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India Likely To Change Tax Law After Vodafone Case

Monday, February 6, 2012

The Indian government is planning to include additional provisions in the forthcoming Direct Taxes Code in an attempt to avoid future court clashes with multinational companies like Vodafone.

Following Vodafone’s recent victory in court, the Indian government has taken a closer look at its tax law and legislation in the hope of being able to close the loopholes which were responsible for its public defeat.

Unnamed finance ministry officials have disclosed to the Indian media that one such provision will be brought forward in the upcoming 2012/13 budget to allow the government to tax transfers between two non-residents if at least 50% of the underlying assets are in India. This means that the government will be able to tax business deals such as the Vodafone-Hutchinson transaction in the future.

Another provision included in the forthcoming Direct Taxes Code, currently not expected to be implemented until 2013/14, and which could now figure in the budget is the proposed general anti-avoidance rule (GAAR), which enables the tax department to invalidate any business deals or arrangements found to be doing just that: avoiding tax.

The GAAR will mean that the burden of proof in a tax dispute will switch from the tax department to the taxpayer. However, there are fears that such sudden and drastic changes will further erode India's reputation with foreign investors.

The changes may mean that other mergers and acquisitions currently being challenged in court could also be affected. Such deals include SABMiller Plc’s acquisition of Fosters Group's Indian unit.

The relief experienced by such companies after the initial court ruling may be short-lived after all.