, this may not be such a wise move in the long term. It is no secret that India has a very narrow tax base. Barely two percent of individual income earners pay tax, while nearly half the companies that file ITRs pay zero tax. In this scenario, the options for the government to generate revenue to deploy in development and administration are limited. It would, therefore, be unfair to carve out a tax regime favouring foreign investors at the expense of domestic businessmen. However, sweeteners could be offered to FPIs, such as keeping a quota in IPOs and selling shares at discounted prices. Markets have their ups and downs, and we should have the patience to wait for the cycle to turn.