Market experts warn long-term capital gains tax hike could deter FIIs, hinder market democratisation

Samir Arora and Saurabh Mukherjea were speaking at Moneycontrol's Markets ki Dhadkan event held in Mumbai.

Market experts like Sameer Arora and Saurabh Mukherjea expressed criticism towards the hike in long-term capital gains tax, labelling it as a hinderance not just for foreign institutional investors looking to pour money into Indian equities but also in the path towards democratisation of domestic investors in the market.

Speaking at Moneycontrol's Markets ki Dhadkan event, Arora, founder of Helios Capital, who has often been outspoken about his concerns regarding the increase in long-term capital gains tax, highlighted that it places FIIs at a disadvantage.

Disagreeing with the idea that India has enough capital, Arora argued that most private equity ventures are funded by nearly 100 percent foreign capital. Given our dependence on foreign capital, Arora is of the view that India still lacks sufficient risk capital and requires much more investment to grow at the rate necessary to produce meaningful change.

Emphasising on this idea, Arora blamed India's capital gains tax for the lag in market performance, explaining that while pre-tax returns in India may seem promising, post-tax returns tell a different story. "Over a 20-25 year period, in dollar terms, the returns in the US and Indian markets are essentially the same when adjusted for taxes," Arora noted.

To further illustrate, he pointed out that foreign investors holding US-based ETFs like Inda US gained only 15 percent this year, despite the domestic index rising 20 percent due to the 5 percent loss from capital gains taxes.

"It is just wrong for India to get so overconfident that we have enough capital, we have these investors and we don't care, when actually we should care," Arora said. He emphasised the need to care more about attracting more capital, instead of assuming it can continue without concern.

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Meanwhile, Saurabh Mukherjea, Chief Investment Officer of Marcellus Investment Managers had another perspective to offer. Highlighting the growing trend of wealth financialisation among high-net-worth individuals and family offices, Mukherjea stated the huge potential for wealthy households to move their wealth from physical to financial assets, especially given that a large proportion of household wealth still remains in physical holdings.

However, Mukherjea argued that the high capital gains tax could make these equity investments less appealing and derail efforts to democratise the stock market. He explained how the portfolio management services (PMS) model, which involves a 20 percent tax on short-term capital gains (STCG), sat at a disadvantage compared to tax-free structures like the Employee Provident Fund (EPF).

As a solution, he vouched for the introduction of a tax-free savings account, akin to the 401(k) system in the US, where individuals can save for retirement without being taxed multiple times. Mukherjea questioned the fairness of taxing income at 30 percent, followed by taxing stock market investments at 20 percent, particularly in a country like India, which is still in the early stages of development.

Mukherjea also noted the growing presence of women in India's financial markets. Citing data from the Reserve Bank of India (RBI), he pointed out that women now hold more bank accounts than men and are becoming a major force in mutual fund investments. However, he flagged concerns that high CGT rates could hinder this new wave of investors, putting roadblocks in the democratisation of investor participation in the market.

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