Foreign investors are urging government to reconsider its decision to increase taxes on the super-rich, including a higher levy on certain groups of portfolio investors, arguing the move will hit the competitiveness of Indian capital markets.
In the annual budget announced last week, Finance Minister Nirmala Sitharaman proposed a tax increase of 3 per cent for individuals with an annual income between Rs 2 crore and Rs 5 crore, and 7 per cent higher tax for those earning more than Rs 5 crore.
But Indian stocks slumped after the budget document's fine print revealed the new tax will also apply to foreign portfolio investors (FPIs) setup as trusts to invest in Indian markets.
Asset Managers Roundtable of India (AMRI), a lobby group of FPIs, said the higher tax could affect many large foreign mutual funds and pension funds, and hit India's reputation as a stable tax jurisdiction.
"This will certainly impact the competitiveness of the Indian capital markets," AMRI's President Nandita Agarwal Parker said in a letter to India's finance minister this week.
A finance ministry spokesman said he had no comment on the letter. The federal finance secretary S.C. Garg said at an event on Friday that the higher tax was aimed at "putting some extra responsibility" on the super-rich, and some of them happen to be FPIs.
About 40 per cent of roughly 9,400 FPIs investing in India are registered as trusts, according to tax experts, while the rest are registered as corporates. Together, they have invested nearly $50 billion in Indian equity, debt and hybrid products.
AMRI's letter, reviewed by Reuters, said India's new tax structure would mean the effective peak rate of short-term capital gains tax on equity sales will be 21.37 per cent for trust-based FPIs, compared to 16.38 per cent for corporate FPIs.
The peak tax in case of capital gains on the sale of listed derivative products will increase from 35.88 per cent to 42.74 per cent on such FPIs, AMRI argued.
Eugenie Shen, head of asset management at Asia Securities Industry & Financial Markets Association, said high tax rates may discourage certain investors as these rates could be higher than in their home country.
"India has been doing a lot recently to make access easier for FPIs but this tax increase undermines these efforts," Shen told Reuters in an email. "It sends confusing messages to foreign investors."
Tax experts said if FPIs wish to switch from a trust-based model to a corporate one, it could have legal and tax implications in their home countries, and also raise the risk of violating general anti-avoidance rules in India that prevent entities from changing structures to avoid tax.
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