The government should increase the capital gains tax to 30 per cent from the current 20 per cent to retain foreign investments in the economy for a longer duration, industry body Assocham said.
"The time has come when India needs to increase capital gains tax on securities traded into Indian capital markets on FIIs investments from a stipulated level of 20 per cent to 30 per cent," Assocham said in a statement today.
Tax assessed on profits realised from the sale of capital assets, such as stock, is known as capital gains tax.
However, Assocham said the higher capital gains tax should be levied only on withdrawal of an investment within six months. For the next six months, suggested maintaining capital gains tax at the current rate of 20 per cent, beyond which there is no capital gains tax.
Assocham said foreign investments should be retained for at least six months so that the country can use these funds to its advantage and reinvest such funds for the development of the economy.
Foreign inflows into the country's capital market are a cause of concern for the RBI, as without a moderate deterrent, capital inflows could lead to rupee appreciation, impact exports, fuel inflation and create asset bubbles, it said.
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"In emerging economies like India, capital inflows can result in currency appreciation and thereby weaken its exports and external engagements," Assocham Secretary General D S Rawat said.
Citing the views of the government and the Reserve Bank, Assocham said capital inflows to the extent of$150 billion can be absorbed tolerably in the economy.