A confident India can afford to squeeze investors

MUMBAI, May 21 (Reuters Breakingviews): India's next government could raid investors. Global money managers are worrying that, if re-elected, Prime Minister Narendra Modi's administration will make sweeping changes to tax rules, including increasing the money it collects on capital gains from share sales. There's some merit to the idea.

Finance Minister Nirmala Sitharaman dismissed a media report along those lines this month as "pure speculation". The changes would aim to prevent the erosion of the tax base and unify treatment of different asset classes, CNBC-TV18 said. The article, citing unnamed sources, was subsequently unavailable on its website.

It's a logical idea because the current rules incentivise investments in equity over debt. Listed equity investments held up to one year are considered short-term and gains are taxed at 15 per cent. By contrast, gains on debt securities up to three years after purchase are taxed at the normal rate applicable to the investor's income, going up to 40 per cent for foreigners.

The obvious fix is to narrow the gap between the rates. New Delhi is trying to trim India's budget deficit to 4.5 per cent of GDP by March 2026, from the current 5.8 per cent. That makes raising taxes on equity, rather than cutting those on debt, a more attractive option.

Other benefits would include helping India to deepen its bond market. The securities regulator is keen to reduce companies' dependence on bank borrowings for financing large projects. It recently slashed the minimum ticket size on corporate bond purchases to entice more retail investors into the $550 billion, opens new tab market. That is poised to take off, following the inclusion of India's sovereign bonds in global indices, so a small nudge could go a long way.

Raising the tax on capital gains wouldn't be popular and is always risky for a capital scarce country like India, but stocks are booming; the benchmark Nifty 50 is up 23 per cent in the past one year, and is trading near an all-time high. India logged record annual portfolio inflows worth $40 billion, opens new tab in the year through March and participation in markets from mom-and-pop investors is surging. If the new government has a comfortable win, it could afford to spend some political capital to make the change.

India's income tax department is planning sweeping changes to tax laws once a new government takes charge, CNBC-TV18 reported on May 2, citing unnamed sources.

The changes could be aimed at preventing erosion of the tax base and unifying treatment of different asset classes, the report said.

Finance Minister Nirmala Sitharaman on May 3 described the report as "pure speculation" in a post on X, formerly Twitter. The report and a related social media post on the television channel's website and X handle were later removed.