Union Finance Minister Nirmala Sitharaman on November 2 acknowledged growing concerns among foreign portfolio investors (FPIs) and domestic equity market participants over India’s taxation regime, saying she would consider the feedback even as the government remains focused on sustaining economic growth of 7 percent or more.
Responding to a question on whether the upcoming Union Budget could offer a more favourable tax environment or a red-carpet treatment for foreign investors, Sitharaman stopped short of making any commitment on changes to equity taxation, but acknowledged that the circumstances facing investors had changed and that their concerns had become louder.
Moneycontrol had reported on October 26 that a decision to restructure long-term capital gains (LTCG) tax on equities, held by both foreign and domestic investors, may be taken in the coming weeks, likely before the Budget.
The LTCG tax on sale of equities by foreign and domestic investors is 12.5 percent without indexation benefits. The tax is applicable on gains exceeding Rs 1.25 lakh per financial year on listed shares. No such limit is applicable on sale of unlisted shares
“I realise the anxieties prevailing among retail investors and equity participants,” she said, adding that the government recognised the concerns being raised by market participants.
The finance minister pointed out that India’s taxation structure was broadly similar in 2023-24, when the country witnessed strong foreign investment inflows, including some of its highest inflows, without the government having to introduce additional tax incentives to attract investors.
“Nothing extra was done to draw in investors,” she said, noting, however, that the current situation was different, with challenges having increased and net foreign institutional investor (FII) outflows having risen.
Sitharaman said foreign flows had begun showing signs of returning, but acknowledged that the changed circumstances had amplified calls from investors for a more supportive tax regime.
“I understand circumstances have changed, so voices of concerns are louder. I quite appreciate it. I will consider all this,” she said.
Her remarks are significant as investors look for clarity on whether the government will revisit capital gains taxation, particularly the long-term capital gains (LTCG) tax regime, in the upcoming Budget. While Sitharaman did not specifically mention LTCG or promise any revision in tax rates, her acknowledgement of investor concerns is likely to keep expectations around equity taxation in focus ahead of the Budget.
The issue assumes importance amid concerns over sustained foreign portfolio outflows, market volatility and the relative attractiveness of Indian equities compared with other emerging markets.
Sitharaman said capital would be particularly important at a time when the government and businesses were working to sustain economic growth of over 7 percent. “In order to keep that intact, we need capital and equity particularly now,” she said.
She also indicated that the government’s emphasis on deepening the domestic bond market over the past few years would now have to be viewed alongside calls for greater support to equity markets.
The finance minister said she had placed considerable emphasis on widening and deepening the bond market in recent years, but acknowledged that market participants were now making a case for similar attention to the equity market.
“I would not want to say more at this point, but I recognise the voice,” she said.
Earlier today, a report by SBI Research said that the Centre has sufficient fiscal space to absorb the revenue loss from abolishing long-term capital gains (LTCG) tax, with the potential impact estimated at just Rs 40,000–50,000 crore in FY28.
The report argues that even a complete abolition of LTCG tax could be accommodated within the government’s fiscal consolidation roadmap, as tax collections from capital gains are likely to decline significantly amid subdued stock market returns.
SBI Research estimates that LTCG tax collections could fall to Rs 40,000–50,000 crore in FY27 from approximately Rs 1 lakh crore in FY26 and Rs 1.29 lakh crore in FY25.
“We believe the Government would be able to take this hit,” the report said, referring to the hypothetical abolition of capital gains taxation.
News agency Reuters reported on October 2 that Securities and Exchange Board of India (SEBI) has recommended the government remove the LTCG imposed on foreign investors.
