India Unties $6.4 Billion Tax Knot That Rattled Investors

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India said foreign portfolio investors can use tax treaties to reject demands on past capital gains, seeking to defuse a row that cast a cloud over the $48 billion poured into stocks and bonds from overseas.

Foreign institutional investors domiciled in countries that have signed double taxation avoidance treaties with India are exempt from these levies, Central Board of Direct Taxes Chairwoman Anita Kapur said in a phone interview in New Delhi.

Kapur spoke after India’s Finance Ministry held a conference call with investors to ease concerns over the Minimum Alternative Tax, which led some tax officials to claim past dues of as much as $6.4 billion. The spat has jarred with Prime Minister Narendra Modi’s pledge to end what his one-year-old government has called the “tax terrorism” of the prior administration.

“The tax clarification is a big relief for investor sentiment,” U.R. Bhat, a director at the Indian unit of U.K.- based Dalton Strategic Partnership LLP, which oversees $2 billion in assets, said in a phone interview. “Markets badly need an unclogging of the bottleneck of investments. There is not much positive news from corporate earnings, policies and macro-economic data. About half of the foreign inflows into India comes from tax treaty countries.”

The clarification signals foreign portfolio investors coming from treaty countries such as Singapore or Mauritius won’t have to pay a 20 percent levy on past capital gains under the Minimum Alternative Tax, according to Sameer Gupta of Ernst & Young.

Minimum Alternative Tax

The S&P BSE Sensex equity index rebounded to close up 0.8 percent in Mumbai Wednesday, after an intraday fall of 1.1 percent.

“The markets rebounded after the clarification that back-tax claims will be closed for treaty benefit holders,” said Anita Gandhi, a director at Mumbai-based Arihant Capital Markets Ltd. Gandhi attended the ministry’s call with investors.

Finance Minister Arun Jaitley in his budget speech in February said overseas funds don’t need to pay the levy from April 1, but in doing so energized some officials to pursue claims for prior financial years.

Officials hadn’t levied MAT on institutional investors abroad in the past 22 years, according to funds’ body ICI Global.

Foreigners have invested about $20 billion in Indian stocks in the past year and $28 billion in bonds. The inflows into equities helped the Sensex index surge 23 percent in the period, one of the largest climbs in the world.

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