Foreign Investors Await Signs of BJP Action on Tax Disputes

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DELHI – As Narendra Modi and the BJP determine how to best deliver upon the party’s lofty economic promises, foreign business leaders will be watching closely as the new administration mulls its options for resolving several high-profile tax disputes launched by the outgoing Congress party.

With several multi-million dollar tax disputes now in limbo between the Indian government and Vodafone, Nokia, Royal Dutch Shell, AT&T and General Electric, among others, Ministry of Finance officials recently announced that progress towards resolving these disputes would not resume until late 2014 – giving the BJP ample time to decide how its government will officially proceed on the matter.

“The government has to give [the resolution process] a legal shape. When the new government comes they will decide,” a finance ministry official said prior to the release of election results last week.

Before negotiations with these companies can resume, India will need to change its existing tax law, which currently lacks a provision for resolving tax disputes through negotiation. Despite the BJP’s ardently pro-business rhetoric, many foreign business leaders are unsure how it will address these sensitive legal battles in practice.

“Tax reforms will be the first priority,” commented BJP leader Subramanian Swamy, “we will end what we have called ‘tax terrorism’ by the outgoing government.”

“We will be looking at a regime which is investor-friendly and [in which] the corporate sector doesn’t suffer policy or decisions which are regressive. Confidence in the economy will prevail,” BJP spokesman Nirmala Sitaraman added.

Vodafone Unequivocal

Party to one of the longest-running tax disputes in Indian history, Vodafone Group has been particularly vocal about the need for the BJP-led government to expedite the resolution of tax arbitration shortly after taking office.

“I read during the electoral campaign very pro-business statements from the winning party. Therefore, I am optimistic that the BJP will quickly do something to restore confidence in the country. We had an issue that has been really damaging to the Indian reputation, which is this retrospective taxation. Maybe this is actually a great opportunity for the new government to make a statement about how open the country is again,” Vodafone CEO Vittorio Colao commented in London earlier this week.

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“I will engage in any conversation that they deem necessary,” he added.

On Wednesday, Vodafone India reported its first net profits since entering the country in 2007, with Colao characterizing India as a “very good story” but emphasizing the need of the incoming government to “improve investor sentiment.” Following the report, Vodafone India additionally hinted yesterday morning at the possibility of an IPO after its tax dispute is resolved.

Nokia Troubles Spill Over

Nokia’s tax dispute with India will likely be one of the most pressing legal issues the BJP will face upon taking office, however.

After India’s Madras High Court asked the Tamil Nadu sales tax department to reconsider its nearly US$400 million claim against Nokia India and offer the company an individual hearing earlier this month, aftershocks from the tax dispute began impacting a number of other electronics manufacturers in the Chennai region.

Last week, Foxconn India announced it would soon introduce a voluntary retirement scheme for employees at its Chennai facility. Foxconn, one of Nokia India’s main vendors, was heavily dependent upon the firm’s Chennai operations prior to the dispute over its cellphone manufacturing facility.

This tax claim is one of several Nokia is currently contesting regarding its cellphone manufacturing facility in Chennai’s Tamil Nadu state. Tax officials in the state are claiming Nokia wrongfully claimed export benefits when devices manufactured in Chennai were sold domestically. According to tax officials, Nokia has failed to produce adequate documents to support export claims on mobile phone handsets produced in the special economic zone (SEZ).

In light of the various disputes, which could cumulative be worth nearly US$4 billion, Indian authorities froze Nokia’s Chennai factory and prevented the transfer of the plant to Microsoft Corp. in the firm’s recent acquisition of Nokia’s devices and services business. Nokia’s Chennai plant was one of the company’s largest, with nearly 7,000 employees. In response to India’s claims, Nokia characterized the dispute as “without merit” and stated it was “weighing its options for legal recourse [and] will defend itself vigorously.”

The Promise and Peril of the BJP’s Mandate

While the BJP’s pro-business mandate from Indian voters coupled with a rare majority government– the first in three decades – undoubtedly has the potential to transform rhetoric into results, investors and citizens will now look to the new government for delivery and follow through on these promises.

Tax disputes with foreign firms such as Vodafone and Nokia have been particularly damaging to India’s reputation among foreign investors, and entering office with a strong pro-business position on these disputes will partly determine whether the BJP can successfully restore investor confidence in the country.

One thing is for certain, however: foreign firms will be watching closely for how the BJP approaches these unsightly disputes as an indication of just how pro-business and pragmatic Narendra Modi’s government is likely to be in the long-run.

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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