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Strange tale Insurers face long-term gains tax
June, 20th 2008

In a first, the Central Board of Direct Taxes (CBDT) has slapped long-term capital gains tax on equity investments made by Oriental Insurance Company.

The general insurer has been asked to cough up Rs 450 crore as tax liability for two years - 2006-07 and
2007-08.

It is learnt that other insurers have also been served with similar notices.

In February, we were asked to pay Rs 450 crore as tax for two years. Of this, Rs 350 crore is just for 2007-08. This has dented our cash flow, said M Ramadoss, chairman and managing director of Oriental Insurance.

The move comes as a surprise, as there is no long-term capital gains on equity.

Oriental made a total profit of Rs 560 crore on investments made when the Sensex was at 5000 levels, Ramadoss said. Now, the income tax department has claimed Rs 450 crore as tax liability. It is illogical, he said.

The immediate impact on inflation will be in the petrol and diesel prices, LPG hike may only impact the consumption after a week. Also some other economists have predicted higher inflation looking at the sharp rise in the inflation last week, but we have not seen that trend, Padhye said.

Some economists expect that trend to continue.

Lehman Brothers India economist Sonal Varma expects inflation to rise to 10.00% on Friday because of higher fuel prices.

We expect the number to remain firm for the rest of the calendar year 2008 and averaging 8.5% for the fiscal. It will only come down in the first quarter of calendar year 2009 when we expect oil prices to drop to $90 per barrel, she said.

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