This story from the Washington Post is over a year and a half old, but it highlights one of the biggest problems with doing business in India today:
Global telecommunications giant Vodafone should be one of the success stories of investing in India. Instead it is a cautionary tale about barriers to foreign investment the country badly needs
Vodafone’s entry into the fast-growing market was well-timed and
profitable. In 2007, it paid $11.2 billion for a two-thirds stake in
Hutchison Essar. Now its mobile subscribers in India have increased more
than fourfold to 127 million.
But then came the tax bill: Indian
officials slapped the company with a $2.5 billion capital gains charge
for the purchase, and alarm bells started ringing.
It was an
interpretation of the country’s tax law without precedent, an attempt to
raise money on a transaction that took place outside India, and even
more controversially taxing the buyer rather than the seller, a Chinese
firm. Since then, the government has opened retroactive tax
investigations into hundreds of other deals involving foreign companies.
“We
have received feedback from many foreign investors that the growing
unpredictability in India’s tax policies creates unquantifiable risks in
investment planning,” the ambassadors of the United States, Britain,
the European
Commission and four other countries wrote in a letter to
India’s finance minister. “We are concerned that this uncertainty could
affect the confidence of those thinking of investing in the Indian
market, who may seek an alternative destination for FDI.”
I can tell you from a professional point of view, that the tax aspects of this deal were analyzed well in advance of the deal being done. That's just the way these deals work. I can also tell you that this decision came as a huge shock to those involved. It's simply not possible to do any meaningful business in this type of environment.
But according to Western business leaders and diplomats, one problem
stood out above all others: the sheer unpredictability of doing business
in India.
“What most deters investors is unquantifiable risk,”
said one foreign business leader who spoke on the condition of anonymity
for fear of harming his business interests. He complained about murky
laws and poorly defined regulations that leave bureaucrats with the
power to make arbitrary and sometimes opportunistic decisions, and that
make investment expensive and risky. “There is a love of opaqueness and
ambiguity.”
