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Investment trust

29 March 2012 By Jeff Glekin

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.

Vodafone is the largest foreign direct investor in India. It has invested $26 billion since 2007. But that’s small beer compared to the $200 billion foreign investors hold in India’s equity market, according to data from the Securities and Exchange Board of India. Together, they hold 17 percent of the total.

Investors have two concerns. First, they fear the retrospective taxation of capital gains made over the past six years. Worries abound, and are deepened, because past investment had been made with presumed certainty. Investors seemed to have a government assurance, and a supreme court judgment, which indicated that they would not be subject to any such taxation.

Investors are also worried about New Delhi’s prospective tax plans, and especially proposals designed to target tax evasion. Legitimate tax exemptions may be recast as illicit loopholes. Investors who currently don’t pay any capital gains tax may have to cough up 15 percent on future profits.

If the government moves are being misinterpreted, New Delhi needs to act swiftly to erase the doubts before the fears become any more entrenched. The smart thing to do would be to clarify policy now before new laws are passed. Ambiguities could debilitate for an extended period if new legislation has to be tested in court and driven by the establishment of precedent.

New Delhi may be quite justified in pursuing reform of its investment tax regime. Investors may be obliged to contribute more and enjoy fewer exemptions. But retrospective orders, though they may be designed to correct past mismoves, create problems that can stretch far into the future. And even while uncertainty reigns, investors are freezing up.

 

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