Tax law change 'scaring' overseas investors: Karan Bilimoria (Interview)

New Delhi, April 15 (IANS) The Indian government's move to amend a law retrospectively to tax global merger and acquisition transactions involving Indian assets is "scaring" foreign investors and might hit fund flows from overseas, believes Lord Karan Bilimoria, president of the UK-India Business Council.

"The moment you start doing retrospective changes and saying I am going to go back 50 years, I can't tell you how much that has scared foreign investors. It is a very dangerous thing for countries like India which need foreign money to boost growth," said the London-based entrepreneur, who is part of Prime Minister Manmohan Singh's Global Advisory Council.

In the 2012-13 budget presented last month, Finance Minister Pranab Mukherjee proposed to amend the 1961 Income Tax Act retrospectively to allow authorities to tax global merger and acquisition transactions involving Indian assets and shares.

The amendment, if and when passed by parliament, will bring into the tax net overseas transactions like Vodafone-Hutchison. According to the government estimates, such cases have tax implications of around Rs.40,000 crore.

Bilimoria said investors from across the world were concerned over the proposed tax amendment and it might deter some big ticket overseas investments.

"Faith in the rule of law is crucial. Such kind of things will definitely hurt confidence in the system," Bilimoria, founder and chairman of Cobra Beer, told IANS in an interview here.

The government moved after the Supreme Court rejected the IT department's Rs.11,000 crore ($2.2 billion) tax demand on the $11-billion Vodafone-Hutchison deal, saying Indian tax authorities do not have jurisdiction over overseas transactions.

However, the finance minister has clarified that the proposed amendment is not vindictive or targeted at any particular company but aimed at preventing the erosion of revenue.

"You can perfectly understand his (finance minister) argument why he wants to change the rules. He does not want India to be a tax haven. But don't do it retrospectively. Do it looking ahead, say from now onwards if such a situation arise we will levy tax on you," said Bilimoria.

He said the issue of Vodafone tax row will be discussed prominently at the annual UK-India round table to be held at Oxford later this month.

Bilimoria said the UK-India Business Council along with other business associations would continue to put pressure on the Indian government to push forward the economic reforms and not to make any retrospective changes in legislation that would harm investment.

"At the upcoming meeting our main focus will be on reforms. Unfortunately and disappointingly, there has been real lack of reforms. It is holding India back," Bilimoria said.

He said to achieve a double-digit growth India needed to push forward the reforms in the areas like retail, insurance, banking and labour.

"The growth rate of 6.9 percent would be considered fantastic from the point of view of the US, the UK or other advanced economies. But it is not sufficient for countries like India, who need to pull millions of people out of poverty."

India's economic growth is projected to slow to 6.9 percent in 2011-12 as compared to 8.4 percent growth registered in the previous year. The government targets 7.6 percent growth in the current financial year.

On India-UK business relations, Bilimoria said the governments of the two countries needed to further liberalise policies to boost investments and trade and enhance people-to-people contacts.

He pointed out that the last major step towards liberalisation in the economic policy between the two countries was of opening up the airlines sector.

"Opening up of aviation sector between the two countries has really helped each other. The number of travellers, both business and tourists, has rocketed mainly because now it's so easy to travel. Earlier there were just two airlines - Air India and British Airways; now you have several," said Bilimoria.

(Gyanendra Kumar Keshri can be reached at gyanendra.k@ians.in)