Markets Set For Uncertain Week
The stock markets are past caring about Donald Trump and his trade moves
On Episode 625 of The Core Report, financial journalist Govindraj Ethiraj talks to Ravi Hegde, Founding Partner, RHP Partners, Lloyd Pinto, Partner - US Tax, Grant Thornton Bharat as well as Shishir Lagu, Partner – Tax services, KNAV Advisory Inc.
SHOW NOTES
(00:00) The Take
(05:19) Markets set for uncertain week as trade talks still inconclusive
(06:35) OPEC to hike production further, could soften oil prices
(07:49) India says it won’t be held to deadlines on trade deals
(11:46) The Jane Street phenomenon and the legal wrangle
(22:33) Trump’s Big Beautiful Bill, what does it mean for Indian companies in the US and here
NOTE: This transcript contains the host's monologue and includes interview transcripts by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regarding any feedback, you can drop us a message on [email protected].
—
Good morning, it's Monday, the 7th of July, and this is Govindraj Ethiraj broadcasting and streaming weekdays from Mumbai, India's financial capital. Well, before we start, let me tell you that we do have a longer episode today as we have an important conversation on the One Big Beautiful Bill Act, or OBBBA, and its implications for India with two leading U.S. tax experts. So stay tuned towards the end for that.
The Take: It's Like Lambs To The Slaughter
India's trigger-happy retail traders lost about 181,000 crores, or $22 billion, in futures options between 2021 and 24. The Regulator, Securities and Exchange Board of India, or SEBI, said in a study released in September last year.
Moreover, only 7% or so of retail traders made a profit in the derivative segment. In the year 23-24, 91% of retail traders made losses while trading in derivatives, and they lost about 52,000 crore rupees. Most of the profits were generated by larger entities that used trading algorithms, with 97% of foreign investors' profits and 96% of proprietary traders' profits coming from algorithmic trading, SEBI said.
The proportion of retail traders below 30 years in age rose to 43% in fiscal 24, and most individual traders belong to low-income groups earning less than 500,000 rupees, or 5 lakh rupees annually, according to SEBI. Not surprisingly, India is the world's largest derivatives market, accounting for nearly 60% of global equity derivative trading volumes of 7.3 billion trades in April, a Reuters report quoting the Futures Industry Association says. So, when SEBI passed an order barring Jane Street Capital, a New York-based trader, no one should really be surprised.
And yet people were, as if Jane Street dropped out of the skies, and more on that specific case shortly. But Jane Street only painfully highlights the stark gap between the no's and no nots. Jane Street also exposes the cruel role that technology plays in depriving the least smart and least savvy from their savings and transfers it to the rich and the techno-literate.
Jane Street's description of itself should tell you why. It says it hires researchers and traders whose ideas and algorithms are informed by a deep mathematical fluency and technologists who understand their systems from the hardware on up. Moreover, Jane Street says, or perhaps posts, that it builds low-latency networks, hack compilers, and design distributed systems, and wraps up by saying deep learning is the future of quantitative trading.
On the other side, so to speak, a recent viral video showed a Uber driver claiming to have lost 2.5 lakh rupees in options trading last year. He also added helpfully that he did not lose any money in stocks. Instead, all of it was lost in options trading, which he also said he would get back into, but with a difference, which is when he had enough capital.
His annual income, around 2.5 lakh rupees. The Uber driver, whose video I saw, seemed to take all of this in his stride and this seemed to be more a sharing of a life experience rather than an outpouring of woes, which is good for him. But it's not just Jane Street's hyper-smart quant Wall Street traders he's ranged against.
There is another layer right at home. These are the smart techies sitting in glass and steel complexes in Bangalore or elsewhere behind slick, stock-broking apps constantly smoothing out chinks in user experience so an options trader, whether sitting in a car, train, or just walking, can do deals on the go with a swipe. Meanwhile, their marketing colleagues pump attractive how-to-invest videos and other social content that lures mostly first-time traders into these trading apps click-by-click.
