The
recent amendment of the Income Tax Act, which allows India
to tax foreign takeovers retroactively to 1962, has raised concerns in the US corporate
sector. US is of the view that such steps dampen enthusiasm about India's
investment climate. The US Treasury Secretary Timothy Geithner has reportedly
told his Indian counterpart that US businesses have become worried about
changes in India's
tax regime for foreign companies. Also Washington
is examining India's
proposed tax provisions to determine how they will impact on the US-India
bilateral income tax treaty and overall economic relations.
Timothy
has reportedly encouraged Finance Minister Pranab Mukherjee to reassure foreign
investors that India
will continue to welcome foreign capital. The Finance Minister in this year’s
Union Budget came up with a proposal to amend the IT Act with retrospective
effect to bring into the tax net Vodafone-type merger and acquisition deals
involving assets in India.
The UK-based Vodafone, which in 2007 bought Hong Kong-based Hutchison’s telecom
business that included Indian assets for around $11 billion, has attracted tax
of Rs 11,000 crore.
However,
Vodafone has refused to pay the tax arguing that since both companies are not
based in India,
the tax rule does not apply on them. The Supreme Court has given its judgment
in favour of Vodafone. Nevertheless, the amendment to the law itself and the
ability of the IT department to tax companies retrospectively has drawn flak
from investors domestically and internationally.
In
recent months, foreign investors have begun to sour on India due to
these major policy swings. In a letter to Premier Manmohan Singh earlier this
month, seven global business groups, including the Confederation of British
Industry and the US Business Roundtable, warned of a 'widespread
reconsideration of the costs and benefits of investing in India.'