India’s Finance Minister
will be assessed by international investors on policy changes to increase
foreign inflows, clarify tax laws and expand the country’s tax base, in his
presentation of the Union Budget shortly after the latest gross domestic
product (GDP) data is released today.
India's
current-account deficit (CAD) has worsened since 2008 due to slowing exports and expensive
oil and gold imports. It recorded a current account deficit of $22.3 billion in the third
quarter of 2012, or 5.3% of GDP, the worst in a decade. That
compares with less than 1% of GDP in the first half of the last decade.
“The Finance Minister has to steer the
country away from the danger of being the first BRIC country to lose investment
grade status via a credit downgrade,” said Bundeep Singh Rangar, Chairman of
London-based advisory firm IndusView. “He has a challenging task of revving a
growth engine, that sputtered under his predecessor, with the fuel of more foreign
capital and wider tax collections.”
“India’s
current tax base represents fewer than 35 million, or a dismal 3% of its
population,” said Rangar. “That contrasts the size of its middle class
estimated to be 250 million people that’s expected to reach 600 million by
2030.”
India’s CAD is being financed
through stable capital flows, according to India’s Harvard-educated Finance
Minister P. Chidambaram. In 2012, Foreign Institutional investments (FII) totaled
$10 billion and the country attracted $27.3 billion worth of Foreign Direct
investments (FDI). Both combined represent $37.3 billion, which isn’t enough to
feed the growing CAD.
On the other
hand, annual remittances into India that currently fuel the world’s largest
remittance-corridor, surpassed $70 billion in 2012, as NRIs took advantage of a
week rupee and high deposit interest rates at Indian banks.
“India’s secret weapon is its 25
million strong overseas diaspora who sent twice as much money into India in
2012 than FDI and FII combined and more than net earnings from exports of
software, business, financial and communication services,” said Rangar. “$70
billion in annual remittances by Non-Resident Indians (NRIs) provides India
with a distinct advantage over other BRIC economies.”
“Cutting
subsidies and privatizing public sector companies will only go so far,” said
Rangar. “The Budget should make it seamless for Non-Resident Indians (NRIs) to use
their remittances to invest in Indian company securities, mutual funds and
other investment products and foster an increase in annual remittances into
India.”
“India needs to
attract more inward investment and better collect tax to fund the $1 trillion
requirement outlined by the Prime Minister to build the country’s
infrastructure over the next five years,” said Rangar. “Better infrastructure
is critical to increase India’s GDP as it will shear waste and inefficiencies
in agricultural and industrial output.”
To attract
foreign investments, the government should best amend its controversial tax law
and not impose tax with retrospective effect on overseas deals involving
local assets. India has also said it may soon finalize the rules for a proposed
clampdown on tax avoidance as it considers delaying implementation of a plan
that also spooked foreign investors.
India is currently
aggressively pursuing tax claims against multinational firms and has targeted
several companies for tax audits on transfer pricing.
“The Indian
tax man’s potential treatment of low cost intellectual capital work allocated
by India to multinationals, as being a higher value service and therefore,
taxable at higher rates, will give reason to multinationals to seek other jurisdictions
where taxation is simpler and the cost advantages are as good, if not better
than India,” said Rangar. “The tax man should focus its efforts to widen the
tax base and therefore, increase revenue.”
India, currently
the world’s tenth-largest economy, is vying to be among the top five by 2022,
according to the London-based Centre for Economics and Business Research (CEBR).
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