Taxing moment: Budget likely to hike taxes

Mumbai: Investors in India are bracing for higher taxes and fewer incentives from the government’s annual budget on February 1 as the focus shifts to wringing out revenues to finance giveaways and higher public investment.

While Prime Minister Narendra Modi’s administration is widely seen as being friendly to businesses and investors, it not expected to announce any dramatic moves at a time when the economy is under pressure from a cash squeeze.

Among expected measures are a hike in a transaction tax on stock derivatives trading and a less beneficial approach to long-term capital gains tax exemptions, according to analysts. India could also provide additional details for new rules in April that will crack down on tax havens, after the government on Friday provided some, but not all, key clarifications.

Foreign portfolio investors are also seeking clarity behind "indirect transfer" rules that could increase tax liabilities for overseas funds.

But any negative impact from such measures could easily be offset should the government also lower corporate tax rates or provide incentives to sectors hit by government's surprise decision in November to abolish high-value banknotes, analysts said.

"We can certainly see a sensitivity for investor concerns, and the government wants to do things like ease the cost and complexities of doing business, improve India's competitiveness rankings and attract foreign investors," said Rajesh H. Gandhi, a tax partner at Deloitte Haskins & Sells.

“However, at the same time the government has revenue pressures as it seeks the meet its fiscal targets.”

Expectations for higher taxes for investors have increased since Mr Modi said in December that market participants needed to make a “fair contribution” to nation-building, without providing any details.