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Ease of doing business: It's still tough for MNCs
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SME Times News Bureau | 21 Sep, 2020
The Modi government has left no stone unturned in inviting foreign
investors with claims of an improved business environment backed by
unprecedented reforms in the past six years, but what many industry
players face is a different story altogether.
From high tax
levies to retrospective applicability of taxation, companies including
multinational corporations (MNC) face a number of obstacles in running
and expanding their businesses in India, nonetheless they continue to
operate in the country, given the large market it offers to them. There
are a host of global giants including Vodafone Group, Cairn Energy and
Walmart which had to face regulatory issues in the country.
Noting
that for foreign investments to come in, it is essential that
appropriate incentives, single window clearance among other incentives
are provided, Sumit Batra, Partner at India Law Alliance, says that
India has not been able to provide such comfort to foreign investors.
"Issues such as retrospective applicability of tax laws, change in
overall business sentiments, tedious compliances and an era ushered by
ordinances, has made things difficult," Batra told IANS.
Several
bigwigs have from time to time raised their concerns regarding the
issues faced in the one of the largest consumer markets in the world,
the latest being Shekar Viswanathan, Vice Chairman of Toyota Kirloskar
Motor, the Indian unit of Toyota. In a recent interview Viswanathan said
that Toyota Motor Corp will not expand further in India due to the high
tax regime in the country, adding that apart from impacting expansion
plans, high levies also impact demand and eventually halt job creation.
Later,
in a statement, Toyota Kirloskar Motor said that it continues to be
committed to the Indian market and operations here are an "ingteral
part" of its global strategy. It, however, added: "In wake of the
slowdown that has been exaggerated by the COVID-19 impact, the auto
industry has been requesting the government for support to sustain the
industry through a viable tax structure. We remain confident that the
government will do everything possible to support industry and
employment."
According to Suman Chowdhury, Chief Analytical
Officer at Acuite Ratings and Research, while the GST applicable for
vehicles is pegged at 28 per cent, the purchase taxes on cars in India
have been historically high and given the fiscal compulsions, the
government may not be in a position to reduce the taxation rates in the
current scenario.
"With regards to policies, what can possibly
help the sector is the introduction of the scrappage policy to ensure
removal of polluting vehicles on the road and its replacement by new
BS-VI models," Chowdhury told IANS.
According to Sridhar V,
Partner with Grant Thornton Bharat LLP: "Some of the policies like End
Of Life for vehicles they believe could trigger a fresh demand across
but more so in the truck segment. We have been hearing about some of
these being looked into by the government and believe, they should be in
place soon," he added.
Several other players in the auto
industry too have been seeking a cut in taxes including the Goods and
Services Tax (GST) to boost demand for the sector which was already
reeling under a slowdown well before the pandemic brought the market to a
standstill.
However, a cut in GST does not seem coming any time
soon for the auto sector as the Finance Ministry, according to sources
is of the view that current taxes on the sector were lower than pre-GST
times and the industry should rather look at reducing their costs by
cutting down the royalty payments to parent companies abroad instead of
asking the government to change the GST rates.
Automobile is
just one of the sectors feeling the heat of high Indian taxation.
Telecom has been the worst hit in terms of taxes, levies and
litigations. The much sensational retrospective tax issue of Vodafone
Group remains fresh in the public and corporate memory. The group has
been further hit in the adjusted gross revenue (AGR) matter.
According
to an assessment by the Department of Telecommunications, Vodafone
Idea, the merged entity owed a total of Rs 58,254 crore. As per the
government, the operator now owes balance AGR dues of around Rs 50,399
crore. As a result of the payment of levies and AGR dues, Vodafone Idea
has lost its entire net worth, according to its auditors, and they have
raised serious doubts over the company's ability to continue as a going
concern in the April-June quarterly earnings of the company.
In
November last year, Nick Read, the Vodafone Group CEO termed the
situation in India as 'critical' and warned that the company may shut
down its India operations. Although the company has reaffirmed its
commitment towards India post that and recently Vodafone Idea also
rebranded its telecom services as 'Vi' and is trying to make a
turnaround along with fundraising plans, the telco's financials still
remain very fragile.
"Vodafone case was a classic example in
which a global telecom giant has been battered left, right and centre
and saddled with huge tax dues and now the much talked about AGR dues,"
India Law Alliance's Batra said. Telecom players including Bharti
Airtel's Chairman Sunil Mittal have brought up the issue of high taxes
and spectrum prices on public platforms.
Another glaring case of
a foreign major facing a legal issue over retrospective taxation in the
country is that of Scottish oil firm Cairn Energy. Cairn Energy has
pinned its hopes on a favourable order from the arbitration panel over
its tax dispute in India where it has challenged the government for
seeking Rs 10,247 crore in retrospective taxes from the oil explorer.
Further,
in another hurdle, the country's most prolific Barmer oilfield operated
by billionaire Anil Agarwal-led Cairn Oil and Gas has been reduced to
operate on temporary permission from the government which has denied
full 10-year extension to the company's production sharing contract
claiming higher share of profit petroleum.
After prolonged
delays, the government had in October 2018 agreed to extend by 10 years
the contract for the Barmer field after the expiry of the initial
25-year contract period on May 14, 2020. This extension, however, was
conditional upon the company agreeing to increase the share of
government's profit (profit petroleum) from the oil and gas produced by
10 per cent.
"We have referred a few matters to arbitration that
we were not able to mutually resolve. We are hopeful to see some
positive outcomes; we are committed to produce in this block and
contribute significantly towards a self-reliant economy," a company
statement said.
What has irked the company is the government
changing the goalposts while committing on extensions. The latest being
the government claiming additional profit on petroleum after
re-allocating Rs 2,723 crore common cost between different fields in the
block and disallowing Rs 1,508 crore cost on a pipeline, sources privy
to the development said.
Similarly, US-based retail giant
Walmart's acquisition of Flipkart also faced issues after the Centre
changed the FDI norms for the e-commerce segment. Experts are of the
view that Indian laws should be in sync with the global laws and provide
the much needed ease of doing business. They also highlight that the
much-acclaimed Insolvency and Bankruptcy Code, 2016, has also not been
able to meet the expectations of foreign investors and private equity
funds owing to the tedious and complicated legal scenario in the
country.
Despite the regulatory and taxation issues faced in the
country, a major factor for MNCs and other foreign investors to hold on
to the Indian market continues to be the large market it provides. The
government still has to go a long way in terms of improving the business
environment despite its recent upgrade in the global ease of doing
business rankings.
"Given the favourable demographics and the
demand potential, India is still one of the most attractive markets for
MNCs. As an economy, we need to focus more on improving the
infrastructure quality and streamlining the bureaucratic processes to
expedite the potential foreign investments in the country," Chowdhury of
Acuite Ratings and Research said.
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