Kotak AMC's Nilesh Shah has called for a reduction in the tax burden from Securities Transaction Tax and long-term capital gains, arguing it hinders foreign investors. He suggests that recent selling by overseas players reflects global portfolio reallocation rather than an exit from India. With markets correcting about 30% from September 2024 highs, investors are watching for potential budget changes and sector-specific growth opportunities.
Nilesh Shah, Managing Director of Kotak Mahindra Asset Management Company, has advocated for a change in how the government taxes equity investments. He argues that the combined impact of the Securities Transaction Tax (STT) and long-term capital gains tax creates a double tax burden that discourages foreign institutional investors. Since many of these investors cannot claim credits for these Indian taxes in their home countries, the costs accumulate, making India less attractive compared to other markets.
The Securities Transaction Tax was originally introduced in 2004 as a substitute for capital gains tax. However, both taxes have continued to exist, creating a cumulative financial hurdle. While Finance Minister Nirmala Sitharaman has acknowledged this concern, no specific changes have been confirmed ahead of the next Union budget. Addressing this tax friction is seen by many in the industry as a key step to improving foreign capital inflows.
Despite the recent trend of foreign investors selling Indian stocks, Nilesh Shah suggests this does not mean they are leaving the Indian market permanently. Instead, he characterizes the activity as a strategic reallocation of funds. Global investors are currently dealing with complex pressures, including high interest rates in the United States and a massive focus of capital toward the artificial intelligence sector, which has diverted liquidity from emerging markets like India. Shah notes that many macroeconomic concerns, such as fluctuating oil prices and interest rate movements, are already reflected in current stock valuations.
Market valuations for large- and mid-cap stocks have pulled back significantly, with levels roughly 30% lower than the peaks seen in September 2024. This correction has brought valuations back into more reasonable ranges, which may offer better entry points for long-term investors. Corporate earnings remain resilient, providing a support base for the market despite the broader economic challenges.
Looking ahead, certain sectors continue to show promise. The consumption sector is being watched for potential growth, driven by expected discretionary spending and the impact of upcoming pay commission recommendations. Additionally, the banking and financial services sector remains in focus, supported by robust credit growth and historically low levels of non-performing assets. Investors may continue to monitor official budget announcements for any changes to capital gains or transaction tax structures, as well as tracking future trends in foreign investment flows to understand market sentiment shifts.