Indian tax 'calls rule of law into question'

The international business community has launched a blistering attack on the Indian government for a retrospective tax grab against multinational companies.

The changes, which could crystallise a pounds 1.4bn tax charge for Vodafone, threaten an exodus of investment from India, according to some of the world's most powerful trade bodies.

A letter to Indian Prime Minister Manmohan Singh from organisations such as the CBI, the US National Foreign Trade Council and Japan Foreign Trade Council warns that the changes have questioned the rule of law, due process and fair treatment in India.

The letter coincides with a high-profile visit by George Osborne, the Chancellor, to India. He is expected to raise the tax issue with ministers.

"We are writing to express deep concerns about many of the tax provisions proposed in the Finance Bill 2012," the letter states. If enacted, these proposals will significantly alter the Indian taxation of our member companies with
retroactive effect extending back for as much as half a century.

"Some of our member companies had already begun re-evaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation."

The letter has elevated the tax issue from a bilateral dispute between Vodafone and the Indian government to a multilateral row that could end up in the international courts. As well as Vodafone, companies such as SAB Miller and Kraft are among those that have carried out deals involving Indian companies which could fall foul of the revised law.

The Indian Finance Bill introduced a measure that means deals involving Indian companies dating back to the 1960s could be taxed, irrespective of where the deals were carried out. India is currently struggling to close a 4.94 trillion rupee (pounds 60.6bn) budget deficit.

Vodafone has been fighting to overturn a pounds 1.4 billion tax claim arising from its 2007 acquisition of Hutchison Whampoa's Indian business. Indian courts have twice ruled in Vodafone's favour, most recently at the Supreme Court.

The letter to Singh states, "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, due process and fair treatment in India.

"Although presented as clarifications, these changes are seen as in clear reaction and contradiction to a long series of recent rulings and judgments rendered by Indian tribunals."

The letter was signed by Business Roundtable, Canadian Manufacturers & Exporters, Capital Markets Tax
Committee of Asia, the CBI, Japan Foreign Trade Council, National Foreign Trade
Council and the United States Council for International Business.