By Rafael Nam, Himank Sharma and Michelle Price
MUMBAI/HONG KONG, May 13 (Reuters) - A Hong Kong-based lobbygroup representing global banks and investors is consideringchallenging a controversial tax in India's Supreme Court,escalating a row that has eroded investor confidence in PrimeMinister Narendra Modi's government.
The Asia Securities Industry and Financial MarketsAssociation (ASIFMA) is in discussions with financial firms,lawyers and tax consultants about applying to join an existinglegal action on a tax dispute, several sources aware of thetalks told Reuters.
"An application for an intervention would have to be made bymid-June," said one of the sources.
A spokeswoman for ASIFMA declined to comment.
The existing Supreme Court case, filed by Mauritius-basedCastleton Investment Ltd, is seen as a test case on thelegitimacy of extending the so-called minimum alternate tax(MAT), which was intended to ensure companies inside India paida minimum tax rate, to foreign investors' gains.
The government has conceded that MAT will not apply to suchgains from April 2015, but the tax authority is pursuing claimsfor past years.
Castleton's hearing was brought forward to August to achievea quicker resolution of the issue.
The court can deny ASIFMA's application if it rules it doesnot share enough in common with the Castleton case, which dealswith broader tax-related issues.
If accepted, it would be the first time an overseas lobbygroup has challenged India's government in its top court.
Foreign investors have been working together to fortifytheir opposition.
"There has been a lot of lobbying and explanatory work. Wehave been closely liaising with European and foreignassociations in Hong Kong," said Marc-André Bechet, DirectorLegal & Tax at the Association of the Luxembourg Fund Industry.
ASIFMA could also pursue its own separate case, but somemembers say a direct challenge would be more controversial, thesources said.
Foreign firms could also file cases individually, but thatcould take years. Telecoms company Vodafone, the biggestforeign corporate investor in India, has been caught in a stringof tax disputes since it entered the country eight years ago.
Tax authorities began issuing MAT notices to foreignportfolio investors late last year and have so far sent claimsfor just 6 billion rupees ($94 million), but investors fear thefinal bill could run to billions of dollars.
Indian bonds and shares have seen a heavy sell-off sinceforeign funds started publicising the fight against MAT inmid-April.
The government has established a panel to examine the issue,and tax authorities say they would hold off for now on furtherback-tax claims.
However, the government has said foreign funds who havealready received such claims can only challenge them through thelegal system.
Several funds including Aberdeen Asset Management and one owned by BNP Paribas have filed challenges inthe High Court of Bombay, but legal experts say a finalresolution of the issue will require the country's top court. ($1 = 64.0900 Indian rupees) (Editing by Will Waterman)
Vodafone (VOD)