Several global business associations have sought reconsideration of the retrospective amendment of the Income Tax Act, warning that the proposed change has prompted widespread review of costs and benefits of investing in India.
"If the tax law changes are made, they should not apply retroactively. Past court decisions must stand despite subsequent legislation", global business chambers including Confederation of British Industry, US Council for International Business and Japan Foreign Trade Council said in a letter to Prime Minister Manmohan Singh.
These associations claim to be representing interest of 2.5 lakh companies world wide.
Justifying the government's move to amend the IT Act with retrospective effect to bring into net the Vodafone-type merger and acquisition deals involving domestic assets, Finance Minister Pranab Mukherjee had said in Parliament last week that "India is not a no tax country...India has a determined tax rate but it is not a tax haven."
The global associations said, "The most prominent of the judgements that the proposals appear designed to reverse is the very recent Supreme Court ruling in the Vodafone case , holding that it is a well-established principle of Indian law that an overseas transaction cannot be taxed in India even it has the indirect effect of changing control of a company in India."
The letter was also forwarded to Mukherjee, Law Minister Salman Khurshid and Commerce and Industry Ministry Anand Sharma.
In their letter, the global trade bodies also warned that some global companies have already started to re-evaluate their investment plans because of the uncertainty looming over the country's tax laws.
"Some of our member companies had already begun re-evaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years," it added.
The issue relates to the Supreme Court order which set aside the Bombay High Court ruling that had asked Vodafone Holdings to pay Rs 11,000 crore in tax as a result of acquiring Hutchinson-Essar Ltd in 2007 in an overseas deal.
In order to deal with the situation following the Supreme Court ruling, Mukherjee in his Budget proposed to amend the Income Tax Act with retrospective effect from 1962 to bring into the net overseas deals concerning domestic assets.
India, the letter said, "will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world and restore confidence in the relevance of the judiciary."
The proposed changes would undermine confidence in the policies of India toward foreign investment and taxation, the letter said, adding "(it) has called into question the very rule of law, due process, and fair treatment in India".
If tax law changes are made, they should not apply retroactively and past court decisions must stand despite subsequent legislation, the letter said.