New tax rules will not make India unattractive

By Vikram Barhat | April 12, 2012 | Last updated on April 12, 2012
2 min read

The proposed new tax rules in India, widely resented by foreign investors and expected to increase the costs of investing in India, will not make India any less attractive as investment destination.

Vishal Chetan, vice-president of finance at Excel Funds, hopes the Indian government will reconsider the new rules before they are enacted on May 15, but is not too worried about their perceived reputational risk factor.

“India still remains very attractive because it’s a growing country with domestic consumption, the middle class is coming up really fast, and China is slowing down,” he said. “Foreign investors and American businesses are still going to go there.”

Besides, the rules doesn’t impact mutual fund investors significantly as they are not subject to taxes in India, provided they meet certain conditions under section 10 (23 D) of the Income-tax Act, he added.

“Basically, [as] foreign unitholders, we would be subject to certain capital gains tax if the proposed rules were to be enacted,” he said. “Foreign investors would have to bear that additional cost; this is something we can’t help.”

But that would be the extent of it. The new tax rules, he said, will not wipe out their profit.

That is not to say the proposed tax rules will be implemented in their current form. Chetan, like many others, draws hope from India’s history of dramatic volte-face on policy matters.

“India does have a history of bringing out these rules and making a U-turn on them,” he said. “The anti-avoidance [part of the proposed] rules were supposed to come out under the direct tax code, but [were] postponed. Out of the blue they slipped it into the budget.”

There is ample evidence, he said, that the Indian government will likely not backtrack on anti-avoidance rules, but may drop the much-resisted retroactive provision therein.

Vikram Barhat