The government has sought to clarify that the Budget proposal of raising short-term capital gains tax is aimed at curbing volatility and would not impact long-term investors.

Meanwhile, the stock markets reacted negatively to the proposal with the benchmark Sensex dropping 245.76 points to close at 17,578.72 points.

"It (hike in short-term capital gains tax) does not affect the long-term investor and the average investor. So, they should stay invested for longer term," Finance Minister P Chidambaram told reporters at his post-Budget press conference.

The Budget for 2008-09, presented in Parliament on Friday, proposed to raise short-term capital gains tax to 15 per cent to make it on par with the Dividend Distribution Tax.

The Budget also proposed to avoid double-taxation on Dividend Distribution Tax by parent and subsidiary companies. Revenue secretary P V Bhide said, "There is an objective to curb volatility...We are asking people to stay long-term."

Chidambaram said, "Most countries in the world do not make a distinction in the short-term and long-term capital gains, India is the only one such country."

The government, however, has not made any changes to the duration for 'short-term'. Capital gains made by holding shares for more than a year do not attract tax but such earnings within a year do attract short-term capital gains tax.

The finance minister, however, said the increased rate may marginally affect some people. Commenting on the proposal, experts called it a big dampener for the overall market sentiments and FII investments.

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