Super-Rich Tax Surcharge Has Already Started Impacting Foreign Investments In India

Overseas investors pulled out most money from Indian equity markets so far this year in July after the government raised the tax surcharge on the super-rich.

Foreign portfolio investors withdrew a net Rs 4,954 crore from equities in the first 15 days of July, the highest so far in 2019, the data available on the website of National Securities Depository Ltd. showed. If this trend continues, the monthly FPI inflows may turn negative for the first time in five months.

The Budget 2019 proposed to increase the surcharge on individuals with a taxable income of Rs 2-5 crore to 25 percent and for those earning more than Rs 5 crore to 37 percent. This led to an effective tax rate of 39 percent and 42.7 percent—one of the highest in the world—respectively, for the two groups.

Global and non-resident investors participate in India via non-corporate trusts. These structures are treated on par with individuals for tax purposes. That has led to concerns about the levy being applicable to foreigners. Though the Indian government has clarified that FPIs and alternative investment funds can get registered as corporates instead of a non-corporate structure or trust to avoid payment of a higher surcharge, tax experts say converting investment vehicles into companies won’t be easy.

The Nifty 50 Index has declined nearly 2 percent since the budget announcement on July 5. The 50-stock gauge is also on track for its worst monthly performance since October last year, according to Bloomberg data.