A government proposal to do away with the distinction between short-term and long-term investment

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for levying Capital Gains tax on securities trading may cause volatility in the market, as investors may not hold stocks for long, analysts said.

"It is a big setback for diversion of savings to capital markets as investors will shy away from keeping investments for long term period. This will also increase volatility," CNI Research CMD Kishor P Ostwal said.

However, investors may not complain about another proposal in the revised draft of Direct Taxes Code to tax FII income from securities as Capital Gains tax, apparently to check the tendency of some of them to evade taxes, they added.

The DTC draft proposes to impose tax on gains in securities trading irrespective of the fact whether securities is held for short-term or the long-term. Currently, the government does not impose tax on gains made from securities held for more than a year, but levies 15 per cent tax on gains made from stocks sold before one year.

On the proposal of imposing tax on FIIs for gains in securities market as Capital Gains, HDFC Securities head for private broking and wealth management Vinod Sharma said, "This will not adversely impact foreign investment."

Foreign investors in general will not have to subject their income to domestic tax if they have rooted their investments through some tax havens, so it is good for the market, good for the foreign institutional investors, Ostwal added.