Foreign Funds Face Tax Hurdles in India’s Stock Market

Global funds are starting to return to India’s stock market, which is experiencing a strong rally. However, they are facing a major issue: high taxes on profits (capital gains taxes). Investors, like Carson Block from Muddy Waters Capital, have voiced concerns about these taxes.

Recently, global funds made their first weekly stock purchases after selling many investments throughout the year. They are worried about India’s economy and tax rules, which impose steep taxes on overseas investors compared to other countries like China, which also want their money.

Block believes that to attract more foreign money, India needs to change its tax system. Pictet Asset Management’s Prashant Kothari agrees, stating that lowering capital gains taxes could draw more investments.

Despite the pressure, India hasn’t proposed any changes to its tax laws, insisting on treating local and foreign investors the same. A representative from India’s Finance Ministry hasn’t commented on the issue yet.

So far this year, foreign funds have pulled out about $15 billion from India’s stock market but have invested more in Indian debt markets due to better prospects. Block, who has been known for shorting Chinese companies, visited India aiming to start a fund. However, he stressed that if foreign investors can’t avoid paying capital gains tax, they need to predict how much it will affect their profits.

For some, there are ways to lower tax bills, such as setting up operations at the Gujarat International Finance Tec-City, which has friendlier rules. But this isn’t practical for smaller funds. Debt investors have more straightforward options, like buying bonds issued by global institutions, which not only provide returns but also avoid local tax issues.

Damien Buchet from Finisterre Capital stated it’s easier to invest in international bonds instead of dealing with the complexities of the Indian bond market.