The controversial Vodafone tax case, centring on whether foreign firms engaging in M&A in India are liable to pay capital gains tax, will not deter future investments, a local lawyer has said.

Although analysts have predicted that the court order on Vodafone to pay a US$2m tax following its stake acquisition in local telco Hutchinson will cause investor uncertainty, Daksha Baxi, head of Khaitan & Co's international tax practice, says that the order will not affect foreign investors' confidence in India, as it is an independent case in itself. 

"The Vodafone court ruling cannot have any impact on whether there will be more telco market M&A deals or not," she said. "This is dependent purely on the perception of the economic benefit to the deal makers in acquiring or investing in Indian telco sector."

According to analysts from firms such as KPMG, the 'aggressiveness' of the Indian tax authorities would affect foreign investors who will likely reassess the profitability potential of their investments. Vodafone is contesting the ruling on the grounds that the deal involved foreign players, Vodafone's Dutch subsidiary and Hutchinson's Cayman Islands company. But Baxi said that investors will not be deterred by tax implications.

"We do not believe deals are driven primarily by tax litigation or tax implications. They are dependent on the attractiveness from commercial and business perspectives. Therefore, such a ruling will not have an impact on investor confidence," Baxi said. "We do, however, think that the Indian tax implications will need to be more carefully examined while structuring any cross-border M&A transaction."

Khaitan & Co, which recently advised on the US$2.7bn telco deal between NTT DOCOMO and Tata Teleservices, predicts that, on the contrary, the Indian telco industry will likely be engaged in more future deals. "There is no impact on the projected growth of the Indian telecom industry [which] does have the potential to grow at a much higher rate than most other countries and, to that extent, we do not see that this ruling will have any impact on such deals. If anything, for the economic reason itself, we see more telco deals happening in India, provided there are funds available to the investors to enter into such deals."