Money managers push for tax cuts to stem foreign portfolio outflow

The $900-billion asset management industry in India is urging the Narendra Modi administration to eliminate capital gains tax for foreign investors to make the nation's markets more appealing. Fund managers claim a higher levy on debt funds is a deterrent, prompting them to seek parity with stocks. Uncertainty surrounding tax laws has also created challenges for firms, including private equity giants from Wall Street, who sometimes use overseas entities to manage tax bills efficiently.

The push for tax cuts comes as local stocks have underperformed compared to emerging-market peers over the past two years, despite a rally last week. Global funds are projected to withdraw money from equities for an unprecedented third consecutive year, with outflows nearing a record $27 billion this year. By removing capital gains levies, asset managers believe after-tax returns for foreigners could improve, a critical factor in their investment decisions.

Edelweiss Financial Services Ltd. Chairman Rashesh Shah emphasized the importance of showcasing India as a desirable long-term allocation by removing the tax. Finance Minister Nirmala Sitharaman has signaled a willingness to consider tax changes on stocks but has not confirmed any revisions to capital gains or transaction taxes.

Global players, such as the US, UK, Germany, Japan, and major emerging markets like South Korea, Brazil, China, and Taiwan, currently exempt such inflows from tax. This divergence in treatment has created a disparity with global standards, as noted by Marcellus Investment Managers' Saurabh Mukherjea. The industry also advocates for treating long-term gains on debt mutual funds at the same rate as equities, rather than at investors' applicable income-tax rates.