In the complex deal between Hutch and Vodafone, Hutch had the advantage of double taxation avoidance treaty. On the other hand, Vodafone was left to face the contention of IT department over capital gains tax on the profits made in the investment in India.
Certainly, the companies will now face a higher tax weightage risk while entering India. The ruling has created apprehensions in the global business community for all such future transactions in India. Many would argue that it will adversely affect the FDI inflow. But it will purely depend on the perception of economic benefits to the deal maker in acquiring or investing in India. One must consider some facts and overall scenario before coming to any conclusion.
India has come a long way since economic reforms were started in 1991 in attracting FDI and today we are the second most attractive investment destination after China. Multinationals would undoubtedly want to grab the opportunities India provides in terms of investment, in spite of strict and complex tax regulations. Moreover it should we noted that there are many examples of aggressive tax authorities globally that are successfully attracting FDI.
The particular case of Vodafone is basically discouraging the foreign investments that are routed through various tax havens like Mauritius. Since liberalisation, Indian businesses have used Mauritius?s status as a tax haven to convert black money into white. Such investments, therefore, cannot be regarded as fresh inflows. The corporates should not ignore the spirit of the Double Tax Avoidance Agreement.
The world business community and polity are enthusiastic and confident about the investments and business opportunities they have in India. Undoubtedly the investors will reassess the profitability in total but not be deterred by tax implications to make investments in India. The foreign companies looking to invest their money in India would have to choose the right way of making investments. They will be cautious but will not be discouraged.
The author is a master of business economics student at Delhi University