There are moments in a nation's economic evolution when a seemingly modest policy change has the potential to trigger gains far greater than its immediate fiscal pain. India stands at such a moment today, with the question before policymakers: should India continue to levy capital gains tax (CGT) on equity investments held by FPIs?
If CGT on FPI equity investments is removed, revenue forgone would be an estimated 15-20 bps of GDP. Against that stands the prospect of a lasting reduction in India's cost of capital, stronger foreign capital inflows and faster long-term economic growth. Few policy choices offer such an attractive trade-off.
