The Hindu Business Line : New tax regime lures NRIs to capital markets

WILL the differential tax regime introduced in the Union Budget for banks and capital markets, result in the flight of $33,248 million of NRI bank deposits to new havens in the Indian capital markets?

Reflecting the view of the new generation of NRIs in the Gulf, Mr Jose Mathew, Chartered Accountant with PSI Middle East, told Business Line from Dubai: "There has been a sea change in the attitude of the NRIs away from the stability and security of bank deposits to the high, yet speculative returns of the capital markets. With a perceptible surge in numbers of the investing community in the Gulf, Barjeel Geojit Securities had to shift their operations to a bigger trading hall within the same premises."

Mr K.V. Shamsudheen, Chairman of the Pravasi Bandhu Welfare Trust, based in Dubai was a lot more circumspect: "There has been a paradigm shift in the attitude of NRIs from bank deposits to capital market investments after the Budget. This could soon translate into affirmative inflows into the Indian capital markets. But it is going to be a slow process. The term deposits held in Indian banks will have to mature over the coming months and maybe years before the full impact of the shift in investment becomes evident."

Some stockbrokers felt that the new trend could bring greater liquidity to the Indian capital markets and even help alleviate the impact of the proposed turnover tax.

The NRI community though jubilant over the removal of long-term capital gains tax and steep reduction in the short-term capital gains tax is, however, deeply concerned over the imposition of income tax on NRI deposits. They are more averse to bureaucratic formalities such as the need for filing income tax returns on income from NRI bank deposits.

The Budget pronouncements have resulted in a corresponding surge in new accounts, which have been opened for capital market transactions as well as enquiries related to the capital markets and equity-based mutual funds among the Gulf NRIs. Almost 60 per cent of the NRI remittances come from the Gulf region.

Of these, 64 per cent are from an emerging affluent middle class, willing to explore new and innovative avenues, Mr Shamsudheen said. An online survey conducted by Pravasi Welfare Trust with a base of 1,00,000 NRIs has revealed the changing profile of NRI community seeking alternative investment avenues.

And the brokers in the country plan to capitalise on these changing NRI sentiment. Mr C.J. George, Managing Director of Geojit Securities, said: "The old generation of well entrenched NRIs who rose within foreign companies over the decades is over. The new breed of affluent, technically qualified and upwardly mobile NRIs have become a reality. They are more interested in the high returns of the capital markets and have no qualms in giving the low returns of bank deposits the go by. We will soon be launching an education campaign among these new converts to highlight the relatively low tax regime and immense opportunities in the Indian capital markets."

But people like Mr Jose Mathew need no convincing. "I have all along been investing in the Indian capital markets and the new tax regime will induce more people like me to shift their investments," he said. The banking community is also getting increasingly worried.

Mr A. Sethumadhavan, Chairman of South Indian Bank said, "The threat of a diversion from bank deposits to capital market may not be immediate. But it is real. The NRIs have a great sense of discomfort with Indian bureaucracy and some could even go to the extent of pre-closing their accounts in order to avoid filing returns."

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