* Govt may exempt FPIs from higher taxes introduced for the rich
* Indian markets rallies 1.78% on the news
* Latest rollback is third such reversal of budget proposals (Recasts, adds details, background, market reaction)
By Aftab Ahmed and Manoj Kumar
NEW DELHI, Aug 8 (Reuters) - India is likely to exempt foreign portfolio investors (FPIs) from an increase in taxes in this year’s budget approved by parliament, two government officials told Reuters, in comments that prompted a rally in stock markets.
Finance Minister Nirmala Sitharaman faces pressure to roll back controversial tax measures introduced last month as foreign investors pull funds out of Indian markets and automakers and other manufacturers report falling sales and job cuts.
Thursday’s comments came after Reuters reported the government may hold back on two other budget measures - the issue of controversial overseas sovereign bonds and a rise in the minimum shareholding norm to 35% from 25%.
India’s benchmark NSE index rose 1.78% after the news.
In the budget last month, Sitharaman proposed to hike taxes on those earning more than 20 million rupees ($282,925.45) annually, a step that rattled many FPIs. Foreign investors took $1.8 billion out of Indian equities in July alone.
Separately, domestic media said the government was considering reducing tax on long-term capital gains introduced three years ago, as a step to further boost markets.
Sitharaman, who held meetings this week with businesses and investors, is widely expected to amend some budget proposals and announce new measures to boost economic growth, which hit a five-year low of 5.8% in the January-March quarter.
One of the officials, who declined to be named, said the government will issue either a notification or an executive order that could be later submitted to parliament for approval, to exempt the foreign portfolio investors, mainly registered as trusts, from the increase in surcharge on super rich taxpayers.
The government estimates a total revenue loss of 4 billion rupees if it withdraws the higher taxes on foreign portfolio investors, the second source said.
The source added the government does not plan to withdraw or cut taxes on Indians earning more than 20 million rupees, however.
Sitharaman said steps would be taken “fairly quickly” to help the industry after meeting representatives of the auto sector, which has cut thousands of jobs.
The finance minister generally meets industry groups ahead of the budget to ensure it reflects their concerns.
Kiran Mazumdar-Shaw, managing director of biotech firm Biocon Ltd, had told Reuters the government needed to open dialogue with industry to help revive economic growth. ($1=70.6900 Indian rupees) (Reporting by Aftab Ahmed, Editing by Richard Borsuk and Clarence Fernandez)