Rising Risk: Foreign Firms Sense Hostility in India

Tax and Policy proposals has increased the perception that business environment is hostile. Indeed, the new Chair of Greater Dallas Indian Chamber of Commerce Mr. Sunil Maini, who resides in Plano, Texas, can make a difference to this situation in India.

Plano is a city which pioneered giving tax breaks to companies, as it did with JC Penney and EDS in 1986-87, that uplifted the whole economy of Plano, Texas. Contrast that with Garland, Texas where the elders did not want to give tax breaks to JC Penny, Dallas residents did not want to give tax incentives to the football stadium, that went to Arlington, Garland resisted the town east mall, Mesquite got it. For the last 15 years, the Citizens of Dallas have not passsed the bond to complete the project River Walk, the likes of San Antonio, that will burst our economy... It is all lack of leadership world wide.

I am considering consulting with the business leaders to start on campaigns to bring about a positive change for growth. Way back when the Diboll project was in doldrums in Maharashtra, Enron had contacted me to do their PR to turn the hostility into a conducive environment... I actually talke to the guy who is in Federal Penitentiary for all the robbing he did. Thank God, I was not a part of that.
Mike Ghouse
Select India Articles about India at http://mikeghouseforindia.blogspot.com

All articles by Mike at www.TheGhousediary.com

How much of this is exaggerated, needs to be verified

Rising Risk: Foreign Firms Sense Hostility in India
Amol Sharam, Megha Bahree and Paul Beckett

NEW DELHI—If businesses like certainty, then India has been a big turnoff for foreign companies.

A series of recent developments have greatly increased the perception that the country has a risky business environment where policies suddenly can turn hostile.

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Bloomberg News

A Bharti Walmart shopper in India, where Wal-Mart can't operate alone.

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Tax proposals in the national budget unveiled in March stunned foreign firms. They could create significant retroactive tax liabilities for international mergers stretching back a half-century and eliminate a tax exemption many investors now have, wreaking havoc on corporate deal making, legal experts say. More than a half-billion dollars in foreign capital has left the Indian stock market in recent days.

The government also singled out a U.K.-based oil producer for a multibillion-dollar levy that the company calls discriminatory. Internet executives fromGoogle Inc. GOOG -0.32% and Facebook Inc. are facing criminal prosecution for not removing Web content that some consider objectionable even though the companies have said they followed the letter of the law. And long-promised efforts to liberalize foreign investment in the retail, defense and insurance sectors have stalled.

Foreign companies long have braved the risks of corruption and a stifling bureaucracy in the hopes of capitalizing on the fast-growing emerging Indian market. And New Delhi has done its part to court foreigners at international events like the World Economic Forum's annual conference in Davos, Switzerland. But the tax proposals, which are set for an April vote in Parliament and designed to reduce a yawning budget deficit, have helped heighten anxiety about doing business here.

"In the scramble to generate tax dollars, the government will go after soft targets," said Saurabh Mukherjea, head of equities at Ambit Capital, a Mumbai-based boutique investment bank. "Foreigners, whether they be companies or investors, are obvious soft targets since they don't have an impact on the government's electoral fortunes."

One of the budget proposals would allow authorities to tax transactions dating to 1962 in which an Indian asset has been transferred between two foreign entities. That essentially would override an Indian Supreme Court ruling in January that U.K. mobile-phone companyVodafone Group VOD -0.82% PLC isn't liable for over $2 billion in taxes on the 2007 deal it struck to enter India.

Foreign investors have viewed India's court system, while clunky, as relatively reliable and independent. But the government's proposal to negate the ruling has left the impression that court decisions no longer are final.

Another provision in the budget would increase taxes on oil production by 80%. The only private company affected would be India's largest oil producer, Cairn India Ltd., whose major stakeholders are Vedanta Resources VED.LN +1.98% PLC and Cairn Energy CNE.LN -0.40% PLC, both of the U.K. Cairn India has said the tax increase would cost the company $2.5 billion through 2020 and could discourage its plans to invest $6 billion in India.

"The government has been desperately trying to attract investment in the oil-and-gas sector and it hasn't worked," Cairn India Chief Executive Rahul Dhir said in an interview. "This will just create further disincentives to invest."

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Associated Press

Traffic moves past a Levi's showroom in Mumbai. Indian tax proposals have rattled some foreign businesses.

