Foreign funds brace for India's alternative tax demand

Dozens of foreign funds investing in India are preparing to challenge a series of unexpected new tax demands, raising concerns that global investors could be the latest international businesses targeted by Indian revenue authorities.

The dispute concerns orders received by about 100 international funds over recent weeks, according to estimates compiled by tax consultants.

The demands say the foreign investors are liable to pay India's minimum alternative tax, a form of corporate taxation traditionally not applied to international funds.

So far, the demands have hit only a small portion of the roughly 6,000 global funds registered in India, but the likelihood that many more will receive similar notices has alarmed investors and tax analysts.

"It is very likely that the authorities will send out demands to other foreign funds . . . when they do it could have a very bad effect on investor confidence in the markets," said Dinesh Kanabar, chief executive of Mumbai-based Dhruva Tax Advisors.

The latest dispute follows a series of Indian tax battles involving foreign businesses including Cairn Energy, Vodafone and Cadbury, which have unnerved investors and undermined confidence in Prime Minister Narendra Modi's programme of economic reforms.

It also comes after Arun Jaitley, finance minister, issued a robust defence of India's revenue authorities against charges of "tax terrorism".

"India is not so vulnerable that every legitimate tax demand can be considered as tax terrorism, because we are not a tax haven and we don't intend to be one," Mr Jaitley said on Monday.

No foreign institution has commented publicly about receiving one of the new demands, which were issued as part of tax audits for the financial year ending in March 2012.

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The size of demands has also not been disclosed, although one senior figure at a global tax adviser said they amounted to "sizeable" sums. "Our clients have seen orders of between $250,000 to many millions of dollars," the person said.

Tax experts said the demands will result in fresh legal disputes. "All of these funds who have been served draft orders will now appeal, so there is a fight ahead," said Sudhir Kapadia, head of tax at consultants Ernst & Young in India.

The claims have caused particular confusion because earlier concerns about the minimum alternative tax recently prompted India's government to reassure foreign investors that they would be exempt from it in future.

"We are very worried about these developments", said Patrick Pang of the Asia Securities Industry and Financial Markets Association, a trade body that has lobbied India's government over the tax.

"Lots of countries have a form of minimum alternate tax regime, but all of them apply it only to domestic companies, and it is clear in India it should not apply to foreign investors."

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