(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
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
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.
- 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
- 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
- For previous columns by the author, Reuters customers can
(Editing by Edward Hadas and David Evans)