ETBudget Roundtable | STT and dividend double taxation need a review, says WhiteOak’s Aashish Somaiyaa

Speaking to Kshitij Anand on the sidelines of the ETMarkets Budget Roundtable held in Mumbai, Somaiyaa argues that the current framework of securities transaction tax and dividend taxation amounts to double taxation and warrants a serious review.

He also shares his views on Atmanirbhar Bharat as a continuity-led strategy, the cyclical nature of FII flows, and why macro stability, rather than short-term incentives, will ultimately shape foreign investor confidence in Indian markets.

Edited excerpts:

Atmanirbhar Bharat appears to have moved from intent to execution. How do you see this evolving going forward? Do you expect any new Atmanirbhar Bharat–linked policy measures in Budget 2026?

Aashish Somaiyaa: Yes, if you look at recent developments, India has been taking a range of steps, whether it is the recent labour code relaxations or, earlier, the production-linked incentive schemes. This has been a sustained and ongoing effort.
Despite the global turmoil driven by geopolitical tensions, one thing is unlikely to change: India is set to remain the fastest-growing large economy and the world’s biggest consumer market and labour force of the future. Given this enduring advantage, most global businesses will want to operate in India over the next 10 to 15 years. I therefore see this more as a story of continuity.

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You are likely to see further measures in this direction. Even going back to 2019, tax-related initiatives were clearly aimed at boosting manufacturing. We are already seeing traction in sectors such as electronics manufacturing, automobiles and auto ancillaries, where momentum is steadily building. I believe this trend will continue over the next five years.

Navneet raised the issue of FII flows, and we’ve seen sustained outflows, particularly in 2025. Do you see the government introducing any measures or incentives to discourage selling, whether driven by dollar strength or other global factors?

Aashish Somaiyaa: I think FII selling over the last 12-18 months has been driven by two key factors. The first relates to the domestic slowdown that became evident sometime in 2024. While markets had run ahead, GDP growth moderated to around 5% and earnings growth was largely flat. At the same time, RBI policy remained restrictive, government activity was muted due to elections, and multiple uncertainties weighed on sentiment. That combination prompted some reassessment.Running in parallel was a massive AI-driven rally in the US. Markets such as China, South Korea and Taiwan were perceived to be more central to the AI theme. Within emerging market allocations, if one market is slowing while opportunities are opening up elsewhere, rebalancing becomes inevitable, leading to capital reallocation.

The second factor is structural and longer-term. Globally, FIIs have increasingly gravitated towards the US. If you look at long-term data, the US has been the best-performing equity market in dollar terms, delivering compounded returns of around 15% over the past 15 years.

From India, the impact is less visible because most domestic investors do not invest overseas, and India itself has been the second-best-performing market after the US. Taiwan has performed well more recently, though it is not directly comparable. Most other emerging markets have delivered relatively poor returns. In fact, India has stood out, attracting comparatively better flows and rewarding foreign investors.

Countries such as the Philippines, Vietnam, Taiwan and Thailand have seen sustained negative flows over the past couple of years. Against that backdrop, India has fared better than most emerging markets. Recent outflows have largely been driven by the AI trade and the domestic slowdown.

My sense is that this trend could reverse sometime in 2026. There has been a sword of Damocles hanging over the US market for a while, whether in the form of an economic slowdown or a market correction. Outside the AI theme, growth has been limited. At some point, US markets may lose momentum, triggering a reallocation of capital. I cannot say whether this will happen early or later in 2026, but I do believe we will eventually see a meaningful reversal in flows.

Another critical factor is currency stability. For FIIs to invest meaningfully, the rupee needs to stabilise at some level—I am not suggesting whether that is 89, 90 or 91. When a currency is depreciating, inflows tend to be deferred and outflows accelerate. When the trend reverses, inflows pick up and outflows slow. FII flows, therefore, are not driven by incentives as much as by broader macro factors.

Finally, on taxation for global investors—WhiteOak itself is a large foreign investor, managing about $7 billion as an FII. When we invest globally, we do not face the same degree of taxation. In India, relative taxation is higher. Capital gains taxation can be debated, but securities transaction tax (STT) is clearly a concern. STT was originally introduced in lieu of capital gains tax, but today capital gains have risen even as STT has increased. This often comes up when investors compare markets and is an area that deserves a review. That said, taxation is not the primary driver of recent outflows; several other factors are at play.

That’s a very good point. On the taxation front, this exists in many other countries as well, yet you’re saying it is easier for you to invest elsewhere…

Aashish Somaiyaa: Typically, we manage an emerging market fund that is domiciled in Dublin. From there, we invest across global markets, and in most countries, we do not incur taxes on investments. However, when the fund invests in India and exits, it has to make provisions for taxes. At the very least, there needs to be parity, or India needs to be viewed in comparison with other global markets.

You mentioned GIFT City earlier, and Aashish also pointed out that relatively few Indian investors invest overseas. For those looking to diversify globally, GIFT City offers a credible and accessible route. Increased investment flows through this channel could also be beneficial. Would you like to add your perspective on this?

Aashish Somaiyaa: Yes, on taxation, one additional point to keep in mind is that dividend taxation in India is quite onerous. There are two aspects to this. Companies declare dividends out of post-tax profits, and when those dividends reach shareholders, they are taxed again. This effectively amounts to double taxation and is far from ideal.

There is also a potential side effect. While I am not suggesting this is happening today, such a structure can weaken governance by disincentivising dividend payouts. In effect, it encourages companies to retain earnings rather than distribute them. In India, promoter ownership is relatively high—around 50% at an aggregate level. By contrast, countries such as Brazil, if I am not mistaken, have minimum dividend obligations, where companies are required to distribute a portion of profits as dividends.

India, however, appears to be moving in the opposite direction—indirectly, and perhaps perversely, discouraging dividend declarations. This is an area that clearly warrants a rethink.

Let me narrow this question to specific sectors. Are there any areas where you expect more incentives going forward? Earlier, there was a strong focus on EVs. Do you see clean energy or AI emerging as the next priority areas? Infrastructure was another key focus for the government, will that continue to remain a priority?

Aashish Somaiyaa: We need to look at this in two parts. From a market perspective, over the last two to three years there has been a lot of excitement around defence. With PLI, indigenisation, and geopolitical factors converging, the theme gained traction. However, from a stock market standpoint, wherever the government has focused, the theme has already played out significantly. So, it is important to distinguish between policy focus and market pricing.

Second, in recent times, most actions appear aimed at boosting consumption, with the government shifting its focus to the demand side. Whether it is tax cuts, GST rationalisation, the 8th Pay Commission, or announcements around state elections, the emphasis has increasingly been on demand.

My sense is that earlier the focus was more on capex, supply, and infrastructure. Now, as the cycle evolves, it appears to be shifting towards revenue expenditure and demand-side measures rather than supply-side or capex-driven initiatives. That is my reading of the trends, and I believe any new measures are more likely to be on that side rather than on capex or infrastructure.

So, what are your three expectations from the Budget?

Aashish Somaiyaa: From a market perspective, areas involving dual or double taxation—such as dividends from listed companies—need to be reviewed. Securities transaction tax (STT) was originally introduced in lieu of long-term capital gains tax. Now that long-term capital gains tax has been reintroduced and raised multiple times, STT adds friction to transactions and effectively amounts to another layer of taxation. This, in my view, warrants a serious review.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of The Economic Times)