‘No retrospective taxation’, PM had assured UK’s Brown

Finance minister Pranab Mukherjee's controversial amendment to the Income Tax Act to retrospectively tax cross-border merger and acquisition deals such as the Hutchinson-Vodafone transaction could turn even more controversial than it already is, as it goes contrary to an assurance given by Prime Minister Manmohan Singh to the then UK prime minister Gordon Brown in 2010.

Replying to two letters from Brown expressing concern over India's efforts to tax the Hutchinson-Vodafone deal, Singh had assured Brown in a letter that has been seen by sections of the media, that retrospective taxation was not the norm in India and Vodafone would have the "full protection" of the law.

"I can assure you that Vodafone will have the full protection of law and access to the legal system in India. I also understand there is no retrospective application of taxation and a recent court judgment has affirmed this position," Singh said in a letter to Brown on 5 February 2010.

"I would like to assure you that the government of India is fully committed to providing a transparent and growth-oriented environment for profitable international investment," Singh had written.

Brown had earlier written to the Indian prime minister twice in 2009, questioning the jurisdiction of Indian tax authorities to levy capital gains tax on Vodafone. In his response, the PM made it clear that the action taken by the income tax department "was based on specific facts of the case" and came with the assurance that "a transparent and growth-oriented environment for profitable international investment" will be provided.

Two years later, Mukherjee has proposed to amend the Income Tax Act with effect from April 1962 to ensure that the government does not lose revenue. While the Budget proposal has come in for strong criticism from all quarters, the finance ministry has sought to defend the move arguing that it cannot lose revenue. In fact, Mukherjee had gone to the extent of saying that there will be "fiscal chaos" if the law was not amended, and said retrospective amendments were fairly common.