India capital gains tax proposal
Move on overseas deals will limit claims to 6 years
NEW DELHI: India will claim capital gains tax on cross-border acquisitions completed in the past six years through an amendment after Vodafone Group Plc won a case against such levies, according to Finance Secretary R.S. Gujral.
Finance Minister Pranab Mukherjee on Friday proposed changing the law two months after the Supreme Court ruled that Vodafone didn’t have to pay Us$2.2bil in tax on its purchase of the local business of Hutchison Whampoa Ltd in 2007. Taxation experts at firms including KPMG said the changes applicable retrospectively from 1962 might slow foreign investments into the South Asian nation.
Gujral, seeking to reduce concern that the changes will prompt the tax office to claim levies on 50-year-old deals, said the amendment was proposed to clarify the intent of the law. Mukherjee, struggling to rein in the widest budget deficit among major emerging economies, wants the change to ensure the government gets as much as 400 billion rupees (Us$8bil) of tax payments that officials say are under litigation.
“Once the investment decision is made, then only do investors look at issues of taxation,” Gujral said on Sunday. “I don’t think this will discourage FDI (foreign direct investment).”
Nishith Desai, managing partner at law firm nishith desai & Associates, called the proposal a “knee-jerk reaction” to the Vodafone lawsuit.
“The budget proposes a number of regressive, retrograde and extraterritorial provisions that would significantly increase tax costs and alter the dynamics of cross-border transactions and M&AS (mergers and acquisitions),” Desai said in an e-mail on Saturday. The proposal would “considerably erode India’s standing in the eyes of investors,” he said.
India attracted Us$27.6bil of foreign direct investments in 2011, a 31% increase over the previous year, according to data from the trade ministry. The nation gave foreign investors the guarantee that they would not be taxed doubly, Mukherjee said in an interview to Bloomberg UTV on Saturday. “We do not give them the guarantee that they will not have to pay tax in any country. That way we’ll simply encourage tax evasion. That is not possible for any government.”
The Supreme Court in January dismissed the government’s demand for 112.2 billion rupees of taxes from Vodafone, stemming from the 2007 purchase.
Transactions like Vodafone could now be reopened and “assuming that the law holds, the companies will be issued tax notices,” said Uday Ved, a partner at the local unit of KPMG.
The government’s budget proposal to introduce general anti-avoidance rules, or GAAR, enabling the taxing of companies it believed were structuring deals in a manner to escape taxes, could serve as a roadblock to investments, Desai said.