Will India Scrap Capital Gains Tax to Bring Back FIIs? | Govindraj Ethiraj | The Core Report

Added: 2026-05-31

[00:00:02]Good morning. It's Friday the 29th of May and this is Govindrahati broadcasting and streaming weekdays from Mumbai, India's financial capital. But in transit right now, our top stories and themes. The war has now run for a full 3 months with no end in sight as markets brace once again for a fall.

[00:00:20]Will the government cut capital gains taxes for foreign portfolio investors?

[00:00:23]And what's at stake? Air India Indigo to cut back flights in June and July.

[00:00:29]US airlines are stepping up their India presence but not for flights and lessons from Kenya's experiment with satellite internet.

[00:00:44]This is a call report with Goind Raji.

[00:00:50]Before we start, as Indian investors look beyond a strong home market story, the discussion that we want to bring about and focus on is is this the right time to diversify and how should that risk be managed as you look beyond Indian markets to global opportunities.

[00:01:03]Join us as we continue our navigating market risk series for a special discussion with Radhika Gupta, managing director of Edel Weiss Mutual Fund and Navnit Monot, managing director of HDFC asset management company. This is on the 2nd of June. That's the coming Tuesday at the Cororum in Lower Pel Mumbai.

[00:01:20]Seats are limited and you can register in the link below.

[00:01:27]It's now a three full months of the West Asia conflict started by the US and Israel after they attacked Iran. Is this a forever war already? Well, not yet presumably, but it's surely inching towards that. Meanwhile, the $100 mark for a barrel of oil is what we are watching closely given that prices are presently lower but could edge up once again. As we discussed on Wednesday, the truce is fracturing at several places and it will take considerable effort once again to bring it back to a reasonable start point. Which of course brings us to our original thought that we've showcased here, which is that there is no point celebrating or even mildly cheering any development in the Iran US stocks until there are tangible outcomes. In India, markets were shut on Thursday, but the gift nifty50 index futures tumbled over 300 points indicating a gap down opening for Indian markets today. So that's about 1.3% at that point. So you can watch to see how the markets react on Friday, unless of course there are some positive developments early Friday morning.

[00:02:24]Meanwhile, Reuters report citing US officials said American forces intercepted and shot down several Iranian drones that were considered a potential threat. So looking at it from here, both sides are essentially firing missiles of some form or the other at each other. Crude oil prices were higher on Thursday. Brent crude was up close to 3% at $979 per barrel. So it's still under $100 per barrel. And equities, Indian stocks are set for their first annual decline in more than a decade according to a Reuters poll of equity analysts. and benchmark equity indices are underperforming most peers with investors outside India selling more than $23 billion of their holdings in 2026 which is more than all of last year's record outflows. The Nifty50 is already down about 8.5% while it was forecast to rise only around 8.7% by end 2026. This poll was conducted between the 15th and the 27th of May and comprised about 24 analysts. if realized the report says the annual decline of about.5% would be its first yearly loss since 2015. Uh society general equity strategy speaking to Reuters said that everyone wants returns at the end of the day whether it's foreigners or domestic investors. Nobody wants to park their money for fun but the returns are not there. Earnings growth is almost negligible to very low. AI is where the flavor of the town is right now and this is where India not just we lack it.

[00:03:50]We're actually on the wrong side according to that analyst. Of course, we did mention on Wednesday that the Nifty Midcap index is at a record high. So, somewhere in the market, there is movement and upwards, even if the benchmarks are not fully reflecting that. Elsewhere, gold prices fell to a two-month low on Wednesday, thanks to expectations of tighter monetary policy to fight rising inflation, even as the war continues spot. Gold was at about $4,447 per ounce on Thursday afternoon. And finally, the chip rally is at $5.7 trillion and counting. How much further can it go? asks the Wall Street Journal.

[00:04:29]Even by the standards of the AI boom, the gains have been extraordinary. The report says SanDisk has gone up 570%.

