Foreign Portfolio Investors (FPIs) and the Indian subsidiaries of global proprietary trading firms have urged the Securities and Exchange Board of India (SEBI) and the central government to provide tax relief by reducing the Securities Transaction Tax (STT). Industry participants argue that the combination of STT and capital gains tax creates a “double taxation” burden that raises trading costs, reduces market liquidity, and risks pushing sophisticated trading activity to offshore jurisdictions. The request comes as regulators continue to evaluate measures to improve the competitiveness of India’s capital markets.
The demand was raised during a meeting with senior officials from SEBI and the Department of Economic Affairs (DEA), where FPIs, multinational trading firms, and European custodian banks highlighted the growing cost pressures facing overseas investors. They warned that recent regulatory changes, particularly stricter leverage norms introduced by the Reserve Bank of India (RBI), could encourage firms to route more trading through offshore entities if domestic trading becomes less economical.
FPIs Seek Reduction in Securities Transaction Tax
Market participants have requested that the government reconsider the current STT structure.
According to industry representatives:
- STT is levied on securities transactions regardless of profitability.
- Investors also pay capital gains tax on profits.
- The combination increases the overall tax burden on trading activities.
- Lower STT could improve India’s competitiveness as a financial market.
Key Issues Raised
| Issue | Industry Concern |
|---|---|
| Securities Transaction Tax (STT) | Increases trading costs regardless of profit |
| Capital Gains Tax | Creates an additional tax burden on investment gains |
| Combined Effect | Viewed as a “double whammy” for investors |
| Requested Relief | Reduction in STT |
RBI’s Leverage Rules Add to Industry Concerns
The request for tax relief follows recent RBI regulations governing broker financing.
Industry participants said the central bank’s rules:
- Restrict banks from funding brokers’ proprietary trading activities.
- Require 100% collateral for credit extended to brokers.
- Increase funding costs for domestic trading entities.
Trading firms argued that these restrictions do not apply in many offshore markets, potentially making overseas trading structures more attractive.
Risk of Trading Activity Moving Offshore
Representatives warned that if trading costs remain significantly higher in India than in competing financial centres, firms may increasingly shift activity through FPI structures or overseas entities.
According to participants at the meeting, such a shift could result in:
- Lower trading volumes in Indian markets.
- Reduced market-making and liquidity.
- Lower tax collections despite higher tax rates.
- Greater migration of sophisticated trading activity offshore.
Potential Market Impact
| Area | Possible Impact |
|---|---|
| Trading Activity | Migration to offshore markets |
| Market Liquidity | Reduced participation by market makers |
| Government Revenue | Lower overall tax collections if volumes decline |
| Investor Costs | Higher transaction expenses |
Government Reviewing Capital Market Competitiveness
The discussions come only months after the government eliminated taxes on government securities (G-Secs) for FPIs, signalling a willingness to improve India’s attractiveness for foreign investors. Market participants argue that similar reforms in equity market taxation could further strengthen India’s position as a global investment destination.
In recent months, SEBI has also introduced measures such as net settlement of funds for FPIs in cash market transactions, aimed at reducing operational costs and improving settlement efficiency. Industry representatives believe tax reforms would complement these regulatory initiatives.
Why the Debate Matters
Foreign portfolio investors play a critical role in India’s capital markets by:
- Providing liquidity.
- Improving price discovery.
- Supporting capital formation.
- Increasing global investor participation.
Industry experts argue that balancing tax revenues with competitive trading costs will be essential as India seeks to attract long-term global capital while expanding the depth of its financial markets.
Looking Ahead
The request from FPIs and international trading firms highlights the ongoing debate over the balance between tax collection and market competitiveness. While investors argue that the combination of STT and capital gains tax raises trading costs and risks driving activity offshore, policymakers must weigh these concerns against fiscal considerations and the need to maintain a stable tax framework.
Looking ahead, any decision on reducing STT is likely to depend on broader discussions between the Ministry of Finance, SEBI, and other regulators. If reforms are introduced, they could lower transaction costs, improve liquidity, and enhance India’s appeal as a destination for global investors. At the same time, authorities will need to ensure that any tax changes support market growth without significantly affecting government revenues.
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