No long-term capital gains tax: FM

With Finance Minister P Chidambaram stating that the government has no intention of introducing long-term capital gains tax or to carry out a one-sided review of the India-Mauritius tax avoidance treaty, the government expects volatility, that wreaked the markets last week, to subside.

Both statements, ministry officials said, should be enough to protect investors.

Stressing that India's growth story goes beyond corporates, the finance minister asked retail investors to do their homework before investing and to look at mutual funds as a safer investment alternative.

The dominant sense in the finance ministry is one of being wronged by the media, at least certain sections, for wrongly interpreting and reporting last week's Central Board of Direct Taxes (CBDT) circular. The circular seeks to make a distinction between traders and investors in the stock market.

The minister used the occasion to drive home the point that India's economic fundamentals were strong.

"India's growth story remains intact. We have forex reserves of $163 billion, inflation has been below 4 per cent for several weeks now, manufacturing is growing at 9 per cent plus and the monsoon has arrived," he said.

The Left parties had on Friday demanded re-introduction of the tax on account of mayhem in the stock markets. They had also demanded a review of the DTAA with Mauritius.

Responding to the latter demand, Chidambaram said, "The India-Mauritius treaty has been debated threadbare. Due to a host of economic, political and diplomatic reasons, we are not proposing any unilateral revision of the treaty. Every political party is entitled to its opinion."

Chidambaram said the decline in benchmark indices on the market was not connected to the (CBDT) circular, which was an update of a 1989 circular incorporating court judgments of the intervening period.

He said the decline in the stock markets was due to fall in metal prices, attractiveness of other markets and hardening interest rates.

"The circular nowhere mentions FIIs and neither does it mention any tax rate. The circular simply refers to a 1989 circular and this circular has been culled out of that," he said, adding that FIIs themselves were aware of their legal position.

"Around 70 FIIs have filed their tax returns and declared themselves as traders, but they are not taxed because they have no permanent establishment in India. Some do declare investment income, but many of them benefit from the DTAA," Chidambaram said.

The minister added that during the period from May 15, FIIs had been net sellers, with mutual funds being net buyers.

"While FIIs sold stocks worth Rs 2,500 crore in the last four sessions, mutual funds bought stocks worth Rs 2,803 crore," he said. In the debt market, FIIs were net sellers at Rs 33 crore, while mutual funds were net buyers at Rs 2,123 crore.