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India’s economic resurgence

India’s economic resurgence
The United Nations Conference on Trade and Development (UNCTAD) has lauded India for leading regional foreign direct investment (FDI) as inflows to South Asia was up by 16 per cent to $41 billion in 2014, the year in which the policy paralysis of the Indian economy got broken with the inauguration of the new government in May 2014 under the National Democratic Alliance (NDA) government headed by Narendra Modi as the prime minister. 

UNCTAD, which tracks global investment flows over the years, has exuded confidence that FDI inflows to India are likely to maintain an uptrend this year as <g data-gr-id="73">economic</g> recovery gains ground. What is more significant is that in terms of the sectoral composition of FDI inflows, manufacturing is likely to gain grit and strength, as policy efforts to revitalise the industrial sector are sustained, including, for instance, the “Make in India” initiative launched in mid-2014 amid fanfare and great expectations to rev up the manufacturing sector of the domestic economy.

Even as India’s FDI inflows surged by a hefty 22 <g data-gr-id="53">per cent</g> to about $34 billion last year out of the $41 billion the South Asian region was able to attract, India’s outbound investment saw a five-fold jump to $10 billion in 2014, recovering from a sharp dip in 2013. UNCTAD ascribes the outbound investment flows from India to the improved performance of the Indian economy. It further said large Indian multinational enterprises (MNEs) have stopped large-scale divestments with some having reverted to their international expansion plans that were earlier interrupted for various reasons. So the net effect of enticing international investment for an emerging economy like India is that if it was able to attract $34 billion by way of FDI in 2014, Indian entrepreneurs also invested a massive $10 billion 
outside India as going elsewhere proved appetising enough to take risks for getting rewarding results.

But the fact remains that the multinational enterprises (MNEs), located in the rich world by far, remain the darlings of the investment-seekers everywhere. MNEs on their part pour their money not on any munificent grounds but only bet on those who do not inflict any difficulty with excessive taxes or who unwittingly ensure conditions for profit-shifting that might even erode the taxation base of the host countries! This is a truth widely acknowledged and renowned western institutions like the Paris-based club of rich nations, the Organisation for Economic Cooperation and Development and G-20 members of both advanced and emerging economies of the post-2008 global financial crisis had been persistently drawing attention to ending this baleful practice but in vain. Even as established habits of MNEs die hard as they sedulously scout for another place if the ones where their business becomes hard to make do, no worthwhile effort has so far been made for evolving international tax and investment policy coherence, according to the UNCTAD. This coherence and clarity must be needed for the benefit of all stakeholders of the global economy so that risks and rewards are duly balanced with no single entity – either an MNE or an offshore tax haven or a country which routes these investments from its sovereign space – emerges as the sole beneficiary.

It is in this context that the UNCTAD has come out with substantive recommendations for instituting such a global tax and investment policy coherence through its annual flagship publication World Investment Report (WIR), 2015.Secretary-General, UNCTAD, Mukhisa Kituyi aptly noted that “the policy imperative is to take action against tax avoidance to support mobilisation of domestic resources and continue to facilitate productive investment for sustainable development”. The overt allusion is to MNEs like Amazon, Apple, Google, Starbucks and other tech-savvy companies, which do not pay tax proportionate to the income they derive from the jurisdictions, in which they do their business, to the dismay of the host countries! India’s efforts to wrest tax from foreign institutional investors (FIIs) by serving them tax notice on unpaid minimum alternate tax (MAT) and other retrospective taxation instituted by the UPA government but still being continued by the NDA government on the pretext that they are legacy issues to be resolved by legal means before they are removed once for all, stem from the premise that MNEs resort to base erosion and profit-shifting (BEPS) to escape tax burdens from the host countries.

Pointing out that these issues could be addressed through “synergistic” policies in light of financing needs for the 2016-2030 sustainable development goals (SDGs) to be set by the United Nations in September; UNCTAD presents a set of guidelines to promote greater coherence between global tax and investment policies. It highlights the reality when it estimates the contribution by foreign affiliates of MNEs to government budgets in developing countries at approximately $730 billion annually, representing on average some 23 <g data-gr-id="69">per cent</g> of total corporate contributions and 10 <g data-gr-id="70">per cent</g> of total government revenues. While the relative size and composition of this contribution differs by country and region, it is higher in developing countries than in developed ones, reflecting “the exposure “and reliance of developing countries on corporate contributions! Rightly, does the UNCTAD note that an investment perspective on tax avoidance put the spotlight on the role of offshore investment hubs (tax havens and special purpose entities in other countries) as major players in global investment domain? Some 30 per cent of <g data-gr-id="62">cross-border</g> investment is routed through offshore hubs before reaching its destination as productive assets.

UNCTAD argued that while tax avoidance by MNEs are a global problem relevant to all countries because investments from offshore hubs are made in developing and developed(emerging) economies alike, profit-shifting out of developing nations can have a marked negative impact on their prospects for sustainable development with loss of tax revenues. Tax revenue losses for developing countries related to inward investment stocks that are directly linked to offshore hubs total an estimated $100 billion a year. There is a clear link between the share of offshore-hub investment in host countries’ inward FDI stock and the reported (taxable) rate of return on FDI. The more investment is routed through offshore hubs, the less taxable profits accrue. India’s participatory notes (PN) through Mauritius tax haven route has been a notorious instance of how the country lost in crores of rupees in tax revenue that should have been gleaned to ensure sustainable development down the years.

Key objectives of set of guidelines for coherent global tax and investment policies include, among others, removing aggressive tax planning opportunities as investment promotion levers; considering the potential impact on investment of anti-avoidance measures; taking a partnership approach in recognition of shared responsibilities between host, home and conduit countries; managing the interaction between international investment and tax treaties and bolstering the role of both investment and fiscal revenues in sustainable development as well as the capabilities of developing countries to address tax avoidance issues.

These are doable recommendations, provided the will to coordinate policies is found among the statesmen of the G-20, who gather once a year to discuss financial stability issues at the highest level in their bid to ensure smooth running of the world economy.IPA
G Srinivasan

G Srinivasan

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