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India's Softer Tax Stance Fails to Placate Foreign Investors

  • Anjana Pasricha

Indian Finance Minister Pranab Mukherjee (C) waves as he arrives at his office before leaving for Parliament to present Budget in New Delhi, File.

Indian Finance Minister Pranab Mukherjee (C) waves as he arrives at his office before leaving for Parliament to present Budget in New Delhi, File.

NEW DELHI - India has softened recent controversial tax measures that had rattled foreign companies, but this has not gone far enough to placate overseas investors. Business confidence in Asia’s third largest economy has taken a hit.

For weeks, foreign investors had pressed India to reconsider a proposal to retroactively tax foreign companies that have bought an Indian asset overseas. Parliament passed the law this week after Finance Minister Pranab Mukherjee said he could not let India become a tax haven.

The government says the new tax rules are aimed at "tax evasion" by foreign companies, which often route their investments in India through tax friendly countries like Mauritius.

Investors say they face the prospect of huge bills they had not anticipated because the new law can be used against transactions from as early as 1962. The company immediately affected is Vodafone. It could face demands to pay more than $2.2 billion in taxes from its takeover in 2007 of a telecom company, even though the Indian Supreme Court ruled it was not liable to pay the tax.

However, Indian authorities stepped back on a separate rule that could also have led to higher tax liabilities for foreign investors in India’s stock markets. They said its implementation will be deferred by a year.

In recent weeks, concerns over the proposed law had led some foreign funds to withdraw investments from India, costing the country billions of dollars.

However, analysts say the government’s moves may not have done enough to revive confidence in India as an attractive investment destination.

A. Prasanna, an economist at ICICI Securities in Mumbai, says India’s economy has been losing its sheen as growth slides to around seven percent. “I don’t think anyone should question the intent of the government. But I think the short term problem or the medium term problem that continues to persist, essentially is that reforms are not moving forward and the investment climate has worsened," Prasanna stated. "That apart, there is a general sense of drift in policy making which has definitely contributed to this problem.”

Officials say India remains attractive for investors because it is a growing economy with a huge middle class population. They say investment decisions are based on the size of the market and will not be impacted by the new tax laws.

But analysts are not so sure. They point out that there are no signs of a quick economic revival as the government had hoped. The national currency, the rupee, has plunged by nearly 16 percent against the dollar in the last year. And the latest data indicates that industrial output - a key economic indicator - fell 3.5 percent in March from a year ago due to weak domestic demand and investment.