Look unrelenting in exerting pressure on India to withdraw proposed tax amendments

Global players appear to be unrelenting in exerting pressure on the Indian government for withdrawing the “retrospective” amendment in tax law proposed in the Finance Bill, 2012.

With U.K. Chancellor of Exchequer George Osborne failing to make much of an impact on Finance Minister Pranab Mukherjee during his recent India visit — especially when Britain also recently enacted a tax legislation with retrospective effect — almost a dozen American industry associations on Wednesday approached U.S. Treasury Secretary Timothy Geithner to take up the controversial matter with the Minister at the upcoming International Monetary Fund-World Bank Spring meetings in Washington.

Mr. Mukherjee, who is already in the U.S. to participate in the Fund-Bank meetings and other conferences such as that of G-20, is also likely to hold bilateral talks with the U.S. Treasury Secretary.

In a letter to Mr. Geithner, the associations said: “The undersigned associations write to inform you of their strong opposition to recently proposed tax amendments in the Indian Finance Bill 2012. These proposed amendments will have a significant negative effect on our companies, customers and shareholders, and investors in India and may well have a detrimental impact on the flow of direct investment into India.”

‘Significant erosion'

The communication which has the U.S. Chamber of Commerce and the U.S.-India Business Council, among others, went on to say: “The proposals, which include an unprecedented period of retroactive tax collection, a broad and unclear general anti-abuse rule and an onerous tax on indirect stock transfer, are inconsistent with international tax policy and standards and result in significant erosion of the rule of law. We encourage you to raise these concerns with your Indian counterparts during the upcoming IMF and World Bank meetings this week.”

Apparently batting for Vodafone — the main protagonist in the retrospective tax law amendment — apart from others who fear they may come under its ambit, the industry associations noted that the “unprecedented nature of this amendment sets a particularly poor precedent and, consequently, we believe it essential that the U.S. Treasury speak out so that other countries might be dissuaded from enacting similar policies.”

Supreme Court order

It may be recalled that following the Supreme Court ruling that Vodafone was not liable to pay about Rs. 11,000 crore as taxes on acquisition of Hutchison's stake in Hutchison-Essar in 2007, the government sought to plug the loophole and show its legislative intent in cross-border transactions. For this purpose, a proposal in the Finance Bill 2012 seeks to amend the law “retrospectively” with effect from the date of its enactment — April 1, 1962.

As for the proposal on GAAR (General Anti-Avoidance Rules), the U.S. industry associations pointed out that the unclear anti-abuse rules would have negative implications for companies investing in India. While the GAAR provision in the Finance Bill are aimed at targeting deals with a clear motive of tax avoidance, the associations' letter to Mr. Geithner viewed that such amendments “are inconsistent with India's specific obligations to the U.S. under the current bilateral tax treaty.”

“Furthermore, the unilateral definition of treaty terms may significantly alter the benefits and burdens of the existing Income Tax Treaty to the detriment of the U.S.,” the letter said, of which copies were also marked to U.S. Secretary of State Hillary Clinton, U.S. Trade Representative Ron Kirk and Commerce Secretary John Bryson.

Vodafone's threat

Incidentally, this development has come just a day after Vodafone's Dutch entity threatened to drag India into international arbitration and served a notice of dispute on the government. Responding to the notice, Mr. Mukherjee had said: “It is their [Vodafone's] prerogative and we will examine the notice ... As a legal entity, they are entitled to legal recourse.”

Finance Secretary R.S. Gujral had also said made it clear that the proposed retrospective amendment and introduction of GAAR were not meant to harass any company. “Let me say at this stage, intention of the government is not to hassle anyone or to trouble anyone,” he said on Tuesday at a CII function here.

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