The Indian government has recently announced huge changes to its tax legislation and is to backdate the changes to 1962.The new rules will introduce a tax on any overseas investment in India
The UK’s Chancellor, George Osborne has claimed that the legislation will harm investment; specifically citing that ‘retrospective taxation’ on overseas investments would damage the Indian economy. The Indian government’s move follows a victory by Vodafone in a case in the Indian Supreme Court that would allow the company to avoid paying $2.2bn in tax following its 2007 $10.7bn takeover of Hutchison Whampao.
Seven overseas trade organisations, including the CBI and the United States Council for International Business, have joined Osborne’s condemnation saying in a letter to the Indian government that: ‘ the sudden and unprecedented move in the [Budgetary] bill has undermined confidence in the policies of the government of India toward foreign investment and taxation and has called into question the very rule of law.’
Indian Finance Minister Pranab Mukherjee has faced widespread overseas condemnation following his proposals and many companies have pointed out that the move will affect investment, which amounts to far greater sums of money than the backdated tax. Vodafone alone has invested £4.4bn over the last five years in India, and has already paid over 250 billion rupees in fees and taxes to the Indian treasury coffers. The new tax legislation will also affect the Indian employment market; for example, Vodafone employs 20,600 workers and uses an independent distribution network amounting to 1.25 million people.
The US has also pointed out that the action proposed by the Indian government would do little to close the Indian budget deficit and would, instead, cause foreign investment in the country to slow down, therefore affecting the economy and the jobs market. Nandan S Nelivigi, a partner in New York offices of law firm White & Case pointed out that: ‘new deals…there is no question that they are on hold until the tax implications are clear.’
A recent article in the NYT pointed out that the Indian economy had become increasingly reliant on overseas investment to offset both its budget and trade deficit.
The new tax measures – there are two dozen altogether – will include legislation that will give the tax office the power to regard previous tax loopholes used by foreign investors as liable for tax. These loopholes include the curtailing tax moves that direct foreign investment funds for India via Mauritius and therefore are not currently taxable. The new legislation will also give the Indian tax collectors enormous new powers and allows them to determine what oversees investment should be taxed, therefore destroying the country’s uniform tax code.
Mukherjee claims that he has made the move in a bid to declare to the world that India is not a tax haven, zero-tax or low –tax country. Mukherjee has also stated that the new tax proposals would not apply to those wishing to track Indian stocks, otherwise known as participatory notes.