INDIA BUSINESS WORLD - MAY 2006
THE MONTH THAT WAS...

NO CAPITAL GAINS TAX ON EQUITIES: FM

  Foreign Institutional Investors (FIIs) can breathe easy now and continue to bet on the India growth story. Finance minister P Chidambaram has ruled out imposition of long-term capital gains tax on equities traded on the Indian bourses.

He has also clarified that the India-Mauritius Double Taxation Agreement (DTAA) is not up for review.

“There is no intention to reintroduce long-term capital gains tax on securities traded on the stock market. The issue of double taxation avoidance agreement has been debated threadbare. Due to a host of economic, political and diplomatic reasons, the treaty cannot be reviewed unilaterally,” the finance minister said on Saturday while responding to a query on the CPM's demand to reintroduce the tax. The statement assumes significance in view of this week's stock market crash which has brought down the Sensex by more than 1,300 points. The contentious draft circular of the Central Board of Direct Taxes (CBDT) does not mention foreign institutional investors, Chidambaram said while speaking to media persons here. “The FIIs are aware of the legal position on taxation, 70 of them have declared themselves as traders,” he added. While some FIIs do declare investment income, many of them benefit from DTAA, he said.

Since FIIs have no permanent establishment in India, they cannot be taxed. The CBDT circular was not dealing with any specific case and was put out only to elicit public views, Chidambaram clarified. The circular was an update of the 1989 circular incorporating court judgments of the intervening period. Attributing the stock market crash to the CBDT circular was not right since there were a host of factors, including decline in metal prices, hardening interest rates and other competitive emerging markets that had an impact, he said. The finance minister urged retail investors to exercise judgment and make informed decisions. Advocating investments in mutual funds, the finance minister said that while FIIs were net sellers, mutual funds were net buyers both in the debt and equity markets.

In the period beginning May 15, FIIs sold stocks worth Rs. 2,500 crore in the last four sessions, while mutual funds bought stocks worth Rs. 2,803 crore, Chidambaram said. In the debt market, mutual funds were net buyers at around Rs. 2,010 crore and FIIs were net sellers at Rs. 33 crore. The finance minister explained that the stock markets go beyond Sensex stocks, adding: “In the last four trading sessions, 420 stocks have risen adding more than Rs. 5,200 crore to their market capitalization.”

FIIs influence 10% of volumes in derivatives market and 10% of volumes in cash market, the finance minister said. “FIIs play a significant role in India like in any other market. I believe mutual funds also play an equally important role,” Chidambaram said.

Allaying apprehensions about the economy, he said, fundamentals were very strong and they did not undergo any change recently. “The foreign exchange reserves are at $163 billion, inflation has been reined in below 4% for several weeks, the manufacturing sector is growing at over 9% and the monsoon has set in and is expected to be good,” Chidambaram said. “The India growth story continues to be a growth story. It goes beyond stock markets and includes agriculture, services and manufacturing,” he added.

The Government today said inadequate infrastructure was retarding the country's economic growth by 1.5-2.0% every year and that the constraint of funds would not be allowed to come in the way of developing infrastructure.

“To address the need for long term funds for infrastructure projects, the government has set up the Indian Infrastructure Finance Corporation (IIFC) with Rs. 10,000 cr,” finance minister P Chidambaram said, after inaugurating the conference of state chief secretaries on public private partnership.

“There will be no limit to funds if there are viable long-term projects to be funded,” Chidambaram said. The IIFC has written to all state governments inviting proposals for infrastructure projects. Chidambaram said that while there were institutions like the IDFC to meet long-term funding needs of the infrastructure sector, the demand in turn was also huge. To make private participation in infrastructure projects viable, the government has started a viability gap funding scheme.

Chidambaram said the committee on infrastructure headed by Prime Minister Manmohan Singh has estimated that the highway sector needs an investment of Rs. 2,10,000 cr by 2012, while ports need Rs. 50,000 cr during the same period and airports need Rs. 40,000 cr by 2010. The India Infrastructure report of 1996 had said that the rate of investment in infrastructure should grow from 5% of the Gross Domestic Product (GDP) to 8% by 2005-06 but it has stagnated at 4% between 1997-98 and 2003-04, he said.