Vodafone, India’s biggest foreign corporate investor, has threatened to take the country to international arbitration

INDIA vowed on Tuesday (May 8) to push ahead with controversial legislation allowing it to retroactively tax such companies as British mobile phone giant Vodafone over cross-border business deals.

The measure, which has stirred huge protests abroad from foreign investors, would oblige overseas firms to pay tax on transactions involving Indian assets routed through tax havens.

“India cannot become a no-tax country, a tax haven” to lure international investors, finance minister Pranab Mukherjee told parliament.

The amendment to India’s Income Tax Act would bypass a Supreme Court ruling dismissing a $2.2bn (£1.36bn) tax bill imposed on Vodafone over its takeover of Hong Kong-based Hutchison Whampoa's Indian cellular unit in 2007.

Mukherjee did not mention Vodafone by name but said “either you pay tax here or in your own country.”

“There cannot be a situation where somebody will make money on an asset located in India and will not pay tax either in India or the country of its origin,” he told lawmakers.

“The legislature has the right to make arrangements to correct the court judgement,” Mukherjee added. “Lawmaking power resides in parliament.”

The deal was struck between Vodafone’s Dutch subsidiary and a company based in the Cayman Islands, a tax haven, that held Hutchison Whampoa’s India assets.

Mukherjee clarified that India would not target those deals that take place in countries with which India has double tax avoidance agreements.

But New Delhi has no such accord with the Cayman Islands.

India contends Vodafone should have withheld the amount the seller, Hutchison, would have owed in capital gains tax when it sold the Indian unit for $10.7bn (£6.64bn).

Vodafone successfully argued in the Supreme Court the deal was exempt from any tax because the sale took place abroad and both buyer and seller were from beyond India's borders. It also noted it was the purchaser and made no gain.

Vodafone, India’s biggest foreign corporate investor, has threatened to take the country to international arbitration if it pursues the demand for the tax.

The cash-strapped Indian government had been widely expected to plug merger tax loopholes.

But the retrospective nature of the legislation, unveiled as part of the national budget, stirred an international outcry at a time when India urgently needs big-ticket foreign investments to upgrade its dilapidated infrastructure and spur slowing economic growth.

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