Hong Kong: Asian investment banks fear that a tax provision in India's incoming finance bill will lead foreign investors to withdraw from the country's stock markets and have written directly to Pranab Mukherjee, finance minister, urging him to intervene.
The letter, sent on Wednesday by the trade organisation for Asian investment banks and its global sister body, says that provisions in the bill could be used to tax investments by Foreign Institutional Investors (FIIs) in Indian shares.
The provisions, which relate to the taxation of indirect asset transfers and the General Anti-Avoidance Rule (GAAR), are already disrupting the more than $200bn of funds that foreign investors have invested in India's equity markets as they begin to sell out of their holdings ahead of the bill's introduction on April 1.
The Asian Securities Industry and Financial Markets Association wrote in the letter that FIIs fear the tax rules could subject this foreign investment to double or triple taxation. "Such onerous taxation – or even the risk of such taxation – could threaten this important source of capital for India's businesses," it wrote.
The industry is hopeful that once the government understands the gravity of the situation, the rules will be clarified. If the uncertainties are not resolved then FIIs, which invest on behalf of foreigners who do not have clearance to invest directly in the Indian markets, will decide the tax risks are unacceptable, the industry body fears.
"These investors may then proceed to liquidate their India investments and such a disorderly dissolution of large positions held by these overseas investors could seriously disrupt the Indian capital markets," ASIFMA said in the letter.
Foreign investments of $200bn account for 17 per cent of the total value of India's equity markets. FIIs are also big investors in the local currency government and corporate debt markets, ASIFMA said.
The provisions are the latest tax-related scare for foreign businesses in India following the government's pursuit of Vodafone of the UK in a dispute over a $2.9bn capital gains tax case, which India's Supreme Court recently dismissed on appeal.
However, the Finance Bill 2012, which contains the provisions the investment banking industry is concerned about, is being used to change the country's tax laws to allow cross-border deals similar to Vodafone's purchase of Hutchison Essar to be taxed.
The change will be retrospective, meaning Vodafone's case is likely to be reopened and so raises the prospect of further legal wrangling in a process that has run for five years.
Nicholas de Boursac, ASIFMA chief executive, said in a statement that the financial services industry was concerned that these tax proposals may inhibit the efficient operation of the Indian debt and equity markets. "We believe that many of these consequences are unintended, and we urge the Finance Ministry to clarify the scope of the tax proposals and thereby avert unnecessary disruption to the Indian capital markets," he said.
Indian authorities could not immediately be reached.
Copyright The Financial Times Limited 2012
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