New Delhi: Seeking to tamp down a growing controversy over India's investment climate, Finance Minister Pranab Mukherjee assured US Treasury Secretary Timothy Geithner that recent Indian tax proposals that have rattled foreign investors are "not substantive but clarificatory," according to an Indian government statement on Friday.
Mukherjee, who met Geithner in Washington on Thursday, downplayed the impact of proposals--included in budget legislation Parliament is expected to vote on in coming weeks--that would allow Indian tax authorities to impose taxes retrospectively on certain transactions involving foreign firms that date back to 1962.
Mukherjee told Geithner that the changes "reiterated only the intent" of longstanding Indian income tax law rather than granting new powers for tax authorities, according to the statement. Many lawyers and tax experts have disputed that assessment, however, saying the tax proposals would amount to a major shift that could complicate mergers and other transactions between foreign entities in which an Indian asset changes hands.
Mukherjee also told Geithner that "tax cases which have already been assessed and finalized up to April 1, 2012, cannot be reopened," the statement said.
The budget legislation included several proposals that sparked anxiety among foreign investors. Geithner raised concerns about those proposed changes and their impact on India's investment climate.
A proposed tax avoidance rule could introduce new capital gains tax liability for many foreign companies, including large institutional investors, that invest in India through Mauritius. India and Mauritius have a tax treaty to avoid double taxation, but foreign companies might not get the treaty's protection under the new regulation if Indian officials feel they're only operating in Mauritius to get tax benefits.
"The Indian tax laws are very clear that the companies making capital gains from the assets located in India will have to pay taxes either in the country of their origin or in India. It is not a case of double taxation but ensuring that companies that are liable to pay tax must pay some tax," the statement said.
The two officials also discussed a dispute over software royalties. "It was informed that discussions have been held in the past between the tax authorities in both the countries and they had agreed to disagree on such characterization," the statement said.