Retrospective Taxation – Probably Not Applicable to Most Foreign M&A Deals

Foreign investors have been wary of investing in India since the beginning of the year after the budget introduced the General Anti-Avoidance Rules, or GAAR, and retrospectively changed the income tax law.

Vodafone is expected to be the first victim of this tax and the press has subsequently dubbed the retrospective tax amendment the “Voda Tax.” These plans have created a stir in India and among the foreign investment community with regards to the viability of India as a premium destination for FDI. The government deferred GAAR by a year after foreign institutional investors pulled out nearly US$1 billion from India in April.

Additional comments from the authorities have been made last week, with Finance Minister Pranab Mukherjee saying that the income tax department will not reopen cases where assessment proceedings had been finalized before April 2012.

On Monday, additional clarification was given to this issue. According to an Economic Times report, the government may only tax those transactions where Indian assets make up 50 percent or more of the total assets being transferred via sale. This clarification comes as a relief to foreign investors since it should exclude transfers of Indian assets in a global M&As, where these assets account for only a small proportion of the deal.

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