India to amend laws to provide for retrospective taxation of capital gains

India has proposed amending laws to allow retrospective taxation of capital gains by foreign companies. According to industry analysts, the move, could have a negative impact on investment in the nation.

The government came out with a ''knee-jerk reaction'' to this year's loss of a $2.2 billion tax case against Vodafone Group Plc (VOD) and the proposed change in law would considerably erode India's standing in the eyes of investors and treaty partners they say.

In the Finance Bill, 2012, the minister has proposed amendments to Section 9 of the Income Tax Act, 1961, to ensure that cross-border deals were made liable to pay capital gains tax in the country. If passed parliament passes the bill, it would impact the Rs11,000-crore tax dispute between the British telecom firm and the Income Tax department and also impact other similar cases involving taxes to the tune of about Rs35,000 crore-Rs40,000 crore. (See: Bent on taxing Vodafone, govt to change laws) Finance minister Pranab Mukherjee, trying to get a grip over the highest budget deficit among major emerging economies, is looking to ensure that the government got as much as Rs40,000 crore in tax payments that, according to officials was under litigation.

According to KPMG, the move may slow foreign direct investment to the third-largest economy in Asia.

India gave foreign investors the guarantee that they would 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.''

In January, the Supreme Court dismissed the government's demand for Rs112.2 billion of taxes from Vodafone stemming from its 2007 purchase of Hutchison Whampoa Ltd's, India mobile- phone operations (See: Vodafone wins tax case in Supreme Court).