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By Siri Bulusu
India’s three main stock exchanges hope to draw foreign investment to tax-exempt domestic exchanges by no longer releasing real-time pricing data, a move that comes as the government is trying boost investment.
India’s three largest stock exchanges—the Metropolitan Stock Exchange of India Ltd., the BSE Ltd., and the National Stock Exchange of India Ltd.—announced in a joint statement Feb. 9 they will no longer license data to overseas exchanges in an effort to retain investments in India. Domestic exchanges, known as International Financial Services Centers, will be tax exempt beginning April 1, 2019, following a Finance Bill 2018 amendment aimed at boosting liquidity in India.
Practitioners say the combined efforts will boost investments in India and keep domestic exchanges competitive with neighboring low-tax jurisdictions.
“If overseas exchanges don’t have real-time data on Indian stock prices, then how can they create derivatives based on Indian securities to be traded on those exchanges,” Rajesh Gandhi, a tax partner at Deloitte India, told Bloomberg Tax Feb. 16.
The changes to data-licensing rules will impact any foreign investor seeking to invest in Indian shares, practitioners said.
“If traders end up investing in one of the three major Indian exchanges, they’ll end up paying 30 percent tax on gains earned, so to that extent Singapore derivatives made more sense—but the changes proposed in the Finance Bill will make it so offshore investments become nearly on par,” Gandhi said.
Investors may now look to invest in India’s Gujarat International Finance Tec-City International Finance Services Center (GIFT-IFSC) where traders are required to complete basic registration and derivative trading is exempt from tax, practitioners said.
Practitioners agree that the move will attract foreign investors to GIFT-IFSC due to the tax advantage, but say investments made on the BSE or National Stock Exchange will ultimately depend on tax treaty benefits available to each investor.
“Whoever wants to take a bet on Indian securities has two options—invest directly into India after registering, or invest via Singapore where registration requirements and taxes are more lax,” Gandhi said.
Share of Singapore Exchange Limited, which practitioners say trades heavily on derivatives of Indian indexes, fell from 7.89 Singapore dollars to 7.31 Singapore dollars between Feb. 9 and Feb. 12—the days following the announcement.
Practitioners say the drop was likely due to the immediate movement of investments into Indian exchanges.
Singapore stock exchanges had a competitive advantage when setting prices because they open two and a half hours before the Indian exchanges, require less paper work, and impose lower taxes, according to practitioners.
“The move by the Indian Exchanges is driven by fears of liquidity moving to Singapore on the Singapore Exchange Limited launching trading in single-stock futures in the first week of February,” Hitesh Gajaria, tax partner at KPMG India, told Bloomberg Tax in a Feb. 16 email.
GIFT-IFSC will have to mature before it can provide the same level of liquidity that the Singapore Exchange Limited has, according to practitioners, but in the long-term this shift to India will be win-win.
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