MCCI moots lower tax rates to boost FDI

India should look for opportunities triggered by the U.S.-China trade imbroglio

The Centre must quickly come out with appropriate tax incentives to attract fresh foreign direct investment (FDI) to cash in on the opportunities arising out of the the imminent re-alignment in the global manufacturing supply chain in the wake of an escalating trade war between the U.S. and China.

Top officials of Madras Chamber of Commerce and Industry (MMCI) said the fast-emerging developments in global geopolitical and economic situation warranted the government to be nimble-footed if India is not to lose out on the U.S.-China imbroglio-triggered business opportunities.

“Since this is a limited opportunity for India, we should look at favourable tax rates specifically for large, fresh projects that involve a minimum threshold investment with sizeable employment generation possibilities,” said Ramkumar Ramamoorthy, president, MCCI.

“The global supply chain that came primarily to China is now getting realigned. Risk management is now being discussed even on the boards of global companies,” said Srivats Ram, vice-president, MCCI, who is also the managing director of Wheels India Ltd. Where does it go from China? It largely will depend on the relative competitiveness of other countries. “ But they are clearly looking at other investment options, including India,” he said.

“We looked at various factors of production that could influence this decision. While India has an advantage in terms of skill availability and scale, one of the challenges we have from an investment view point is that the income tax is significantly higher in India by at least 10 percentage points compared to other competing countries,” Mr. Ramamoorthy, said.

“Income tax rate is one of the things that determine how much a company that invests as FDI takes back as RoI (return on investment). There is a disparity in the tax structure. Since this is a limited opportunity for India, we should look at favourable tax rates, specifically for large fresh projects,” Mr. Ram said.

“One of the major issues in the country is capital formation. While the government has done a fairly good job in relation to public investment, there is a certain lag in terms of private investments. We believe that we need to incentivise fresh, private investment. Our view is that we should leverage this time-bound opportunity arising out of the move out of China and create a favourable window for investment,” Mr. Ram added.

“A differential income tax rate on new investments is an affordable and considerable carrot for global companies looking at India as this will reduce the entry barrier and give India a fighting chance to leverage the realignment opportunity which will create and drive growth and jobs,” he said.

Mr. Ramamoorthy also pointed to the travails of units in SEZ (special economic zones). “Currently, companies manufacturing goods from a SEZ are not able to sell in the DTA (domestic tariff area) as it is deemed as import and there is a customs duty that is slapped on it. The duty structure makes them uncompetitive to sell in DTA. If you are able to open sales to DTA, it will increase job creation, reduce import substitution, improve manufacturing and thereby make them competitive. It is an ironical situation where benefits are made available to imports from countries with which we have FTAs (free trade agreements) but not to the domestic manufacturers,” he added.

“From an IT sector point of view, companies operating out of SEZ and servicing Indian clients can only bill in dollars and not in rupees. If you really want more Indian companies to benefit from technology transfer, especially in digital context, then they have to be allowed to start billing in rupees. Currently, in the SEZ, one cannot sub-lease even a small area to co-locate with technology partners or customers and help co-innovate. This is very restrictive in the current scenario. We really need to look at the way SEZs are structured in the current context and with the new digital wave. We need to be lot more flexible to make job creation possible,” Mr. Ramkumar said.

Both underscored the need for long-term funding institutions. Such institutions are indeed an integral part of capital formation, Mr. Ram said.

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