India Cuts Long Term Capital Gains Tax In 2004/2005 Budget

by Lorys Charalambous, Tax-News.com, Cyprus

09 July 2004

Unveiling the Indian government’s budget for 2004/2005, Finance Minister Palaniappan Chidambaram announced a series of measures designed to spur economic growth and foster investment, whilst attempting to tackle the 10% combined central and state government deficit.

Among the key tax measures was the elimination of long term capital gains tax on securities transactions. In its place will be put a transactions tax on exchange-listed securities levied on the buyer at a rate of 0.15% of their value.

Additionally, the rate of short term capital gains tax on securities will be reduced to a flat rate of 10%.

Meanwhile, equity-oriented mutual funds will continue to keep their exemption from tax, although the rate of tax on corporate unit holders of debt-oriented mutual funds will be increased to 20%.

Other tax incentives include 100% deduction of profits for companies carrying on scientific research and development approved by the government before April 1 2004, for a period of ten years.

However, as feared, the tax exemption on interest income from a Non-Resident account is to be abolished.

In terms of indirect taxes, Chidambaram announced India’s intention to align tariffs with those of the ASEAN (Association of South East Asian Nations) countries, and stated a commitment to harmonise tax rates on goods and services.

The Finance Minister also confirmed the consensus among the states to implement VAT from April 1, 2005, with a formula to be evolved for determining compensation for loss of revenue.

Service tax is also to be increased from 8% to 10%, and a 2% surcharge to fund education is to be levied on income tax, corporation tax, excise duties, customs duties, and service tax.

Chidambaram announced that some R2bn will be raised through the direct tax measures, whilst the indirect tax proposals are expected to be largely revenue neutral.

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