[00:04:37]Intel has more than tripled. Samsung, Micron, and SKH Highex have all entered the club of $1 trillion companies, and Advanced Micro Devices now has a higher valuation than JP Morgan Chase. The Wall Street Journal report says investor enthusiasm for the building blocks of artificial intelligence helped pull the stock market out of its Iran war slump while raising worries that a surge of this dramatic size and scale must end some time. We will have more interesting views on the AI boom, but as viewed by fund managers in the United States, so watch out for that over the weekend.

[00:05:11]Elsewhere in climate, average global temperatures are forecast to reach near record levels in the next 5 years with Arctic temperatures expected to warm faster than other regions. According to a report by the UN weather agency and the UK's Met Office on Thursday, a research scientist at the UK Met Office told Reuters, there is very clear evidence that the climate is warming and global average temperature is continuing to rise. Rising temperatures affect businesses directly, including sectors like construction, which will be and would be severely hit in countries like India, as we're already seeing this summer. Businesses, including those marshalling gig workers, would be wise to prepare for these times of extreme weather, as must consumers.

[00:05:57]Meanwhile, the impact of high energy prices is spreading. Indigo and Air India, the country's largest airlines, have cut their planned domestic flights for June and July, according to a Reuters report. Jet fuel costs have jumped sharply as we know and Indigo has reportedly cut about 7 to 10% of their flights and Air India has cut 22% for the next 2 months. Indigo is a bigger airline, so presumably the numbers may end up being close. An Air spokesperson told Reuters the airline will continue to monitor demand and operating conditions closely with a view to restoring frequencies as conditions stabilize. Passengers affected by the changes would be offered places on alternative flights, complimentary date changes and full or full refunds. India has already cut back on international routes and this is something that's created more opportunity for foreign airlines to add more flights. Indigo has also cut long haul flights prior to the war citing operational constraints and airport congestion. Unlike international carriers, India's airlines cannot overfly Pakistan because of a ban in Pakistan's airspace. And interestingly, Air India Express, part of the Air India Group, has just announced a large promotional campaign offering about 5 million seats under its new express sale with discounts of up to 50% across domestic and international routes. The sale has already opened and will be up till about May 31st for travel between June 15th and October 10th. Now, of course, it's interesting to see whether the cutbacks will affect any of these flights. But as many aviation entrepreneurs have pointed out in the past, including to me, advanced fairs are a good way of building positive cash flow for the airline and for the passengers, of course, these are good deals.

[00:07:35]Is the government at all considering a reduction or doing away with capital gains on sale of shares by foreign portfolio investors? Now the clamor for this has obviously been rising even as the markets have fallen and the rupee has depreciated sharply and foreign portfolio investors have pulled out close to $50 billion in the last 18 months alone. Any changes in the income tax act to mllify foreign portfolio investors would of course mean an admission that the tax was too ownorous to start with and also that India is not in a bargaining position right now. Be that as it may, there are other tax issues that investors are concerned with and they're not always to do with the rate of tax. I spoke with Ajay Roti, founder and CEO of tax compass in Bangalore and also tax expert and I began by asking him how he was seeing the prospects of a tax cut.

[00:08:21]>> So like with most tax policy decisions, there are always pros and cons. There are always certain benefits of having tax on FIS and there will be certain benefits of not having taxes on FIS. Now some countries may be doing it having a zero tax for reasons well known to them.

[00:08:37]We had zero tax for a point of time because we needed foreign capital at that point. Domestic capital was not what it is today and we didn't have a equity market which was as buoant as it is today as good as it is today. So we did have it for zero for a particular point of time. Now whether it has to be zero, whether 10 is good, 12 and a half is good, 20 is good is really a policy decision. Now if we want to argue there are equal merits on both sides of this debate. It boils down to what the government is wanting where this is fitting into their other decisions and what they are wanting to do. So does it make India a little less attractive with attacks? Yeah, post tax and pre-tax differences in terms of returns always are important. But is this the only reason that's holding back a capital or the FIS are selling and taking money out? My personal reason I don't think it's only this is only a reason. So this is a debate which we can sort of have for a long time and we need to see what is it that we have to do here and now.

