Uncertainties in the tax regime were one of the key issues raised by investors with finance minister Arun Jaitley during his eight-day roadshow in the US last month.
Jaitley’s roadshow from June 17-24, one of the longest by a Cabinet minister in recent times, was aimed at highlighting the measures taken by the Narendra Modi government since it came to power last year to boost economic growth, and that it has taken steps to bring stability and predictability in the tax regime.
The US is the largest market for Indian exports and it ranks sixth in terms of FDI in India between FY01-FY15. In FY15, India had a trade surplus of $20.5 billion with the US while FDI from that country stood at $1.82 billion.
With economic uncertainties in Europe, it was not difficult to understand why the minister chose the US for the roadshows to attract long-term foreign capital for manufacturing and infrastructure projects.
“It was useful to speak to US industry leaders and think-tanks and understand their concerns,” one source said.
The minister addressed some of the biggest funds in the US including Calpers, Calstrs, Townsend Group, Hall Capital Partners, Stanford Management Company, J Paul Grey Trust, Dodge & Cox, Franklin Templeton, Geneva Advisors, Matthews, Route One, Standard Pacific, Think Investments and Chris Hansen, among others. The collective value of the assets under management of the funds was upwards of $1 trillion, which is equivalent to the investment India requires in five years through 2017.
In March, the Indian income tax department sent minimum alternate tax (MAT) notices to over 68 FPIs, claiming tax worth R603 crore for past capital gains. The notices mean that FPIs will have to pay tax at an effective rate of 20% on business income or ‘book profit’ with retrospective effect. Though the government removed the MAT liability prospectively in the Budget presented in February, it did not do anything for the past years as the issue was sub-judice.
This led to a net FPI capital outflow of R14,272 crore from the country in May. Aware of the significance of foreign capital flows to India, the government has virtually halted scrutiny of FPIs for MAT dues pending the report of a high-level committee formed to examine the issues and the outcome of a case in the Supreme Court. India is a favourite destination of FPIs, whose net investment stands at R78,428 core so far in 2015. They had invested R2,56,213 crore in 2014.
The foreign investors are also miffed with the amendment to the Income Tax Act in 2012 by the previous UPA government to clarify that the transfer of shares of companies incorporated outside India, which derive their value substantially from assets situated in India, was taxable here. The clarification, which had retrospective effect, drew sharp criticism from investors. The current government calls this a legacy issue.
Among other issues, the investors also inquired about the progress on the proposed goods and service tax (GST), which the government plans to implement from April 1, 2016.