Why do foreign investors flee India 1
Investors are fleeing India
For example, the latest tax proposals in the country's budget have caught foreign companies off guard. If the plans presented in March are implemented, there could be significant retroactive tax liability on international mergers and acquisitions that were up to half a century ago. A tax exemption, as many investors currently enjoy, could be omitted. Legal experts fear that the plan could have devastating effects on company deals. In the past few days, more than half a billion dollars in foreign capital has been withdrawn from the Indian stock market.
A British oil producer was selected by the Indian government. He is supposed to pay a fee of billions of dollars. The company feels discriminated against. Managers of the Internet companies Google and Facebook face criminal prosecution. They refuse to remove content from the web that has been criticized as objectionable by some users. The Internet companies assert that they have complied with applicable law. The long promised liberalization of foreign investment in retail, defense and insurance has stalled.
Will company takeovers be taxed retrospectively for fifty years in the future?
Foreigners have long defied the risks of corruption and the crippling bureaucracy in India. After all, they want to benefit from the rapidly growing emerging market. For its part, the Indian government has not missed an opportunity to attract foreign investors at international conferences such as the World Economic Forum in Davos. And now she comes up with the tax plans that Parliament is due to vote on in April. New Delhi wants to use them to fight the country's serious budget deficit. The unrest among foreign business people is growing.
"In a desperate effort to generate tax dollars, the government will fire at vulnerable targets," prophesies Saurabh Mukherjea, head of equities at the investment banking boutique Ambit Capital in Mumbai. "And foreigners - whether corporations or investors - are obviously easy vulnerable. Because they cannot influence how the government performs in elections. "
One of the proposals gives the authorities the right to tax transactions dating back to 1962 in which Indian assets were passed on between two foreign firms. This would essentially invalidate a January ruling by an Indian Supreme Court. The chamber had found that Vodafone would not have to pay taxes of more than two billion dollars on a deal made in 2007. With the transaction, the British mobile phone company had gained access to the Indian market at the time.
Government lures investors to the energy sector in vain
So far, the Indian court system has been considered cumbersome by foreign investors, but still relatively reliable and independent. Are court decisions suddenly no longer final? The government's proposal, which amounts to a negation of the judgment, made this impression in any case.
With a further provision in the budget, taxes on oil production are to be increased by 80 percent. Cairn India is the only private company that would be affected by the measure. Vedanta Resources and Cairn Energy have significant stakes in India's largest oil producer. Both are from the UK. According to Cairn India, the tax hike would cost the company around $ 2.5 billion by 2020. It must now be carefully examined whether a further six billion dollars will be invested in India, as previously planned.
"The government has tried every possible means to attract investment in the oil and gas sector. It did not work," says Cairn India boss Rahul Dhir. "And these measures will only scare off more investors." The government argues it needs to increase revenue to offset its higher energy bills. No comment was received from the Ministry of Oil.
In the meantime, leading politicians in industrialized nations have become prudent. British Chancellor of the Exchequer George Osborne will hold an annual meeting with Indian Finance Minister Pranab Mukherjee in New Delhi on Monday. He is expected to raise the need for a stable and predictable business climate in India.
Corruption scandals unsettle investors
During a visit to India this week, US Secretary of Commerce John Bryson described the growing trade relations between India and America in the most beautiful colors. But he also had criticism in his luggage. Americans are concerned about tariffs on goods like grapes and citrus fruits, and about Indian import restrictions on foreign-made solar equipment. "That makes it difficult to invest in India," said Bryson. "Our joint progress could slow down." Other US politicians had recently raised their concerns about the proposed retroactive tax to their Indian colleagues.
The Indian Treasury Department did not respond to requests for comment. However, the government has repeatedly affirmed that it is committed to promoting an investor-friendly environment.
The Indian economy is likely to have grown by 6.9 percent in the fiscal year ended March 30th. Seen globally, this is remarkable. However, the increase is not enough to raise the standard of living for millions and millions of Indians who live in poverty, say economists. Foreign direct investment in India last year was $ 27.6 billion. After investments collapsed in the meantime as a result of a whole series of corruption scandals, they have roughly reached the 2009 level again. According to analysts, the budget deficit is 5.9 percent of the gross domestic product. And this hole is now to be filled with the help of the taxation of foreign companies.
Money is flowing out of India's stock market
The budget proposal to combat "tax avoidance" is causing annoyance among international investors. The plan is to come into force on April 1. Then the companies - and many of them are from abroad - will have to prove that they are not doing corporate transactions structured in such a way that they could avoid taxes.
Investors fear that the new regulation could undermine India's tax treaty with Mauritius. Accordingly, companies that operate there are exempt from capital gains tax in India. Foreign funds, including many American asset managers, have invested in Indian stocks and bonds through subsidiaries in Mauritius. You could now face unexpected taxes if you sell shares, some analysts say. This could also affect participation certificates that use foreign funds to invest in India.
In the past three days, net foreign capital has drained the Indian stock market for $ 692.46 million. Investors are obviously preparing for the fact that the Tax Avoidance Act will actually go into effect. Due to the new regulation, foreign funds will recalculate possible profits from their investments in India, said Bobby Parikh of the consulting firm BMR Advisors. It could be that India "is no longer an attractive market".
Finance Minister Mukherjee, in his own words, is not aiming for portfolio investments. The aim of the new tax rules is rather to "take action against aggressive tax avoidance plans".
The hurdles for foreign retail chains remain high
Attempts by India to attract more foreign direct investment have stalled. There is no political consensus. Last year, Prime Minister Manmohan Singh's government again overturned plans to allow large foreign multi-brand retailers such as Wal-Mart to invest. Critics had argued that such a move would mean the end of small family-run shops.
However, retailers with only one brand, such as Ikea, opened their doors in January. You are allowed to participate one hundred percent in Indian projects. But some companies report overwhelming restrictions. For example, overseas retailers have to source thirty percent of their products from Indian small businesses. Only a few international companies have expressed their interest. Ikea is reviewing the guidelines and is still considering opening stores in India, the company said.
The new regulation is "a joke" in its current form, commented Armando Branchini, the managing director of Fondazione Altagamma. The company promotes Italian luxury companies abroad, including Bottega Veneta, Ferrari and Versace. Indian consumers will not buy luxury items such as Rolex watches or Ferraris that are made in India if they believe there is a difference in quality from products made abroad. India is trying to "decide and determine what a company's business model should look like," he says. "That is completely unauthorized and incomprehensible."
—Khushita Vasant and Tom Wright contributed to this article.
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