India’s onerous taxes are a buzz-kill for likes of Carson Block

By Catherine Bosley and Abhishek Vishnoi

Global funds returning to India’s stock market amid a world-beating rally are having to set aside one of the biggest gripes expressed by investors like Muddy Waters Capital LLC founder Carson Block — namely the country’s high taxes.

While global funds marked their first weekly purchase of local stocks last week, they have been big sellers this year. In addition to an uncertain economic outlook, they point to New Delhi’s tax code, which imposes high capital gains levies on overseas funds. That’s an approach at variance with other countries such as China, which are competing for their money.

Block has said that if India wants to attract foreign capital, it needs to change tack. Prashant Kothari, a senior investment manager with the emerging equities team at Pictet Asset Management, echoes that view.

“There’s always competition for global capital,” Kothari said. India’s taxes on capital gains change the calculus for investors, and lower rates would help shift the needle in favor of more investment, he added.

India has so far defied calls to reform the capital gains tax for global funds. The government wants to treat locals and foreigners equally, according to consultants. There’s little sign of that changing.

A spokesperson for the Finance Ministry in New Delhi didn’t respond to Bloomberg’s request for a comment.

Overseas funds have pulled around $15 billion from India’s stock market this year, according to data compiled by Bloomberg. They have gone in the other direction in the country’s debt market, helped by growing bets on rate cuts and the inclusion of Indian bonds in global indexes last year.

Block, best known for a series of short positions on Chinese companies, visited India earlier this year with a view to starting a fund. But he said that if foreign fund managers can’t avoid paying capital gains tax they need to be able to reasonably estimate how much it will reduce returns, which depends in part on performance. “Obviously, that analysis can get subjective,” he told Bloomberg in an email.

The table below shows capital gains tax rates:

Investors have a few ways to reduce the tax bill, including setting up shop at the Gujarat International Finance ­Tec-­City, a financial hub with looser rules in Prime Minister Narendra Modi’s home state. That requires employing staff locally, according to Sunil Badala, head of tax at KPMG in India. That makes it out of the question for smaller foreign funds.

Debt investors have other options. The World Bank, the European Bank for Reconstruction & Development and the Asian Development Bank have all sold rupee bonds overseas, giving bond funds exposure to rupee-denominated debt without being forced to pay local taxes.

“When I compare the attractiveness of the Indian local bond trade with the level of complication — I don’t have to own those,” said Damien Buchet, chief investment officer of Finisterre Capital, part of Principal Asset Management. “I can perfectly replicate that position with some supranational bonds with no tax issues.”