Tax plan on business deals leaves foreign investors wary of India

NEW DELHI, India – Seven industry bodies from the United States to Japan said on Monday, April 2, that an Indian plan to retroactively tax business deals has prompted a widespread review of whether to invest in the country.

The Indian move is seen as targeting British mobile giant Vodafone, which in January won a court battle against a bid to tax the firm over its 2007 $10.7-billion takeover of Hong Kong-based Hutchison Whampoa’s Indian unit.

The “unprecedented” move to bypass the court ruling “has undermined confidence in the government’s policies on foreign investment,” said the letter to Prime Minister Manmohan Singh, quoted in local media.

New Delhi’s planned change to the Income Tax Act would be retroactive to 1962 and would oblige domestic and foreign firms alike to pay tax on any transaction involving an Indian asset.

Some of the foreign lobbies’ members have already begun “re-evaluating” their investments in the country due to mounting controversy and uncertainty over taxation, the letter said.

The government’s approach is “prompting a widespread reconsideration of the costs and benefits of investing in India,” it said.

The proposal, announced in last month’s budget, “has called into question the very rule of law, due process, and fair treatment in India,” it added.

The letter coincides with a visit to New Delhi by Britain’s finance minister George Osborne who is expected to raise the tax issue with the government.

Signatories to the letter include the Confederation of British Industry, the United States Council for International Business and the Japan Foreign Trade Council.

“India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary,” the groups said.

There was no immediate comment from the Indian government.

Vodafone said Friday it was urgently looking at ways to head off a potential fresh Indian tax demand for $2.2 billion and slammed as “grossly unjust” the government’s latest plans.

Indian tax officials contend Vodafone should have withheld the amount the seller, Hutchison, would have owed in capital gains tax when it bought in 2007 the Indian mobile unit, which now has nearly 150 million subscribers.

Vodafone successfully argued in India’s Supreme Court the deal was exempt from any tax because it took place abroad and both buyer and seller were foreign.

It also noted it was the purchaser and made no gain on the acquisition.

As well as Vodafone, transactions by companies such as SAB Miller and Kraft involving Indian firms could be affected by the proposal. – Agence France-Presse. – Agence France-Presse