Changes in IT laws to hurt investment, not just Vodafone: UK

Batting for Vodafone, Britain on Monday said India's proposal to recover from the British telecom major Rs11,000 crore tax for the Hutchison-Essar deal of 2007 will badly hurt the country's image among investors.

"We are concerned that the budget measure will not just impact one company, Vodafone, but because we think that it will damage the overall climate for investment in India," UK's Chancellor of Exchequer George Osborne told reporters.

Earlier in the day, Osborne in his meeting with Finance Minister Pranab Mukherjee discussed the issues concerning the proposed amendment to the Income Tax Act, 1961, which seeks to bring into tax net overseas mergers and acquisitions involving domestic assets.

While Osborne highlighted the anxiety amongst the UK investors on the proposed amendment of the I-T Act despite the Supreme Court verdict, Mukherjee is believed to have reiterated India's stand that it is neither a no tax country nor a tax haven.

Osborne's comments came a day after several global trade associations, claiming to represent 2.5 lakh companies, writing a letter to Prime Minister Manmohan Singh and Mukherjee seeking reconsideration of the retrospective amendment to the Income Tax Act.

"If the tax law changes are made, they should not apply retroactively. Past court decisions must stand despite subsequent legislations," global business chambers including the Confederation of British Industry, US Council for International Business and Japan Foreign Trade Council said.

The Vodafone CEO Vittorio Colao too has written to Singh saying the move to amend I-T Act with retrospective effect is "arbitrary and punitive".

He said a retrospective obligation to withhold tax or designation of Vodafone as Hutchison's "agent" for tax purposes would be "profoundly unjust".

The issue relates to the Supreme Court order which set aside the Bombay High Court ruling that had asked Vodafone Holdings to pay Rs 11,000 crore in tax as a result of acquiring Hutchinson-Essar Ltd in 2007 in an overseas deal.

In an interview to CNBC-TV18, Osborne said a company like Vodafone has made enormous infrastructure investment in India bringing mobile phone telephony to lots of Indian communities.

Replying to a query related with UK government's recent retrospective move to amend law to tax Barclays, he said "sometimes finance ministers around the world use retrospective action whey they feel that a company or speaking about the case in Britain has deliberately avoided taxes that were due. Each country has to decide its own tax laws".

The Vodafone issue also figured during a bilateral meeting between Osborne and Finance Minister Pranab Mukherjee during the India-UK Economic & Financial Dialogue.

In their letter, the global trade bodies had said that some global companies have already started to re-evaluate their investment plans because of the uncertainty looming over the country's tax laws.

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

It said that, "the most prominent of the judgements that the proposals appear designed to reverse is the very recent Supreme Court ruling in the Vodafone case, holding that it is a well-established principle of Indian law that an overseas transaction cannot be taxed in India even it it has the indirect effect of changing control of a company in India."

In order to deal with the situation following the Court ruling, Mukherjee in his Budget proposed to amend the Income Tax Act with retrospective effect from 1962 to bring into the net overseas deals concerning domestic assets.