For companies the need further evidence that the state can foster uncertainty in business, they need look no farther than Dell, which in a recent article said a potential tax rule in India is hampering investment. It’s also leading other companies to shut down operations in the region.
Amit Midha, Dell Computer’s president of Asia Pacific and Japan told India’s Economic Times that current policies are creating too much risk. “Policies like retroactive taxes…are a huge risk for us to make an investment. We just do not know how to assess our results and how to report our results globally,” Mr. Midha said, referring to India’s plan that would allow the Indian government to tax any overseas merger dating back to 1962 (see related story here).
That’s a significant statement for a company with 27,000 employees and operations in eight cities in India, making it Dell’s biggest employee base outside the United States.
And perhaps that uncertainty is beginning to be seen throughout the economy. India’s economy is growing at its slowest pace in nearly a decade, inflation remains high and the government is struggling to control fiscal and current account deficits. Over the past year, the rupee has weakened about 17 percent against the US dollar. And, as if that were not enough, power outages have further exacerbated the worsening business environment.
And Mr. Midha’s complaint on retroactive taxes has been a key concern for the investor community. In the federal budget in March this year, the Indian government introduced the general anti-avoidance rules (GAAR) targeting companies and investors routing investments through tax havens such as Mauritius (see related story here). The lack of clarity on implementation of the rules has left investors feeling less confident has set off a bit of panic among foreign investors: the flight of investors out of India in May forced the government to defer implementation of the guidelines until 2013, following which Prime Minister Manmohan Singh set up an expert panel to finalize the controversial GAAR.
The panel will present a second set of draft guidelines by the end of August and submit a final report, complete with a schedule for implementation, by end of September. Despite all the gloom and doom, there is still some hope for corrective action on GAAR. Finance Minister P Chidambaram recently said: “Clarity in tax laws, a stable tax regime, a non-adversarial tax administration, fair mechanism for dispute resolution and independent judiciary will provide great assurance to investors. We will take corrective measures wherever necessary.”
But let’s hope it’s not too late. The Economic Times also reported Germany’s Fraport, the world’s second-biggest airport operator, recently decided to shut down its development office in India, making it the latest in a growing list of companies exiting Asia’s third-largest economy.
“When a company is trying to leave India and that company is well respected, then clearly it suggests that there is something, this place is not easy to work,” Dell’s Mr. Midha said.