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Business Comment

David Prosser: Securing a share of India's economic miracle may cost more than expected

Outlook India's stellar economic growth, which was barely touched by the global downturn, has for some time been expected to prompt a mergers and acquisitions boom in the country. But while foreign corporations are keen to secure their slice of the cake – and to get results quickly, rather than starting from scratch – India has always been protective of its domestic businesses, with tough regulation limiting the access of foreign buyers to many industries.

Could the country's hardening attitude towards the taxation of company takeovers be a new front in the battle against multinationals? First Vodadone felt the hot breath of the Indian tax authorities on its neck, and now Kraft is running into a spot of bother too.

In Vodafone's case, the telecoms giant is still fighting court rulings that it must pay £1.6bn of capital gains tax following its takeover of Hutchison Essar, India's biggest mobile phone company, three years ago. Now there are calls for Kraft to face a similar charge on its purchase of Cadbury's Indian business, which it took over when it bought the confectioner last year.

There are other cases too. Reports in the Indian press yesterday suggested an American takeover of one of India's leading IT companies had been delayed amid fears that a Vodafone-style tax charge might be levied.

The Kraft case would seem to be a bridge too far: the American company owns an operation in India after a global transaction, rather than because it specifically bought an Indian business, like Vodafone. Still, even the suggestion that Kraft might be hit with an unexpected liability – and a large one at that – fuels the perception that tax uncertainty is another issue to add to the list of reasons why many multinationals do not regard India as being as open for business as they would like.

Politics may be part of the picture. India's coalition government, rocked by links to a series ofcorruption scandals, is underpressure to show the electorate it is on their side – tax raids on foreign-owned multinationals aren't a bad way to do that. But whatever the motivation for the increasingly aggressive approach of India's tax authorities – or even the rights and wrongs of going after businesses in this way – don't bet on that M&A boom materialising just yet.