FDI: Foreign Deferred Investment

It’s pertinent to avert the on-going crisis rather than disguising the truth and marketing concurrent economy that has no buyer even on discount.

Pompous road shows cannot charm smart global investors, Mr. Chidambaram. Stop running from pillar to post to woo them and openly accept the acerbic truth of Indian Economy’s battered state. Foreign inflows are drying, imports are rising, and Current Account Deficit is widening, to top them all, even Indian Rupee is sinking.  No sane investor would head to India in current circumstances. Wasn’t it enough insulting, Mr. Chidambaram, that two US trade representatives bluntly endorsed negative sentiment about India just a couple of days after your so called road show at US? It should be. It’s pertinent to avert the on-going crisis rather than disguising the truth and marketing concurrent economy that has no buyer even on discount. Foreign Direct Investment is needed. No doubt. But, what is more needed is to generate self-convincing investment sentiment which would naturally draw foreign investment at home. Won’t you agree Mr. Chidambaram?

For reforms on FDI front, you recently constituted a committee under the chairmanship of Economic Affairs Secretary Arvind Mayaram which recommended raising the FDI cap in various sectors such as defense, multi-brand retailing, telecommunications etc in order to spur investment. You are all for this FDI-cap-hike binge but it’s highly unlikely if it would impress investors as it is more profit not more control what they are looking for and current economic situation is not in the position to offer that. Thus, it doesn’t matter whether 51% FDI in multi-brand retail is allowed or 74%, whether 100% FDI is permitted in telecom or less than that, overseas companies won’t consider India as investment destination as long as investment sentiment in the country doesn’t approve.

Did you notice that serious investors are getting repelled from India while, worryingly, corrupt and crooked ones who are approaching it? It’s a further damage to India’s reputation that Foreign Investment Promotion Board (FIPB) rejected three FDI offers as they happened to abuse India’s Double Taxation Avoidance Treaty with Mauritius. Given the brazen internal corruption, perhaps India is globally perceived as a country where malign business practices can be readily sustained. You must change this perception.

No doubt it’s non-transparent, corrupt and poor governance which has created clouds of uncertainty around Indian economy.  That doing white business in India is risky has become a general notion. From 2G scam, coal scam to recent jet-Ethihad deal, no overseas deals are bereft of controversies. Any sincere investor looking forward to setting-up long term business in the country would expect transparent and stable laws but India is a country where policies can anytime be transformed and deals can be withdrawn. Therefore, as long as there is no transparent and expedite governance model to execute foreign deals, India would remain a turn-off investment destination for overseas investors. After all who would want to stuck in arduous mis-management maze such as India has! Right, Mr. Chidambaram?

India is a federal country where consent of state governments is required for any policy to fructify. It is animosity between center and state governments which, many times, leads to hassles in the implementation of any scheme. For instance, 51% FDI in multi-brand retail had been approved long time back in December 12 but no proposal for the same has been filed yet as final decision whether to allow FDI rests with the state governments and most of them are unwilling thus unforthcoming  to welcome foreign retail giants in their particular state. This non-supportive approach of state governments also works as a turn-off for investors. You would certainly second it. Right, Mr. Chidambaram?

You must also know that  Indian rupee’s roller-coaster movement, country’s chronic high inflation and expensive credit due to higher interest rates eat on the real returns on investment. Also their indirect impact causing fluctuation in energy prices, land shortage, skyrocketing land tariff, time-taking approvals at various stages etc are few other infrastructure bottlenecks which dissuade global investors to set-up business in India.

Therefore, being a sensible Finance Minister, you must hit on exactly where the problem lies, which you very well understand but hesitate to accept. Don’t you know that spending on populist schemes like Food Security Bill will only aggravate macroeconomic challenges? Aren’t you aware that it’s cronies and corruption which repels serious foreign investors from India? Also, you very well know that trumpeting false about India as investment destination or your efforts to increase foreign investment limits are meant to come to copper. Seemingly it’s better to accept that India’s internal governance challenges can never be worked upon. Forget about foreign Direct Investment. It’s Foreign Deferred Investment till the time suo-moto rejuvenation of India's macro-economy doesn't take place. That’s what you want to convey, Mr. Chidambaram?

Taxing Zenith

Thanks to US president Barak Obama, the new fashion of taxing super-rich has finally come to Indian shores. Prime Minister’s economic adviser C. Rangarajan recently suggested imposing surcharge on income of India’s neo crème de la crème. With an endorsement from the Finance Minister P. Chidambaram the idea of taxing super riches may become a reality in the forthcoming budget. This idea has a stock justification as Indian economy is reeling under the pressure of high fiscal deficit.  Political connotations also appear apt in the given scenario.   But proposal of this taxation seems to be a delicate choice for the finance minister as black economy dimension of higher taxation is no less befitting. Increased taxes on wealthiest elite may fuel the exodus of black money to tax-havens or stimulate them to move in to countries having lower income tax rates.

