Mauritius

April 10, 2012

Offshore: New Indian Tax Proposals Make Investors Cautious

Gains derived by an enterprise of Maurice in the sale of 'compulsory convertible debentures' (CCD) to an Indian company are interests that are taxable in India.

Such was the position of the Authority for Advance Rulings (AAR) which states that all gains from the sale of these instruments will not be eligible for exemption from capital gains tax under the treaty India-Mauritius. The AAR held that the appreciation of the value of 'debenture' is equivalent to an interest payment, and therefore taxable under the treaty India-Mauritius. 

Worried about the slowdown in the Indian economy, Indian authorities, until recently, promised to promote policies aimed at making the country more welcoming to foreign investment. Instead, the government does the opposite by proposing a budget full of new taxes that would make it difficult and expensive foreign investment. 

This likely increased costs of investment in India raises real questions in the investment community in the world. In the U.S., companies working with investors in the Indian market already indicate the freezing of several acquisitions in India besides the denial last week of professional associations representing over 250,000 businesses in the United States, Canada, Britain, Japan and Hong Kong. 

A warning that becomes important, especially with recent data showing the dependence of India on the capital of the United States, of Europe and Japan to help offset not only its budget deficit, but also its trade deficit, which was estimated at $ 175 billion for the 12 months ending in March. 

According to Indian press reports, the Indian government aims to increase foreign direct investment (FDI) in India to achieve in 2017, 5% of overall investments against 1.3% in 2007. While India, as emerging economies, is a favoured destination for FDI, the Department of Industrial Policy and Promotion (DIPP) of India has stressed that this prominent position will be sustained. 

And, any slowdown in the foreign investment would come at a difficult moment for the Indian economy, which slowed considerably to a growth rate of 9.9% two years ago to 7.4% last year and should not do better than 7 % this year. According to forecasts by Ernst & Young's in his 'Rapid Growth Markets Forecast' (RGMF) quarterly, India to grow just 6.1% in 2012. 

In response to the tax proposals, which could make foreign investors owe more billion, they have already achieved net sales of $ 600 million in Indian stocks and bonds, according to Indian government data, compared with net purchases of 57.7 billion rupees 10 days before the budget.

 

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