An entry into some of these indices is expected to generate an additional $20 billion of foreign investment into the economy. The government also hopes to clear one more tax issue, that of withholding tax on investments, for which the announcement is to be made soon.
For the last two years, the government of India is attempting to list its sovereign debt papers in some of the global bond indices.
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The issue of India’s tax treatment of foreign money had upset these negotiations. Managers of global bond indices wanted India to offer a legal assurance that it will not change its tax laws to the disadvantage of investors in these funds. They had also asked India to list its sovereign debt papers on leading international central securities depositories like Clearstream.
The Taxation Laws (Amendment) Bill, 2021, passed by the Lok Sabha last week, makes the job of Indian negotiators much easier. The Bill provides for the withdrawal of tax demand made on indirect transfer of Indian assets if the transaction was undertaken before May 28, 2012, the day the infamous retrospective tax legislation came into being. It has been also proposed to refund the amount paid in these cases without any interest thereon. For this purpose, the Bill seeks to amend the Income Tax Act of 1961 and the Finance Act of 2012. This means investors putting money into India will know clearly what the tax demand on their instruments is without the ghost of a past law suddenly making an appearance.
“There was no retrospective tax implication that could come up for any investor in these indices. Still, the fact we had a law in our statute books — that puts controls on the flow of money into and out of the country — did often come up in our discussions with them,” said a government official.
Being a part of these depositories based on rules framed by the European Commission in 2012 puts an obligation of dematerialisation for the traded securities, a harmonised settlement period for their transactions and a clutch of other rules to ensure settlement discipline measures.
This will mean the tax treatment on these papers, like the lower withholding tax, will need to be frozen by India. The government will essentially need to give a commitment that these will not be changed to the disadvantage of investors in these funds. So, investors can invest in the papers in foreign currency and liquidate those also without suffering any exchange loss. As long as retrospective tax existed on the books, the managers were finding it difficult to convince pension funds and other long-term investors that India will not play around with its tax laws.
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