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COMMENT: Why Osborne should tread carefully about Indian tax

UK finance minister George Osborne should not be using today’s visit to his Indian counterpart to complain about the Indian tax system, he should be patting him on the back and telling him to keep up the good work.

Since taking office in 2010, Osborne has been arguing that his fiscal reforms would aim to ensure that the UK “is open for business” and last month’s budget confirmed his intentions. So while the Chancellor is expected to use his meeting with Pranab Mukherjee to make his displeasure known about the way India has treated Vodafone and the country’s plans to retrospectively tax similar transactions going back 50 years, Osborne should be rubbing his hands with delight as India’s constant attack on taxpayers could encourage business to invest in the UK instead.

The different approach taken by both finance ministers was clear to see last month when both men delivered their 2012 budgets within days of each other.

Highlights of the UK budget included a further cut in the corporate tax rate (22% by 2014 and with a hint that it could eventually be 20%), new controlled foreign company rules and a patent box regime.

This contrasts greatly with Mukherjee’s budget from a few days earlier. Just over two months after the government lost its Supreme Court battle with Vodafone, the government decided to retrospectively amend the country’s tax law to target Vodafone and other multinationals. The move has done little to improve India’s image as a place for doing business. This amendment now brings transactions done by companies such as Kraft and SABMiller onto the radar of the Indian government.

The change to the law has also been criticised by seven trade bodies representing investors from North America, Europe and Asia who wrote to Prime Minister Manmohan Singh and Mukherjee protesting against the budget’s proposed changes.

The letter, whose signatories included the Confederation of British Industry and Capital Markets Tax Committee of Asia, said the move showed “disregard for the judiciary”.

But Osborne would be wise not to bring this up in today’s meeting. In February 2010, the then UK prime minister, Gordon Brown, wrote to Singh to express his concern over the Vodafone case because of its potential to create uncertainty for foreign investors and affect the country's investment climate. Singh replied by stating briefly that the case was before the Indian legal system.

And now intergovernmental organisations are set to become embroiled in this matter. Press reports have suggested that Vodafone feels the government’s attack on them is “grossly unjust” and unfair on India’s largest inbound investor and are looking to involve the UN in the dispute. But should the UN get involved? No. This proposed change is not the only unfair tax law in the world. The UN has better things to be getting on with.

What taxpayers should realise is that they can moan endlessly and criticise the way the government is taxing companies, but the logical conclusion is to leave India. This happened in the UK over the last decade as companies left in protest against an uncompetitive tax system. But thanks to Osborne's tax reforms, companies are now relocating to the UK

But taxpayers won’t leave India. It is too big a market to exploit. Unfortunately for them, uncertainty and frustration is just part of doing business in India.

FURTHER READING

How two cases provide insight into taxation of indirect transfers in India

How you can avoid becoming the next Vodafone

UK budget brings indirect tax changes

Everything you need to know about the UK budget

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