The tax that’s making foreign investors flee

DH Deciphers

The outlook for the Indian equity markets, as of date, is on the downside. The markets, according to various analysts, are expected to witness correction till Diwali this year. Many expect the markets to touch a 52-week low by Diwali. (PTI File Photo)

The Indian equity markets have witnessed unabated outflow of foreign portfolio investor (FPI) and foreign institutional investor (FII) money since Budget day. After the government imposed a higher surcharge on the income of the super-rich in the country, FIIs and FPIs have withdrawn over Rs 11,500 crore from the Indian markets.

What is this surcharge?

The Budget has raised the surcharge on income tax paid by the super-rich. Prior to the Budget, a surcharge of 15% on a tax of 30% was levied on those earning more than Rs 1 crore. The Budget has increased the surcharge to 25% for those with taxable income between Rs 2 crore and Rs 5 crore and to 37% for those earning more than Rs 5 crore. This makes the effective tax rate for  the  two groups 39% and 42.74% respectively.

How are FPI/FIIs impacted by this surcharge on super-rich individuals?

Many of the FPIs will be hit by the hike in surcharge because they invest as non-corporate entities, which are classified as regular individuals for taxation purposes. Almost 40% of the foreign investors invest in Indian markets as non-corporate entities. Those investors are negatively impacted by this surcharge. They fear that at a time when India’s corporate earnings are muted, the surcharge would erode their wealth. Foreign investors constitute 30% of the Indian equity market, making it the biggest investor group in the markets. As a result of negative sentiment, as FIIs and FPIs are pulling out, the markets have till now seen investors’ wealth erode by Rs 10.33 lakh crore. For that, the government is expected to earn Rs 500 crore in additional revenue.

Where are FPI/FIIs going to park their money now?

There is a high likelihood that the US Federal Reserve will slash its key policy rates by 25 basis points (bps) when it meets on July 30-31. In fact, US President Donald Trump’s pick to fill an open seat on the Fed Board, Judy Shelton, has openly batted for a 50 bps cut this time. Trump has argued that the US is at a disadvantage because the Fed’s interest rate is at 2.5%, much higher than Europe’s zero rate and Japan’s negative rate. Hence, foreign investors are expecting US stocks to rally after the policy review. So, as of date, FIIs and FPIs are flushing US markets with liquidity.

What is the outlook for the Indian markets?

The outlook for the Indian equity markets, as of date, is on the downside. The markets, according to various analysts, are expected to witness correction till Diwali this year. Many expect the markets to touch a 52-week low by Diwali.

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