The short-term capital gains tax on foreign institutional investors may be replaced with a turnover tax in the forthcoming Union Budget.

FIIs are subject to a 10 per cent STCG, as against 30 per cent applicable to domestic investors.

Market sources feel a clause in the recently announced common minimum programme in which the new government asserted it will not allow misuse of the double taxation avoidance treaties implies that the STCG will be replaced with a non-discriminatory ToT.

In fact, the proposal to introduce a ToT was mooted by a section of the FIIs to Union finance minister P Chidambaram when he visited Mumbai recently.

The FIIs reportedly told Chidambaram that the STCG was the only irritant prompting them to take the Mauritius route under DTA as long-term capital gains and dividends are already tax-free.

Brokers and FIIs have already submitted detailed presentations to the finance ministry indicating that the change will be revenue-neutral.

Brokers indicate that even a levy of 0.2 per cent on FII purchase and sales transactions will make up for the revenue loss if STCG is scrapped.

Said a dealer from a domestic institutional brokerage house: "Scrapping the STCG will not amount to any big loss as by and large most FIIs are long-term investors and their STCG liability is not large at all."

FIIs have played a major role in the Indian capital markets, with net investments of Rs 16,438.80 crore (Rs 164.39 billion) in 2004 till date.