BREAKINGVIEWS-India offers only half-hearted tax retreat

Tue May 8, 2012 5:37pm IST

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(Fixes spelling in paragraph 4) (The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By Jeff Glekin

MUMBAI May 8 (Reuters Breakingviews) - India's dangerous dance with foreign investors has taken another twirl. Fund managers have welcomed an announcement by India's finance minister that he plans to delay the introduction of new tax rules. But Pranab Mukherjee's backwards turn does not go far enough. Investors and India are left in an uncomfortable position.

There are some good things about the latest manoeuvre. Mukherjee has shown he's sensitive to investor unrest over the rules proposed in the March budget. It looks like he won't be retrospectively taxing any institutional investments made into Indian debt and equities. And he has reduced the scope of the backward-looking changes by promising not to tax capital gains on deals made in countries which have a double taxation treaty with India. The last adjustment protects deals done from Mauritius from retrospective tax.

But the Cayman Islands have no such treaty. That means Vodafone, which structured its purchase of Hutchison Whampoa's Indian mobile phone operations with a Cayman Islands vehicle, is still on the hook.

That detail is discouraging but the failure to retreat on the principle of retrospective taxation is more worrying. Such changes are simply unfair, especially as the Supreme Court has already given a ruling on how the laws should have been interpreted.

Mukherjee has delayed implementation of the forward looking anti-avoidance rules which had spooked fund managers. The change should be enough to restart inflows of foreign capital, according to Standard Chartered. That's good for the rupee. Even better, the Economic Times, a well connected newspaper, suggested that the proposals may never see the light of day.

While they wait to find out, investors may give the government the benefit of the doubt. But they deserve a clear answer to the basic question: will they or won't they have to pay capital gains taxes on short-term investments? Mukherjee is still dancing around the issue.

CONTEXT NEWS

- India's finance minister announced in parliament on May 7 that he intends to delay by a year the roll-out of measures to crack down on tax evasion.

- However the changes to the finance bill do not appear to give any respite to Britain's Vodafone, which India wants to tax over its 2007 acquisition of Hong Kong-based Hutchison Whampoa's mobile operations in India. However, Pranab Mukherjee also said a move to amend income tax laws retrospectively would not override the provisions of the agreements to avoid double taxation which India has signed with 82 countries, including Mauritius.

- The rupee is down 9 percent against the dollar since the start of March, taking it close to a record low. In March and April, India saw net portfolio outflows of $540 million, compared with $13 billion in inflows in January-February.

- The vagueness of the original plan, which was unveiled as part of India's budget for the fiscal year beginning in April, caused uncertainty among foreign investors.

- Reuters: India delays tax evasion steps after investor outcry

- For previous columns by the author, Reuters customers can click on

(Editing by Edward Hadas and David Evans)

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