Global trade bodies warn PM Manmohan Singh of tax plan impact

International trade associations representing more than 250,000 companies have written to Prime Minister Manmohan Singh criticising new taxation proposals and warning that investment plans by overseas companies could be reconsidered.

India's budget last month outlined proposals that would allow authorities to make retroactive tax claims on overseas deals and bring in new anti-tax-avoidance measures, moves that have been criticised for further denting investor sentiment towards India.

"The sudden and unprecedented move in the Bill has undermined confidence in the policies of the Government of India toward foreign investment and taxation and has called into question the very rule of law, due process, and fair treatment in India," seven global trade bodies said in a letter to Singh.

"This is now prompting a widespread reconsideration of the costs and benefits of investing in India," continued the letter, signed by bodies including the U.S.-based Business Roundtable, the Confederation of British Industry and the Japan Foreign Trade Council.

A long-running tax struggle between London-listed Vodafone Group Plc , India's largest overseas investor, and the government, has come to symbolize the perils to foreign investors in the country.

Vodafone won a five-year legal battle in January when the Supreme Court dismissed a $2.2 billion tax demand from authorities over the British company's acquisition of Hutchison Whampoa Ltd's <0013.HK> Indian mobile assets in 2007.

That ruling was hailed by business groups as victory for clarity in India's investment climate, which has suffered due to policy paralysis, regulatory uncertainty and widespread corruption allegations against the government.

But a proposal in the recent budget to retroactively impose tax on deals conducted overseas where the underlying asset is located in India would amend 50-year-old-tax laws and allow New Delhi to pursue tax on long-concluded transactions.

"Some of our member companies had already begun reevaluating their investments in India due to increasing levels of controversy and uncertainty regarding taxation in recent years," the letter said.

Vodafone said last week it was considering a number of actions after the proposal, which it said was "grossly unjust".

The tax proposal, if written into law, could also affect Kraft Foods Inc's 2010 acquisition of Cadbury's Indian business and deals involving Indian assets sold by AT&T Inc and SABMiller Plc's purchase of Fosters.

In the letter, also sent to Finance Minister Pranab Mukherjee, the trade bodies said a plan to expand the definition of "royalty" retrospectively to 1976 would affect companies such as Ericsson.

"There appears to be an assumption, often expressed by Indian tax authorities, that India's ability to attract foreign investment is not affected by its taxation policies and practices. This simply is not the case," the letter continued.

"India will lose significant ground as a destination for international investment if it fails to align itself with policy and practice around the world," it said.

Sluggish investment is partly to blame for slowing growth in Asia's third-largest economy, which grew at just 6.1 percent in the December quarter, the weakest in nearly three years.

World Bank offers $500 million loan for education in India

The World Bank has offered $500 million interest-free credit to India for improving the standards of secondary education, an official statement said Friday.

The World Bank Thursday approved the credit that will help the Indian government's efforts to make good quality education "available, accessible and affordable to all young persons at the secondary level.

The project will support all activities as envisioned in the $12.9 billion Rashtriya Madhyamik Shiksha Abhiyan (RMSA) programme, a flagship government of India programme for gradual universalisation of secondary education, the World Bank said in a statement.

"This World Bank project will support the objectives and activities of RMSA. It will facilitate a whole set of mechanisms built around identifying what is needed to improve the quality of secondary education," said Venu Rajamony, joint secretary, economic affairs in India's finance ministry.

The project will be financed by a credit from the International Development Association (IDA) -- the World Bank's concessionary lending arm - which provides interest-free loans with 25 years to maturity and a grace period of five years.

The money will be used for setting up libraries, computer laboratories, upgrading primary schools in to secondary schools and providing training to teachers.

In addition, expansion, repair and renovation will take place in some 60,000 existing government secondary schools; some 44,000 upper primary schools will be upgraded into secondary schools; and about 11,000 new secondary and senior secondary schools will come up mainly in underserved areas.

Efforts will also be made to strengthen the role of local bodies in school management, which can, over time, lead to greater accountability and improved outcomes, the World Bank said.

"RMSA is a young programme which is expected to grow rapidly and hence it is an opportunity for the World Bank to support the government of India in building effective systems as the programme expands while improving quality," said Roberto Zagha, World Bank country director for India.

Zagha pointed out that a major concern in India these days was the issue of quality education.

"Mere improvement in access, if it is of differential quality, may not be conducive for inclusive growth. Recent international research confirms that improved quality - measured by cognitive skills - is important in determining future income and contribution to economic growth," he said.

"Hence the country needs all their young people to get good quality secondary education," Zagha added.

The World Bank's funded project is designed to meet critical needs in secondary education.

"First, to make sure that secondary education expands in such a way that quality and equity are enhanced at the same time; second, to develop and evaluate innovative approaches to secondary education; and, third, to leverage World Bank resources to help the government address systemic issues in the sector."