NEW DELHI: Two international trade bodies have joined the global chorus seeking a review of the government’s move to retrospectively tax overseas transactions involving Indian assets, a proposal widely seen to be targeted at British telecom company Vodafone.
The France-based International Chamber of Commerce and the Business and Industry Advisory Committee to the OECD have together written to the finance ministry, cautioning that the government’s proposal in its recent budget could have adverse implications for the country.
“We are concerned the recent introduction of retroactivity is not only unwelcome for the future ofIndia’s investment climate, it will also send a signal to other countries that retroactivity is an acceptable route,” says the joint letter addressed to Pranab Mukherjee.
The letter goes on to say that retrospective taxation could erode the profitability of many global firms as they may be forced to make provisions for the adverse impact of the sudden change in law. “It will certainly put an emphasis on India but perhaps not in the manner desired by you and your colleague ministers,” the letter says.
While ICC claims to represent “hundreds of thousands of member companies and associations from over 130 countries”, BIAC is the industry body of the OECD’s business community.
The letter adds to the global pressure being mounted on the government, which had earlier been warned by trade bodies representing more than 250,000 companies across US, Europe and Asia that retrospective taxation could hurt foreign investment.Britain’s Chancellor of the Exchequer (or finance minister) George Osborne had last week suggested that Vodafone was being unfairly treated.
The government’s proposal for a retrospective change in Income Tax law came after it lost the case in Supreme Court in January. The apex court had ruled that Indian tax authorities had no jurisdiction over the $11.2 billion deal struck in 2007 between two overseas subsidiaries involving Vodafone’s purchase of 67% stake in Indian telecom company Hutch Essar from a company controlled by Hong Kong-based conglomerate Hutchison Whampoa.
The finance ministry has, however, maintained that the proposal is simply a clarification of the existing law and not a retrospective change in the law. The ministry has also said that India will not become a tax haven just because it wants foreign investments.
Vodafone Group CEO Vittorio Colao had also written to Manmohan Singh last month, saying that the “arbitrary and punitive retrospective treatment” of the company could tarnish India’s image as an investment destination. Colao highlighted that Singh had asked the company in June 2010 to “have faith in the protection of the Indian judicial system”.
He further said that the SC judgement had been widely hailed as a reassuring sign to investors of the strength and independence of India’s institutions. It is unprecedented to introduce amendments to “overturn cases decided in law by Supreme Court”, he said, adding that since the transaction was closed five years ago “Vodafone cannot withhold tax from a sum paid to Hutchison then”.