This can’t be good for the reputation of India’s Prime Minister Modi.
Being business friendly has been a cornerstone of Modi’s year-old administration, specifically by ending arbitrary and retroactive taxation. But the current hubbub over a new tax on foreign investment shows that can only go so far.

Recently, foreign investors have received tax notices alerting them they need to pay the minimum alternate tax on their capital gains, which is about 20%. The Indian Government says the tax on foreign investors is not a policy issue, but currently a legal one, and as such, it cannot reverse the decision.

Historically, foreign investors have been exempt from the tax, but a 2012 ruling by the Indian tax body said now they must pay. India’s Finance Minister Arun Jaitley said investors owe about $6.3 billion. While Jaitley said capital gains will be exempt starting April 1, 2015, that doesn’t help with the last three years. One taxpayer sued, and currently the Indian Supreme Court is reviewing the case.

Asia Unhedged is all for the free movement of capital and thinks retroactively enforcing a tax code that has historically been a non-issue is shortsighted and stupid because it will be like shooting oneself in the foot. Is the amount of tax money going to make up for the lost investment that will probably ensue after this is enforced? The Indian market benchmark, the S&P BSE Sensex has already lost 2% this week over this issue. If the courts uphold this decision you should expect a lot more outflows.

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