Together, the apps herd unsuspecting traders like that Uber driver into an arena where quite literally the wolves of Wall Street, like Jane Street Capital, are waiting. The Uber driver, or millions like him, or the 91%, never had a chance. The game was always in favour of the Jane Streets whose existence hopefully the Uber driver will now learn about and understand his limits.
The tech has argued in the past for more friction in trading. While the regulators have responded with several moves to reduce trading speculation, particularly in derivatives, and to tighten the flow of unsecured loans, that's the Reserve Bank of India, which could be used to fund all of this, none of this is clearly enough. Regulators also tend to look for larger systemic equilibrium issues, which is obviously not so disturbed or not so much disturbed by retail investors losing their shirt because the amounts are still small.
The social impact, of course, is something else. The Uber driver has a phone hooked to his dashboard. The phone connects him to passengers or potential passengers on an app.
Another screen takes him, presumably, to the trading screen of a breaking app. Now, this is a story that plays out one way or the other across more than 800 million smartphones in India. Some gamble on IPL scores, others gamble with options trading.
The common factor is access and the lack of awareness of what lies on the other side. The slicker the app, the faster the wealth destruction.
And that brings us to the top stories and themes.
The stock markets are set for another uncertain week as trade talks are still inconclusive.
OPEC is to hike production further and that could soften oil prices.
India says it won't be held to deadlines on trade deals.
The Jane Street phenomenon and the legal wrangle.
Trump's big, beautiful bill. What does it mean for Indian companies in the United States and here?
Another Week Of Uncertainty
The stock markets are looking like they're set for another week of uncertainty. There is, of course, another way of looking at it, which is that stock markets are past caring about Donald Trump and his trade moves. Wall Street for sure does not care, is hitting record highs, and is operating on the seeming assumption that somehow all these tariff battles will come to naught.
Technically speaking, that is correct because nothing has really happened yet, despite tariffs having crept up in the last few months. While there could be reasons for that, the real impact is yet to be felt, possibly because companies are eating the tariffs as Donald Trump wants them to, or the inventory pipeline is still clearing from imports that were front loaded. We don't know.
Back home, last week was overall negative for the markets, though they did close on the positive on Friday. The major indices were up on Friday, thanks to IT stocks after upbeat US jobs data, and also a later rebound in financial stocks, but overall were down for the week as investors were standing by for the potential India-US trade deal, and more on that coming up too. The BSE Sensex gained about 193 points, so it closed at 83,432.
The NSE Nifty 50 was up 55 points to 25,461, but for the week as a whole, as we said, they were down about 0.7%, but remember, they've gained about 15% from March.
More Oil On The Way
Meanwhile, in a fairly significant announcement, the Organisation of Petroleum Exporting Countries Plus agreed on Saturday to raise production by about 548,000 barrels per day in August, or about half a million barrels per day in August, further accelerating output increases, according to a Reuters report.
The group which pumps about half the world's oil has been or had been curtailing production since 2022 to support the market or prices, but is now reverse course this year to regain market share, even as US President Donald Trump asked the group to pump more to help keep gasoline prices lower, according to Reuters. The August increase represents a jump from monthly increases of about 411,000 barrels per day, which OPEC Plus had approved for May, June, and July, and 138,000 barrels per day in April. This is the jump.
OPEC Plus cited a steady global economic outlook and healthy market fundamentals, including low oil inventories as reasons for releasing more oil, and that production increase will come from eight members of the group, Saudi Arabia, Russia, the United Arab Emirates, Kuwait, Oman, Iraq, Kazakhstan, and Algeria. Crude is currently quoting at a little over $68 a barrel.
India Says No Deadlines
India's bilateral trade deals with the United States are still to materialise, and while the concerns on imports of dairy and agriculture are well-known and tabled, India has also shifted its stance in recent months to a more firm one, bordering on the aggressive. India is ready to make trade deals in the national interest, but not just to meet deadlines, Trade Minister Piyush Goyal said on Friday when he was asked whether a deal could be reached with the U.S. in time for the July 9th deadline. He said that India never does any trade deals on the basis of deadlines or time frames.
