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TAX NEWS - June 2010

India Proposes Tax on Stock Sales, Overseas Funds

India proposes to impose capital gains tax on all stock transactions by Indians and overseas funds as part of changes in tax laws that are aimed at boosting revenue to 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 today. The so-called direct tax code also proposes to allow a deduction at a specified percentage for investments held for more than one 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.

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 ($211 billion) in spending that's needed to spur economic growth.

Overseas investors, categorized as Foreign Institutional Investors, will also be liable to pay tax. 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.

Currently, short-term capital gains arising from sale of stocks within a year are taxed at 15 percent 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 and today the government released a revised discussion paper after receiving feedback. The government has sought comments on the revised discussion paper by June 30, it said in the statement.

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 today.
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