With IFR’s 2015 India ECM conference taking place in Mumbai on April 23 (register here for free) I’ve been tracking activity and news flow in preparation. It’s been a great story year-to-date: rapidly rising stock prices; ECM activity coming at a pretty decent clip; the mega Coal India trade near the start of the year; solid visible supply; and broad optimism around the macro and economic management stories.
But then comes a bolt out of the blue that threatens to spoil the party as the heretofore beloved Modi administration – via a very resolute FM Arun Jaitley – attempts to stiff foreign corporate and portfolio investors with unexpected tax bills that could reach US$8bn.
Clear-cut tax arrangements are a crucial tenet of investment policy, so hitting foreign funds now with historical demands is a pretty hostile act that will in many cases undermine the economics of the investment proposition. For the supposedly business-friendly Modi, taking this step is hardly, well, friendly. In fact it’s an embarrassing and baffling contradiction.
There is talk that the tax could extend to foreign private equity and venture capital firms. Might this, I ask, end or at least disrupt the love affair between India and the foreign investors that Modi so needs to realise his economic plan?
I pose this as a question only because foreign investors haven’t staged a bad-tempered stampede out of Indian equities – yet. In fact, local stock indices are continuing their seemingly unstoppable rise following a brief pause for breath. The Sensex is up around 65% to-date off its two-year low and prices are forecast to continue hitting record highs in 2015.
There is talk the tax could extend to foreign private equity and venture capital firms. Might this end or at least disrupt the love affair between India and the foreign investors?
India ECM activity hit almost US$7.5bn in the first quarter. That number may have been flattered by the US$3.6bn Coal India offering, but foreign investors have nonetheless been actively bidding for stock at every turn. The government will need them if it wants comfortably to hit its selldown target this year and maintain an investment lifeline for its bank and corporate issuers.
So is the tax saga a storm in a teacup that will blow over as events settle down? Tough call. An easier call is that it is going to get messy as enraged recipients of chunky tax demands seek redress through the courts. If the high-profile campaign to collect what the government considers back payments – via a tax that wasn’t even designed originally to capture FIIs – is more than political grandstanding, how far is an administration, admittedly in dire need of higher fiscal receipts, willing to push the issue and jeopardise international investor relations?
Jaitley may well say – as he did in New Delhi at the Confederation of Indian Industry’s annual sessions on April 6 – that demanding taxes that are due hardly amounts to tax terrorism and that India is not a tax haven. Fine, but sending tax notices to about 100 unsuspecting licensed foreign institutional investors who thought they were exempt, and threats to widen the net to the entire FII/FPI construct is a punchy gambit.
The notices relate to a 20% Minimum Alternate Tax levy on long and short-term capital gains on book profits. In his 2015–16 budget, Jaitley exempted FIIs from MAT but made no clarification about prior years. The notices sent out are for assessments for 2011–12 and earlier but there is still a lack of clarity about what happens right up to 2014–15, not to mention in future years.
“I think what FIIs and FPIs [foreign portfolio investors] are asking is retrospective exemption and not retrospective application of a tax law. Because MAT was leviable on them … these assessments, these demands have been raised,” a defiant Revenue Secretary Shaktikanta Das said at the same CII meeting at which the FM spoke. He also pointed out that some FII/FPIs had gone to the Authority for Advance Rulings (a MoF department set up to advise non-residents on income-tax liabilities) and were aware that MAT was applicable. But why, then, the unacceptable delay in sending out notices? It’s bewildering.
Long story short, foreign players have a fight on their hands. The outcome of Cairn Energy’s case will be instructive in this respect
ICI Global, the international arm of the Investment Company Institute that lobbies on behalf of the regulated funds industry, took a dim view of developments and wrote to the government in January seeking urgent clarifications. As did the European Fund and Asset Management Association, which expressed its concerns in February. The Federation of Indian Chambers of Commerce and Industry, meanwhile, is calling for a formal clarification stating that foreign companies with no business presence are not liable for MAT.
Long story short, foreign players have a fight on their hands. The outcome of Cairn Energy’s case will be instructive in this respect. The British company filed a Notice of Dispute under the UK-India Investment Treaty last month after receiving a draft assessment order for fiscal 2006–07 of a staggering US$1.6bn plus applicable interest and penalties. Mondelez International is similarly contesting its US$88m demand. When UK foreign minister Philip Hammond met Jaitley in New Delhi in March, the Cairn issue came up and Hammond expressed his dissatisfaction at the turn of events. This is not a trivial matter.
The case against foreign investors comes in parallel with efforts to get Indian corporations to come clean on assets stashed outside India. The government introduced the Undisclosed Foreign Income and Assets (Imposition of Tax) Bill on March 20 to crack the issue of black money. The bill envisages harsh penalties, including up to 10 years imprisonment for wilful evasion.
Jaitley is expected to provide further elucidation on the tax saga in a parliamentary budget session starting on April 20. In that respect, IFR’s India ECM conference is timed to perfection. I’m going to be pushing the tax issue hard through the moderated panel sessions. It promises to be a lot of fun. Don’t miss it.
