According to a Reuters report, SEBI has recommended that the government consider scrapping LTCG tax on foreign investors. The regulator has also proposed allowing domestic mutual fund investors to switch from existing holdings to other schemes without triggering LTCG tax liability, according to sources quoted in the report.
The recommendations have been submitted ahead of the annual Union Budget scheduled for February. However, the proposals are advisory in nature, and the final decision on whether to accept them rests with the government.
Indian equities have underperformed other emerging markets over the past two years, with foreign investors withdrawing a record billion from Indian stocks so far this year. Meanwhile, retail investors have increased their overseas investments as domestic market returns have remained subdued.
SEBI's proposals follow numerous discussions the regulator has held with foreign investors over the past two years. Continued selling by overseas funds has also put pressure on the Indian currency.
One of the recurring concerns raised during these interactions has been India's tax treatment of foreign investors, the sources said.
"The proposals are aimed at reducing the upfront tax burden on foreign investors," one of the two sources told Reuters.
SEBI has pointed out that the costs of investing in Indian equities are among the highest when compared with other markets.
At present, investors are required to pay LTCG tax of 12.5% on securities held for more than a year. Short-term capital gains are taxed at 20%. These levies are in addition to securities transaction taxes on trades and withholding taxes on dividend income.
In a note issued earlier this week, brokerage firm Jefferies said lowering capital gains taxes could make Indian equities more appealing to overseas investors and help attract portfolio inflows.
Brokerage IIFL has estimated that doing away with capital gains tax could increase foreign investors' returns by 2.3 percentage points.
The underperformance of Indian equities has also affected domestic investors. The benchmark Nifty 50 has fallen 4.8% over the past two years, whereas the MSCI emerging markets index has gained 40%.
Returns from diversified domestic equity mutual funds, which have become a popular investment avenue among retail savers, have also remained weak during the same period. Data from fund research firm Morningstar shows that large-cap mutual funds have delivered average returns of minus 1.6%.
SEBI wants to encourage investors to continue investing in domestic mutual funds. To achieve this, it has proposed that moving investments from one mutual fund scheme to another should not trigger a tax liability, provided the original units have been held for more than a year, the sources said.
The domestic mutual fund industry currently manages assets worth Rs 82.6 trillion ($870.80 billion). Monthly investment schemes bring in an average of Rs 30 billion every month.
With foreign investors pulling record amounts of money out of Indian equities and domestic investors facing subdued returns, SEBI's proposals seek to address the tax burden on investors and encourage continued participation in the country's equity markets. The government's decision on the recommendations will determine whether the proposed tax relief becomes part of the measures considered ahead of the February Union Budget.
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