The first full-fledged budget of India’s National Democratic Alliance (NDA) government has only partially addressed foreign investor concerns regarding retrospective taxation – which give powers to tax authorities to reopen tax cases going back to 1962 – that targeted companies such as UK telecommunications giant Vodafone.
In his budget speech on February 28, 2015, finance minister Arun Jaitley reaffirmed what he stated in his interim budget speech last year that “ordinarily retrospective tax provisions adversely impact the stability and predictability of the taxation regime and resort to such provisions shall be avoided”. But such provisions still remain on the books.
To make good on his assurance on retrospective taxes, the finance minister has deferred the implementation of a general anti-avoidance rule (GAAR) to counter aggressive tax avoidance by two years. It has also been decided that when implemented, GAAR will apply prospectively to investments made on or after the first of April 2017. GAAR was sought to be introduced in the union budget for 2012/13 to prevent tax evaders from routing investments through tax havens such as Mauritius, Luxembourg and Switzerland. As this measure evoked sharp reactions from foreign as well as domestic investors, its introduction has been postponed since then.
The latest budget, however, sought to provide greater clarity on the taxation regime for offshore mergers and acquisitions, such as Vodafone’s acquisition of Hutchison Whampoa’s stake in 2007 to enter the domestic mobile telecommunications space. Capital gains tax will be applied to all transactions involving indirect transfer of a foreign company's assets if 50% or more of the company's assets are based in India. However, these provisions will not apply if the value of Indian assets does not exceed $1.6m. Only that part of income that pertains to the Indian operations will be taxed on a pro rata basis. The 50% threshold was laid down by the Delhi High Court.
According to Vodafone Group's CEO, Vittorio Colao: "The main problem of doing business in India is the cost of doing business in terms of spectrum, in terms of tax challenges, in terms of complexity, but India is a great country”. However, he declined to comment on his company’s ongoing tax problems with the Indian government. The matter is currently under arbitration. The Indian government and Vodafone have appointed an arbitrator each. “We will see where it goes. We are in the process of appointing a third arbitrator,” Mr Colao told local business newspaper The Economic Times.