Singapore: After the initial market rally following the corporate tax rate cut, markets have cooled. In an interview, Samir Arora, founder and manager of Singapore-based hedge fund Helios Capital, said low tax rates will help India take part in the ongoing global supply chain shift. Arora also explained why the tax cut was needed, how it will help companies and how it has changed investors’ perception about the government. Edited excerpts:
You have called the corporate tax rate cut not just bigger than this year’s budget but bigger than previous five budgets. Why?
I think it was in 2014 that then finance minister Arun Jaitley had promised a 25% corporate tax and his promise has now been fulfilled. What is even more dramatic is the new 15% rate for manufacturing companies, which will make India very competitive, and will help India attract global companies to set up their manufacturing bases both for the domestic market and, over time, to export.
Can you highlight how this will boost the economy and the market?
Of course, lower taxes are better than higher taxes and the equity markets have got a big bump-up as corporate earnings will be higher for the same income before tax for many companies. This will give them more cash in hand, which they can use for various purposes, from just paying higher dividends to reducing their debt or using the extra funds to better compete in their market.
Any direct benefit to the corporate sector is of direct benefit to the equity markets. Even if a company is loss-making, its share price should go up, for its present value of future profits goes up in any case. I believe that the low corporate tax rates and particularly the 15% rate for new manufacturing companies will help India participate in the global supply chain shift that is taking place, on the margin, from China to other countries in the region and around the world.
Do you think when the euphoria settles down, the math of fiscal prudence will drag the markets down again? How about the view point of foreign portfolio investors?
I think that there has been no euphoria yet. MSCI India Index is up around 2.5% this month and less than 2% year to date and all that recent rally has done is to bring these number into barely positive territory. Equity investors will prefer higher growth and lower taxes any day over a small increase in fiscal deficit.
In any case, a stronger equity market itself helps in attracting investments, achieving higher prices for government divestments, etc., and over time, can kickstart the capex cycle as corporates and investors get more confidence in investing in India.
What about FPI investment in Indian markets? They have barely picked up despite the FPI surcharge roll-back and corporate tax cuts. What do you think is the reason behind it?
People believe that it was the FPI tax surcharge in the budget that was behind the outflows, but in my opinion, it was the last straw that broke the camel’s back. It was not the surcharge alone that caused it; the economic slowdown and how initially the government dealt with the surcharge made the investors upset and just because it was rolled back investors would come back was too high an expectation. In a big-picture sense, the Indian taxes on market trading are too high as compared to every market in the world. That at some level upsets the investors.
I am surprised why FPI flows have not been much higher after the corporate tax cut, but I think that will happen soon as they see the strength in the market.
Over time, we can have substantially higher FPI flows if capital gains taxes are reduced back to zero as before 2018.
Why do investors feel that Indian taxes on market trading are too high?
About 30%-40% of FPI money in India comes from endowment funds, pension funds and sovereign funds, who are long-term investors and are tax-exempt in their own countries. Any taxes they pay in India is a permanent loss to them for there is no concept of offsetting these taxes in their home country as they are anyway tax-exempt. This reduces returns from India vis-a-vis other countries for no other country charges taxes on capital gains to foreign investors.
Even otherwise, it is an administrative nightmare to connect the taxes paid to specific underlying investors in an open-ended fund to enable them to get credit for taxes paid in India. Capital gains tax also makes it difficult for exchange traded funds to match an index performance for index is effectively a pre-tax index.
The government has been taking steps to revive the economy; how do you view these changes?
There has been a significant mindset change among investors after the corporate tax cut. There had been a growing feeling amongst corporates and investors that the government was not mindful of the concerns of industry, but with the prime minister’s speech that wealth creators should be respected and these steps by the government, there can be no doubt that the government wants to take industry along and this is a big positive.
The government is listening to the market and that is a big positive for the market. I feel that the government is now looking at the index as much as market participants.
Do you think that the valuations of Indian companies are high?
No, Indian companies’ valuations will always be higher than the peer countries because we have a better mix of MNC subsidiaries, consumer companies, more capital-efficient companies and private sector banks, etc.
Which are the sectors you are bullish on?
We are always bullish on three major sectors—financials, consumer and information technology. We don’t normally buy commodity companies, state-owned companies and Indian companies trying to become multinationals by buying assets outside India.
The writer is in Singapore for the Asia Journalism Fellowship, a programme of Temasek Foundation and the Institute of Policy Studies, National University of Singapore.