ASIFMA and SIFMA Urge Indian Finance Ministry to Address Unintended Tax Consequences of Finance Bill, 2012

ASIFMA, joined by global alliance partner SIFMA, today sent a letter to Indian Finance Minister the Hon. Pranab Mukherjee urging him to act to preempt portions of the Finance Bill, 2012 (“Bill”) that will adversely affect investment in the Indian capital markets.

In particular, ASIFMA members believe implementation of the Bill’s provisions relating to taxation of indirect transfers of assets, as well as the General Anti-Avoidance Rule (“GAAR”), are too broadly worded and could be interpreted to tax investments by Foreign Institutional Investors (“FIIs”) in the Indian listed equity markets.

Nicholas de Boursac, ASIFMA CEO, also stressed, "The financial services industry is concerned that these tax proposals may inhibit the efficient operation of the Indian debt and equity markets. We believe that many of these consequences are unintended, and we urge the Finance Ministry to clarify the scope of the tax proposals and thereby avert unnecessary disruption to the Indian capital markets. Incorporating some of the recommendations of the Standing Committee on Finance would go a long way to resolving this important and urgent issue."

The relevant provisions of the Bill are expected to take effect on April 1, 2012, and it appears that market participants have already begun to reduce their positions in India. FIIs have assets under custody of more than Rs. 10 lakh crores (over US$200 billion) or 17% of the capitalization of India’s equity markets. In addition, they invest substantial sums in Indian government and corporate debt.

FIIs fear that the new tax rules could subject this foreign investment to double or triple taxation. Such onerous taxation – or even the risk of such taxation – could threaten this important source of capital for India’s businesses. In the meantime, FIIs are carefully evaluating these new tax risks.

In the letter to Finance Minister Mukherjee, ASIFMA and SIFMA confirmed the industry’s commitment to supporting the development of the Indian economy and recognized India’s potential as an important investment jurisdiction, noting that clarification of these tax provisions would help such efforts.