FPIs Urge STT Cut Amid RBI Leverage Rules

Foreign portfolio investors (FPIs) and Indian arms of international trading companies have collectively appealed to regulatory bodies for a reduction in the securities transaction tax (STT). They argue that the combination of STT and capital gains tax places a significant financial burden on investors.

These appeals were directed to the Securities & Exchange Board of India (Sebi) and the Department of Economic Affairs, highlighting the cumulative impact of these levies. The industry believes that such a burden could deter investment activity within the domestic market.

RBI’s Leverage Rules and Market Impact

During a recent meeting, high-frequency trading firms voiced concerns that the Reserve Bank of India’s stringent regulations on leverage could lead to a significant shift in market activity. These rules mandate 100% collateral for credit extended to brokers for proprietary trade or investment.

This regulatory stance could compel firms to move their trading exposures from domestic entities to FPIs, potentially altering market dynamics. Such a shift carries several implications:

• Lower tax revenues for the government.
• Reduction in market-making activities.
• Diminished liquidity-providing trades in the domestic market.

Historical Context and Industry Demands

These discussions follow India’s decision two months prior to eliminate taxes on government securities (G-Secs) for FPIs, effective April 1, 2026. This earlier move aimed to attract more foreign investment into government bonds.

The removal of G-Sec taxes for FPIs included several key components:

• Elimination of interest withholding tax.
• Removal of short-term capital gains taxes.
• Removal of long-term capital gains taxes.

Industry officials now contend that rationalizing STT and other levies would enhance the competitiveness of transaction charges in India. There is also a persistent demand to reduce the capital gains tax, which has seen increases over recent years.

Securities Transaction Tax: A Closer Look

The STT, initially introduced in 2004, continues to apply across various financial instruments. These include stocks, derivatives, and equity-oriented mutual funds.

Notably, STT remains in effect even after the reintroduction and subsequent increase of the long-term capital gains tax. Furthermore, a recent Supreme Court verdict concerning Tiger Global has introduced additional uncertainty for foreign investors regarding the interpretation of treaties and indirect transfers, complicating the investment landscape.