The government has clarified rules around the taxation of foreign investors, as the benchmark stock index fell on the re-introduction of a levy on prospective profits.
Foreign investors in India don't need to pay tax on past gains on investments in the equity market, Finance Secretary Hasmukh Adhia said in an interview with Bloomberg in New Delhi.
The BSE Sensex equity index dropped 2.3 percent, a day after Finance Minister Arun Jaitley said India would end a tax break on equity investments. The fine print of the tax seemed to apply only to domestic investors, sparking fears that foreigners may be taxed retrospectively on gains.
"As far as grandfathering and the limit for levy of tax is concerned it applies to both residents and non-resident investors," Mr Adhia said.
The new measure aims to tax profits exceeding Rs 1 lakh from shares held for more than a year at the rate of 10 percent. Earlier, gains from equity investments held for more than 12 months were tax-exempt. The centre in July 2004 abolished long-term capital gains tax on shares and replaced it with a securities transaction tax. The government decided to retain the STT despite the move to tax capital gains.
"STT will stay until we come to a regular regime of capital gains tax for every asset class," Mr Adhia said. "There is no double taxation because today on any other class of investment including debt instrument or on the immovable property the present holding period is two years and the gains are taxed at higher rates."
India has budgeted for 200 billion rupees from the capital gains tax in the first year. The collections are expected to double in the following year if the current stock market trends continue. He said the taxation proposals would not lead to flight of capital.