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Foreign investors grow wary of India

Publication Date : 25-06-2012

 

Concern is growing in the corridors of power in Delhi as investor sentiment in India continues to slide. Sections of the Indian government have joined calls against a tax amendment that allows Delhi to reopen old tax cases going back to the 1960s that involve foreign companies.

The unpopular provision has spooked investors, prompting Corporate Affairs Minister Veerappa Moily to urge Prime Minister Manmohan Singh last week to reconsider the move.

Outgoing Finance Minister Pranab Mukherjee, faced with a huge budget deficit, wanted the amendment so that the government could claim up to 400 billion rupees (US$7 billion) in back taxes from foreign companies.

Though Mukherjee later clarified that cases going back beyond six years would not be opened, the move has drawn opposition from both domestic and foreign businesses since it was announced in March.

"It creates a kind of unpredictability syndrome in the minds of investors," said Pranav Sayta, tax partner at Ernst & Young in India. "The retrospective part needs to be dropped."

The move to tax overseas transactions is seen as a response by the government to claim $2.2 billion in taxes from British telecom firm Vodafone for the 2007 purchase of India-based Essar Telecom, then owned by Hong Kong-based Hutchison Whampoa. The Supreme Court had ruled in favour of Vodafone.

"Investor interest in the country is on hold. There are no new inquiries or new transactions because of the uncertainty (about tax laws). Foreign investors are profit-oriented," said Praveen Nigam, head of Amplus Consulting, which provides advisory services to the corporate sector.

Due to strong opposition, the government postponed by a year new anti-avoidance rules until 2013.

The rules would allow the authorities to tax transactions that they thought had been done to avoid taxes. This was targeted at foreign institutional investors, who invested in India through units registered in countries such as Mauritius.

With Mukherjee due to step down tomorrow to contest next month's presidential election, DrSingh is expected to take control of the Finance Ministry. The premier has indicated to journalists that reform will be back on the agenda.

"We need foreign investment, both portfolio investment and direct investment. If there are any obstacles which come in the way and if there are any policy impediments, we will address those problems effectively and credibly," he said on board Air India One, his special aircraft, on his return from a trip to Mexico and Brazil last Saturday.

The Indian government has had trouble driving reform, with policies such as allowing foreign investment in multi-brand retail, foreign airlines to buy stakes in domestic carriers, and a uniform goods and services code all put on hold.

Uncertainty also prevails in areas such as telecommunications, where a new policy has failed to bring clarity on issues like spectrum pricing.

The stalled economic agenda combined with a lack of clarity on regulations have hit foreign investor sentiment, with a few companies even pulling out of the country.

Telecom firms Etisalat of Abu Dhabi and Bahrain Telecommunications, whose 2G spectrum licences were among those cancelled by the Supreme Court, have left.

German airport operator Fraport is closing its India sales office and leaving the country after government plans to privatise smaller airports never materialised.

Multinational companies took $10.7 billion out of the country last year, up from $7.2 billion in 2010 and $3.1 billion in 2009, according to a report by Nomura.

 

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