NEW DELHI: The Associated Chambers of Commerce and Industry of India (Assocham) has recommended to the government to subject foreign inflows of economies of scale into the Indian capital market to 2% tax rate until these start withdrawing their stimulus packages and hike interest rates to levels above zero per cent.
Excessive foreign inflows into Indian equities is gradually becoming a cause of concern for policy makers, including the Reserve Bank of India, as it is felt that without moderate deterrent in such inflows, Indian capital markets could overstretch, besides inflate rupee appreciation and create asset bubble. This will not only weaken domestic export competitiveness but further fuel inflation too.
Therefore, imposing 2% tax on foreign institutional investors’ (FIIs) investments is recommended as has been done by Brazil in recent past so that possible imbalances in the capital market are corrected and India doesn’t repeat a history of 2007, according to Assocham.
In Brazil, when foreign inflows were subjected to moderate taxation, that worked successfully without inviting any criticism from any quarter and the FIIs responded to the measure in a required spirit. There is no harm if India follows it at this hour of need, feels the chamber.
In a statement, Assocham argued that foreign investments in Indian equities are likely to exceed record levels of close to $18 billion in the current fiscal as until recently, their investments are measured at about $15 billion in Indian equities. This has been happening because FIIs in economies of scale are lifting money at zero per cent interest rate and suitably parking such capital into Indian equities because of their potential factor and nature of free market economy.
If this goes unchecked, neither the rupee appreciation can be stopped nor inflation be put to check and India’s exports competitiveness would gradually fizzle out.
Therefore, until governments in economies of scale start withdrawing their stimulus package and build pressures on their federal bank to increase interest rates, a recommended prudent step for government would be to subject inflows of foreign capital to a moderate tax regime of 2%.
According to Assocham, the suggested step would not have a cascading impact to arrest inflows of foreign capital towards India but send right signals among FIIs that India is not among the developed countries where one can park one’s surpluses at any given opportune time.
Source : The Economic Times