An Indian government panel has called on the government to scrap a law to tax past merger deals, in a move that could spare British phone giant Vodafone a multi-billion-dollar tax bill.
Earlier this year, lawmakers passed legislation giving the left-leaning Congress government the right to tax merger transactions retroactively.
The government had said it might pursue Vodafone for $3.72 billion in back taxes, interest and penalties, spooking foreign investors.
But on Tuesday, the government-appointed panel said in a draft report that the tax provisions "should be applied prospectively" rather than retroactively, meaning that they should apply only to new mergers.
Prospective application of tax laws, the committee said, "would better reflect the principles of equity and probity in the formulation and implementation of commonly recognised taxation principles".
The tax measure has been seen as aimed at overriding a Supreme Court ruling dismissing what was then a $2.2-billion tax claim on Vodafone stemming from its 2007 takeover of Hong Kong-based Hutchison Whampoa's Indian cellular unit.
The legislation provoked huge criticism from foreign investors for its retroactive nature as well as questions about India's respect for the rule of law and contributed to an overall souring of overseas investor sentiment.
If the government opts to apply the law retrospectively, the committee said, it should waive the interest and penalty payments.
The dismay over the tax legislation added to investors' unhappiness about economic policy paralysis and a slew of graft scandals besetting the government of Prime Minister Manmohan Singh.
But India last month, under its new pro-market finance minister P. Chidambaram, surprised investors with a blitz of reform measures opening up the economy to wider foreign investment in such areas as aviation, retail and broadcasting.
Soon after his appointment, Chidambaram asked tax expert Parthasarathi Shome to look into the retrospective amendment to tax laws and said that "nobody should harbour any fear".
He added he wanted India to have a "stable tax regime with clarity on tax laws" and authorities to have a "non-adversarial" approach to tax collection.