Don't agree with the latest decision on SGX Nifty & LTCG tax: Surjit Bhalla

In a bid to end SGX Nifty and Sensex futures trading abroad, Indian exchanges have come together and have issued a press release. Henceforth, they will not provide data on Indian indices or stocks to any foreign exchanges. In an interview with CNBC-TV18, Surjit Bhalla, PMEAC Member shared his views and readings on this move.

The imposition of the long-term capital gains (LTCG) tax doesn’t provide the government with much revenue, he said.

We are in a very competitive world, things are completely globalised and it is very difficult for a country to chart out a protectionist course and in my view, that is not advisable, he added.

The government can get a total revenue of Rs 5,000 crore from LTCG tax. It does not fit the revenue maximisation bill and the tax revenues that are obtained are way outlandish from what I understand, said Bhalla.

I don’t agree with the latest decision on SGX Nifty and LTCG tax, it has opened up a debate and we should have a very constructive debate on this as to what makes sense and what doesn’t make sense and concentrate on the revenue side, he further mentioned.

Below is the verbatim transcript of the interview.

Anuj: Your thoughts on this because a lot of people are saying that it is a bit of a retrograde step, in a free economy kind of environment to have this kind of restriction. I want your first thoughts.

A: First let me make it clear that whatever I say, they are my personal views and has nothing to do with whether I am a PMEAC member or not, strictly personal view. I have done a lot of work on the capital gains side, I have not done that much work or research on this new initiative, and plus you have today in the papers that perhaps the Singapore Exchange (SGX) will tie-up with Gujarat International Finance Tech (GIFT) City.

So if I were to take a birds eye view, it looks like the government is trying to get people to come to the GIFT City, but we will see how it plays out. The other thing in the Budget is increase in custom duties, etc. which is also smacking of protectionism. So we will have to wait and see as to how protectionist the government becomes and what are the arguments for imposing or getting SGX to collaborate with the GIFT City.

Latha: Will these have any other repercussions? In the sense, this morning there are fears that India could get a lower weightage in the MSCI indices because of some restrictions on foreign participation in Indian indices. Are there collateral damage that we will see?

A: We will have to wait and see. It is one argument which I have made and I am making that the imposition of the long term capital gains (LTCG) tax does not provide you with much revenue. So, why are they doing it? I think that hurts the image and the destination theme of Indian stock markets or Indian equity markets.

So we are in a very competitive world, things are completely globalised as you all know and we have been discussing for at least a decade and I think it is very difficult for a country to chart out a protectionist course. In my view that is not advisable. We will just have to as I said on this thing whether it has repercussions or not, everybody will take a view in totality about the Indian stock market including the imposition of LTCG as well as this sign of protection.

Sonia: What do you think the options could be henceforth? In order to protect the existing customers, do you think there could be a possibility that SGX collaborates with NSE to start its own India focused derivative product, you spoke about GIFT City, etc. but do you think that is a possibility?

A: Today in the papers there is a sort of discussion that the SGX might get a licence from NSE to operate via the GIFT City and that brings in extra revenue I guess. Something that I have been talking about and I have talked about on your program, and other programs for the last decade, we heavily disprotect fund managers in India. Why that is not going away I do not know.

So, for example, all the foreign investment firms, they manage portfolios on Indian equities from outside of India, get the management fees, etc. and we disprotect our own fund managers in India because you are not allowed to, other than now perhaps possibly through the GIFT City, to invest in Indian securities on behalf of clients. Why is that not changed? I don’t know, the securities market in India, the financial markets in India, sometimes you go out of your way to provide protection to the foreign investors and now you are trying to find protection to the Indian investors or the Indian exchanges. So I think the government needs to look at this in some detail to have some consistency in what they are advocating.

Anuj: I agree this is your personal view and in the past you have been an investor in the market as well, you have run a very successful firm yourself, one view is that like it or not, this is about taxation, there is an STT which takes away – it looks small but because it is not allowed to be offset against your income, that is the big reason that a lot of volume has shifted offshore and may still continue to shift offshore whether you provide data or not. Would that be a valid argument?

A: I go back to the Kelkar Committee taskforce report which I contributed back in 2002-2003 and what that report had advocated was no LTCG, the imposition, and the short term tax rate was brought down from 30 percent to 10 percent, and the introduction of the STT. It turned out the reason I advocated that then is that a lot of countries, a lot of exchanges around the world in the developing countries have imposed this as a very easy way to collect revenue, to provide some taxation, and provide if you will attractive possibilities for investment into their markets and get revenue. So I think that is done by all, there is no place in the world where you do not have taxes, either STT or long term tax or short term tax. The question with taxation is that we should separate morality, okay let us go get the rich guys, form efficiency. The goal of anybody making tax laws should be to maximize tax revenue.

Now if it means that what you impose decreases the attractiveness of your market, you are decreasing your tax revenue. It is interesting to note the following, the LTCG tax was 20 percent back in 2002 when the Kelkar Committee of report came out, and where they advocated doing away with it. At that time, the estimate was that LTCG tax revenue would be Rs 1,000 crore. This is from the ministry of finance, they obviously have done the research, they came up with that is the revenue you would get; at 20 percent that is Rs 500 crore at 10 percent. The stock market has gone up 10 times since 2002, from 3,200 to 32,000.

Now, the total tax revenue that you would get from LTCG is somewhere close to Rs 5,000 crore and you are getting Rs 7,000 crore and now next year it is estimated from STT of Rs 11,000 crore. So I do not understand from the revenue side how is this advocated or why is this advocated. It just to me does not fit the revenue maximisation bill and second the tax revenues that are obtained are way outlandish from what I understand.

Latha: I take your point on that but I just wanted your view back on the issue that we are discussing now the SGX Nifty probably ending as a product. If the NSE were to offer Nifty futures round the clock, say early morning from 6:30 and up to late evening, say 11:30, would that kind of resolve the problem and by the way do you think GIFT City index will get buyers, will find an audience?

A: I do not know, there are various reasons why Nifty in Singapore is a very popular product. So we need to investigate why, is it just the timing – I do not think so. I think there are various things about taxation, Singapore is a very clean tax environment and therefore all the investors come in there and rather invest through that rather than come through the Indian. If the GIFT City environment is there, I do not know what the view would be, how the tax authorities would handle in terms of their books or whatever. So I think the major reason for people finding Singapore attractive is the corporate governance there, and obviously taxation helps. So if they moved it to 6:30 to whatever, I do not know how much we will gain.

I think the solution that is being suggested is that they operate through the GIFT City and operate in Singapore. It seems that, that might be a win-win situation, does not change anything other than your trades are technically going through GIFT City which is fine, we will get revenue that way and at the same time I would ask the authorities, ministry of finance, Sebi, etc. why don’t they open up our markets to foreign investors, individual investors? In India you can invest up to USD 2,50,000 overseas, why don’t we open that to the foreigners that they can invest in the Indian markets USD 2,50,000. So I think we need to rethink, this is provided I would say by the ministry of finance by imposing the LTCG tax and telling the agencies or the exchanges to go ahead and stop Singapore, I think this is opened up a very healthy debate.

I hope – I don’t agree with the decision, but it has opened up a debate and I think we should have a very constructive debate on this as to what makes sense and what does not make sense and in particular, concentrate on the revenue side and therefore the other side being the incentive side for investors. We cannot assume that people will come here forever or will find us more attractive than others. We need to compare ourselves.