We will accept it only when it's completely finalised and in national interest. Officials from the Ministry of Commerce were in Washington and returned after an extended visit last week to obviously work out the details of the bilateral trade deal between India and the U.S., and these trade deals usually take a very long time. U.S. President Trump had threatened to impose a 26% tariff on all imported Indian goods amongst the tariffs set to take effect next week on countries around the world who fail to reach agreements before the deadline he set in April.
He's also reportedly upset that he's going to start sending letters on Monday to several countries. India's state minister said that national interest will always be supreme, and keeping that in mind, if a good deal can be made, then India's always ready to make a deal with developed countries.
Discounts On Cars
Passenger vehicle makers are offering steep discounts to liquidate unsold 2024 inventory, while two-wheeler manufacturers are taking a more measured approach thanks to stable retail demand and tighter inventory control, a report in Business Standard has said. For cars, discounts range anywhere between 70,000 to 2 lakh rupees or 200,000 rupees, and even 400,000 rupees or 4 lakhs on models like the Hyundai's Ioniq, Mahindra's XUV700, according to Business Standard. The big challenge is, of course, inventory levels, which have been dangerously high for more than a year now, as we at The Core Report have been reporting.
C.S. McNishward, president of the Federation of Automobile Dealers Association of FADA, and a regular guest on the show, also said that this aggressive discounting is directly tied to high inventory levels, and current inventory is about 50 to 55 days, which is elevated, and dealers face a 2% holding cost if vehicles remain unsold for two months, and that's pushing them to offer deep discounts. In contrast, two-wheeler companies, obviously because they're seeing better sales and less inventory, have avoided broad-based discounting. Retail sales in the passenger car segment between Jan and May were up about 2.5% year-on-year.
That's Jan and May 2025. In other interesting car news, Suzuki has beat Mercedes-Benz to become Japan's top car importer in June. The interesting part about this story is that those cars going to Japan from Suzuki are assembled in India, like the Jimny Nomad.
Suzuki brought about 4,800 vehicles into Japan last month, which is up dramatically from a year earlier, overtaking Germany's Mercedes-Benz, according to data from the Japan Automobile Importers Association on Friday, quoted by Bloomberg. Honda is known as a longtime importer of its own cars into Japan, but Suzuki is more interesting or notable because it's one of the smaller manufacturers in terms of total global output, well behind market leader Toyota, according to that Bloomberg article. An analyst told Bloomberg that Japanese consumers don't particularly care whether vehicles are produced in Thailand, India, or Japan if they want a particular car, and also argued that General Motors, Ford, and other U.S. car makers aren't able to gain traction in Japan because they don't offer products such as smaller Kei cars that appeal to local buyers.
Jane Street
India's SEBI has barred U.S. security steering company, Jane Street Capital, from the local market until further orders and seized $567 million of its funds, saying an investigation found it manipulated stock indices through positions taken in derivatives. In the most stringent action ever against a foreign trading firm in India, the SEBI has said in an interim order dated July 3rd that Jane Street and its related entities would no longer be able to participate in the domestic securities market, according to a Reuters report. The order said some of the firm's trading strategies were manipulative and led to losses for retail investors on the other side of the trades.
SEBI's impounding of those $567 million are attributed to unlawful gains earned from that alleged misconduct. SEBI said that the Jane Street entities are restrained from accessing the securities market and further prohibited from buying, selling, or otherwise dealing in securities directly or indirectly, and said the ban will stay in place until a final order is issued on completion of investigations. Share prices of some stockbroking firms, including those linked to Jane Street, fell on Friday.
SEBI asked Jane Street to deposit those impounded funds in an escrow account and asked bankers to ensure that no debits are made. If those impounded funds are deposited, the firm can take fresh positions in Indian securities provided they discontinue the so-called manipulative strategy according to sources who spoke to Reuters. Now, this action comes at a time when there are about half a dozen global trading firms from Citadel Securities and IMC Trading to Millennium and Optiva were all ratcheting up their presence in India's booming derivatives market, according to Reuters.
I caught up with Ravi Hegde, longtime securities lawyer and founder of RHP Partners, and I began by asking him how he was reading SEBI's order.
