India Says New Tax Won’t Apply to Foreign Institutional Investors
Move on minimum alternate tax is aimed at calming investors’ concerns
India said Tuesday that it wouldn’t go through with plans to apply a controversial tax to international portfolio investors, hoping to calm concerns about the country amid global market volatility.
Indian Finance Minister Arun Jaitley said the so-called minimum alternate tax, which Indian tax authorities had started demanding of foreign institutional investors this year, wouldn’t be applicable to them.
“Providing certainty in tax law is the function of the government. The ambiguity required to be clarified, so we have done it,” Mr. Jaitley told a news conference late Tuesday.
The announcement will help address the concerns of foreign institutional investors, who yanked a total of $2.5 billion out of Indian stocks in August. That is one of the largest monthly withdrawals from the market since the global financial crisis.
It could also earn Prime Minister Narendra Modi some Brownie points with international business leaders ahead of his visit to the U.S. this month, where he is expected to meet executives in Silicon Valley.
Mr. Jaitley’s announcement is “a big relief for all the investors,” said Suresh Swamy, partner in the tax and regulatory services team at PricewaterhouseCoopers India. “They were staring at a huge tax demand and years of litigation. I think all that has been put to rest.”
This year, Indian tax officials surprised investors when they sent notices to 68 international funds asking them to pay the minimum tax, which they hadn’t had to pay in the past.
Authorities demanded the funds pay six billion rupees ($90 million) in back taxes on previous years’ investment gains. Tax authorities also approached other funds to reassess their previous years’ taxes, to determine whether they also owed MAT.
The sudden implementation of the tax on foreign investors was seen by some as a step backward for the Modi administration, which came to power last year pledging to make it easier to do business in India.
Mr. Jaitley and other leaders of Mr. Modi’s party had said they would end what they dubbed “tax terrorism,” which came from the unpredictable and sometimes heavy-handed enforcement of the country’s confusing tax law.
Foreign investors were surprised by the huge back MAT bills. Some investors, includingU.K. money manager Aberdeen Asset Management, even approached Indian courts to have the tax demands reversed.
In the face of investor ire, the government set up a panel to look into whether foreign investors should have to pay this tax. The panel, headed by retired judge A.P. Shah, submitted its report to the finance ministry in late July.
On Tuesday, Mr. Jaitley said the government had decided to accept the panel’s recommendation that the minimum alternate tax not be applicable to foreign institutional and portfolio investors. He said the government will amend its laws at the next session of Parliament to clarify the rules.
Meanwhile, New Delhi will issue a circular to local tax officials to not pursue any MAT-related cases until the law is amended, said Mr. Jaitley.
Source: WSJ – India Says New Tax Won’t Apply to Foreign Institutional Investors