[00:09:33]In my view at this point we are able to sustain without foreign capital. Our domestic capital SIPs DIS are doing a fantastic job. There's good money that's been placed there. Are we as stout for capital as we were many years back when we needed to make it zero? I don't think so. So one of the arguments is that this kind of tax which is levied because after all these investors are being taxed in their home country one of the arguments is that this in a way goes against the convention of tax for portfolio investors and such a tax does not exist in most other parts of the world. What do you feel on that?

[00:10:09]>> Slightly a complex question and it's a little text but I'll try to simplify it as much as possible. You know FIS are not taxed in a simple manner in most countries. You know there could be sometimes single stage taxation. They could be passed through which really means it gets taxed in the hands of the ultimate investors and not FI itself etc. Therefore sometimes if they are getting taxed in two jurisdictions whether foreign tax credit is available etc becomes difficult but principally they may not suffer double taxation in most there will be treaties and things like that but there could be inefficiency there could be tax inefficiency that will be there. Does it go against how it's done in all other countries? No. There are countries which I can give you examples where FIS are taxed or foreign investors are taxed.

[00:10:53]Forget FIS. US for example doesn't tax.

[00:10:56]Singapore doesn't tax. So there are countries which don't tax. This takes me back to the earlier point. It's really about there's no right or wrong. It's really what we want to be doing at this point of time. For every country that we have an example of not taxing foreign investors, there could be one which is taxing. Now these could be two different countries at different stages of their life and for different purposes they may be doing it but yeah of the larger countries which matter most of them don't tax.

[00:11:22]>> Okay. So let me ask the other question.

[00:11:24]So yes tax is only one aspect of why investors come in or go out and obviously a lot of flows have happened when these tax rates were there. Now but what are the other tax related interventions in a broader sense not just section 210 that India could look at to make let's say inbound investment easier and outbound investment or outbound flows more seamless. I think that is the most important thing going in my view. It's not just about the tax.

[00:11:53]It's about everything else around that.

[00:11:55]Now the biggest pain that every foreign investor has with India today is our whole litigation, tax litigation, tax administration. How you know returns are scrutinized. Companies are fighting huge tax battles. It need not only be the investor. It could be the investy company. They're stuck in a large dispute. Exits become difficult. There has to be lockins, escros, you know, indemnities, multiple things. I think addressing our whole tax litigation, tax administration approach to scrutiny is one of the biggest things that any investor would today want. Specific to FI is this whole tiger global ruling which really updates a lot of the principles about you know foreign investors coming in from certain treaties which enjoyed a beneficial treatment which they no longer do but that has sort of again troubled them a bit. Some clarity there, some stability there. Of course, the government has not been making large retrospective amendments. some small tweaks for administrative purposes they have done but not really large things like the old retro taxes that troubled but more on your own stability on the tax matters administration litigation issues like withholding while monies are being remitted the timelines for that I think little bit focus on these kind of things you know it's not only about the headline tax right there's lower litigation helps and then stability helps the government could look at other things like select effective benefits to tax and we'll get there you know but select players stable capital long-term capital giving a different treatment these are the kind of things that they can think of rather than straight away you know we get to abolishing or taking away the tax or making it zero I really don't think making it zero and having the kind of litigation environment that we have today will help again other things on tax matters being addressed is equally important in my view >> can you elaborate on that when you say that making it zero and not doing something else >> you make it zero but then there's still this kind of you know aggressive tax administration litigation for everything then you have the same problem right because the companies in which you are investing is actually going through these tax litigation issues therefore there's a impact on the valuation there's an impact on your exits I personally know funds which have not been able to have a good exit clean exit because there's a huge tax litigation that's there which can't be closed therefore you know who will take the past litigation burden so therefore there's money that's locked in these kind of things when they want to transfer shares past litigations impact them. So that's the big problem.

[00:14:28]>> And when you say companies are unable to sell and you're talking about really primary market in the sense they are locked into as private equity or venture capital.

