Anti-avoidance rules may open up a Pandora's box of uncertainty and litigation.
India has proposed changing laws so it can retrospectively tax capital gains by foreign companies, a move industry analysts say could have a negative impact on investment in the nation.
The government's had a "knee-jerk reaction" to this year's loss of a $2.2 billion tax case against Vodafone Group Plc, said Nishith M. Desai, managing partner at law firm Nishith Desai & Associates in Mumbai. The proposed change in law "will considerably erode India's standing in the eyes of investors and treaty partners," he said in an emailed statement yesterday.
Finance Minister Pranab Mukherjee, struggling to rein in the widest budget deficit among major emerging economies, wants the change to ensure the government gets as much as Rs400 billion (Dh29.6 billion) of tax payments that officials say is under litigation. The move may slow foreign direct investment into Asia's third-largest economy, according to KPMG.
India gives foreign investors the guarantee that they will not be taxed doubly, Mukherjee told Bloomberg UTV yesterday. "We do not give them the guarantee that they will not have to pay tax in any country. That way we'll simply encourage tax evasion and tax avoidance. That is not possible for any government."