US to India: retro tax law will hurt

GEITHNER TO PRANAB: 'Dampened enthusiasm on investment... looking at bilateral impact'

Written by The Financial Times | Washington | Published: April 20, 2012 10:11 pm

Tim Geithner,US Treasury secretary,raised the stakes over India’s proposed tax laws,telling Pranab Mukherjee,Indian finance minister,that the plan had “dampened enthusiasm” in the Asian nation among US business and investors.

Geithner’s intervention on Thursday comes amid growing concern from US companies that they could be hit with huge levies if Indian measures to tax certain international business transactions retroactively are implemented.

The warning from Geithner could help Vodafone,the UK telecommunications group,fend off a large tax bill that would be imposed on its 2007 purchase of Hutchison Essar as a result of the legislation.

At a meeting in Washington ahead of the spring meetings of the World Bank and International Monetary Fund,Geithner “encouraged Mukherjee to reassure foreign investors that India will continue to welcome foreign capital”,according to a Treasury official.

Geithner specifically pointed to “certain tax provisions” in India’s budget that had “raised significant concern among US industry and dampened enthusiasm about India’s investment climate”. Geithner also said that the US Treasury was “examining India’s proposed tax provisions to determine their impact on the US-India bilateral income tax treaty,” the Treasury official said.

US business groups,ranging from the Chamber of Commerce to Financial Services Forum and the Information Technology Industry Council,had been pressing Geithner to step into the fray in recent days and were pleased he did so.

“We are most appreciative to the Treasury secretary for raising this important issue,” said Diane Farrell,executive vice-president of the US-India Business Council in Washington. “We’re hopeful that the Indian government understands the positive spirit in which our concerns were conveyed.”

The warning by Geithner to Mukherjee comes after George Osborne,UK chancellor,made a public intervention on the matter earlier this month on a trip to New Delhi,chastising the Indian government for the proposed measures and warning of potentially harmful effects on trade and investment.

In March,India unveiled a series of amendments to its finance bill that have angered a wide range of multinationals. The most high-profile measure would retroactively tax business deals in which a non-resident transferred shares into a non-Indian company that derives its value “substantially” from Indian assets.

“The unprecedented nature of this amendment sets a particularly poor precedent,and,consequently,we believe it essential that the US Treasury speak out so that other countries might be dissuaded from enacting similar policies,” said a letter from twelve US business lobby groups to Geithner earlier this week.

The Indian embassy in Washington did not immediately respond to a request for comment.

US worries about the proposed Indian tax measures comes against a backdrop of increasing dismay at the pace of economic reforms to open India’s fast-growing economy to foreign investors. In the meeting with Mukherjee,Geithner said India needed to advance “important economic reforms that will increase opportunities for bilateral trade and investment and strengthen India’s business climate through greater transparency and predictability”.

Among other gripes,US retailers have complained about India’s failure to allow international big-box chains to operate in the country. Meanwhile,trade tensions have increased,with India and the US launching,or preparing to launch,the first step in three formal disputes at the World Trade Organisation over India’s poultry ban,and America’s duties on Indian steel and work visa policies. — The Financial Times

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