CHALLENGES TO FOREIGN DIRECT INVESTMENT IN INDIA – BY Dr. BOBBY SRINIVASAN AND Dr. SUDHAKAR BALACHANDRAN

September 18, 2014 | Posted by bobbysrinivasan << back to blog

The new Modi government is committed to improving the foreign direct investments in India, particularly in the areas of defense, insurance and infrastructure. The companies which are considering in investing in India will look at several parameters. Some of them are discussed here.

Ease of doing business in India. This is probably one of the biggest stumbling blocks India faces in attracting FDI. The bureaucracy, corruption, labour and land acquisition laws are frighteningly complicated and slows down the entire process of setting up a business. A country which is anxious to attract business should look to see how other countries are managing these issues and what steps they have taken to make it attractive for the foreign companies to set up their shops.
Taxation that is applicable to the corporate profits. The global tax landscape has seen considerable changes in the recent past and this will continue to be the same in the near term. In the context of India, the total amount of revenues collected thru the various taxes and duties falls extremely short of the requirements. For ex., in the last budget presented by FM Jaitley which states that for every 100rs our government spends, Rs.24 is borrowed money. This is already extremely high, so our government is not in a position to lower the corporate taxes as the revenue collected will make the deficit even higher. Each country uses a particular tax rate which depends upon a number of factors including the historical baggage it carries. In the current state of the economy large amounts of money is required for socio-economic development and subsidies, etc. Currently, our Indian corporate tax for a domestic companies stands at 33.99% when the net income exceed 10 crores. We are presenting a table of corporate tax rates for other countries for comparison.

Name of the country	Tax rate
France	33%
Belgium	33.99%
Venezuela	34%
Argentina	35%
Zambia	35%
Japan	35.64%
US	40%
Brazil	34%
South Africa	28%
Hong Kong	16.5%
Singapore	17%
Australia	30%
Philippines	30%
China	25%
Malayasia	25%
Indonesia	25%
UK	21%
Canada	26.5%
Germany	29.58%
Italy	35.4%
Switzerland	17.92%
Taiwan	17%
Kuwait	15%
Ireland	12.5%
Bulgaria	10%
Qatar	10%

From this table, you can observe that India has one of the highest corporate tax rates.

Besides the taxes, corruption adds up significantly to the cost of doing business. It will not be far-fetched to say that 1-2% surrogate has been added due to corruption.
In the last few years, the land prices have shot through the roof. One estimate shows that the production costs in India is very much affected because of the land prices. The BJP government should ponder over this problem before they arrive at a reasonable tax rate for multinational companies. Things such as education cess and surcharge should be totally removed to lower the tax rate. Unfortunately for India the tax collected from individuals is limited since less than 3% of the population pay income tax at all. India continues to be a welfare state and most of the costs associated with welfare are borne through deficits. The budget deficit in India is a nightmare and the accumulated deficits (debt) are around 77% of the GDP.

When you want to attract foreign capital, we should make it attractive for them to earn an reasonable rate of return from their investments. If taxes take away bulk of their earnings, then the amount they can distribute to the share-holders gets much smaller. The foreign investment also faces currency value changes and this makes it even more difficult for foreign companies to set up shops in India. While in India, we clammer for FDI, we also find that we are being marginalized because of the not-so-friendly nature of doing business here. Its time our government recognizes this and takes necessary steps to attract more and more FDIs. Every year, nearly 1 crore people join in the job market and hoping to find something useful to do with their lives. If the business climate is not favourable to foreign companies, they have alternative places to go, which is only at the cost of India’s growth opportunities. Finally, the investors, no matter where they live in the world, will always prefer a higher rate of return for a given level of risk, the question to answer is whether India can deliver that.

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