The social media is full of outrage wherein people are criticising Long Term Capital Gains (LTCG) on Foreign Institutional Investors FIIs and calling it stupid idea.
In a move that has sparked debate among economists and investors, India’s Union Budget for 2025 has proposed increasing the tax rate on long-term capital gains (LTCG) for foreign institutional investors (FIIs) from 10% to 12.5%. T
his policy shift aims to align the tax rates for foreign investors with those applicable to residents and is set to take effect from April 1, 2026.
Global Tax Practices on FIIs
Contrary to the assertion that 199 countries do not tax FIIs, many nations impose taxes on foreign investors, though the rates and structures vary significantly. For instance, withholding taxes on dividends and interest can range from 10% to 35%, depending on the country’s domestic tax policies.
Additionally, the United States taxes foreign investors on certain types of income, including dividends and interest, and provides mechanisms like the foreign tax credit to mitigate double taxation.
Implications for India’s Capital Inflows
The increase in LTCG tax for FIIs has raised concerns about India’s attractiveness as an investment destination. Higher taxes on capital gains could deter foreign investors, potentially leading to reduced capital inflows. This is particularly significant as India competes globally to attract foreign investment to fuel its economic growth.
Experts suggest that while the intent to harmonize tax rates is understandable, the potential impact on investment decisions cannot be overlooked. Foreign investors often consider tax implications alongside factors like political stability, regulatory environment, and market potential when making investment choices.
Comparative Perspectives
Globally, countries adopt varied approaches to taxing foreign investors. For example, Spain has proposed a 100% tax on property purchases by non-EU nationals to address housing affordability concerns.
Similarly, Hungary has faced criticism from foreign companies over increased taxes and regulatory pressures.
These examples highlight that while taxation is a tool for domestic policy objectives, it also influences a country’s appeal to foreign investors. Striking a balance between revenue generation and maintaining an investor-friendly environment is crucial.
Public Opinion
“199 countries do not tax FIIs. Only india does. I didn’t know that no other country taxes FIIs. In a world competing for capital inflows, then LTCG on FIIs was a really stupid idea,” Sai tweets.
While replying to Sai’s tweet, Ajay Rotti said, “Most countries tax capital gains only from real estate in their country. It is not just FII.. Even you and I won’t pay capital gain tax in most countries for trading in their securities unless there is an underlying real estate or in some cases business effectively connected with that country. @Iamsamirarora has a good point. If you see the actual capital gains collected from FIIs.. It may not even be that significant. If we take out capital gains and make the laws clear… They could even set up shops here and hire investment managers. Have offices which they are avoiding now. Add to employment.”
