India's Emerging Certainties: Death, Taxes–And Litigation
from
January/February 2007
by J.J.C.
Indian taxes on foreign businesses are way down from the 65% rate of 25 years ago, to about 42%. But that still leaves them above what is paid in other parts of the developing world—about 33% in China, for example. Moreover, India’s tax rules for foreign companies are among the most litigation-producing anywhere. Says Dinesh Kanabar, deputy managing partner of RSM, a leading Mumbai accounting firm, “Many of the U.S. multinationals I meet with [as prospective clients] tell me something like this: ‘India is a half percent of my global revenues and 20% of my time. I can’t afford that.’”
A big part of the problem is that what’s black and what’s white isn’t always clear in Indian tax law, which is why business is booming for firms like RSM. The potential snares often involve Indian tax rulings that fall outside international norms. A U.S. computer maker with production in India, for example, may face special Indian taxes on the software embedded in the computer. “The U.S. does not accept India’s stand on this,” Kanabar notes, “so it seeks to tax the profit from India without giving appropriate credit for the taxes paid in India.”
Indian tax authorities may also take an unexpected view of the profitability of your operations there. An Indian subsidiary, for example, may purchase product from its parent and ascribe a $10 price to it. Further down the line, when the product is resold, that cost basis will determine the profit and the tax. But Indian authorities may not agree with the $10 cost basis and may lower it, thereby raising the taxable profit. Sometimes a company finds itself in trouble because low-level tax bureaucrats make idiosyncratic rulings that turn everything upside down, even determinations previously reached by their superiors. All these cases are likely to end up in courts. While companies usually prevail over the tax collector, the litigation is time-consuming and expensive.
The tax laws aren’t just an obstacle, however—increasingly, they’re an incentive. Take infrastructure projects, a priority for the government because the lack of airports, roads, water, electricity, and the like deters potential foreign investors. Many infrastructure projects benefit from a 15-year tax holiday consisting of 10 full tax-free years and five partial. Not surprisingly, tax-stingy General Electric is all over India’s infrastructure development, supplying everything from turbines to jet engines to CT scanners. India has set up special economic zones too, which not only offer generous tax breaks in themselves but, since many are located in remote areas without sufficient infrastructure to sustain business, also provide further breaks to companies that will invest in the infrastructure the zones need.
Clearly, a company eyeing India needs to consider its tax approach before investing any serious money. The tax differences between a resident business, a partnership, and a branch, for example, can be huge. Says Kanabar: “A company’s tax can be anywhere from 24% to 42%. That’s the difference between handling it properly and not handling it properly.”
