Special Feature
Part of a ZDNet Special Feature: The Microsoft-Nokia Deal

Is India hostile to foreign direct investments?

The recent Delhi High Court judgment gives a reprieve to Nokia — but it may not have improved India's image as a sound destination for foreign investment.

For a country whose GDP growth is sputtering at around 4.5 percent, the answer to this question should be an unequivocal "no" — but the experiences of the last few years have begun to give many the feeling that all the current government cares about these days is plugging that big fiscal deficit of 4.8 percent using whatever ammunition it has in its arsenal. And this means filing what people say are spurious tax cases against foreign companies.

This sentiment was given a fillip when the Income Tax (IT) department froze the assets of Finnish phone giant Nokia — specifically its Chennai factory, one of Nokia's largest — that employs 5,800 people and produces 200 million phones a year, and once, ironically, the icon for FDI in the country. The IT department's contention was that Nokia dodged $334 million worth of taxes on royalty transfers, which ballooned to a staggering $3.4 billion if you tack on interest over the last seven years. Nokia denies these allegations.

It is not hard to imagine the audible sigh of relief that must have resonated in Helsinki when a Delhi High Court ruled on December 12 that the Chennai plant should be unfrozen, considering the verdict was a few hours before an internal deadline that the company simply had to make in order to close the $7.2 billion sale of its global mobile phone business to Microsoft. If the verdict had gone the other way, it would have been forced to close the factory, and over 5,000 people would have been out of work.

However, online chatter on tax blogs suggest that the Nokia matter may be more than just an overzealous tax authority wielding its power — that MNCs in India sometimes tend to play fast and loose with accounting rules. Either way, these encounters have become familiar events. Three other MNCs have fought pitched battles against the current government on taxation issues, including Vodafone Group, Royal Dutch Shell, and IBM, most often over so-called transfer pricing.

The most famous — and contentious — of these has been the Vodafone Affair. The company had entered India in 2007 through a Netherlands subsidiary and then acquired Hutchinson's stake in its JV with Indian company Essar through a Cayman Islands transaction. The Indian IT department said that Vodafone owed it $2.5 billion in taxes over the transaction, but the company disagreed, since the transaction had taken place outside India. The matter went to the Supreme Court.

In January 2012, the SC ruled in favor of Vodafone, stating that the IT department has no jurisdiction over foreign transactions. However, in 2012, India changed its Income Tax Act retrospectively, and made sure that any company in similar circumstances is not able to dodge taxes by operating out of tax havens like the Cayman Islands or Lichtenstein. The matter is still being duked out in courts.

Stay tuned for more of these while the government tries to balance its books in a moribund economy.

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