INTERVIEW TRANSCRIPT
Ravi Hegde: See, Govind, to be very honest with you, this will be a moot question as to whether it is a strategy or, of course, exploiting the strategy and doing an illegal act. Now, what SEBI sees is that there is a correlation between the derivatives and, of course, the stocks and futures. So, if you recollect, Madhvi Buch had passed an order in the matter of Infosys three years ago, where she had explained this whole concept as to how the correlation exists.
Now, what has been done is, using a proprietary trading algorithm or a software, they were aggressively trading in the stocks in a manner that the indexes are manipulated. So, what SEBI says is that you were trading aggressively during the expiry days in patch two and there is no commercial sense in your trading pattern where you buy excessively and immediately in the second patch you are swearing it off. Now, why do you do that?
Because it has an underlying effect on the index. That is basically what SEBI stands for. And interestingly, what is more important is more on the trading, what SEBI says is the totality of the circumstances.
SEBI says as an FPI under the FPI regulations, you are not supposed to swear off on the same day, you are supposed to take delivery. Now, what did you do? You ensured that there is an Indian entity here, which because of which you can circumvent this rule.
That is basically what SEBI is: The connected entities, in fact, they were exercising the trading in such a manner that no same person would have exercised otherwise. That is why SEBI said that there seems to be something wrong. And what is interesting here is while we can talk about the legalities for us together, whether this option trading is fine, whether the stock buying is fine, what is important is the genesis of this investigation is a lawsuit between two giants, where one of them said that my two employees have taken my software and they have gone to you.
That is how the lawsuit began. That's when the profits, when they realised that even for one financial year, it was close to one billion dollars. They realised what could be the importance in the Indian market that they are so much fighting for.
Now, this whole order is on Gen State, but there is nothing against Manhattan management, whether that will be subjected to investigation, whether SEBI has already started the investigation is something which will come to know eventually. But what is really bothering me about this order? I mean, legally, if you ask me this question, we are not judges to decide whether they are per se wrong because they are all prima facie findings today.
Now, you just see SEBI says that they got to know about this once they started an investigation and told NSE to prepare a detailed report. NSE gave them a caution notice and also told them that, look, this is what we feel that there is some artificial trading. Why did SEBI not take action immediately?
Why did they have to wait till May, then June, and then finally pass an order in July where they have explained that even during those days, they continued with this aggressive approach, which no common investors would have done. Now, could you say that SEBI's delayed action has resulted in the loss is one question. Now, what is really bothering me more than this is there is a direction today to say that while we are investigating this further, we are asking you to deposit this ill-gotten gain of 4800 crores.
Now, what they say next is, if you deposit this amount, the restriction which I am putting is gone. What is the logic in this? You are telling him that there is an interim direction necessary where I have to protect my market for further pollution.
I have to ensure that my investors are safe here. You cannot flout around the FPI rules by setting up companies here in India where, of course, you can get away with this by taking short positions, which otherwise FPIs cannot do. Can you simply say that, okay, you deposit this money, then continue to do whatever you want to.
Now, we don't know whether that money has been deployed in other trading strategies. See, for Jane Street, this 4800 crores is not a big deal. But then if they again continue, then we could have issued a final show-cost notice.
Why an ex parte order?
Govindraj Ethiraj: Okay, I'll come back to that. So, as I understand, there are almost more than 250 foreign portfolio investors who are trading algorithmically. But tell me, how does this link work?
So, if a foreign portfolio investor, let's say in this case, Jane Street, is sitting outside India and investing, and they are obviously investing in derivatives in this case, and they were, as I understand, buying mostly Bank Nifty and buying aggressively in the morning, selling in the evening, and therefore influencing the underlying stock prices. Now, my question really is, the entity that is holding the domestic stock or the underlying stock is sitting in India. So, how is the funds getting transferred between the two?
Ravi Hegde: So, they have mentioned that they have been seeing their financial statements. In fact, they call this their investment. While normally, of course, their trading portfolio should have been less.
If you see their bank accounts, they say that their exposure has been more. So, obviously, the funds have been remitted into India. That is clearly stated in their financial positions as well.
See, otherwise, it is not possible for any Indian entity sitting in Mumbai to trade so aggressively unless and until you have the money put in as a margin or anything.
