Dear Prime Minister,
The world is lauding India for its exceptional success story. At 7% growth, India is the fastest growing large economy and inspires investors’ interest in its credible future growth story. It has consistently focused on reforms for attracting investments. Its immense market potential, favourable demographic profile, skilled workforce, continued focus on infrastructure and capex and political stability make this country an attractive destination for MNCs. India’s gross FDI to GDP ratio was about 2% for FY2023. With continued focus on right policies, India may have further room to achieve a higher ratio FDI/GDP ratio.
As the finance minister prepares to present the Interim Budget, we MNCs compliment the Government for its determined on allowing for greater private and foreign participation and improving ease of doing business. We also take the opportunity to highlight a few areas where India needs to step up its game and bring non-legislative reforms at this juncture.
Expedite contract enforcement
There is an urgent need to provide an expeditious process for enforcement of contracts to save time and costs for businesses. The Economic Survey for 2020-21 noted that enforcing a contract in India takes on average 1,445 days compared to 403 days in Indonesia, 496 days in China and 801 days in Brazil. Judicial reforms targeting the quality, speed, and access are urgently required to address the problem of delayed contract enforcement. Appointing more judges/ tribunal members – just as recently done in the case of National Company Law Tribunal – would be helpful for speedier disposal of cases. Similarly, at the state level, setting up more commercial courts can ease the burden on the current ones. India could also accelerate arbitration and mediation mechanisms both in commercial and taxation laws. Globally it is recognised that arbitration and reconciliation is the best way to settle disputes rather than going to the judicial system.
Incentivise investments
The last few budgets brought in several measures to attract long term foreign investments, particularly Sovereign Wealth Funds (SWF). These funds have responded in full measure, investing over INR4 trillion as on December 2023. The tax exemption to SWFs is subject to the condition that investments are made before 31 March 2024 and held for a period of three years. Considering the positive response from this category of investors, the timeline may be extended for two more years after 31 March 2024.The decision to provide exemption from angel tax to investments from the 21 notified jurisdictions in certain categories of investors like banks and insurance companies, has been a welcome step and would encourage foreign investment from these jurisdictions. However, countries such as Netherlands, Singapore, Mauritius and Luxembourg, from which major FDI flows into India, remain excluded. We feel that there is a case for providing exemption from the angel tax provisions to ‘strategic’ FDI into Indian companies from any jurisdiction, other than those identified by Financial Action Task Force (FATF) for increased monitoring. Greater flexibility in valuation should also be provided.
Plug and play facility
In the current dynamic economic environment, speed of implementation is pivotal for businesses seeking to set-up manufacturing in India. They want to get underway as soon as they get the necessary investment approvals. Therefore, any announcements towards an innovative “plug and play model” for commencing manufacturing or expansion would be welcome, especially for global corporations with limited history of operating in India. Going beyond the single window clearance framework, this model would entail factors like availability of built-up industrial sheds, access to logistics infrastructure, timely environmental and other regulatory approvals and access to skilled manpower.
Continue focus on tax certainty
Tax certainty is crucial for investors. We truly appreciate that the government has been constructively engaging with stakeholders on policy changes and understanding their concerns. In keeping with this approach, and in line with the global practice, we trust that the draft rules for implementation of BEPS Pillar Two would be shared with stakeholders with sufficient time provided to businesses to prepare for the reporting requirements.
Several initiatives have been taken to reduce the high level of litigation. 516 Advance Price Agreements (APA) were signed as on 31 March 2023, which is no small achievement. Keeping up this momentum and to further reduce the pendency of over 800 APA cases, we request that measures may be taken towards capacity building of APA teams. Combined with the success of APAs, the absence of options for controversy and dispute prevention is driving MNCs to the APAs route for tax certainty. If the safe harbour rules are rationalised to make them more attractive for taxpayers, it can reduce burden on APAs. The safe harbour rules must cover additional sectors/ transactions to ensure maximum coverage.
We trust that the structural GST reforms will be undertaken in due course. In the meanwhile, considering the sharp increase in GST litigation, government should actionize the setting up of GST appellate tribunals at the earliest and in a stipulated time frame. This will ease the burden on the judiciary and ensure faster and economic resolution of GST issues. Setting up a National Appellate Authority of Advance Ruling to settle the confusion arising from divergent rulings given by state AAARs would go a long way in providing certainty to taxpayers.
Maintain policy stability
Large scale investments require long term stable policies with respect to trade, incentives for manufacturing and regulatory standards. Frequent policy changes/ pronouncements, that take businesses by surprise, put their investments at risk. Automobile industry is an example, where corporations were impacted from either a surprise policy announcement such as timeline for implementation of new emission standards or in cases where the stated regulatory action was postponed just before it was to come into effect. We recognise that government is committed to providing stability in policies, and we trust this approach will be followed, going forward.
Finally…
The long-term growth prospects, large domestic market together with an easy and competitive business environment, can make India an unbeatable proposition for global companies. India is assuming a larger role in global supply chains and is actively inviting investments to shore up domestic capability in strategic sectors like semi-conductors, IT and telecom equipment, defence manufacturing and medical equipment to name a few. MNCs can be significant partners in India’s next phase of growth, by supplementing the investments from domestic capital and entrepreneurship.
Given that the global FDI pie has been shrinking due to economic and geo-political factors, with several countries competing with India to attract FDI, we hope that the interim budget would give a strong positive signal to global corporations by addressing the highlighted issues and signalling a level playing field between domestic and foreign capital.
Yours truly,
Rajnish Gupta, Partner & Director,
Tax and Economic Policy Group, EY India
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
BUDGET FAQs
1. How can the interim budget contribute to attracting more foreign investments to India?
The interim budget can play a crucial role in attracting foreign investments by focusing on measures to improve the ease of doing business.
2. What specific tax measures are suggested by MNCs to enhance the stability of global supply chains in India?
While the government has made progress in tax administration, there is a need for greater tax certainty, particularly in areas like transfer pricing.
3. When will Nirmala Sitharaman present the interim budget?
The Finance Minister will present the interim budget on February 1, 2024
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
