MUMBAI ,January 27 (Reuters) - Investors in India are bracing for higher taxes and fewer incentives from the government's annual budget on Feb. 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 is 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 is also set to provide guidelines for new rules in April that will crack down on tax havens, while foreign portfolio investors are 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 Modi said in December that market participants needed to make a "fair contribution" to nation-building, without providing any details. Among the potential measures could be a second consecutive annual hike in the Securities Transaction Tax for futures and options markets, currently set at around 0.05 percent for every 10 million trades. India could also lower the time threshold for long-term capital gains. Currently, investments sold after at least a 12-month holding period are exempt from taxes, while anything below that is taxed at up to 20 percent of the gains. For foreign investors, the budget is expected to provide guidelines behind the General Anti Avoidance Rule (GAAR) that will start in April, especially on whether it will take precedence over individual tax treaties such as those with Singapore or Mauritius. Overseas portfolio investors will also seek more details after India's tax department said in December that foreign companies with more than 50 percent of their assets in India could be liable to pay indirect transfer taxes when exiting from their investments. The comment was seen as potentially ensnaring foreign funds that have more than half of their portfolios invested in India. FACTBOX: Measures expected from the annual budget that could impact markets MUMBAI (Reuters) - Investors in India are bracing for higher taxes and less incentives from the government's annual budget to be unveiled on Feb. 1 as the focus shifts to wringing out revenues to finance giveaways and higher public investments to support the economy. Detailed below are the main expectations of measures that could impact markets: GUIDELINES FOR GENERAL ANTI AVOIDANCE RULES (GAAR) - Government set to announce detailed guidelines behind GAAR, which will be implemented starting on April 2017 - GAAR is meant to crack down on tax havens, making it harder to claim some tax exemptions - Key clarification awaited is whether GAAR will take precedence over individual tax treaties, including Singapore and Mauritius TAXES UNDER INDIRECT TRANSFER RULES - Government expected to say whether foreign portfolio investors, private equity funds and venture capitals are liable to pay indirect transfer taxes - Confusion created after tax department said in December such investors could be liable to pay taxes if more than 50 pct of a fund's or investment vehicle's assets are based in India under some conditions - Tax department also said indirect transfer tax could be charged under certain ownership and investment levels MASALA BONDS WITHHOLDING TAX - Government may keep in place a 5 percent withholding tax paid by issuers on "masala" bonds, or rupee-denominated debt sold overseas, despite some lobbying for its removal SECURITIES TRANSACTION TAX ON EQUITY MARKETS - STT on futures and options may rise for second year in a row from current levels of 0.05 percent for every 10 million trades, which rises for bigger transactions. REDUCE TIME PERIOD FOR CAPITAL GAINS EXEMPTIONS - Reduce threshold for tax exemptions for capital gains - Currently investments sold after at least a 12-month holding period are exempt from taxes, while anything below that is taxed at up to 20 percent of the gains.
