Hongkong: The investor groups of US and European nations have called for the Indian government to clarify its tax regime for foreigners on an urgent basis, following surprise attempts by tax inspectors to scrape back money they say is owed on years of previously untaxed gains.
According to tax experts, international funds and banks could face a bill of around $8 billion just as many investors from foreign shores are poised to pour money in India after the election of Prime Minister Narendra Modi, who has pledged to create a more business-friendly environment in the country.
Patrick Pang, a managing director at the Asia Securities Industry & Financial Markets Association (ASIFMA) in Hong Kong said, “This development has caught everyone by surprise and is extremely worrying for foreign investors.”
"It suggests that the Indian government can come out at any time and re-clarify what was believed to be an established tax policy on foreign investments”, he added.
ASIFMA is one of several business groups, including London-headquartered ICI Global, the European Fund and Asset Management Association, and the Federation of Indian Chambers of Commerce and Industry, to have raised the alarm over attempts by the Indian tax department to levy minimum alternative tax (MAT) on foreign investors' profits, according to certain media sources.
In many jurisdictions, governments use a form of MAT to ensure that tax breaks don't pull domestic companies' effective tax rate below a minimum threshold. Foreigners without local operations are not typically covered by such operations.
In India, foreign investors have hitherto paid 15% on short-term listed equity gains, 5% on gains from bonds, and nothing on long-term gains, but from late last year many firms received notices from tax inspectors requiring them to pay MAT, potentially bringing overall tax on these gains to as much as 20%.
Although the following month, finance minister Arun Jaitley intervened via the 2015 budget bill to state that capital gains made by foreign investors as of April 2015 were exempt from MAT, but that did not resolve the issue.
As per a Hindustan Times report, “ Keyur Shah, a partner in the India tax practice at EY said, “he government's clarification in February, though right in intent, has created unwanted confusion, and the view the tax office is taking is that, by implication, the past years' gains can be subject to MAT.”
A senior official from the tax department, on condition of anonymity told that the tax office believed the exemption from MAT does not apply retroactively.
"There is nothing (in the budget) to suggest that it (the exemption) would apply to old cases," the official told a news agency.
He further told that the tax department was enforcing the rule.
In the last few weeks, many foreign investors have duly received notices requesting their MAT calculations for financial year 2011-2012.