Foreign Investors and India’s Tax Men Are Clashing Anew: Q&A
Nothing is certain in India except death and tax disputes. Ask foreign portfolio investors: they now face demands for past dues of as much as $6.4 billion.
The wrangle stems from the Minimum Alternative Tax, or MAT, which officials say leads to a 20 percent levy on capital gains by foreign funds. Finance Minister Arun Jaitley in his budget speech in February said overseas funds don’t need to pay the levy from April 1, but in doing so energized tax officials’ pursuit of claims for prior financial years.
For some investors, that’s jarring with Prime Minister Narendra Modi’s pledge to end what his almost one-year-old government has called the “tax terrorism” of the previous administration. Modi is seeking to woo investment, including from the three countries he visited this month — France, Germany and Canada — while also curbing India’s budget deficit.
The MAT claims “are unpleasant surprises that can dampen investment sentiment towards India,” said Hugh Young, a Singapore-based managing director at Aberdeen Asset Management Asia Ltd., which manages assets worth about $59 billion. “It undermines government efforts to attract fund flows,” he said.
Here are answers to frequently asked questions about the latest tax controversy. The information is drawn from interviews with fund managers, associations representing investors, tax experts at PricewaterhouseCoopers India and Ernst & Young, and Indian ministry officials.
Q: What’s the latest tax spat?
A: Foreign portfolio investors in India have received notices for liabilities under MAT, which is effectively a minimum corporate tax. Jaitley said they don’t have to pay the levy beginning April 1, but he didn’t say they’ll be exempt for previous periods. The finance minister in a TV interview estimated the sum involved at 400 billion rupees ($6.4 billion).
Q: Why are foreign portfolio investors upset?
A: They argue MAT is meant for Indian companies with a local balance sheet, not overseas ones. Jaitley should have exempted foreign funds for all past years, according to Ketan Dalal, senior partner at PricewaterhouseCoopers. Litigation may follow, he said. Officials hadn’t levied MAT on overseas institutional investors in the past 22 years, funds’ body ICI Global wrote in a Jan. 28 letter.
Q: What’s the government stance?
A: Pay up past dues. Not least because a tribunal called the Authority for Advance Rulings said so in 2012. Tax officials are relying on that verdict for the flurry of demands. India is not a tax haven and legitimate demands can’t be called tax terrorism, Jaitley said this month. Dissatisfied foreign investors “should go to a higher judicial forum,” Revenue Secretary Shaktikanta Das said on April 16.
Q: What could be the ripple effects?
A: Unclear, but potentially any foreign company with income from India may get snared by MAT, since only foreign portfolio investors are exempt since April 1. If the exemption is restricted to foreign portfolio investors investing in equities, overseas funds purchasing corporate bonds in India may also face a liability, according to Asia Securities Industry & Financial Markets Association.
Q: Is this different from the previous tax disputes?
A: Yes. Cairn India Ltd. got a $3.3 billion tax claim in March for failure to deduct tax on gains made by its former parent Cairn UK Holdings Ltd. in a share transfer pricing case. Cairn India is contesting the case in court.
State and federal tax spats forced Nokia Oyj to close its factory in Chennai. The company wants the dispute resolved so the plant can be sold.
British telecom company Vodafone Plc won transfer pricing cases in the Mumbai High Court, which the Indian authorities aren’t appealing.
A separate dispute over capital gains from Vodafone’s 2007 acquisition of Hutchison Whampoa Ltd.’s Indian business is going into international arbitration, Vodafone spokesman Ben Padovan said in an e-mail.