The government has said it needs to increase revenue to offset its higher energy costs. The Petroleum Ministry didn't respond to a request for comment for this article.

U.K. Chancellor of the Exchequer George Osborne will be in New Delhi Monday for an annual meeting with Indian Finance Minister Pranab Mukherjee and is expected to discuss the need for predictability in India's business environment.

In a speech here Monday to an Indian trade group, U.S. Commerce Secretary John Bryson spoke glowingly of burgeoning U.S.-India trade ties. But he also ticked off a list of U.S. concerns about tariffs on items such as grapes and citrus fruits and about Indian restrictions on imports of foreign-made solar-power equipment.

"This makes it harder to invest in India," Mr. Bryson said. "Our progress together could slow down."

U.S. officials in recent meetings with their Indian counterparts also have raised concerns about the retrospective tax proposal.

The Indian Finance Ministry didn't respond to requests for comment for this article, though the government has said it is committed to fostering a hospitable environment for investors.

The Indian economy is expected to have grown 6.9% in the fiscal year that ends Friday. That is strong by global standards but not strong enough for India to raise living standards for its hundreds of millions people in poverty, economists say.

Foreign direct investment in India was $27.6 billion last year, rebounding to around its 2009 level after a barrage of corruption scandals caused a slump. And the moves to boost government revenue through taxes on foreign companies are intended to help close a budget deficit that is 5.9% of gross domestic product, analysts say.

But foreign investors have complained about another budget proposal set to take effect April 1 that will let tax authorities crack down on "tax avoidance." It puts the onus on companies, many of them foreign, to show that they didn't structure corporate deals to avoid taxes.

Investors have expressed concern that the new policy would override India's tax treaty with Mauritius, which exempts companies operating there from capital-gains tax in India. Foreign funds, including many U.S. asset managers, that have invested in Indian stocks and bonds through Mauritius subsidiaries now could face unexpected taxes when they sell shares, some analysts say. The move also could affect participatory notes, derivatives that foreign funds use to invest in India.

India's stock market has seen a net outflow of $692.46 million in foreign capital in the past three days as investors anticipate the tax-avoidance rule going into effect.

Bobby Parikh, of consulting firm BMR Advisors, said the new policy will change foreign funds' calculations about the potential profits from investing in India and it "may cease to be an attractive market."

Mr. Mukherjee, the finance minister, has said that the new tax rules are intended "to counter aggressive tax avoidance schemes" and that the goal isn't to target portfolio investments.

Meanwhile, efforts to attract more foreign direct investment have been stalled by a lack of political consensus. The government of Prime Minister Manmohan Singh backtracked last year on plans to allow investments by big-box, multibrand foreign retailers such asWal-Mart Stores Inc., WMT +0.60% after critics said the move would crush mom-and-pop shopkeepers.

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Agence France-Presse/Getty Images

Indian Finance Minister Pranab Mukherjee said he hopes 'to counter aggressive tax-avoidance schemes.'

India in January opened the door for single-brand retailers such as IKEA Systems BV to control 100% of Indian ventures. But some companies said restrictions were onerous. The new policy requires retail foreign investors to obtain 30% of their products from Indian small businesses, and few foreign companies have shown interest in the new opportunity. IKEA said it is evaluating the guidelines and whether it wants to set up stores in India.

Armando Branchini, executive director of Fondazione Altagamma, which promotes high-end Italian companies including Bottega Veneta, Ferrari and Versace overseas, said the new policy "is a joke" in its current form.

He said Indian consumers aren't going to buy Indian-made luxury items like Rolexes or Ferraris if consumers assume there will be a quality difference with foreign-made products. India is trying "to decide and shape what has to be the business model of a company," he said. "It's a totally arbitrary approach and not understandable."

—Khushita Vasant and Tom Wright contributed to this article.Mike
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MikeGhouse is committed to building a Cohesive America and offers pluralistic solutions on issues of the day. He is a professional speaker, thinker and a writer on pluralism, politics, civic affairs, Islam, India, Israel, peace and justice. Mike is a frequent guest on Sean Hannity show on Fox TV, and a commentator on national radio networks, he writes weekly at Dallas Morning News and regularly at Huffington post, The Smirking Chimp and several other periodicals. His daily blog is www.TheGhousediary.com