Expressing concerns over Foreign Portfolio Investors facing MAT demand, global rating agency Fitch on Friday said the controversy may prompt FPIs to think twice before investing in India.
The long-term impact on investor inflows of the retroactive tax on capital gains is not yet clear. "It may lead FPIs to think twice in the future, although India's strong growth outlook compared with many of its peers may attract them anyway," said Thomas Rookmaaker, Director, Sovereign Ratings, Fitch Ratings.
The Income Tax Department has already issued notices to 68 FIIs totalling Rs 602 crore for non-payment of MAT at the rate of 20 percent for profits earned.
Some foreign investors have gone to the court, while the government has decided to set up high-level committee to resolve the issue.
Referring to recent outflow of funds, Rookmaaker said, "there have been some net foreign investor outflows in equities in recent weeks, but not so much in bonds."
India's external balances were strong relative to peers on some accounts, and could withstand the current outflows, he said, adding that the country's foreign exchange reserves were high.
Last month, the agency had affirmed India's 'BBB' - rating with stable outlook. The affirmation, Rookmaaker said, balances the country's improved prospects for growth, inflation and the external balances, with its limited progress on the fiscal front.
"The drive to improve the investment climate is clearly a central element in the government's policy agenda.
"The government seems to be pointing its arrows at the right target in this regard, as India's business climate does not compare well with 'BBB-' peers and it seems there is a long way to go before it does," Rookmaaker added.
India's position in World Bank's Ease of Doing Business Index is the lowest of all the 'BBB-' rated sovereigns and even dropped in 2014 (assuming 2013 is calculated using the new 2014 definitions).
Rookmaaker further said that strengthening of the business climate goes beyond improving issues related to the World Bank's Ease of Doing Business indicators -- which is difficult enough in itself -- and includes ensuring a predictable tax regime.