More foreign investors to face India tax demands

Hundreds more foreign institutional investors are likely to receive new demands for India's minimum alternative tax (MAT), the country's most senior revenue official says, in a move set to heighten concerns that global funds are heading for a new tax row with New Delhi.

Estimates suggest only about 100 of the roughly 6,000 funds registered with Indian regulators have received demands for the tax, although the notices have already prompted fierce criticism from tax experts who argue that all foreign portfolio investors should be exempt.

News of a likely ramp-up in demands comes as some of India's largest investors, including Aberdeen Asset Management, have confirmed receiving notices, prompting renewed worries that more major funds could now follow companies such as Vodafone and Cairn Energy into protracted legal tax battles.

Facing growing criticism over the MAT demands, Shaktikanta Das, revenue secretary, told the Financial Times that a 2012 legal ruling had suggested foreign funds were liable for MAT. Until that decision had been challenged and overturned, he said, tax inspectors could seek payment from any fund investing in India.

"The government is committed to providing a non-adversarial and stable taxation regime," he said. "[But] when there is a judicial pronouncement which says that this much of tax is due, how can the government say: 'No, no, no. I will forgo this tax?'. The process has to be followed."

Mr Das stressed that India's government had introduced legislation to stop funds facing the MAT from this year. But he said that in cases dating back over the past few years, funds would have to launch legal appeals rather than expect an exemption.

"For the past period, naturally the FIIs will have to seek judicial remedies," he said. "Prospectively, we have sorted out the problem. But it is not possible for the government to simply intervene and make this past problem go away."

Although there are no reliable estimates for the total tax bill funds may face, a number of major foreign players have confirmed receiving MAT notices, including a fund operated by Aberdeen, one of India's largest foreign investors with $10bn in assets.

"Our advice is that tax treaties apply, so we aren't liable. Mind you, that was what Vodafone thought, and look what happened to them," said Hugh Young, Aberdeen's managing director in Asia.

"The fact that we suddenly get a tax demand like this is new... It certainly doesn't fill one with warm cuddly feelings towards India...[and] this must make India a less attractive place to invest," he added.

Confusion among foreign fund managers over the demands follows a heady period of investment, with FIIs ploughing a record $43bn into Indian debt and equity last year.

Foreign funds now also hold a record 20 per cent of all Indian equities, worth roughly $300bn, or more than 40 per cent of freely floated shares.

The new tax demands are likely to further damage India's reputation as a favourable destination for foreign investment, and risk undermining reassurances such as those given by Prime Minister Narendra Modi in Germany this weekend.

Foreign investors wanted a situation where "the rules won't change frequently" and where there "would be no surprises", Mr Modi said.

Further reading: Are some foreign funds in India protected?

About 6,000 foreign funds run by a few thousand institutions are estimated to invest in India, writes James Crabtree.

Many of the largest funds, such as Aberdeen and First State, invest through Mauritius or Singapore, where tax treaties provide favourable treatment.

These protections include an exemption from short-term capital gains taxes, alongside other forms of "double taxation", which prevent foreign investors paying tax in both their home country and India.

An element of the confusion around the minimum alternative tax concerns whether funds investing through these two routes would be protected from the tax.

Shaktikanta Das, India's revenue secretary, said funds investing through Mauritius and Singapore would receive no special protection in the first instance, and therefore could receive demands to pay the tax.

But he argued that treaties should allow funds operating through Mauritius and Singapore to claim a refund in their home markets, if legal appeals against MAT failed, and they therefore did have to pay the tax in India.

"Wherever there is a double taxation avoidance agreements, they will have to pay the tax [in India]," Mr Das said. "But they will then be able to claim a credit in their respective country. That is the international standard in these cases, so it is what will apply."

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