The long-term capital gains tax exemption for share transactions proposed in the Union Budget is expected to discourage corporates from taking the Mauritius route for undertaking portfolio investments in India.

Companies prefer the Mauritius route as it provides a tax haven for entities which operate from there.

Sudhir Kapadia, partner, KPMG, said that the abolition of long-term capital gains tax would provide only limited relief to such investors.

"This exemption is applicable only in the case of listed securities and those which are long-term in nature," he said.

However, there are funds which would like to exit in a shorter timeframe and they would have to pay tax at regular rates, he said. In other words, these short-horizon funds will continue to route their investments through Mauritius.

The exemption is applicable for shares acquired on or after March 1, 2003, but before March 1, 2004.

Since there is no guarantee that the exemption will continue as it will be taken up for review, overseas investors will keep their Mauritius registration.

"If the government's intention was to boost the capital market, all the capital gains should have been abolished," Kapadia said. This is the case in the south Asian markets.

Industry sources said that while gains made would be eligible for capital gains, tax exemption losses made cannot be set off.

"So it is a double-edged sword," Kapadia said. The Budget 2003-04 has proposed that investors who buy stocks of listed companies from March 1, 2003, will be exempt from paying tax on the gains they make on their investments if they hold them for more than a year.