Changing Tax Rules: India's Big Mistake?

Bangalore: India is sitting at the edge as an investment destination due to major policy mistakes and the stock prices are likely to go down if nation’s credit rating is cut, according to Mark Mobius, one of the world's best-known emerging market investors.

Mobius, Executive Chairman of Templeton Emerging Markets Group, told, "The Indian government has been making many big policy mistakes. The most important of all is the idea of having retroactive taxation," as quoted by Reuters.

Firstly, it gives India power to retroactively tax the indirect transfer of assets. Secondly it targets tax evaders through the General Anti-Avoidance Rule (GAAR), putting the burden on investors registered in countries with special tax exemptions with India to prove they do not intend to explicitly avoid tax.

In response to controversial proposed tax rules, Macquarie's Asia hedge fund in March exited its short positions in Indian single stock futures, fearing that they would lower investment returns. Around $50 billion worth of emerging market equities are managed by Mobius’s team mangers for Franklin Templeton Investment, an arm of U.S. money manager Franklin Resources Inc.

India comprises of 16.1 percent of Mobius's $17.7 billion Templeton Asian Growth Fund as of end-March. The flagship fund had Indian software exporter Tata Consultancy Services among its top-10 holdings.

As Standard & Poor cut India's credit rating outlook from stable to negative, portraying that heavy fiscal and current account deficits and political paralysis are tough on Asia's third-largest economy. The country has been warned by the agencies of losing investment-grade status. Mobius said, "If it actually happens, it will be a big shock. The market will be shocked and prices will sharply decline.”