Highlights
- Sridhar Sivaram supports scrapping capital gains tax for foreign investors.
- He proposes a marginal STT increase to keep government revenues intact.
- He believes domestic investors already enjoy favourable equity taxation.
LTCG Tax India: Amid the ongoing debate over long-term capital gains (LTCG) taxation in India, Sridhar Sivaram, Investment Director at Enam Holdings, has argued that the government should consider abolishing capital gains tax for foreign investors while retaining it for domestic investors.
Speaking on the issue, Sivaram said foreign institutional investors (FIIs) face unique operational and compliance challenges under India’s current tax regime, making a strong case for reform. He suggested that the government could adopt a revenue-neutral approach by slightly increasing the Securities Transaction Tax (STT) for foreign investors while eliminating capital gains tax on their equity investments.
“For the foreign investor, I think there’s a strong case for removing capital gains altogether because India is among the few countries where there is a capital gains tax for foreign investors,” Sivaram said.
Marginal STT hike can offset revenue loss
According to Sivaram, Enam Holdings has repeatedly suggested to policymakers that a small increase in STT specifically for foreign investors could compensate for the revenue foregone from removing capital gains tax.
“You can marginally increase the STT only for the foreign investor and make it revenue-neutral, while removing capital gains completely,” he said.
He noted that the tax creates significant operational complications for overseas funds.
“It is an operational hassle more than anything else. Daily NAV calculations become a nightmare because you don’t know what sort of capital gains should be factored in. Repatriation of money is also an issue because investors need tax certificates,” Sivaram explained.
He added that discussions around easing tax-related frictions for foreign investors appear to be gaining traction.
No strong case for extending the same benefit to domestic investors
While some market participants have advocated scrapping capital gains tax for domestic investors as well, Sivaram does not support the idea.
“I am not in that camp. Obviously, all of us want zero tax, but there is also a revenue impact for the government,” he said.
Sivaram has pointed out that capital gains taxation for domestic investors exists in most major economies and that Indian equities already enjoy a relatively favourable tax treatment compared with other asset classes.
“The case for a foreign investor is very strong. The case for a domestic investor, I don’t think, is that strong,” he said.
Debt investments deserve tax relief, not equities
Sivaram highlighted the widening taxation gap between equity and debt investments, echoing concerns recently raised by veteran banker Uday Kotak.
According to him, equity investors pay a significantly lower effective tax rate than debt investors, encouraging a disproportionate flow of savings into stock markets.
“The gap is so vast today that a disproportionate amount of capital is flowing into the equity markets,” he said.
He argued that policymakers should focus on making debt investments more attractive rather than offering additional tax benefits to equities.
“If at all there is a case, it is to bring down debt taxation so that there are more avenues for people to invest other than equity,” Sivaram said.
The investment veteran noted that post-tax returns from many debt products remain unattractive compared with equities, contributing to weak flows into debt mutual funds and other fixed-income investment categories.
The discussion comes at a time when India is witnessing strong retail participation in equities and sustained domestic inflows into mutual funds. While demands for lower equity taxes periodically emerge from market participants, Sivaram’s comments suggest that easing taxation for foreign investors and improving the tax framework for debt products may offer a more balanced approach to capital market development.