India Committed to Stable Tax Regime, Jaitley Says

India is committed to a stable and predictable tax regime to attract investment and spur economic growth and retroactive changes to tax law made in 2012 will only be applied after scrutiny, Finance Minister Arun Jaitley said.

All new cases arising from retroactive changes made previously that apply to indirect transfers of Indian assets will be examined by a panel before any action is initiated, Jaitley said in his budget speech to parliament today. Cases that are currently pending at different stages “will naturally reach their logical conclusion,” he said.

The proposal comes as investors have been wary after India changed rules two years back that forced Vodafone Group Plc to start international arbitration to resolve a $2.4 billion tax dispute over a 2007 acquisition. Prime Minister Narendra Modi seeks to woo overseas investors to boost economic expansion from near a decade low.

“New investors will like this because there’s a commitment that they won’t do it again,” Girish Vanvari, Mumbai-based co-head of tax at KPMG India, said by telephone. “There’s a presumption that the panel will be more pragmatic and investor friendly.”

Vodafone has been embroiled in a tax dispute with India since its purchase of Hutchison Whampoa Ltd.’s Indian business.

The company, based in Newbury, England, said it will continue the process of international arbitration after Jaitley’s comments in the budget speech today. Vodafone said it made no capital gain from the deal with Hutchison and maintains there’s no tax to pay, it said in an e-mailed statement today.

Cayman Islands

The mobile phone service provider has said it doesn’t owe taxes because the acquisition was between two international companies, with the target asset registered in the Cayman Islands. After India’s top court ruled in Vodafone’s favor, the government in 2012 changed laws enabling it to retroactively tax cross-border deals going back as far as five decades.

Vodafone in May started international arbitration to resolve the dispute.

The arbitration with Vodafone will continue and the tax demand made on the company stays, an Indian government official said in New Delhi, asking not to be named citing rules.

Marten Pieters, Vodafone’s chief executive officer for India, said in May that the business in the South Asian nation could overtake the U.K. and Italy in the next few years. The carrier bid 196 billion rupees ($3.3 billion) for wireless spectrum in February.

“I hope the investor community both within India and abroad would repose confidence on our stated position and participate in the Indian growth story with renewed vigor,” Jaitley said today.

Panel’s Role

The role of the panel, proposed by Jaitely, is not clear, Rajiv Anand, tax partner at Deloitte in India, said in an e-mailed statement.

“It could just be that the high powered committee would be given the mandate to scrutinize each transaction to ascertain if the arrangement had substance or was it entered into to avoid India capital gains tax liability,” said Anand.

More than 4 trillion rupees of tax demand is disputed and being litigated in various courts, Jaitley said. To reduce litigation in direct taxes, the government has proposed to enlarge the scope of an income tax settlement body to resolve disputes.

The government has also proposed changes in the transfer pricing regulation. One of the steps proposed include a “roll back” provision that can be applied to international transactions undertaken in previous four years in specified circumstances, Jaitley said without elaborating.

India will also align transfer pricing regulation with “best available practices,” said Jaitley. The government will seek parliament’s approval to make changes in the relevant laws, he said.