[00:14:36]>> I'm not talking purely only on the public market but the larger class of foreign investors coming into India. So you know the Mauritius route for example was most likely created because we did need capital or we were hungry for capital at that time and it was a route that was accepted by all. It was not that Mauritius was a big source of original investment and so on. It was obviously being routed. So we knew that.

[00:14:59]My question is obviously times change and our need for capital may change, our policies may change. What is the one or two things we can do to manage the transition better even as we introduce policies back and forth? So on managing the policies better I think one is this whole thing of past positions you go and unsettled them if you've admitted and if everybody knows that the malicious route was being used for that then you've already plugged it you have revised the treaty you have renegotiated the treaty you brought them into tax the same with Singapore then do you want to go back and unravel all of those things question those things to say yes you didn't have a substance you amended the treaty because you always knew people were coming in without substance so this whole of unsettling past positions. Once you have accepted, moved on going back and changing and questioning that and why that happens is again because of the way our tax administration litigation functions. Things happen 2 years later it goes into a stay and then it gets revived again. There's some other decision. So there is no certainty for a long period of time. So one way of doing that transition is to say we are changing here and now therefore I will do a prospective thing for you. Whatever is retrospective in that sense I truly grandfather it. Today we have a situation where you actually grandfather it in the law but you are actually questioning the grandfathering in the courts. So therefore you grandfather it in letter and spirit and don't touch those old positions because you always knew that was the issue like you rightly said Ben. So that's one bit on the transition and second is really lay out some of these things when you are transitioning what is it that you are looking for give guidance to the you know taxpayers I think that a little more communication more statement of their position as to why they have done and what is the thing that for the past for future what are the things that is expected those are things that will help in a very smooth transition when you make these changes because change will happen but then how do you do it got it AJ thank you so much for joining me >> thank you US airlines are ramping up their presence in India. It's not of flights.

[00:17:04]US carrier American Airlines which has a daily service to New Delhi from New York is going to double headcount at its India technology hub to about 800 by early next year according to a Reuters report. Meanwhile, Southwest Airlines has also said it's going to expand its Hyderabad GCC to about a thousand employees over the next few years.

[00:17:22]Several global American companies like JP Morgan Chase, Walmart, McDonald's, Nvidia and Liy have already expanded technology operations. As the Reuters report points out, American Airlines setup in Hyderabad 2 years ago employs about 400 people focused on software engineering, AI and cyber security.

[00:17:47]The Megallaya government has signed an agreement with Elon Musk's Starlink India to improve connectivity in remote and inaccessible areas in the state.

[00:17:55]According to a report in the India today magazine last month, the agreement suggests that Starink services could arrive soon in India as the company has already received the necessary approvals or most approvals from the government.

[00:18:06]Now, Megallaya is a hilly state and faces unreliable internet connectivity due to its unique topography. However, Starlink's rollout of satellite internet services is still pending as the telecom regulator that's the telecom regulatory authority of India or TRI is yet to finalize the spectrum pricing for satellite internet and spectrum allocation by the department of telecommunication. So even as we wait for that how will Starlink do versus other services already in India particularly the terrestrial kind. Last month, Moses Kibaro, Nairobi based digital entrepreneur and founder and CEO of Dots Savvy, wrote a piece saying that 3 years ago, Starlink was going to disrupt Kenya's internet market. But things did not go as planned. Quoting federal data, Kimaru says Starink has only about.9% of Kenya's total fixed internet subscriptions today and thus the much hyped and expected Kenya internet market disruption quite simply never happened, at least not as expected. He says the reason he says is that the incumbents perhaps alarmed by the Starling threat responded aggressively. Faster speeds, better pricing, and broader coverage.

[00:19:08]Interestingly, he says Kenya's fixed internet market grew an impressive 85% in 2 years. And in a nutshell, consumers won, and the competitive pressure that Starink brought to Kenya's internet market was a good thing for everyone.

