India irks international investors

Notorious for its tight capital controls and glacially paced market reforms, India has now displeased foreign investors with a bevy of new taxes proposed recently in the Finance Bill 2012.

The international media wasted no time in drawing attention to the widespread concern for, and reconsideration of, the costs and benefits of investing in India.

One of the several proposed taxes empowers the country to tax any offshore transactions involving assets in India, retroactive to 1962.

The controversial proposal will allow the country sweeping powers to tax investment funds that route their investments to India via Mauritius, which makes up about 40% of all foreign direct investment to India.

Another retroactive provision would impose a 10% tax on any software imported into India since 1976.

These proposals come just two months after the government of India promised to ease restrictions on direct equity investment to attract foreign investment. Instead, it has effectively made more difficult and expensive for outsiders to invest in India.

The proposal has received a strong pushback from the international community, which considers this policy out of sync with the rest of the world.

A group of business associations representing 250,000 companies in Canada, the U.S., Britain, Japan and Hong Kong has formally sent a protest letter to the Indian prime minister, Manmohan Singh.

They argue “the sudden and unprecedented move in the Bill has undermined confidence in the policies of the Government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India.”

Securities investors, on the other hand, let their actions speak for themselves. Foreign investors triggered a net outflow of $600 million from Indian stocks and bonds the 10 trading days after the proposal was made public.

This is a clear indication that, if enacted, these proposals will significantly weaken India’s position as a destination for international investment.

The Indian government has so far done nothing to suggest it’s willing to reconsider. An approach like that does India no favours, especially in light of the rapid cooling of its economy.

It will further discourage foreign investors, especially Canadian businesses, which are being encouraged to broaden their economic participation in emerging markets, of which India is a key player.