Foreign portfolio investors on Wednesday welcomed India’s decision to scrap efforts to make foreign funds pay tax on past profits, but they remained wary of the country’s unpredictable tax regime.
A high-profile row with foreign investors had erupted late last year following the retrospective imposition of the minimum alternative tax (MAT) on funds, including Aberdeen Asset Management.
With foreign investors holding a quarter of the shares on the main Sensex board, the controversy rattled Indian markets and there was relief after the government announced on Tuesday that it would waive those tax demands.
“The fact that government has acted on the recommendations so fast shows that they really don’t want to rock the boat,” U.R. Bhat Managing Director at Dalton Capital, a Mumbai-based fund that caters exclusively to foreign investors, said.
“What’s clear is the government really wants to resolve its tax disputes with foreign investors.”
The government’s about-face comes at a time when equity markets around the world are suffering due to volatility in China. India has been no exception, with foreigners selling a record amount of Indian shares last month.
Announcing the decision late on Tuesday, Finance Minister Arun Jaitley said the changes would be made to tax legislation in the coming parliamentary session, and said it might help investor confidence.
MAT had previously existed in statute books but had never been imposed on foreign investors. The change reinforced longstanding perceptions that India’s tax officials were overly aggressive toward foreign investors.
India is separately in international arbitration with Cairn Energy over a retrospective $1.6 billion tax bill, as well as in dispute Vodafone over tax related to the transfer of shares.
New Delhi has long sought to tighten the criteria of who can benefit from the treaty, which allows investors registered in the East African island to avoid paying any capital gains taxes, and both sides are expected to negotiate any changes.
“There’s market talk that the capital gains exemption for equities under the Mauritius-India tax treaty may be taken out. That’s one of the biggest upcoming concerns,” said Patrick Pang, Head of Fixed Income and Compliance for industry body Asia Securities Industry & Financial Markets Association.