Govindraj Ethiraj: So, you're saying there is an Indian entity which is also, therefore, exposed in this particular case? Yes.
Ravi Hegde: The first notice number one and two are Indian entities. And this is exactly what you established your counterparts in India so that through them you can do and flout these regulations. See, for a common man, if you're aggressively trading in any stock, buying and even selling, it's your loss.
There is no commercial sense in that.
Govindraj Ethiraj: Right. So, between the two, that is the international entity and the domestic entity, who is more liable as things stand as the current interpretation of law?
Ravi Hegde: Well, under law, all the four are liable because they are all parties to this action. They are persons acting in concert for this fraud, which is what Sebi has said. Because with just two entities, you cannot do anything.
So, therefore, all of them acted in concert with each other to ensure that they take this position. We don't know if there are other entities also involved in this because this is all prima facie what Sebi has seen.
Govindraj Ethiraj: So, they were essentially buying the Bank Nifty Index, aggressively selling it in the evening, which in isolation they're obviously allowed to do because it is a derivative. So, here's the larger question. If people like Jane Street are aggressively buying and selling derivatives, it's obviously people who don't understand or are not able to move as fast, who are perhaps on the other side of this equation.
I mean, small investors or not so experienced investors, isn't it?
Ravi Hegde: Absolutely. You have asked a very relevant question, which would be the argument in another way for Jane Street. Because if they say, when I am buying huge quantities in the morning, when I'm taking such an aggressive stand at 5, 11, 59, there are people who are selling.
And this is cash or futures, they are not options. Similarly, when I'm the seller, there are people buying it and there is no allegation that I'm connected with those guys. My squaring off has happened aggressively is your problem, but not with the persons who have ultimately purchased.
And these persons who purchase are those gullible investors who didn't know what was happening.
Govindraj Ethiraj: Right. So, if you were to look at, I don't know if there are similar cases elsewhere, or if you've encountered any such cases of, let's say, algorithmic trading, wherein obviously retail or newer investors lose out, which I guess is what would usually happen. Is there any precedent of any sort for this kind of action anywhere in the world that you're familiar with?
Ravi Hegde: No, not really. I can compare this similar to the colocation scam, where brokers used to take advantage of the colocation facility, where they say that you got a price advantage, and because of the HFT softwares that you had, your trades were executed much faster than other brokers who are similarly placed. So only that HFT and algorithm, whatever they are talking about, is the nearest example in the Indian context, which I can say, because this is the highest ever impounding order passed by SEBI.
Govindraj Ethiraj: Right. And last question. So, do disgorgement orders generally work from the past?
Ravi Hegde: Absolutely. SEBI has got an inherent right, because this is all pending investigation and enquiry. Under Section 11 of the SEBI Act, without even hearing you, they can pass an order because an investigation is pending. They have explained the reasons, the balance of convenience, and the urgency in this.
So, at this stage, it's a settled position of law, even by the Supreme Court, that when investigation is pending, normally the appellate authorities will not interfere. They say that you have been given an option, go and explain your rationale. Then, of course, you come to me if SEBI does not help you or understand your case.
So, at this stage, it is very difficult for anyone just to rush to an appellate authority and say that, look what SEBI has done. Because investor's perspectives also have to be looked into. And I'm sure SEBI will be taking help from FINRA, SEC and everything in this matter, for sure.
Govindraj Ethiraj: Right. Ravi, thank you so much for joining me.
Ravi Hegde: Pleasure, pleasure. Thank you, Govind.
OBBBA
Last week saw the passing of the One Big Beautiful Bill Act, termed as a budget reconciliation law by the United States Congress, containing both tax and spending policies. Now, the US Congressional Budget Office estimates the bill could add about $3.3 trillion to federal deficits over the next decade and leave millions without health coverage, a forecast that the White House has disputed.
The bill was signed into law by President Trump on July 4th, that's Friday. The OBBBA contains hundreds of provisions. It permanently extends the individual tax rates Trump had signed into law in 2017, which were originally set to expire at the end of this year.
