India's GST Overhaul Aims to Woo FPIs, Boost Brokerage Exports - Whalesbook

The Competitive Edge: GST Zero-Rating for Brokerage Services

The Finance Bill 2026 introduces a significant recalibration of India's Goods and Services Tax (GST) regime, specifically targeting cross-border financial services. By proposing the omission of a key provision in the Integrated Goods and Services Tax (IGST) Act, the bill aims to classify brokerage and intermediary services rendered to overseas clients as exports. This effectively zero-rates these services, removing the previously applicable 18% GST burden. This policy shift is designed to directly cut transaction expenses for foreign portfolio investors (FPIs) who previously bore the non-creditable GST as a direct cost. Such a move is intended to sharpen the price competitiveness of Indian financial intermediaries on the global stage.

Resolving Disputes and Enhancing Global Appeal

Beyond direct cost savings, the amendment addresses a persistent source of friction within the financial sector: years of high-value GST disputes. The previous classification of intermediary services, where the place of supply was deemed to be India irrespective of the client's location, led to extensive litigation and aggressive tax positions. Tax experts anticipate this change will bring much-needed clarity and finality to these long-drawn issues, potentially benefiting not only brokerage firms but also IT, ITES, and BPO service providers previously caught in similar interpretations. By aligning with global destination-based taxation principles, India seeks to enhance its appeal as a hub for international capital at a time when FPIs are reassessing emerging market allocations.

Market Headwinds and Sector Fundamentals

Despite the positive implications of the GST reform for brokerage services, the broader market context in early 2026 presents challenges. The Union Budget 2026 also included a hike in Securities Transaction Tax (STT) on derivatives, which has already triggered significant market volatility and substantial FPI outflows. In January 2026 alone, FPIs withdrew approximately ₹36,000 crore from Indian equities, a trend continuing from 2025, partly fueled by global uncertainties and this domestic policy change. The Nifty Financial Services Index, representing key players in the sector, was trading around ₹26,612.20 on February 2, 2026. The sector's broader valuation metrics show a P/E ratio of 22.4x and a market capitalization of ₹117.0 trillion as of February 2, 2026. While the GST change is a structural positive for financial service exports, the immediate impact on foreign investment sentiment is tempered by other budget measures and prevailing global economic conditions.

Navigating the Future Landscape

The prospective implementation of the GST amendment is poised to improve India's standing in offering brokerage and related services internationally. It is expected to reduce compliance friction and enhance the attractiveness of Indian capital markets for foreign investors reassessing their portfolio allocations. However, the effectiveness of this measure in reversing broader FPI outflow trends hinges on a combination of macro-economic stability, currency trajectory, and ongoing regulatory clarity. The market will closely observe how these structural benefits interact with immediate investor concerns and evolving global investment dynamics.