The government decision to tax Vodafone-like deals through an amendment to the I-T Act with retrospective effect will not impact foreign investment flows, said a finance ministry official.
"The apprehension that the retrospective amendments would create negative sentiment for FDI is not correct," an official said while explaining the rationale behind the finance ministry's decision to amend the Income Tax Act with retrospective effect from 1962 to bring into net overseas deals concerning domestic assets.
Foreign Direct Investment (FDI), the official said, "is not primarily dependent upon tax, but is more governed by aspects like huge domestic market, low cost of operation, low labour cost and huge skilled manpower".
As per the amendment proposed in the I-T Act by finance minister Pranab Mukherjee on Saturday, all persons, whether resident or non-residents, having business connection in India will have to deduct tax at source and pay it to the government even if the transaction is executed on a foreign soil.
The amendments, once carried out, will have implications on Vodafone which won Rs 11,000-crore tax dispute case against tax authorities in the Supreme Court. It will also impact other similar cases involving taxes to the tune of about Rs 30,000 crore.
The official further said, "There has been a long history of amending the I-T Act with retrospective effect to overcome the decisions of court and the constitutional validity of these amendments has been upheld by the courts."