Paul Beckett:WSJ:April 2,2012
A group of international trade and industry associations claiming to represent some 250,000 companies have written to Prime Minister Manmohan Singh strongly criticizing the proposal, tucked away in the budget, to tax transactions potentially as far back as 1962.
“This is now prompting a widespread reconsideration of the costs and benefits of investing in India,” the letter said, adding that confidence in doing business here has been undermined. Hello China, Brazil, and Indonesia in other words.
The controversial proposal, which would impose tax on the exchange of an Indian asset by two companies outside India, already has sparked howls of protest among foreign companies. It would reverse a recent Supreme Court ruling on the issue in favor of Vodafone Group PLC of the U.K. and be retroactive in its impact. It would potentially affect hundreds of corporate acquisitions. Many foreign companies say they now feel singled out for financial punishment as the government seeks to narrow its troublingly high fiscal deficit.
The associations’ letter, dated March 29, was cc-ed to Finance Minister Pranab Mukherjee and Anand Sharma, commerce minister. It comes as British Chancellor of the Exchequer George Osborne meets Mr. Mukherjee in New Delhi today and is expected to bring up British concerns about what Vodafone and others see as the recent sour turn in the Indian business environment.
“Some of our member companies had already begun reevaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years,” the letter said. “The sudden and unprecedented move in the Bill has undermined confidence in the policies of the Government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India.”
The signatories to the letter include the Business Roundtable, Canadian Manufacturers & Exporters, the Capital Markets Tax Committee of Asia, the Confederation of British Industry, and the United States Council for International Business.
Much of the letter dwells on the government’s move to reverse its top court and, the writers contend, contradict years of international tax rules and treaties. But its overall message is clear: “India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary.”
As the letter itself notes, Parliament has the right to legislate what it wants to pass laws about. But, arguments about legal precedence and the sovereignty of Parliament aside, the astonishing aspect of this whole brouhaha is how badly the government has handled it.
Perhaps this shouldn’t be astonishing given how badly it has handled almost everything else, but we marvel at the ability of the government to cause offense to a sector that has been one of the government’s – and India’s – biggest boosters: foreign companies. Many are, simply, desperate to do business here, to throw money at the country.
That is money the country desperately needs, and should do what is needed to ensure that it arrives in truly impressive amounts, given how badly it is required for infrastructure and development and how good India could look compared to struggling investment destinations the world over.
And yet the government slips this proposal into the fine print of the finance bill and Mr. Mukherjee fails to mention it in his closely-followed budget speech. Fair enough, you might say, because the speech is intended for a domestic and popular audience that tunes into the nation’s financial discussion once a year.
But since then, neither the Finance Minister nor the Prime Minister has done anything to effectively clarify what the exact scope of the government’s intentions are. Mr. Mukherjee has given some interviews, made some off-the-cuff remarks, even held briefings designed to assuage investors and clarify his stance. On Sunday he said in Kolkata in defense of the retroactive proposal that India could not be a tax haven. Before that, he had claimed that this provision would not be used vindictively, though he declined to mention how he can be sure of that.
In short, so far no one seems any the wiser about what he means.
The Sensex has been on an unnecessary and damaging roller-coaster ride as investors try to figure out what on earth is going on.
Mr. Mukherjee compounded the transaction tax confusion by adding in another provision of the budget the empowerment of tax authorities to go after the structuring of transactions that appears principally motivated to avoid tax.
Does this affect the most popular way for foreign funds to invest in the Indian stock market? Mr. Mukherjee, a full two weeks after his budget speech, is still trying to tell people what he means (that it won’t affect genuine investment.)
But foreign investors, corporate and financial alike, believe that these proposals give an inordinate amount of discretion to India’s tax authorities which, after all, were the same authorities who went after Vodafone in the first place. For a government that recently has been seeking to improve its communications, this has all been very poorly communicated.
The Prime Minister’s Office referred inquiries on the letter to the finance ministry, which could not be reached for immediate comment.
There are certainly many in India who look at this and say: Boo-hoo for foreigners. The most common response is that investing in India is a long-term game and foreign companies need to be prepared for the upsets, setbacks and surprises that India periodically dishes out in return for the riches that the market is presumed to hold. They add that the best way to handle these snafus is to shut up and work behind the scenes, so the associations’ letter may just rile the government rather than prompting a rethink.
Be that as it may, the biggest loser in all this can only be India itself. Foreign companies don’t vote, so what does the government care, the thinking goes? But they do, with very little fuss most of the time, pump billions into the Indian economy every year. If the government continues on this course, it might find that the money goes elsewhere and the Prime Minister and Finance Minister will only have themselves to blame.
Paul Beckett is the WSJ’s South Asia bureau chief.