[00:19:20]And Starink also grew particularly in more rural areas and remote businesses also being a likely target market in India. Of course, in India, Aireel and Reliance Go are also set to launch satellite internet networks, assuming all clearances come through. But right now, the red carpet is laid out or has been laid out for Star Link and Elon Musk. Kimmyaru also says last month, Airel Africa and SpaceX tested Starling direct to sell in Kenya standard 4G phones connected to satellites in dead zones with no dish, no hardware, and even completed Airel money transactions.

[00:19:53]I reached out to Moses in Nairobi, Kenya, and I began by asking him how he was seeing Starlink and satellite internet advances in his country and what we could take away.

[00:20:02]>> First of all, I was one of the very first people in the country to have a Starlink unit. It wasn't actually mine.

[00:20:07]It was given to me by one of the local internet service providers to review cuz they were looking at it as sort of as a backup option for some of their customers. And immediately one of the challenges that I faced was something called obstructions where if you're in an area where there are a lot of trees, a lot of buildings and you don't get a clear line to the satellite, it becomes quite compromised in terms of the quality of the speed and of course the reliability of the connection. So just environmental factors right there sometimes can be a challenge in an urban style setting. But more importantly, I got this service. I tried it out. I was generally quite disappointed initially.

[00:20:40]And as you can imagine at that point in time, you know, everyone's been on the internet. You know, there's a lot of hype around, you know, mask, you know, 3 years ago and stalling. And there was this expectation that when Staling comes to Kenya, it's going to transform the market, right? And of course, it's because many of us have what I call fairly lackluster internet experiences quite often with our service providers for various reasons. But people saw that this is going to be the one that changes everything for them. As it turned out, you know, when Stalin came in, one of the biggest concerns was the price because in order to get the unit, the the terminal and get it up and running and then the monthly subscription, you know, you were going to need, I think, at least something close to $1,000, you needed to spend a subscription that was significantly higher than what many of the providers in most urban locations will provide. So, the economics didn't seem to make sense, but people were generally excited. And so many of the early people who signed up and got it working properly, even in urban environments, because you just have to mount it properly, etc., were actually celebrating the fact that you know not getting this 100 megabits per second connectivity it's fast it's doing the job as it were and although the price was quite prohibitive for many people many people actually saw the benefits of that not just in rural parts of the country but also in the cities but you got to remember that there's providers in Kenya with millions of customers millions of subscribers you know whether it's largest mobile networks or the largest fixed home internet fixed to fiber to the business fiber to the home connectivity many of them on the ground and I think what happened is that when the hype started to build up, many of the incumbents sort of fought back by offering faster internet connectivity at more or less the same prices or even lower prices. And that sort of changed the complexion of the internet service space because suddenly it felt much more accessible. They started innovating in what they were selling in the marketplace. And to a large extent, I think they probably overreacted to the Starink sort of threat. And the reason I say this is because if you look at Starlink and its satellite technology, it does not have the ability or the capacity to handle what a fiberbased internet service provider can do on the ground. Not just in terms of speed, but just in terms of serving customers. And in fact, when the demand exceeded supply, so to speak, selling actually stopped selling their services in Kenya at some point as they built up the base stations that allow you to then have more capacity. So there were some what I'd call technical constraints that also limited their growth. But I always held of the opinion that Starlink was always going to be a peripheral player that they were going to be in those areas where adequate internet infrastructure is lacking in which there are many parts in Kenya where that is still the case.

[00:23:04]But in any sort of typical urban periquality mobile datab based you know 4G 5G which is significant coverage around the country right now then that is when you would probably use a Starlink. And if there's no fiber, you might get a wireless through some of the other internet service providers that specialize in underserved areas, but for sure not as fast as what Starlink is. So to some extent, it was a boon because it meant that we got lower priced internet from the incumbents. They also started covering the gray areas. There's still corporates even in Nairobi that use stalling and other cities and towns in the country as sort of a backup internet connectivity for redundancy. And I think it's just sort of added to something that was already there, but it didn't transform the market per se. But for those who were in areas where generally internet was hard to get, it became a gamecher.

