Aditya Shah has called for the complete removal of the Long-Term Capital Gains (LTCG) tax for foreign investors in India, citing its necessity to attract foreign portfolio investments (FPIs). Shah argues that the current LTCG framework is out of step with global peers and that its removal is essential to restore India's competitiveness as an investment destination.
Shah highlights that no comparable emerging market levies capital gains on foreign portfolio inflows at the current rate in India. He emphasizes that the revenue lost from abolishing the tax would be outweighed by indirect gains such as a lower cost of capital, higher employment, and deeper equity markets. Shah suggests reverting to the pre-2018 regime, where LTCG did not exist, as a clear signal that India is open to foreign investment.
Addressing the narrative that domestic institutional investors (DIIs) and SIP inflows can absorb FPI exits, Shah dismisses it as flawed. He asserts that a healthy capital market requires both foreign and domestic participation, with foreign institutional investor (FII) money being crucial to reducing the cost of capital.
“In a healthy country, both domestic investors and foreign institutional investors will come and invest. Foreign money is absolutely required to decrease the cost of capital and drive further investment.”
Aditya Shah
The backdrop to Shah's comments includes a market facing multiple shocks: FPI outflows, a weakening rupee, and geopolitical tensions such as the US-Iran conflict. Shah argues that policy clarity on LTCG is a variable the government can control and act on quickly, making it a critical lever to arrest the sentiment slide and rebuild India's appeal as a destination for long-term foreign capital.
"In a healthy country, both domestic investors and foreign institutional investors will come and invest. Foreign money is absolutely required to decrease the cost of capital and drive further investment," says Aditya Shah.
Background
The call for LTCG removal comes amid a challenging economic environment, with the Indian government seeking ways to stabilize the rupee and attract foreign investment. The removal of LTCG for foreign investors could potentially make India a more attractive destination for long-term capital.
Looking forward, market observers will be keenly watching for any policy shifts from the Indian government regarding LTCG, as such changes could significantly impact foreign investment flows and market dynamics.
