New Indian Government Promises More Stable Tax Regime for Attracting FDI

June 4, 2014 Posted by India Briefing Reading Time: 4 minutes

DELHI – Ravi Shankar Prasad, India’s new Minister for Telecommunications, Law and Information Technology, has promised to foster a stable and transparent economic climate for foreign investors – hinting that India’s controversial retroactive tax policies would soon be abandoned.

Soon after taking office last week, Prasad commented, “The larger view is that retrospectivity is avoided to the maximum. The fiscal regime, the policy regime, [the] taxation regime must be very evident because India needs investment.”

As Narendra Modi and the BJP determine how to best deliver upon their lofty economic promises, foreign business leaders are watching closely for signs the new administration will take immediate action to resolve several high-profile tax disputes launched by the outgoing Congress party.

With several multi-million dollar tax disputes currently in limbo between the Indian government and Vodafone, Nokia, Royal Dutch Shell, AT&T and General Electric (among others), Ministry of Finance officials have said further progress towards resolving these disputes would not be made until late 2014 – placing the ball firmly in Modi and Prasad’s court to decide how to proceed in the immediate-term.

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, however, many foreign business leaders are unsure exactly how it will address these sensitive legal issues in practice.

The Indian Government’s ongoing tax dispute with Vodafone Group – one of the longest-running in the nation’s history – is without a doubt one of the most contentious and divisive issues currently facing Prasad.

“We will look into it. Our manifesto has been very specific that we want a stable regime where those who invest in India may not have to face uncertainty,” Prasad said when asked about the multi-billion dollar dispute.

Upon learning of Modi’s victory in national elections last month, Vodafone CEO Vittorio Colao expressed optimism that the new, allegedly pro-business, administration would seek a rapid end to the dispute.

“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. I will engage in any conversation that they deem necessary,” Colao commented in London.

Also on Prasad’s agenda is repairing India’s telecom sector, which has been severely troubled since the Supreme Court ruling on the so-called “2G Spectrum Scam” resulted in the 2012 cancellation of 122 telecom licenses awarded to 22 operators in 2008.

Despite new 2G auctions earlier this year, the sector remains plagued by the fallout from the scandal.

“I am aware of the problems in the telecom sector and my first priority is to set things right. The telecom sector has been in the news for many of the wrong reasons,” Prasad said.

“There are two areas of focus that have to be fixed immediately—quality of service to the consumer and building investor confidence. There is 100 percent FDI in the sector and this investment in the sector must be quickened under a transparent [and] stable regime,” he added.

Prasad’s comments follow the submission of a paper by the Associated Chambers of Commerce and Industry in India (ASSOCHAM) that suggests a new four-part telecom strategy for reducing regulatory costs, auctioning off the available spectrum, providing an impetus to domestic manufacturing and extending benefits of infrastructure status to the industry.

After being sworn in last week, foreign investors are hopeful Prasad will waste no time tackling key tax and legal issues he inherited from the Congress administration.

According to many analysts, how Prasad and Modi proceed regarding putting an end to India’s unhealthy legacy of retrospective taxation will be a key determinant as to just how pro-business and pragmatic the new government is likely to ultimately be.

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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