The Indian government is facing tremendous heat to bring down its fiscal deficit. And it might have just found a new weapon to deal with the crisis. The government in this year's Union budget has proposed to amend tax laws with retrospective effect from 1962. This would bring under the tax net all cross-border mergers and acquisition deals involving Indian assets or businesses. What it means that, the retrospective amendment will allow the government to tax any deal involving assets in India even if the deal is struck outside the country. And this now seems to have become the strongest fiscal weapon.
The government is hoping to collect Rs 400 bn from this tax law change, half of it would be collected from Vodafone. But the tax authorities might not stop here. According to a leading financial daily, the income tax department is planning to probe deals of SABMiller's acquisition of Foster's India, Vedanta Group's purchase of a majority stake in Sesa Goa through the acquisition of Finsider International, and General Atlantic and Oak Hill Partners' buyout of GE's 60% stake in Genpact.
This could mean bad news for the foreign investors. This proposal of the government has invited a lot of criticism from foreign investors and could hurt the country in attracting foreign direct investment (FDI) in the future. Many foreign investors feel that with this kind of tax, it is only the taxman gains rather than those who are investing in India, creating jobs, connecting rural India and so forth.
Meanwhile, the government is maintaining that this proposed law will not have any effect on foreign investments. This is because the retrospective taxes will not override the provisions of Double Taxation Avoidance Agreements (DTAA) with 82 countries, which are relevant for taxation of non-residents in the case of offshore mergers and acquisition. Whatever the governments intentions in cracking down on abuse of tax havens, India might have alienated overseas investors with the timing and communication of its measures when it can ill afford to do so.