Finance minister Pranab Mukhherjee has found support in World Bank president Robert Zoellick for his move to retrospectively amend the Income Tax Act, 1962 in a bid to thwart tax avoidance by companies through cross-border deals such as Vodafone's acquisition of a 67 per cent stake in Hutch Essar in India through an overseas transaction.
UK-based Vodafone acquired the 67-per cent stake of Hong Kong-based Hutchison Wampoa in Hutch Essar of India through an overseas deal involving Hutchison and Vodafone's Dutch arm, thereby achieving ''double tax avoidance''.
Vodafone has now threatened to invoke an India-Netherlands double taxation avoidance treaty to thwart Indian government's move to change income tax laws to bring cases of ''double tax avoidance'' like that of Vodafone under the tax law.
''We had some discussions with finance minister Pranab Mukherjee to try to understand this in relation to investment. The sense that I had is that this is something more appropriate to them that at the heart of the policy they believe people should pay taxes somewhere,'' Zoellick told a news conference at the conclusion of his five-day visit to India.
Zoellick, however, said ''retrospective'' need not be ''retroactive'' as the ''Indian government is sensitive that they want to have an environment that draws both domestic and foreign investment and so I hope investors must give the Indian government time.''
The finance ministry's budget announcement on the proposed amendments to the Income Tax Act 1962 has been criticised by and corporates both at home and abroad saying that it is regressive in nature and would impact investment flows into the country.