* Budget proposes retrospective tax on M&A deals
* Proposal contradicts Vodafone Supreme Court ruling
* Lack of clarity to unnerve foreign investors-experts
* Amendment to look at up to 6-yr old deals-finmin
By Henry Foy
MUMBAI, March 19 India's proposal to back-date
tax claims on overseas deals involving local assets throws
foreign investment into fresh uncertainty, experts and industry
figures said, potentially reopening old legal battles and
clouding business sentiment.
Vodafone prevailed in a January Supreme Court ruling
that found it did not have to pay tax in India on its $11
billion deal to enter the country.
Business groups hailed the decision as bringing clarity to
the country's investment climate after a year of government
scandals, slumping economic growth and policy paralysis eroded
But in his budget on Friday, India's finance minister sought
to bypass that ruling with a retrospective amendment to
50-year-old tax laws, stirring a legal hornets nest and
resurrecting a dispute that many hoped had been put to bed.
"People are indeed very, very worried about the tendency for
India to make retrospective amendments," said Dinesh Kanabar,
chief executive officer and chairman, tax, at KPMG India.
"You litigate for years, go all the way to the highest court
for clarification, only for the government to say: 'This is what
we meant'...The finance minister ought to be far more pragmatic
than look for a few billion dollars here or there," he said.
India had sought $2.2 billion from London-listed Vodafone in
tax after its purchase of Indian assets from Hong Kong-listed
Hutchinson Whampoa Ltd. Vodafone said the deal was
between two overseas entities, and India had no right. The
Supreme Court agreed.
India's Finance Ministry had other plans.
On Friday, the country's federal budget included a proposal
that, if passed by parliament, will allow the country to
retrospectively tax cross-border transactions in which the
underlying assets are located in India.
The amendment would change India's 1962 Income Tax Act, but
will only seek to investigate deals done in the past six years,
Finance Minister Pranab Mukherjee was quoted by local media as
saying at an industry event on Sunday.
"Retrospective fiscal legislation should normally not be
done...(but) every finance minister will have to protect the
interests of the government from a revenue point of view,"
Mukherjee was quoted as saying by the Financial Express.
Vodafone is the largest overseas corporate investor in
India, but its long-running dispute has come to symbolise the
perils foreign firms face doing business in the country.
Clarity on its tax liability was applauded by investors, who
saw it as a rare piece of sunshine in a clouded climate that had
reduced investments in India to a five-year low in 2011,
according to the Centre for Monitoring Indian Economy.
Business figures have criticized the amendment, which the
head of the Confederation of Indian Industries said would
"create an impression of India being an investor unfriendly
country especially at a time when we need urgent investment."
"This is most retrograde. Our policymakers should realize we
do not live in isolation. We need FDI, foreign technology and
capital," said Deepak Parekh, chairman of Housing Development
Finance Corp, India's biggest mortgage lender.
Mukherjee has sought to allay industry worries by asserting
that the new amendment would not duplicate tax paid in other
jurisdictions, and only seeks to ensure tax is paid on deals
involving the transfer of Indian assets.
Even the head of India's planning commission, Montek Singh
Ahluwalia, a powerful policymaker outside of the finance
ministry with close links to the prime minister, said he was
uncomfortable with the proposal.
"I am personally uncomfortable with retrospective things,"
Ahluwalia told CNN-IBN news channel. "Now you know when
ministries do that they usually have some very good reason and I
just don't know enough what the reasoning is."
Vodafone's deal is not unique. Various other acquisitions
involving overseas deals that appeared closed after the Supreme
Court ruling could be affected by the proposal.
Kraft Foods Inc's 2010 acquisition of Cadbury's
Indian business and deals involving Indian assets sold by AT&T
Inc and SABMiller Plc's purchase of Fosters would
be at risk under the new amendment.
"The proposal...raises a question as to whether foreign
investments are protected in India," wrote Nitish Desai
Associates, a legal and tax advisory firm, in a research report.
Legal and tax experts say that while the amendment will see
foreign investors act more cautiously in future deals involving
Indian assets, the government's decision to throw past deals
back into turmoil will only sour overseas investment appetite.
"The government is saying it is clarifying its position,"
said Amrish Shah, national leader, transaction tax, Ernst &
Young India. "But on past deals, it has muddied the water."
(Editing by Tony Munroe)