H. Jacob Lager

Indian Retroactivity: Fact or Fiction?

In Foreign taxes, Offshore Accounts on April 30, 2012 at 8:34 am

Vodafone verdit, Indian tax law

What was supposed to be a final decision in the Vodafone case has instead given rise to an aggressive Indian effort to impose retroactive taxes on foreign investors and significant consternation in the global investment community.

To quickly recap the issue, India attempted to tax the $ 11.2 billion purchase of an Indian subsidiary between two non-Indian parties.  Earlier this year, the Indian tax authorities lost this fight in front of India’s Supreme Court.  The Indian government responded by enacting legislation retroactively imposing a capital gains tax on merger and acquisition deals conducted overseas where the underlying asset is located in India.

The rest of the world has, not surprisingly, freaked out.

Among others, U.S. Treasury Secretary Timothy Geithner has pressed Indian Finance Minister Pranab Mukherjee for reassurances that US investors will not be subject to Indian taxes on years-old transactions.  Mukherjee has attempted to soothe concerns, stating at an April 20 conference that older tax cases would not be reopened.  According to Mukherjee, “No case can be reopened which is more than six years old.” He further added that “there is no uncertainty” in Indian tax law for foreign investors and that India would hold transparent, open discussions with those who have concerns about the law.

Right or not, the recent tax fight does not appear to be slowing Indian investment.

“We are seeing lots of outbound US investment in India right now,” says Lisa Sergi, a senior tax director at WTAS.  “India remains a strong option for our clients in technology and manufacturing as an area with low costs and a terrific market.”

And as for the potential uncertainty of Indian taxes?

“There are clear laws on the books in India, but in practice, the government will fight and hold out until the client pays something more.  But in that way, they are no different than California’s Franchise Tax Board,” says Sergi.

So there you have it:  Indian tax uncertainty is no less onerous than our own.

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  1. It appears that Indian may now be postponing the law implementation. Maybe they finally got the message the rest of the world has been sending…

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