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