India's Finance Minister, Yashwant Sinha, announced a raft of business-friendly tax measures this week.
The most important step is to remove altogether the taxation of Venture Capital Funds, which are seen as vital to the continued flow of foreign investment into India's burgeoning IT sector.
Last February, Mr Sinha had already improved their tax regime by exempting them from capital gains tax and reducing their income tax rate to 20%. Despite that, domestic funds remained at a disadvantage compared with some foreign ones; the new exemptions apply both to distributed and retained earnings, and will put domestic VCFs on a par with their foreign counterparts. It's possible that this will have a negative effect on the growth of the mutual fund sector in Mauritius, but it remains to be seen whether investors will risk direct exposure to the sometimes volatile Indian political climate.
The Minister also announced an extension of existing tax concessions in software and technology parks, free trade and export processing zones, and some proposed 'special economic zones'. Existing companies in such areas will have a tax exemption until 2010, while new formations will receive graded exemptions over the same period. These reliefs should be seen in the context of a previous announcement, withdrawing an existing exemption on profits from export activities.
Finally, Mr Sinha announced that gains from stock options would be taxed as capital rather than income, giving another boost to the IT sector, which was in danger of suffering from skilled labour shortages.
The Bombay stock market responded very positively to these measures, with the BSE-30 index rising 5% on Thursday.
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