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Amid 'ease of business' claims, going remains tough for MNCs

The Modi government has left no stone unturned in inviting foreign investors with claims of an improved business environment backed by unprecedented reforms in the past six years, but what many industry players face is a different story altogether.

From high tax levies to retrospective applicability of taxation, companies including multinational corporations (MNC) face a number of obstacles in running and expanding their businesses in India, nonetheless they continue to operate in the country, given the large market it offers to them. There are a host of global giants including Vodafone Group, Cairn Energy and Walmart which had to face regulatory issues in the country.

Noting that for foreign investments to come in, it is essential that appropriate incentives, single window clearance among other incentives are provided, Sumit Batra, Partner at India Law Alliance, says that India has not been able to provide such comfort to foreign investors. "Issues such as retrospective applicability of tax laws, change in overall business sentiments, tedious compliances and an era ushered by ordinances, has made things difficult," Batra told IANS.

Several bigwigs have from time to time raised their concerns regarding the issues faced in the one of the largest consumer markets in the world, the latest being Shekar Viswanathan, Vice Chairman of Toyota Kirloskar Motor, the Indian unit of Toyota. In a recent interview Viswanathan said that Toyota Motor Corp will not expand further in India due to the high tax regime in the country, adding that apart from impacting expansion plans, high levies also impact demand and eventually halt job creation.

Later, in a statement, Toyota Kirloskar Motor said that it continues to be committed to the Indian market and operations here are an "ingteral part" of its global strategy. It, however, added: "In wake of the slowdown that has been exaggerated by the Covid-19 impact, the auto industry has been requesting the government for support to sustain the industry through a viable tax structure. We remain confident that the government will do everything possible to support industry and employment."

According to Suman Chowdhury, Chief Analytical Officer at Acuite Ratings and Research, while the GST applicable for vehicles is pegged at 28 per cent, the purchase taxes on cars in India have been historically high and given the fiscal compulsions, the government may not be in a position to reduce the taxation rates in the current scenario.

"With regards to policies, what can possibly help the sector is the introduction of the scrappage policy to ensure removal of polluting vehicles on the road and its replacement by new BS-VI models," Chowdhury told IANS.

According to Sridhar V, Partner with Grant Thornton Bharat LLP: "Some of the policies like End Of Life for vehicles they believe could trigger a fresh demand across but more so in the truck segment. We have been hearing about some of these being looked into by the government and believe, they should be in place soon," he added.

Several other players in the auto industry too have been seeking a cut in taxes including the Goods and Services Tax (GST) to boost demand for the sector which was already reeling under a slowdown well before the pandemic brought the market to a standstill.

However, a cut in GST does not seem coming any time soon for the auto sector as the Finance Ministry, according to sources is of the view that current taxes on the sector were lower than pre-GST times and the industry should rather look at reducing their costs by cutting down the royalty payments to parent companies abroad instead of asking the government to change the GST rates.

Automobile is just one of the sectors feeling the heat of high Indian taxation. Telecom has been the worst hit in terms of taxes, levies and litigations. The much sensational retrospective tax issue of Vodafone Group remains fresh in the public and corporate memory. The group has been further hit in the adjusted gross revenue (AGR) matter.

According to an assessment by the Department of Telecommunications, Vodafone Idea, the merged entity owed a total of Rs 58,254 crore. As per the government, the operator now owes balance AGR dues of around Rs 50,399 crore. As a result of the payment of levies and AGR dues, Vodafone Idea has lost its entire net worth, according to its auditors, and they have raised serious doubts over the company's ability to continue as a going concern in the April-June quarterly earnings of the company.

In November last year, Nick Read, the Vodafone Group CEO termed the situation in India as 'critical' and warned that the company may shut down its India operations. Although the company has reaffirmed its commitment towards India post that and recently Vodafone Idea also rebranded its telecom services as 'Vi' and is trying to make a turnaround along with fundraising plans, the telco's financials still remain very fragile.

"Vodafone case was a classic example in which a global telecom giant has been battered left, right and centre and saddled with huge tax dues and now the much talked about AGR dues," India Law Alliance's Batra said. Telecom players including Bharti Airtel's Chairman Sunil Mittal have brought up the issue of high taxes and spectrum prices on public platforms.

Another glaring case of a foreign major facing a legal issue over retrospective taxation in the country is that of Scottish oil firm Cairn Energy. Cairn Energy has pinned its hopes on a favourable order from the arbitration panel over its tax dispute in India where it has challenged the government for seeking Rs 10,247 crore in retrospective taxes from the oil explorer.

Further, in another hurdle, the country's most prolific Barmer oilfield operated by billionaire Anil Agarwal-led Cairn Oil and Gas has been reduced to operate on temporary permission from the government which has denied full 10-year extension to the company's production sharing contract claiming higher share of profit petroleum.

After prolonged delays, the government had in October 2018 agreed to extend by 10 years the contract for the Barmer field after the expiry of the initial 25-year contract period on May 14, 2020. This extension, however, was conditional upon the company agreeing to increase the share of government's profit (profit petroleum) from the oil and gas produced by 10 per cent.

"We have referred a few matters to arbitration that we were not able to mutually resolve. We are hopeful to see some positive outcomes; we are committed to produce in this block and contribute significantly towards a self-reliant economy," a company statement said.

What has irked the company is the government changing the goalposts while committing on extensions. The latest being the government claiming additional profit on petroleum after re-allocating Rs 2,723 crore common cost between different fields in the block and disallowing Rs 1,508 crore cost on a pipeline, sources privy to the development said.

Similarly, US-based retail giant Walmart's acquisition of Flipkart also faced issues after the Centre changed the FDI norms for the e-commerce segment. Experts are of the view that Indian laws should be in sync with the global laws and provide the much needed ease of doing business. They also highlight that the much-acclaimed Insolvency and Bankruptcy Code, 2016, has also not been able to meet the expectations of foreign investors and private equity funds owing to the tedious and complicated legal scenario in the country.

Despite the regulatory and taxation issues faced in the country, a major factor for MNCs and other foreign investors to hold on to the Indian market continues to be the large market it provides. The government still has to go a long way in terms of improving the business environment despite its recent upgrade in the global ease of doing business rankings.

"Given the favourable demographics and the demand potential, India is still one of the most attractive markets for MNCs. As an economy, we need to focus more on improving the infrastructure quality and streamlining the bureaucratic processes to expedite the potential foreign investments in the country," Chowdhury of Acuite Ratings and Research said..