Business lobby groups including those in the US and UK have written to Indian Prime Minister Manmohan Singh protesting plans to retroactively allow capital gains tax on cross-border acquisitions dating back 50 years.
The proposals announced in the annual budget last month are causing companies around the world to revaluate investments in India because of uncertainty over the country’s tax laws, seven trade organizations that claim to have more than 250,000 organizations as members said in a letter released yesterday.
“The sudden and unprecedented move in the 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,” the lobby groups, including the US Council for International Business, said in the letter.
“This is now prompting a widespread reconsideration of the costs and benefits of investing in India,” it added.
Indian Finance Minister Pranab Mukherjee proposed in his March 16 budget changing the law to allow the taxation of overseas deals in which an Indian asset is transferred.
The announcement came two months after the Supreme Court of India ruled that Vodafone Group PLC did not have to pay US$2.2 billion in tax on its purchase of the local business of Hutchison Whampoa Ltd in 2007.
India’s proposals are inconsistent with international law and create an “intolerable risk” of double taxation, the letter said.
The lobby groups accused the government of proposing the measures after it lost a series of tax rulings in the country’s courts, most notably the Vodafone case.
The Indian government, which is struggling to rein in the widest budget deficit among emerging economies, is locked in tax disputes with companies worth more than 400 billion rupees (US$7.9 billion).
Indian Finance Secretary R.S. Gujral said last month the move was just a clarification of the law.
The National Foreign Trade Council Inc, the Confederation of British Industry, the Japan Foreign Trade Council Inc and the Canadian Manufacturers & Exporters are among the other trade bodies that signed the letter.