Economic Highlights

New Delhi, 20 April 2013

Whimsical Policies

GLOBAL INVESTORS SHUN INDIA

By Shivaji Sarkar

Inconsistent policies are hurting the image of the country. The investors feel India is an unstable destination, where laws particularly relating to taxes are changed at bureaucratic whims. If the country is serious about boosting the investment climate it has to have stable and sensitive system.

India has the capacity to draw billions of dollars but policies such as harassing foreign automobile players alleging “they evaded excise duty payment” is changing the global perception. It is true car manufacturers paid less excise duty than the tax men are demanding. But it is not the case that they realized more and paid less. They had reduced prices to below cost in order to sell slow-moving inventory. Many companies, including indigenous Mahindra and Mahindra are cutting down production of utility vehicles amidst recession.

So have all other car makers – Maruti Suzuki, General Motors, Honda Motor, for Motor and Daimler’s Mercedes Benz. To keep the sales going, some of them reduced prices and paid excise duty accordingly. It’s logical. But the tax men found this unacceptable and are now forcing them to pay the duty as per the “original price”. This is creating confusion among the manufacturers and creating a perception that the era of liberalization in India is over. Worse, the Government is behaving in a harsh manner.

The business class feels that it is a costly distraction for an embattled sector and is further likely to turn the sentiments against the country. The car makers were invited to create a global manufacturing hub. Many moved their production centres expecting this to be a cost-friendly economic destination. Together, they have increased exports to 29 lakh vehicles in 2012-13 from 8 lakh in 2005-06. Should they be penalized if they choose to adopt a market-friendly approach?

Importantly, the issue is not limited to them alone. In fact, it is creating confusion amongst all global investors. The tax officials’ approach is that the manufacturers can sell at whatever price they wish to but would need to pay excise duty on the normal price. They insist: “Why should the department be penalized? It’s your own choice”.

This is precisely where the irrationality is and car makers have a counter question: Why should we pay the excise, which we haven’t realized? Sadly, the excise department is behaving like the mahajans (money lenders) who seek to extract every pound of flesh. It may be good for their coffers once but definitely would kill the golden goose.

Of late, the FDI flow to the country has reduced for these reasons. Prime Minister Manmohan Singh’s visits to Germany and other nations to enthuse FDI are not succeeding. This is because global investors are keenly watching Government moves, not only restricted to the automobile sector.

Recall that in the Budget speech of 2012-13, the Government introduced changes in the Income Tax Act 1961 to allow imposition of taxes on foreign companies, which had purchased Indian entities, applicable to past transaction also. The controversial proposal empowered taxmen to scrutinize older corporate transactions such as the Hutch-Vodafone deal of 2007.

This along with the uncertainty over general anti-avoidance rule (GAAR), now put off for two years, has sparked fears among global and domestic investors, who say this would choke capital flow to India. Both the Prime Minister and Finance Minister Chidambaram must realize that mere invitation to investors is not enough. They need to be lured. However, they need not be given extra concessions but at least be assured of a humane administration, which would help them keep their investments safe and operations smooth.

Importantly, the unstable decisions are not affecting foreign investors alone. Even domestic ones have become circumspect. Take yet another instance. The Finnish mobile maker Nokia’s mobile Indian unit received a Rs 2,000 crore tax claim in March for the non-deduction at source paid as royalty to its parent company. The company has since moved courts, contesting the claims.

So is Shell India, the local unit of Royal Dutch Plc. It is at loggerheads with the tax authorities, who accused it of under-pricing an intra-group share transfer by $15,220 crore. Even the Italian Fiat was told to pay higher taxes on cars sold more than a decade ago! And, there may be many more such cases.

It must be kept in mind that a Government is run with political wisdom. The people have elected political leaders not to kowtow inhuman and insensitive rules prepared by the bureaucrats. They need to act differently.

If the functionaries sitting in the treasury benches are incapable of doing this, then it is the responsibility of the Opposition to fix it. Sadly, such wisdom is lacking here too. Recall there was not a demure against irrational decisions of the Railway Minster for raising ticket cancellation and other charges, when the Railways don’t spend a single paisa on many of these services.

Indeed, it’s a mystery why the Opposition allowed the decision to be passed without even a whiff of protest. The people would have been happy had it stalled such irrational and whimsical decisions. Perhaps, there is one reason for inaction: Neither the Opposition nor the ruling members pay a paisa for booking their tickets. How then can the common man’s woes hit them?

These are only some of the demonstrative functions of the leaders, across the party spectrum. There are many other issues, which are passed in Parliament without even a semblance of a discussion, much less a debate.

The foreign visits of dignitaries with invitation to invest, does not bring in FDI. It is a process of luring and showcasing the country. With such dismal set of rules, the country has little to showcase. The message transmitted is different. India lives in two eras – socialist, when it comes to realizing taxes and liberalised when it is benefitting some near and dear one.

The industry has to pay the tax but for that they have to survive, earn and boost the sentiments. If this is not happening, it is definitely because of the Government. Inflation is sponsored by it. Every activity or charges are being raised irrationally and illogically. This creates uncertainty at every level. One now has to pay more taxes for flying by air than the actual fare. For cancelling a railway ticket, one loses almost 40 per cent. The Government simply couldn’t care less.

An overspending Government feels obliged to take the harsh path for extracting more and more. This would not solve the problems. Worse, while it seeks to extract more from companies, it is going on increasing expenditure on its bureaucracy, which twists rules for its benefits, many of which even the corporate wouldn’t dream of. New cars, suitcases, expensive entertainment et al.   

Let there be an open debate. India has the potential of being a global leader, but whims and fancies of decisions have prevented it. It is time to create a humane, rational and low tax regime, if the country has to survive. It can become a global production hub with simplified rules and procedure. Sooner the better.---INFA

(Copyright, India News and Feature Alliance)