It also raises caps on state and local tax deductions for some taxpayers and several temporary tax deductions for TIPS, overtime pay, and auto loans. There is also a 1% tax on remittances outward, but we'll find out more about that. The larger question is, from an India point of view, how this will impact businesses in India with a presence in the United States and also whether there is anything in this bill that merits an Indian response, including a legislative one.
I reached out to U.S. tax specialist, U.S. tax partner Lloyd Pinto at Grant Thornton and Shishir Lago, partner tax services at tax firm KNAV, and I began by asking them what they were taking away from the bill at this point.
INTERVIEW TRANSCRIPT
Govindraj Ethiraj: Shishir, you want to go first?
Shishir Lagu: Just to kind of start with, right, I mean, as soon as the House passed the bill with a 218-214 majority Thursday, the statement which Trump came up with was that there could be no better birthday gift for America than the phenomenal victory which was achieved just a few hours ago. So that was the importance of passing this bill from Trump's perspective. I mean, if you just look at the interest levels, the whole OEEB kind of created over the last few days, not just within the U.S., but even outside of the U.S., including India, was immense. That was predominantly because it impacted a lot of corporations. It impacted a lot of individuals. If you look at it from an Indian perspective, obviously there are quite a few changes within the OEEB which are impacting the Indian multinational corporations doing business within the U.S. While most of the changes, I would say, are taxpayer-friendly, the likes of the bonus depreciation, 174 expensing, or incremental limit to Section 179, or the changes which happened to the interest limitation under 163J, a lot of changes which are actually beneficial to the taxpayers, some changes towards beat which companies expected would come but did not happen.
So there were some wins, some losses. But overall, from an Indian corporate perspective, those doing business within the U.S., it has been a really good bill. That's my take.
Govindraj Ethiraj: Right. Okay. Lloyd?
Lloyd Pinto: Just picking up from what Shishir said, at least for some of the large multinational Indian corporations who have businesses in the U.S., one of the provisions that was closely being watched was the best provision for the base erosion and anti-abuse tax, typically geared towards offshoring. It was an anti-offshoring provision which had Indian MNCs who had businesses in the U.S. doing outsourcing activities having to pay an additional sort of a minimum tax in the past. There was a very interesting provision or an exclusion that was built in by the Senate Finance Committee version, which they released in mid of June, where they had tried to include a particular exemption that could have benefited India companies.
They said if the outsourcing was happening to an entity which was based in a jurisdiction where you ended up paying sufficient tax, for sufficient tax, we need to understand how much of it was. But typically, that is known as a sort of a high tax exclusion in some of the similar provisions. There is a high tax exception available.
If that would have been included, that would have been a big benefit for a lot of technology companies, pharma companies, anybody who's outsourcing some sort of work from the U.S. Unfortunately, that did not make its way to the final version that the Senate passed. I think the House did not make any further changes to it. So I think that was a bit of a disappointment.
It could have been something that would have been quite meaningful to some of our companies.
Govindraj Ethiraj: So when you talk about companies doing business in the U.S. and then offshoring, we're obviously talking about, I'm assuming, information technology services as being one big category. So can you tell me how that works or how that would have played out and how it's going to play out now and what could have been the optimal or non-optimal situation?
Lloyd Pinto: Yeah, so the provision basically has a cover for what they call base erosion payments. Anything that is paid off to a related party in terms of outsourcing. Those deductions get disallowed and an additional tax is paid.
The tax at which the beat is going to be charged now is 10.5%. It was supposed to be increasing to 12.5% by the end of this year. So at least there's a rate relief. The 12.5% would now be 10.5%. But it's an additional tax over and above the regular corporate tax that the Indian multinationals are paying. This would have gone away. This additional tax of 10.5% could have gone away if that exclusion would have been made available. This is applicable, yes, to large companies and by large it means companies who have more than $ 500 million in average revenues over the past three years.
But significantly large technology companies, PPO companies, even some pharma companies were impacted by this. So if this exclusion was available, maybe they would have seen a tax relief to some degree.
Govindraj Ethiraj: If you were to look at some of the points that you made, Shishir, can you walk us through some of those sections and where you see application at this point now?
