Global firms 'may rethink India' over tax proposal

Vodafone sign in Bhopal, India Vodafone has been involved in a tax row with the Indian authorities

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Seven international trade associations have written to Indian Prime Minister Manmohan Singh criticising a new tax proposal under which even 50-year-old corporate deals could be scrutinised.

The proposals were announced as part of India's federal budget last month.

The associations warned that the firms they represent could reconsider their business ventures in India.

The government has been involved in a long-running fight over taxes with the London-listed Vodafone group.

In January, the Supreme Court ruled that Vodafone was not liable for taxes and penalties of up to $4.4bn (£2.8bn).

The case centred on Vodafone's $11bn acquisition of the Indian assets of China's Hutchison Telecommunications in 2007.

The company was presented with a tax demand of 112 billion rupees, currently worth $2.2bn. The Indian government subsequently sought penalties of up to 100% of the original bill.

Vodafone said it did not owe tax on the deal, as the assets were held by a firm based in the Cayman Islands.

'Unprecedented move'

The letter to Prime Minister Singh was signed by seven leading industry associations from the US, UK, Japan, Canada and Hong Kong.

The list of associations comprises Canadian Manufacturers and Exporters, the Capital Markets Tax Committee of Asia, the Confederation of British Industry, the Japan Foreign Trade Council, the National Foreign Trade Council and the United States Council for International Business.

Together they represent more than 250,000 companies, including several top global corporations.

"The sudden and unprecedented move in the Bill [Indian budget] has undermined confidence in the policies of the government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India," the letter said.

"This is now prompting a widespread reconsideration of the costs and benefits of investing in India," it said.

The letter said some member companies had "already begun re-evaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years".

"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world," it added.

Speaking during a visit to Delhi on Monday, Britain's Chancellor of the Exchequer (finance minister) George Osborne said the tax proposals were a concern and might damage India's investment climate.

Analysts say sluggish investment is to blame for the slowing growth of India's economy - the country registered 6.1% growth in the December quarter, the lowest in nearly three years.

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