[00:23:52]>> I think that sentence you used in one of your posts was that it did not disrupt Kenya's internet market, it transformed it.

[00:23:58]>> Yes. Like I said, the players overreacted. I think you know cuz they were really panicking that this had the real potential to take a big share of the market. But even as we speak, I think Stalink has only 25,000 subscriptions or something to that order less than 30,000. You have suppliers like you know Safariccom who across their subscriber base I think is over 35 million users of which inherently each one of them has internet access albeit the problem is that you know you're using data bundles which can be very costly. You have service providers like mingu where I think for,00,500 shillings in Kenya you have at least you know 10 megabits per second or something of that sort per month which is not the fastest but for most use cases perfectly adequate and I think those underserved markets really will never use a star link. the more ultimate classes and the business class were the ones who would actually use it as well as the nonprofits, you know, the schools in the rural areas, you know, nonprofit organizations, tourism businesses who are generally off the radar when it comes to internet connectivity, >> right? And in there too, you're saying that in most cases it's a backup rather than the primary source of connectivity.

[00:25:01]Yeah, because today even fiber you can get gigabit internet in Kenya now in even home level it does cost a bit of a premium but if speed is really your concern and you are using it for you know gaming or applications that require high speed maybe online trading and so forth then I'd say the incumbents are there but the moment you got to sort of go beyond the per urban parts of the country and you start getting into rural then it becomes a gamecher right >> right and Africa has also partnered with stalink to launch launched this service and do they have other services as well in Kenya?

[00:25:34]>> Well, what was Simulator I think it was just last month or the month before that they run a test uh so that you could use your 4G device standard 4G for smartphone to actually connect to their satellite link and you'd be able to make phone calls and also do texting and some limited data capabilities. I do not see Edel actually partnering with Staling to sell the internet per se but where they are I think partnering it's more of a scenario where they might have an existing client possibly on a corporate or enterprise level connectivity and then stalling becomes this additional redundancy that they put into their network mix right that's how I see them actually deploying it right and what's your sense as you look ahead Moses in terms of the kind of consumption patterns in Kenya what people are using the internet most for what are their kind of demands or needs And which let's say blend of services do you think will best meet it at least in the near future.

[00:26:25]>> One thing I got to say is that the biggest game changer that came to internet in this country and many other countries global is obviously co right suddenly internet moved from being something that was a nice to have for many people many people even have fiber to the home just using phones and that sort of thing. It became a necessity because then you know that's the only way your children could do education.

[00:26:44]That's the only way you could work from home. That's the only way you could watch movies. That's how you get on social media. And I think really that acceleration that happened because of covid in terms of connectivity you know many many homes businesses and people who traditionally were not online was suddenly there even court cases to date and things like this I had you know done virtually on platforms like zoom so that transformation was instructive in the sense that it just changed our notion of what the internet was and what we could use it for and then by extension we sort of saw a surge in e-commerce we saw a surge in online education we saw a surge from working from home. Many of us are still working from home most of the time. You see, so when you think about use cases, that's what I'm talking about. I know people who never moved back to Nairobi when they moved to coastal towns and did all sorts of experiments because they wanted a new lifestyle that co, you know, opened up for them. And I think in that sense, internet became much more central, much more endemic to the lifestyles and the work styles of people in Kenya in general. And now I'd say it's like oxygen, right? Everyone everywhere has an internet connection at every level of society. And you'll find that they're using it from everything to filing their taxes, which is coming up next month, to making sure their kids can attend school. So today, most of us are working from home because there's a strike, but I can tell you it's business as usual because of the internet. You know, there's a transport strike because of the sharp increase in fuel prices, but no one is panicking because everyone knows they have the internet and they can work from home. Right, >> that's a good note to end on. Moses, thank you so much for joining me.

[00:28:12]>> Well, thank you for having me and all the best.

[00:28:20]That was the core report with me Govindra Ethi. Do stay connected with more of our coverage at the core. You can check out our website or sign up to our newsletter for our exclusive stories, one in-depth feature a day on www.thecore.in.

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