BREAKINGVIEWS-India's tax grab threat could backfire badly

MUMBAI, March 28 (Reuters Breakingviews) - Investors fear that New Delhi will use tax law changes that could trap Vodafone to snare offshore institutions. If that's not what the government intends, it should say so. If it is, the value of nearly all investment assets is endangered. Capital inflows could slow to a trickle.

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CONTEXT NEWS

- Foreign brokerages are worried about recent provisions, designed to tax indirect investments and combat tax evasion in India. They say the provisions are couched in ambiguous language and could also be used to target overseas market investors. That, in turn, could risk a sell-off in markets, Reuters reported on March 28.

- The Asia Securities Industry and Financial Markets Association, a lobby group, published a letter to Finance Minister Pranab Mukherjee on March 28, expressing "deep concern," and asking for the government to clarify its stance.

- At the heart of its concerns are two provisions announced this month. The first gives India power to retroactively tax the indirect transfer of assets, which was widely seen as targeting Vodafone's $11 billion purchase of Hutchison Whampoa's Indian assets. The second targets tax evaders via the General Anti-Avoidance Rule (GAAR), putting the onus on investors registered in countries with special tax exemptions with India to prove they do not intend to explicitly avoid taxes.

- Mumbai's benchmark Sensex index has lost more than 1 percent this week to stand at its lowest in two months, with traders citing the uncertainty behind these provisions as a main reason.

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

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(Editing by Robert Cole and David Evans)