The finance ministry is looking into whether Kraft Foods will have to pay taxes to Indian authorities in its $19 bn takeover of Cadbury last year, in response to a public interest petition.

The case is the second in recent years where questions have been raised on global firms' tax liability in India following a blockbuster deal, adding to regulatory uncertainty for foreign companies chasing the India growth story.

Indian tax authorities last year asked Vodafone to pay $2.5 billion tax on its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, which the company is currently fighting in court.

Uncertainty over taxes, environmental clearances and other regulations, on top of a slew of corruption scandals, have eroded Asia's third-largest economy's appeal among overseas corporate investors.

"These types of cases are something the Indian authorities have been pursuing for the past two or three years, but it is not a widespread international practice," said Abhishek Goenka, a partner at BMR Advisors in Bangalore.

"We are expecting a number of similar cases which will obviously create an element of concern for cross-border M&A from an Indian perspective," he added.

Foreign direct investment in India fell more than 24 percent in the first seven months of the current fiscal year to $12.56 billion, and analysts have said flows were likely to remain subdued for the near term on concerns over the slow pace of reforms and political volatility in India.

WEAK CASE?

Last month, a New Delhi-based law firm filed a writ petition on behalf of a social activist Ved Prakash in the Delhi High Court, saying Cadbury evaded substantial tax liability in India, as a global deal in which U.S.-based Kraft took over Cadbury also included assets in India.

"On paper, it looks weak," N.C. Hegde, a tax partner at Deloitte Haskins & Sells in Mumbai, told Reuters on Tuesday.

Kraft's Cadbury acquisition was global, with India just a part of the transaction, and thus should not be subject to Indian taxes, he said.

The Delhi High Court asked the petitioners to make a representation before the ministry of finance.

"It seems to be very premature now. The court could not ignore a public interest litigation ... the court will ask the government to look into the matter, the government will look into if they have any kind of case against Cadbury," Hegde said.

However, Hegde said that tax experts were initially dismissive of India's tax claims made against Vodafone, but that case continues in court.

Kraft sealed a deal last year to buy British candy maker Cadbury for about $19.6 billion to create the world's biggest confectioner. Kraft sought Cadbury mainly because of its strong growth in emerging markets like India and Latin America.

"Cadbury has not paid any taxes, nothing has come to India in this whole transaction of $19 billion. So we filed a petition in the Delhi high court," Gaurang Kanth, managing director at Kanth & Associates, the petitioners' counsel, told Reuters.

"We could not really ascertain the exact amount as to how much will be the tax liability, because we were not really knowing the exact amount of transaction which Cadbury was undertaking in India," he said by telephone.

A letter from the finance ministry was made available to Reuters by Kanth.

"Taking cognizance of the petition filed by you, action has been initiated in the matter under the Income Tax laws," Salil Mishra, an under secretary in India's finance ministry, wrote in the letter dated Dec. 22, in reply to the petitioners' letter.

A finance ministry official, who did not wish to be named, told Reuters on Tuesday that the ministry had forwarded the petitioners' letter for necessary action.

"We were made aware that a public interest petition was filed in the High Court of Delhi," a Kraft spokesman in India said.

"We understand that the court has directed the petitioner to approach the government to look into the relevant issues. Kraft Foods is fully committed to complying with Indian law."

Finance Minister Pranab Mukherjee told parliament in November that the government was looking into at least four deals for possible tax losses, media reports said at the time.