Shishir Lagu: Absolutely, Govind. So let's say first if I have to cover the bonus depreciation side of it. So bonus depreciation had come as a part of the Tax Cuts and Jobs Act, wherein it allowed 100% expense for the capital assets which were put to use.
Post-2022, this bonus depreciation started phasing out, which meant that assets put to use in 2023 were eligible for 80%, then 60% and so on. However, because the whole crux of the Trump administration is about making America and to boost manufacturing in America, the big beautiful bill reinstated back this bonus depreciation to 100% and made it permanent. So what it now means is that any capital assets which have been acquired and put to use by the U.S. companies, including the U.S. subsidiaries of the Indian companies, post-January 2025 are eligible for a 100% expense. So it is a huge benefit for the companies who incur substantial capex because they are effectively able to get a complete tax break on this capital addition in the first year itself. The important aspect within that also one should consider is the asset acquisition. So the bonus depreciation provisions are not just available in terms of the new assets acquired, but even extend to the used asset, which means that if you are doing asset acquisitions, or in the U.S., there is a very interesting concept of a deemed asset acquisition. In a layman's term, what it means is that even if an acquisition is a stock acquisition from a legal standpoint, there are ways in which it can be structured as an asset acquisition from a tax perspective. So if you end up doing a vanilla asset acquisition or a deemed asset acquisition, the fixed assets which you are acquiring as a part of this acquisition, you can expense them off as well in the first year itself. So this bonus depreciation is a huge benefit, a huge incentive for companies looking at setting up greenfield projects or looking at expanding themselves within the U.S. And we've seen a lot of deals, let's say happen over the years, including acquisition of assets in the U.S. So does anything change for let's say similar deals that happen in coming days and months? Yes, it does change because I mean, if you are able to look at it right, I mean now it except without this big beautiful bill, we would have been able to claim only 40% of the asset value in the first year and balance would have to be depreciated over say five years or seven years. Instead of that, I'm able to claim depreciation of 100% today, which means that from a pure cash outflow perspective, I have a huge benefit. And the 163J which I'm going to speak of now, is also kind of linked to this because what had happened post 2022, the interest limitation was getting subjected to 30% of the EBIT and not EBITDA.
So the whole benefit of depreciation and amortisation was getting lost. So what this big beautiful bill has done is reinstated it back to 30% of EBITDA. So what it means is the companies who are incurring substantial capex, they are not only being able to claim 100% as a bonus depreciation, but even the interest limitation is kind of or the interest deductibility is going to go up because they are able to add back this depreciation and amortisation in their 163J calculation.
So overall, it has been extremely beneficial.
Govindraj Ethiraj: Right, Lloyd. So this clearly is, I mean, in keeping with the Republican Party's push towards manufacturing, manufacturing in America and so on, and it seems to be benefiting those who will invest or expand. Is there any disadvantage to, let's say, services companies, again, from an India lens?
Lloyd Pinto: No significant disadvantages other than the EBIT liability or the EBIT tax benefit, which they did not change. It will definitely promote manufacturing in America. I think one interesting provision that fortunately did not make its way through the final passage was the revenge tax, which was also sort of the income tax version of the retaliatory tariffs on the indirect side that were levied.
Luckily, there were a lot of negotiations with the G7 and finally a deal was arrived where the US decided to drop it off the final version. But that would have meant additional taxes for businesses which are headquartered in countries where the US felt that they were levying taxes, which the US deems unfair. So taxes like the pillar two taxes or digital services tax, the diverted profits tax, some of these taxes, which the US deemed unfair to its multinationals being subject to in those countries.
The US wanted to retaliate and levy a higher degree of corporate tax as high as almost 20% on companies which were doing business in America, which were headquartered out of these jurisdictions.
Govindraj Ethiraj: Right. And we saw Canada just pulled it back and India, of course, pulled it back much earlier. So I'm going to come to how or whether India should respond or is there a need to respond from a tax point of view?
Because we did have a Google tax, as we called it, and then we pulled it back because of bilateral negotiation reasons. So on the individual front, there's this whole remittance tax, which could have been higher, but at 5% or so now it's 1%. Again, it strikes me that in some of these things, it's not the amount that matters, but the process of filing and deducting and claiming and so on.
