International trade groups representing more than 250,000 companies have told Indian Prime Minister Manmohan Singh in a letter that his government’s new retrospective tax proposals have led foreign businesses to reconsider their investments in the country.
India’s federal budget last month outlined a proposal to enable the tax authorities to make retroactive claims on overseas corporate deals and bring in new anti-avoidance measures, moves that have been criticized for further denting investor sentiment.
On Monday, British Finance Minister George Osborne also raised his concerns over the issue with his Indian counterpart.
The letter from seven foreign business groups delivers the broadest criticism yet made by the overseas business community of an Indian government that has failed to enact economic reforms to spur investment and revive growth.
“The sudden and unprecedented move (on tax) … has undermined confidence in the policies of the Government of India towards foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India,” the groups said in the March 29 missive to Mr. Singh.
“This is now prompting a widespread reconsideration of the costs and benefits of investing in India,” continued the letter, signed by bodies including the U.S.-based Business Roundtable, the Confederation of British Industry, the Japan Foreign Trade Council and Canadian Manufacturers & Exporters.
The Business Roundtable is chaired by Boeing’s chief executive officer, James McNerney, and represents companies with more than $6-trillion (U.S.) in revenues.
India’s reputation among global investors has taken a beating over the past year as the government has lurched from crisis to crisis, including a botched attempt to allow foreign supermarkets into the country and a long-running standoff with South Korea’s Posco over a $12-billion steel plant.
Sluggish investment is partly to blame for slowing growth in Asia’s third-largest economy, which grew an annual 6.1 per cent in the December quarter, the weakest in nearly three years.
More recently a long-running tax struggle between London-listed Vodafone Group PLC, India’s largest overseas investor, and the Indian government has come to symbolize the perils facing foreign investors in the country.
Vodafone won a five-year-long legal battle in January when India’s Supreme Court dismissed a demand made by the Indian authorities for a $2.2-billion capital gains withholding tax on the British company’s acquisition of Hutchison Whampoa Ltd.’s Indian mobile assets in 2007.
That ruling was hailed by business groups as a victory for clarity in the country’s investment climate, which has suffered due to policy paralysis, regulatory uncertainty and widespread corruption allegations against the government.
But the proposal in the recent budget to retroactively impose a capital gains tax on merger and acquisition deals conducted overseas where the underlying asset is located in India would amend 50-year-old tax laws and allow New Delhi to pursue taxes on long-concluded transactions.
“We are concerned about the proposed budget measure,” Mr. Osborne told reporters after a closed-door meeting with Indian Finance Minister Pranab Mukherjee.
“Not just because of its impact on one company, Vodafone, but because we think it might damage the overall climate for investment in India.”
“What India needs, like all countries, is a stable and predictable tax system to encourage investments, and we have concerns that this budget proposal would not add to that,” Mr. Osborne said, adding he had raised his concern with Mr. Mukherjee.
The Indian Parliament is expected to consider the new tax proposals during the last week of April.
The proposals, if written into law, could also affect Kraft Foods Inc.’s 2010 acquisition of Cadbury’s Indian business and deals involving Indian assets sold by AT&T Inc. and SABMiller PLC’s purchase of Foster’s.
“Some of our member companies had already begun re-evaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years,” the collective letter to Mr. Singh said.
Foreign direct investment (FDI) in India stood at $35.3-billion in the first nine months of the 2011-12 fiscal year, powered by two multibillion-dollar energy deals, more than the $32.9-billion registered in the 12 months to March, 2011, according to data from the Reserve Bank of India.
India needs increasing FDI and foreign institutional inflows to offset a rising trade deficit, which is likely to have hit $175- to $180-billion in the year that ended in March.
“India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world,” the letter said.
Vodafone said on March 30 it was considering a number of actions after the budget proposal, which it described as “grossly unjust.”
In a March 26 letter to Mr. Singh, Vodafone chief executive officer Vittorio Colao said the budget proposal contained “extraordinary retrospective provisions, going back 50 years and removing the protection of the courts from investors.”
“Arbitrary and punitive retrospective treatment of one of India’s most prominent long-term foreign investors by the tax authorities could only tarnish the image of India as a destination for inward investment,” he wrote in the letter, a copy of which was seen by Reuters.
Confusion already reigns in India’s telecoms market since the Supreme Court last month ordered all 122 mobile network licences awarded in a scandal-tainted 2008 sale be revoked.
As a result Abu Dhabi’s Etisalat has already announced the winding down of its Indian operations. Meanwhile Norway’s Telenor has been embroiled in a dispute with its Indian partner, Unitech Ltd., and has said it would seek to move the business to a fresh venture with a new partner.