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India seeks to calm US concerns over tax move

India’s finance minister has defended the country as an attractive investment destination after the US said new tax proposals had ‘dampened’ investor enthusiasm for the growing Asian giant.

Pranab Mukherjee sought to allay concerns over proposed legislation to chase overseas firms for taxes on mergers involving Indian assets, saying investment decisions are not made solely on the basis of ‘tax concessions’.

Investment decisions are ‘based on what’s the size of the market, whether the systems are transparent and what’s the purchasing power of people’, Mukherjee said in Washington on Friday.

India, with its increasingly affluent population of 1.2 billion, remains an attractive country in which to invest, he told an audience on the sidelines of meetings of the World Bank and the International Monetary Fund.

‘From all these standpoints, India appears to be a good investment destination.’

The retrospective nature of the Indian legislation to plug tax loopholes on mergers has stirred protests from multinationals at a time when India urgently needs foreign investment to upgrade its infrastructure and spur slowing growth.

The changes would allow India to tax the sale of Indian assets, even if both seller and buyer are foreign and the deal is concluded abroad, and has left companies facing prospects of huge bills they had not anticipated.

US Treasury Secretary Timothy Geithner said earlier this week that US businesses were worried about the changes in India’s tax rules and added that they had ‘dampened enthusiasm about India’s investment climate’.

British mobile phone giant Vodafone faces a $2.2-billion tax bill over its 2007 purchase of the Indian unit of Hong Kong-based Hutchison Whampoa and has threatened to take India to international arbitration.

Mukherjee promised ‘transparent’ discussions with companies that object to the tax measure expected to be passed in coming weeks.

He also insisted India has ‘an unwavering commitment to reforms’ after Indian media reports quoted a top government advisor as saying there would be no liberalisation measures before the 2014 elections due to political disarray.

There has been increasing foreign investor unease over India’s lack of new reform steps to open up the economy.

Reforms have been paralysed by a string of corruption scandals and a sluggish economy that have badly weakened the Congress-led government.

Mukherjee said the government hopes to pass reforms widening foreign investment opportunities in the banking, pension and insurance fields by the next parliamentary session at the latest.

But he conceded long-awaited legislation to streamline tax on goods and services — one of the government’s key reforms — could be delayed due to a large number of approvals required at the federal and state levels.