Voda tax is coming, 20 companies may be on the hook

Foreign investors, take note: Retrospective tax is coming and it may be coming within a few days.

That’s according to a report in Wall Street Journal, which said that legislation to allow authorities to tax deals in which foreign companies transferred Indian assets is expected “within a few days”. Other local media reports said with the new legislation by its side, the government is likely to demand up to Rs 40,000 crore in taxes in up to 20 such cases.

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Of course, the most visible and immediate target will be Vodafone. (In fact, many media reports even call it the ‘Voda tax’). It seems the government is determined to put the British telecom giant on the tax hook for its overseas deal with Hutchison Whampoa to acquire the latter’s Indian assets in 2007, even after the Supreme Court declared it was not liable to pay tax of up to $2.2 billion in the deal.

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The tax amendment, once passed into law, will overrule that verdict. A government official had earlier said that once the tax amendment was passed, the government would raise a fresh claim of about Rs 20,300 crore in tax, penalty and interest against the telecom giant. On its part, Vodafone has served a notice to the government last month and is considering arbitration proceedings over the tax proposal. The company has also said it might not go ahead with its planned initial public offer this year given the policy uncertainty and high prices of spectrum proposed by the Telecom Regulatory Authority of India.

Other deals likely to come under the retrospective tax scanner include SAB Miller’s purchase of Foster Group’s Indian business, Aditya Birla Nuvo’s purchase of New Cingular Wireless Services stake in Idea Cellular, Cairn UK Holdings, Sesa Goa, Sanofi Pasteur and McLeod Russel.

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Predictably, the introduction of retrospective taxation, introduced as part of the Finance Bill, is likely to upset foreign investors, who have criticised the proposed tax amendment for hurting India’s reputation as an investment destination.

While the government claims it is only pursuing what it believes are justified tax claims on deals involving Indian assets, there’s little doubt that the controversial tax proposal will only further muddy the investment climate in India.

Already, investors are wary about India’s growth prospects and starting to rethink about pouring in more money into the country. High interest rates and a sluggish business environment have put off local businesses from investing in further expanding capacity, while in the capital markets, foreign investors, who are the biggest driving force, have decided to adopt a wait-and-watch approach. That’s in sharp contrast to what happened earlier this year, when foreigners poured in more than $11 billion in the country’s capital markets.

Today’s GDP data release will also be crucial to sentiment: if economic growth for the quarter ended March falls below 6 percent, it will deepen the gloom surrounding the economy. The image of a cash-hungry government determined to grab tax by whatever means necessary,even by overturning legal verdicts, will not help.