US stocks may have lost their sheen with Indian investors after the global financial crisis. But Indian investors who pick up stocks of US companies when the market revives have nothing to fear, if president elect Barack Obama goes ahead with his plan to hike capital gains tax in the US.

The proposed move will make no difference to these investors. US residents including FIIs and expats will, however, have a higher tax burden if they earn profits from selling shares of US companies. The tax outgo will be more even on profits made from sale of shares listed on the Indian bourses and other exchanges as well.

Currently, individuals and corporations in the US pay a 15% tax on long term capital gains when they sell assets, including shares after holding them for more than a year. Short term capital gains, on assets held for less than a year, are taxed at a higher rate, depending on tax bracket of the investor.

The preferential tax rate on long term capital gains was meant to make investments in shares and other capital assets attractive for investors. In the run-up to the presidential elections, Obama had signalled his intention to create a new top up capital gains rate of 20%. Some reports, however, say the capital gains tax rate could be hiked to 28%.

According to a senior Indian revenue department official, US based FIIs may find it more attractive to route their investments from tax havens such as Cyprus or Cayman Islands if the capital gains tax is hiked.

It is the prerogative of every country to use tax as a tool to gear its economy. Today, investors have many options. At a time when most of the Asian countries are reducing their tax rates, a higher tax rate in the home country would compel the taxable investors in the US to look for tax deferral structures overseas, said Shefali Goradia, partner BMR Advisors.

A hike in capital gains tax, irrespective of the quantum, will not impact Indian investors offloading US stocks when the market revives, says Sudhir Kapadia, partner, Ernst and Young. This is because US does not tax non-residents on capital gains accruing from sale of US stocks. Indians can invest up to $2 lakh a year in assets overseas.

The US, on the other hand, levies a tax on the worldwide income of its residents no matter where they stay. A hike in the capital gains tax rate may hence trigger FIIs to route their investments from tax havens or low tax jurisdictions. US-based FIIs investing in shares listed on Indian bourses are exempt from paying long term capital gains tax. But they have to pay a short term capital gains of 15%.

US investors, in turn, can get a tax credit in the US under the Indo US Double Taxation Treaty. If the investor earns, say $100 as long-term capital gains, he would end up having $85 after paying tax in the US.

His capital gains are being taxed at 15% in the US now. But if US hikes capital gains tax rate, the investor would have to pay a higher tax on his global income. In effect, tax burden would rise for the ultimate investor in the US.