In­dia’s tax rul­ing on Hutchi­son- Voda­fone deal would scare away Chi­nese in­vestors

Global Times - - Biz Comment - By Xiao Xin The au­thor is a re­porter with the Global Times. bi­zopin­ion@ glob­al­times. com. cn

In­dia’s “tax at­tack” against a unit of Hong Kong ty­coon Li Ka- shing’s CK Hutchi­son Hold­ings, based on un­ten­able grounds, will in­evitably back­fire and dent New Delhi’s ef­forts to lure for­eign in­vestors, Chi­nese busi­nesses in par­tic­u­lar.

In a fil­ing with the Hong Kong stock ex­change on Mon­day, CK Hutchi­son – Li’s listed flag­ship – said that its sub­sidiary Hutchi­son Telecom­mu­ni­ca­tions In­ter­na­tional had re­ceived a for­mal tax bill of 79 bil­lion ru­pees ($ 1.2 bil­lion) from the In­dian tax au­thor­i­ties. The com­pany de­nied the valid- ity of the tax claim linked to its sale of mo­bile phone busi­ness in In­dia to Voda­fone in 2007, a to­tally off­shore trans­ac­tion.

The tax claim, based on ret­ro­spec­tive leg­is­la­tion, con­spic­u­ously seeks to negate a judg­ment by In­dia’s supreme court in Jan­uary 2012 that ruled the 2007 deal was not tax­able in In­dia. The tax penalty or­der has raised con­cerns that it runs con­trary to the prin­ci­ples of in­ter­na­tional law.

The tax claim barely af­fected the shares of CK Hutchi­son, which doesn’t have any sig­nif­i­cant hold­ings in In­dia. On Wed­nes­day, its shares rose 1.3 per­cent to HK$ 101.5 ($ 12.97). The tax claim, nev­er­the­less, has ap­par­ently put In­dian Prime Min­is­ter Naren­dra Modi, who has pledged to free the coun­try from “tax ter­ror­ism,” in an em­bar­rass­ing po­si­tion.

Modi’s push for the im­ple­men­ta­tion of a goods and ser­vices tax, which he touted as a gi­gan­tic step to end “tax ter­ror­ism,” has cre­ated con­fu­sion and com­pli­ca­tions, es­pe­cially for small busi­nesses. The penalty im­posed on CK Hutchi­son will only negate his ef­forts to make the In­dian econ­omy glob­ally com­pet­i­tive.

The tax bill sent to CK Hutchi­son nat­u­rally cre­ates doubts about In­dia’s am­bi­tion of ris­ing to the No. 90 po­si­tion on the World Bank’s ease of do­ing busi­ness sur­vey this year and to the No. 30 place by 2020. The South Asian na­tion was ranked No. 130 in last year’s sur­vey.

Any com­pany seek­ing to in­vest in In­dia will now have to bal­ance busi­ness risks ver­sus op­por­tu­ni­ties and keep in mind the tax penalty an­tics of the In­dian gov­ern­ment. That is cer­tainty set to raise con­cerns about risk. Modi must do some­thing to gen­uinely de­liver on his prom­ise.

For the grow­ing num­ber of Chi­nese busi­nesses as­pir­ing to build a foot­print in the In­dian mar­ket, they must pro­ceed with cau­tion. They will have to avoid po­ten­tial tax pit­falls in a mar­ket that of­fers enor­mous op­por­tu­ni­ties but that is out of step with the in­ter­na­tional mar­ket, es­pe­cially in terms of taxes.

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