The provisions in Finance Minister Pranab Mukherjee's proposed direct tax code seem to favour foreign nationals over the common man. The draft code would treat capital gains at par with incomes. When an asset is resold, the gain made in the process is called capital gain. Earlier, short term capital gains used to be taxed and long term capital gains were exempted from tax. The proposed code makes short term capital gains taxable at par with other incomes but if an asset is resold after one year of its purchase capital gain made in this process would be taxed at a lower rate.
While on one hand, the proposed direct tax code eliminates exemptions of various types for domestic investors, individual tax payers and firms in order to simplify the tax structure and make it more elastic and buoyant, on the other, the Finance Minister has been unnecessarily appreciative of the role of foreign institutional investors in the national economy and awarded them exemption from TDS on capital gains. They are even being allowed to file advance tax, a facility not available to domestic investors.
It is well known that FIIs keep moving their funds in and out of the country, engineering upheavals in the stock market and causing huge losses to small investors. Foreign institutional investors must, therefore, be taxed on the purchase of additional stocks on the lines of the Brazilian Government so that they opt for long term investments instead of making profits and leaving by the next flight. There should also be a provision for a 'lock-in period' of at least three years for investments made by FIIs.
Although tax has been proposed on incomes on foreign direct investment, FDI via Mauritius would continue to remain exempt from it owing to New Delhi's double taxation avoidance treaty with Port Louis. However, most of the investment coming from the rest of the world is routed through Mauritius. There was hope that the new tax code would try to plug this loophole by finding ways and means to tax foreigners and, maybe, even find a way of revising the treaty. But the Finance Minister has failed to make use of this opportunity.
