India on collision course with investors over $6.4bn tax target

India's government has set itself on a collision course with global fund managers, after finance minister Arun Jaitley revealed that tax demands on foreign investors are intended to raise as much as Rs400bn ($6.4bn).

Speaking on Indian television, Mr Jaitley for the first time revealed the size of potential bills for minimum alternative tax, a form of corporate taxation that has traditionally not been applied to international funds.

Mr Jaitley's remarks prompted dismay among senior figures at international investment funds and banks in India. "There is a lot more concern now, this thing could be incredibly messy," said the Mumbai-based head of one global financial institution, who spoke on condition of anonymity. "Investors think this could come with a very serious dent on the markets."

Mr Jaitley said his government could use the funds to pay for higher public spending in areas such as irrigation.

"The amount involved is 40,000 crore [$6.4bn]," Mr Jaitley said during an appearance on India's NDTV news channel on Tuesday evening, using the Indian denomination "crore", meaning 10m. "I can change the face of Indian irrigation with that 40,000 crore," he added.

Demands that fund managers pay MAT represent the latest in a long line of tax disputes in India - which businesses say have dented the country's reputation as an investment destination and resulted in some calling its approach "tax terrorism".

India introduced the MAT in the mid-1990s to ensure domestic businesses paid a minimum level of tax, typically 20 per cent of profits.

In his comments, Mr Jaitley noted a 2012 ruling from a tax regulatory body that suggested foreign investors were liable to pay the tax.

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He also stressed that India had recently introduced rule changes to ensure that the tax would not apply to foreign investors after April 1 2015.

However, India's revenue authorities have said the 2012 ruling allows claims to be issued for previous years. Tax experts estimate that demands have now been sent to about 100 of the roughly 6,000 foreign funds registered in the country.

Mr Jaitley's remarks may indicate that India will target funds investing through Mauritius and Singapore, both of which are protected by treaties protecting investors from short-term capital gains and other taxes.

"If that number [$6.4bn] assumes this is the total tax leviable, this suggests they are now looking to override the treaties," said Sudhir Kapadia, head of tax at consultants Ernst & Young in India. "This would make the FIIs really worried, it would be very damaging."

"This will compel all these guys to appeal, and this will open a floodgate of litigation," he added.

Additional reporting by David Keohane in Mumbai

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