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South Asia

India scraps tax increase to lift equities

The government has done an about-turn on its plans to introduce higher taxes on foreign portfolio investors as it finds ways to boost the equities market. Experts reckon the finance ministry misjudged the state of things.

By Rashmi Kumar

When India’s finance minister Nirmala Sitharaman made her maiden budget speech in early July, she announced a plan to increase the tax on investments held by high net-worth individuals, foreign portfolio investors and alternative investment funds.

Tax rates for both primary and secondary investments would increase from 15% to 25% for non-corporate taxpayers with an income of between Rp20 million ($279,000) and Rp50 million, and to 37% for those with income exceeding Rp50 million.

Sentiment among equity investors soured instantly. Overseas funds withdrew more than $3 billion after the announcement, and the domestic equity markets fell in response to the news. A few weeks later, Sitharaman told local media the government would scrap the planned tax increase – a much lauded move.

“Although delayed, the withdrawal of the enhanced surcharge rates for certain investments in the Indian capital markets should definitely provide some respite to investors,” lawyers at India’s Khaitan & Co said in a note published in late August.

David Cameron 160x186 

David Cameron,
Dorsey & Whitney

“It boils down to a mismatch of expectations between the government and the market after the national elections,” David Cameron, partner and co-chair of the India practice group at law firm Dorsey & Whitney, told Asiamoney’s sister publication GlobalCapital Asia.

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