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FM rules out reintroducing capital gains tax

Chidambaram clarifed that no FIIs would be taxed and the fears were based on "uninformed reporting."

india Updated: May 20, 2006 16:42 IST

After a nearly 1,300-point fall in the key stock market index, Finance Minister P Chidambaram on Saturday ruled out reintroducing long-term capital gains tax on equity transactions or unilaterally reviewing the double tax avoidance treaty with Mauritius.

"There is no intention to reintroduce long-term capital gains tax on securities traded on the stock market... The issue of Double Taxation Avoidance Agreement has been debated threadbare. Due to host of economic, political and diplomatic reasons, the treaty cannot be reviewed unilaterally," he told a news conference in New Delhi.

The bear run in the market was partially due to heavy selling by Foreign Institutional Investors on fears that the Central Board of Direct Taxes may levy higher tax from them.

The FII withdrawal had prompted the Finance Minister to clarify that no FIIs would be taxed and the fears were based on "uninformed reporting."

Following FIIs' pull out, the CPI(M) had demanded that the government reintroduce long-term capital gains and dividend tax, apart from reviewing the DTAA with Mauritius, which was being increasingly used by FIIs for avoiding tax.

Chidambaram's response came in the backdrop of CPI(M)'s demand.

He also allayed apprehensions about the economy, saying economic fundamentals were very strong and it did not undergo any change recently.

"The foreign exchange reserves were at $163 billion, inflation reined in below four per cent for several weeks, manufacturing sector is growing at over nine per cent and monsoon has set in, which is expected to be good," he said.

The markets had tanked nearly 1,300 points on Thursday and Friday, as panicky investors joined FIIs in selling activity.

The Finance Minister said the stock markets go beyond Sensex stocks. "In the last four trading sessions, 420 stocks have risen adding more than Rs 5,200 crore to their market capitalisation".

He said FIIs influence 10 per cent of volumes in derivatives market and 10 per cent of volumes in cash market.

"FIIs play a significant role in India like in any other market. I believe mutual funds also play an equally important role," Chidambaram said.

The Minister also said: "India growth story continues to be a growth story. It goes beyond stock markets and includes agriculture, services and manufacturing".