Shishir Lagu: No, absolutely. I mean, look, I mean, one is the rate has come down to 1%. That is definitely a great thing.
But I think the most important is the exception which they have carved out when it comes to these remittances happening through the regular banking channels, because that's what mostly happens. If you look at the whole H1 or L1 or the Indian community within the US who are looking at the remittances, they normally would do remittances through the normal banking channels. So giving that exclusion and definitely even that 1% is not going to really impact the Indian community any longer.
So I think that's the biggest change which they brought about, not just the rate reduction to 1%.
Govindraj Ethiraj: And then why do you think that 1% is there? I mean, is it like a presumptive tax or is it a tracking tax?
Lloyd Pinto: Maybe I can add the whole reason behind them even going after or implementing or introducing the remittance tax was really to target the informal or the undocumented migrants or workers there. That was the intention because the money that they are earning in the US, the assumption was they're not paying their fair share of taxes. So it was a mechanism to track the money transfers or tax the money transfers and bring them back into the system.
The earlier version said, okay, we will levy a remittance tax. If you have an SSN, we give you a tax credit. If you are a citizen, we give you a tax credit.
So it was targeting undocumented migrants, illegally perhaps working in the US, trying to send money abroad. But the first version of the house bill basically threw out the baby with the bathwater as they say, right? They caught everybody in that whole loop.
Fortunately, I think sense prevailed. They came out with sensible exceptions for transfers made by regular banking channels, those funded by US debit and credit cards. So now the 1% really targets I think their problem area, which is the informal trade cash and money transfers done by undocumented migrants.
Govindraj Ethiraj: So you're saying Indians who are working there or resident there and therefore have a social security number, even if they're not citizens are not exposed to this tax?
Lloyd Pinto: They won't be. So if they're making transfers through their regular banking channels, bank accounts, or funding it through their credit cards or debit cards, they are now excluded from this remittance tax. So even the 1% is not applicable to them.
Govindraj Ethiraj: Got it. Okay, last question to you both. Does India as a country need to respond or is there anything that should concern us as such things do when taxation happens, when let's say Indian companies get taxed outside and vice versa. And therefore, do you think that there is anything to be considered or anything that we should be thinking about Shishir?
Shishir Lagu: To my mind, no. At this point, I think, you know, look, see after the Tax Cuts and Jobs Act kind of came in in 2017, the Indian companies accepted some of those international tax issues like the BEAT and so on, which kind of came as a part of it. When the One Big Beautiful Bill was kind of coming in, like Lloyd rightly said, I mean, people were anticipating the change in the BEAT, which would have, you know, benefitted the Indian companies, but unfortunately, that did not happen.
But nothing worse also happened. So given that, I mean, whatever, like I said, the changes which have come in are beneficial to the Indian companies doing business in the US. So at this juncture, at least I don't feel there is anything or any sort of a pushback which may be needed.
899 definitely was draconian and the right sense prevailed and it did not come in. But the countries including India need to be mindful that it was on the minds of the US to have something like an 899. So they just need to ensure that, you know, that doesn't come in.
But other than that, I don't think there is anything much which needs to be pushed back.
Govindraj Ethiraj: Lloyd, last word?
Lloyd Pinto: Yeah, I think on balance, it's not extremely negative for Indian businesses doing operations in the US. One additional thing that people were hoping was maybe he would tinker with the corporate tax rate.
The last time when we had the 2017 Act, there were talks about a 15% rate, but we landed at 21%. Maybe that was an initial expectation. It did not make its way to the House bill.
So I think that expectation died down pretty soon. But other than that, most of the provisions, at least on the corporate side, have been beneficial in a sense. Yes, while it's beneficial towards manufacturing in the US, it will enable and promote Indian companies also looking to set up more onshore facilities.
With the activity happening on the trade side, in many ways, they are trying to steer companies in that direction to try and do more onshore activities in the US. I think on balance, it's neutral in that sense, if at all slightly positive, and no significant negative connotations for Indian corporates doing businesses there.
Govindraj Ethiraj: Lloyd and Shishir, thank you so much for joining me.
