India said Friday it would change a law to allow it to tax capital gains made by foreign companies after it lost a $2.2-billion court battle with British mobile phone giant Vodafone.
Tax lawyers said the planned move would revive uncertainty about India's regulatory climate at a time when the country urgently needs foreign investment to upgrade its dilapidated infrastructure and spur slowing economic growth.
In January, the Supreme Court dismissed a $2.24-billion tax bill imposed on Vodafone over the firm's $10.7-billion takeover of Hong Kong-based Hutchison Whampoa's Indian cellular subsidiary in 2007.
The planned change to the 1961 Income Tax Act would be retroactive to April 1, 1962, according to documents presented by Finance Minister Pranab Mukherjee in parliament when unveiling the 2012-13 national budget.
Vodafone said it did not believe the retroactive change in the tax law "should have any impact on the final judgment handed down by the Supreme Court in our tax case."
"We continue to have faith in the Indian judicial system," Vodafone said in an emailed statement, without elaborating.
But tax experts said that the proposed change might allow the Indian government to reopen the case.
Under the change, resident and non-resident companies alike would have to deduct capital gains tax and pay it to the Indian government on any merger or acquisitions involving an Indian asset, even if the deal was signed abroad.
"Such transactions are to be taxed in India," said the top bureaucrat in the Indian finance ministry, finance secretary R.S Gujral, adding there "are a large number of similar (Vodafone type) cases."
He said the government believed it could recover up to 400 billion rupees ($8 billion) from such cases.
Earlier in the week, the government said many merger and acquisitions cases similar to the Vodafone deal were pending before Indian tribunals.
For instance, brewer SABMiller is embroiled in a tax dispute with India over its 2006 acquisition of Foster's Indian beer business, which Indian authorities say should be taxable in India.
Indian tax officials contended Vodafone should have withheld the amount the seller, Hutchison, would owe in capital gains tax when it bought the Indian mobile unit.
However, Vodafone, the world's largest mobile operator by subscribers, argued it was exempt from paying any tax because the deal took place in the Cayman Islands and both buyer and seller were foreign.
Vodafone also noted it was the purchaser and made no gain on the deal.
"The disturbing thing for investors is that this is retroactive. It will only create more uncertainty among foreign investors about the regulatory environment here," Neeru Ahuja, a tax expert at global financial advisory company Deloitte Haskins & Sells, told AFP.
"The tax authorities could end up going back into a lot of past transactions," she said.
Vodafone's purchase of Hutchison Essar, since renamed Vodafone India, was intended to expand revenues in the face of saturated markets in Western Europe.
But despite securing 17 percent of the Indian market, it has faced a rough ride.
Two years ago, it took a writedown of $3.4 billion, reflecting a disappointing performance in the cut-throat Indian telecom sector where competition has forced call rates down to below a cent a minute.