Belying Expectations, Finance Minister Doesn't Scrap Law on Retrospective Taxes

Finance Minister Arun Jaitley defied expectations that he would in his maiden budget announce the scrapping of legislation that allows India to tax deals that have already been concluded, which has created a 2.2 billion tax dispute with British mobile operator Vodafone. (Budget 2014: Highlights)

Instead, Mr Jaitley said that any new disputes will be reviewed by a high-level committee. All pending cases of retrospective tax for indirect transfers will be examined by a high-level committee before action is taken. (Finance Minister Arun Jaitley Takes Break During Budget Speech)

"The sovereign right of the government to undertake retrospective legislation in unquestionable. However, this power has to be exercised through extreme caution and judiciousness keeping in mind the impact of each such measure on the economy and the overall investment climate. This government will not ordinarily bring any change retrospectively which creates a fresh liability," Mr Jaitley said. (Rs. 1000 Crore Set Aside to Improve Irrigation Facilities)

He did not comment on the Vodafone case, saying only that existing disputes are "at various stages of pendency and will naturally reach their logical conclusion." (Budget 2014: 5 New IITs and IIMs, Says Finance Minister)

The amendment to tax laws was  introduced by Dr Manmohan Singh's government after the Supreme Court ruled in favour of Vodafone which challenged a $2.2 billion tax bill for its 2007 acquisition of Indian mobile assets from Hutchison Whampoa.  The purchase made Vodafone India's largest overseas corporate investor. (Modi Sarkar's Budget: 10-point Cheat-Sheet on What Economists Expect)

Vodafone has sought international arbitration after its talks with the Indian government failed to find a solution last year.

International investors who fled over reform policy inaction by Dr Singh's coalition government and huge corruption scandals have been flooding back on hopes of change since the BJP's stunning victory in May's national election. (Top 10 Expectations From Arun Jaitley)

Indian authorities had argued that the transaction between Vodafone and Hutchinson was liable to be taxed in India, a claim rejected by Vodafone, which said that, even if tax was due, it should be paid for by the seller rather than the buyer.

The $2.2 billion standoff has played out in courts across the country ever since and has been held up by the business community as a symbol of the perils foreign businesses face from operating in India.