India Proposes Tax on Gains From Stock Sales, Funds

June 16 (Bloomberg) -- India proposes to impose a capital gains tax on all stock transactions by Indians and overseas funds, aimed at boosting revenue and pare the budget shortfall from a 16-year high.

The new proposals include a move to tax investments in stocks and equity-linked mutual funds at the applicable tax rates for income, according to a document posted on the Finance Ministry’s website yesterday. The so-called direct tax code also proposes to allow a deduction at a specified percentage for investments held for more than a year.

India’s Finance Minister Pranab Mukherjee last year unveiled plans for the biggest change to the nation’s tax law in almost five decades, seeking to raise revenue in Asia’s third- largest economy where a majority of the nation’s 1.2 billion people don’t pay a rupee in income tax. Raising tax revenue would help Mukherjee narrow the budget deficit to 5.5 percent of gross domestic product in the year started April 1, from a 16- year high of 6.9 percent in the previous 12 months.

“It’s understandable why the government is targeting foreign institutional investors and domestic investors, they’re easy targets,” Vikas Pershad, Chicago-based chief executive officer of hedge fund Veda Investments LLC, said in e-mailed comments. Still “FIIs are the worst taxpayers to target, because they’re the people for whom it’s easiest to take their capital elsewhere,” he said.

Overseas investors, categorized as Foreign Institutional Investors, will be liable to pay tax as per the proposals. All investments by such investors will be considered as capital gains. Overseas funds that have been reporting income from stock investments as business income and claiming exemptions will not be allowed to claim such benefits, the tax code proposes.

Few Taxpayers

India relies on the 27 million people who pay taxes in the world’s second-most populous nation to help fund 10.2 trillion rupees ($219 billion) in spending that’s needed to spur economic growth.

Short-term capital gains arising from sale of stocks within a year are taxed at 15 percent at present and long-term capital gains for such investments held for more than a year are exempt from tax.

The draft on the new tax code and a paper for public discussion was released in August last year. The government yesterday released a revised document, seeking comments from investors.

India may present the draft direct tax code to lawmakers during the monsoon session of parliament next month, Revenue Secretary Sunil Mitra said in New Delhi yesterday.

Could Deter Investments

The proposals if passed as law could deter overseas investments into India, Pershad said.

Overseas investors sold $2.04 billion in Indian stocks last month, pulling out the most funds since October 2008 as the European debt crisis roiled global equity markets.

“India will become a less desirable market for foreign investors if the taxes are raised as meaningfully as the government is considering,” Pershad said. “Given the current volatility of markets, more trades and investments are being executed with a time horizon of less than 1 year -- why punish people for being prudent?”

The new law also proposes tripling the limit on tax-free investment in pension funds and life insurance to 300,000 rupees ($6,443) to boost savings and help the government raise finance for ports, roads and airports.