India's changes in IT act may hurt foreign investment: UK

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Saurabh Gupta | 03 Apr, 2012
British Chancellor of Exchequer George Osborne in his meeting with Finance Minister Pranab Mukherjee Monday discussed the issues concerning the proposed amendment to the Income Tax Act, 1961, and said that the changes may hurt foreign investments in Asia's third largest economy.

Osborne raised the Vodafone issue at a meeting, saying the Indian government's move to retrospectively tax cross-border deals could adversely affect foreign investments.

The two leaders discussed the Vodafone tax issue during a one-to-one meeting lasting around 30 minutes that was held on the sidelines of the fifth ministerial-level India-UK Economic and Financial Dialogue in New Delhi on Monday.

"We had a very fruitful and effective discussion," Mukherjee told reporters after the meeting without elaborating.

Osborne stressed the need for a business-friendly environment and said no steps should be taken to discourage investments.

"What we want to see happen is more investment, more trade, more Indian businesses doing businesses in Britain, more British businesses doing business in India," said Osborne.

"Working together, we believe that our policies will increase employment in India and increase employment in Britain, and make us a more prosperous pair of country."

Osborne's concern coincided with the request of seven overseas business associations urging India not to make any retrospective amendments in tax legislation.

In a letter to Prime Minister Manmohan Singh, Finance Minister Mukherjee and other senior cabinet ministers, these organsisations said "if the tax law changes are made, they should not apply retroactively. Past court decisions must stand despite subsequent legislation."

The letter was jointly written by the Confederation of British Industry, the US Council for International Business and Japan Foreign Trade Council, among others.

Mukherjee in the finance bill in his 2012-13 budget proposed last month to amend the Income Tax Act retroactively to 1962 so as to make domestic and foreign firms pay tax on any overseas transaction involving an Indian asset.

According to the government sources, overseas transactions like Vodafone-Huitchison have tax implications of around Rs.40,000 crore.

The finance minister had clarified in Parliament that the amendment was not proposed with any "vindictive" intent aimed at Vodafone.

But Vittorio Colao, the Britain-based company's chief executive, in a letter to Prime Minister Manmohan Singh last week termed the legislation as "arbitrary and punitive treatment" and said it would affect the image of India as an investment destination.

The Supreme Court had earlier set aside the Bombay High Court ruling that had asked Vodafone Holdings to pay Rs 11,000 crore in tax as a result of acquiring Hutchinson-Essar in 2007 in an overseas deal.