Non-residents should be exempted from all direct taxes irrespective of whether or not India has double taxation avoidance agreement with their home country or not, to make make Mumbai an international financial centre. It has also pitched for zero capital gains regime.

The high powered expert committee set up to advise the government on making Mumbai an international financial centre (IFC) has recommended that taxation of financial services should be confined to resident income and consumption while non-residents should be exempt from all direct taxes.

On the issue of taxation of capital gains, the committee feels that low or zero tax rates would put India on par with many other countries that have set up IFCs to export international financial services (IFS). A symmetric approach for both domestic and foreign investors without creating officially sanctioned loopholes of the kind that exist in Indian tax treaties allowing special tax treatment for investors in Mauritius, Cyprus and Singapore should be created, it says.

Terming transaction taxes such as stamp duties and transfer taxes on capital assets (securities transaction tax) particularly in financial transactions as bad taxes, the report seeks removal of such taxes which give incentive to evade as also distort the tax structure. The committee wants this to be done as part of the unified goods and services tax form.

An enabling fiscal regime for an IFC requires a tax policy that moves rapidly towards a modern income-tax and a modern VAT for universal applicability in India, the report has emphasised. The incidence of a VAT should fall on domestic consumption only.

Detailing the tax implications for Maharashtra and Mumbai with the setting up of IFC, the committee has stated that neither the state nor the city should expect a new revenue base emerging from large trading volumes of IFS in Mumbai, since an elimination of all transaction taxes has been proposed.

The report has pointed out that the additional demand created for goods and services by an IFC in Mumbai would generate a significant amount of additional revenue for the city without having to resort either to directly taxing IFS transactions, or the profits of firms providing or trading in IFS. Further, the city would gain from a bigger revenue stream through property taxes, the report says.