Chidambaram Allays Fears Over New Indian Capital Gains Tax

by Lorys Charalambous, Tax-News.com, Cyprus

24 May 2006

Indian Finance Minister Palaniappan Chidambaram has stated that he will not bow to demands from opposition groups to both reintroduce long term capital gains tax and tighten the tax treaty with Mauritius to make foreign institutional investors pay more tax in India.

At a hastily convened press conference designed restore some much needed confidence to the securities markets after shares plummeted last week, Chidambaram stated that the Central government has "no intention" of reintroducing long-term capital gains tax on stock profits.

He also said that India could not unilaterally change the tax treaty with Mauritius.

"The issue of the Double Taxation Avoidance Agreement has been debated threadbare," he remarked.

"Due to a host of economic, political and diplomatic reasons, the treaty cannot be reviewed unilaterally," he added.

Reserve Bank of India figures for FDI in 2004-2005 show Mauritius as the lead external investor into India. Mauritius accounted for US$820m out of a total US$2,320 in FDI.

Chidambaram's words were chosen to rebuff calls from the Communist Party of India for foreign institutional investors to pay more tax in India. However, he was also keen to send a positive signal to the securities markets after rumours that the government was preparing to announce a new tax on securities traders swept through the Bombay Stock Exchange, causing the Sensex Index to plummet by more than 1,300 points over two trading sessions last week.

Indian tax authorities have been worrying for some time that the absence of capital gains tax on holding companies in Mauritius makes it too easy for assets to be parked offshore to avoid tax. So far, however, legal challenges to the DTAA in India have failed, and the Indian Government has not seemed overly concerned.

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