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India Finds New Ways to Tax Foreign Investors

India Finds New Ways to Tax Foreign Investors

Photograph by Gabriele Galimberti/Anzenberge/Redux

Sigve Brekke says he’s had just about enough of India’s government. Brekke is managing director of Uninor, the Indian cellular operator controlled by Norwegian carrier Telenor (TELNY). He’s concerned about being socked with a large bill when the government reissues mobile licenses that were canceled in February by the Supreme Court after a bidding scandal that cost some $31 billion.

While officials say they just want a fair price for the licenses, Brekke sees the government trying to stem the state’s red ink by wringing cash out of foreign carriers. “We won’t be able to pick up this check,” says Brekke. If the government doesn’t back down, he adds, “Telenor will be forced to leave.”

Telecom companies gripe that they might end up paying $10.7 billion in new licensing fees and taxes. Other foreign and local executives are aggrieved, too. Luxury automakers say Prime Minister Manmohan Singh’s new taxes unfairly target them. Airport developers and operators are upset about the government’s unexpected decision not to award them $808 million worth of projects. Multinationals counting on India need to think twice, says Amarthaluru Subba Rao, the chief financial officer of GMR Infrastructure (GMRI:IN), a Bangalore-based developer of airports, power plants, and roads. “If there is no long-term strategy for investors,” he says, “nobody will choose to stay in India.”

Singh’s coalition appears willing to take that chance. India’s growth slowed to 5.3 percent, a nine-year low, in the first three months of 2012. At 5.9 percent of gross domestic product, the budget deficit for the latest fiscal year was far above the target of 4.6 percent.

The government has increased spending on impoverished rural areas and on subsidies to help the poor pay for food, fuel, and fertilizer. Much of this aid is financed by borrowing. The red ink of the central government and India’s states and territories totals 8 percent of GDP, versus the 2 percent average for emerging markets, according to Ruchir Sharma, head of emerging markets equity for Morgan Stanley. “As long as growth was chugging along at 8 percent, you could get away with a lot of this stuff,” Sharma says. “In this environment, you can’t.”

Since cutting subsidies is politically dangerous, Singh needs other ways to raise money. The new budget hikes the import duty on autos worth more than $40,000 by 15 percent. The tax is “completely unwarranted,” says Suhas Kadlaskar, director of corporate affairs for Mercedes-Benz India. The government wants Vodafone (VOD) to pay $3.6 billion in capital gains taxes stemming from the British carrier’s 2008 takeover of Hutchison Whampoa’s local assets. Vodafone has said it doesn’t owe back taxes and threatens legal action. Until recently, “India could play hardball with foreign investors because they needed India more than India needed them,” adds Madan Sabnavis, head of the National Commodity & Derivatives Exchange. No longer. “India isn’t doing itself any favors by targeting these industries.”

The bottom line: India’s national and state deficits equal 8 percent of GDP, prompting Prime Minister Singh to seek more revenue from foreign companies.

Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. Follow him on Twitter @BruceEinhorn.
Mehrotra is a reporter for Bloomberg News in New Delhi.

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