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`Revenue effect of FDI must be assessed'
November, 15th 2006
FDI costs may be in the form of revenue lost due to tax sops

Taxing issues
FDI flows have led to revenue erosion in Germany
Tax exemption sought for cos with overseas arms
`India should offer credit for taxes paid abroad'

The Tax Department has to ensure that it obtains a "fair share" of the returns that are generated from foreign direct investments (FDI) in the country without being overbearing in the process, according to a top Finance Ministry official.

Stating that the revenue effects of FDI could be substantial and negative, Dr Parthasarathi Shome, Advisor to the Finance Minister, told a FICCI-organised international tax conference that a cost-benefit assessment of FDI should be helpful.

He said that FDI yields a stream of benefits and also has certain costs. While the benefits may include host country tax revenue from increased capital stock and increased employment, the costs may be in the form of revenue foregone from tax incentives.

He highlighted that studies have revealed that FDI flows have led to revenue erosion in Germany and Italy (to the extent of one per cent of GDP per annum).

A similar approach (getting a fair share of returns without being overbearing) was suggested even in respect of domestic corporates that are on an acquisition spree abroad.

Dr Shome said that globalisation has led to increased opportunities for cross-border investment.

This has also implied unilateral scaling back of corporate tax rates across the globalised world, he added.

While Dr Shome was keen that the Revenue Department gets a "fair share" of the returns generated from acquisitions abroad by domestic companies, India Inc had other ideas.

The FICCI President, Mr Saroj K. Poddar, said that Indian companies that have established subsidiaries outside India must be encouraged to repatriate their earnings into India.

He said that receipt of dividends and capital gains should be exempted from tax or at least taxed on a concessional basis in India.

"These companies do not bring into India their dividends (from foreign subsidiaries) or capital gains, as they are taxable in the hands of Indian holding companies at normal rates."

Tax experts said that India should offer credit for taxes paid abroad, so that domestic companies are able to competitively bid for overseas acquisitions.

"Because of the absence of underlying foreign tax credit, net cash flow to Indian companies from their acquisitions abroad would get reduced. Their competitive bids would, therefore, become expensive. If underlying foreign tax credit is given, it will make Indian bids competitive," Mr Rahul Garg, Executive Director of PricewaterhouseCoopers, told Business Line.

Mr Garg said that the foreign subsidiaries of Indian companies pay taxes in the host country and their dividends to Indian parent companies are again subjected to tax in India. This, he said, reduces the net cash flow to domestic Indian companies.

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