Current income tax rates are divided into three slabs of 10%, 20% and 30%. Earnings more than 15 lakh are taxed at the highest tax rate.  This range of taxation was last revised more than a decade ago in 1997 when people earning close to fifteen lakh used to be considered among top slot of income holders. Now annual income of a good chunk of Indian population has gone up to 40-50 lacs. Hence it is irrational that people earning 15 lakh and someone who earns just double of that is taxed at the same rate. Pranab Mukherjee in his recent presidential speech accepted the fact that the fruits of liberalization have been increasingly savored by a handful number of people. It didn't trickle down to the scale as was expected. Therefore taxing super rich, at least for the time being, is a concept in chorus with the political thinking of the existing government.

People standing at the peak of income pyramid have reached to the saturation of their consuming power. Their investments are landing at the dead assets like land or gold. While exempting or incentivizing lower income groups in tax rate stimulates general consumption and savings.

This is not all a wild guess that higher taxes may incite people to implicitly flood money towards tax sanctuaries. A latest research from National Institute of Public Finance and Policy (NIPFP), a Govt. think tank,   estimates that India’s current black money economy can be 30% of its Gross Domestic Product (GDP) nearly Rs 28 lakh crore. Income tax base in India is meager and only 5.6 percent taxpayers have a declared income of more than 10 lacs. However, the rate at which luxury cars, pent houses and other extremely expensive and swanky items are being sold in the country is a proof of a gross underreporting of income. Finance ministry has enough data of high value transactions to corroborate this enigma of wealth and rampant tax evasion.

It is historically proven that lower level of tax rates increases tax compliance and higher tax rates result into tax evasion. Therefore higher tax might be temporarily levied on well-heeled population as an instant remedy to the fiscal illness but economy is looking for the long term, stable and transparent tax regime. Widening tax base and strong setup for the prevention of tax evasion is the only panacea for our debilitated tax system.  

GAAR: A Grey Bargain

It is by nature that people try to tinker with tax laws to the best of their creative ability so that their tax liabilities can be avoided. Seemingly Indian policy makers have no problem if their tax laws are trampled which is why honorable Finance Minister P. Chidambaram has finally deferred the execution of General Anti Avoidance Rules (GAAR) by two years. In this era of complex capital flows, every mature economy strives to fight better with the prospect of tax avoidance by enterprises and investors in the guise of tax mitigation. Many countries such as China, Canada, and Australia have GAAR rules enshrined in their tax statute. UK and USA have recently tightened GAAR. It is unfortunate that India couldn’t muster courage to go for such stern and essential tax laws.

GAAR is the set of rules which empowers tax authorities to clampdown on transactions primarily driven towards tax-evasion. If implemented, instead of routing through courts, income tax officers can directly reach out to tax fraudulent by invoking GAAR provisions. It was earlier introduced in March 2012 by the then Finance Minister Pranab Mukherjee but giving in to intense outcry from domestic and foreign investors, PM Manmohan Singh while holding finance portfolio in July, appointed an expert committee headed by Parthasarathi Shome, a former advisor in the finance ministry, to review the GAAR recommendations and suggest a suitable way forward. It is by accepting Shome committee recommendations that Chidambaram has postponed the implementation of GAAR till FY 2015-16.

Lately, Mauritius has emerged as India’s favourite destination for overseas investment replacing Singapore. It is also a major source of capital inflows in India accounting for about 40% of total flows. India’s Double Tax Avoidance Treaty with Mauritius and Singapore is exceedingly manipulated by domestic and foreign investors to minimize their tax-liabilities. Voluminous investment is made via so called Mauritius and Singapore entities of multi-national-business targeting Indian market. This is popularly known as treaty shopping. Few Indian or foreign companies inflate volumes of transactions via continuous and frequent purchase and sale of particular security, commodity or asset, thus indulge in round-tripping trade to avoid capital gains taxes. This round tripping and treaty shopping swallows a good portion of revenues in India who is relentlessly reeling under huge deficits.

There is a school of thought who believes that autonomous power given to tax authorities will result into unnecessary harassment of entrepreneurs and industrialists. Investor sentiment will also be badly affected leading to less FII and FDI inflows. However, leveling these criticisms against GAAR is nothing but an attempt to secure undue interests of investors. The truth of black money converting into white by entering Indian markets through tax havens, as discussed above, is clearly opaque. Accountability of Income Tax Dept. can be maintained. It is not a big deal.  Removing shortcomings of tax laws to outwit its misuse is what is more important.

Global economic environment is quite insecure and uncertain. Seeing this, it is imperative to maintain decent level of law and order in the country. GAAR experience of other countries has rendered positive results to them. Foreign investment in those countries hasn’t come down as it is being feared in India. Govt must motivate fresh FII and FDI as core of its policy initiatives. But it is also paramount to have modern tax laws to avoid misuse. A judiciously tough tax regime makes a nation more credible in the long run.