India’s Finance Minister Asked to Explain Retrospective Tax Demands

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Oct. 14 – The ambassadors of the United States, European Union, Britain, New Zealand, Australia, Holland and Spain have written to Indian Finance Minister Pranab Mukherjee to explain what they refer to as the “unpredictability” in India’s tax regime and described recent events surrounding Vodafone’s acquisition of Hutchisons’ stake in Hutch-Essar as “unquantifiable risk in investment planning.”

The essence of the argument is that Vodafone, as an investor in India, has been asked to pay capital gains tax of close to US$2 billion on their purchase of Hutchison’s stake in India based Hutch-Essar, as Hutchison, based offshore did not make the capital gains payment when the deal was concluded, and being offshore have denied the Indian government jurisdiction over the deal.

Accordingly the capital gains liability was passed to Vodafone as the buyer. Similar recent problems have occurred with SabMillers acquisition of Foster’s Indian business, and Aditya Birla Nuvo’s acquisition of part of Idea Cellular’s shares from AT&T Mauritius.

The tax position of the Indian government in the application of punitive tax liabilities on deals with retroactive effect have created anxiety in the international business community and fears that if the policy is not changed, FDI inflows could dry up into India.

Chris Devonshire-Ellis, managing partner of Dezan Shira & Associates in India told India Briefing: The Indian government have got themselves in a twist with this, and the Finance Ministry has not handled this well. ”

“I recall similar blips in China’s tax regime when that was changing, and I suspect that this matter will also prove to be such an example of evolving tax regimes occasionally getting caught out. If not, India may be in for a shock if it needs FDI to help pay for its infrastructure developments. Investors simply won’t turn up if this sort of liability is on the table.”