Government may raise taxes on direct invetment flows

The government plans to raise taxes from cross-border direct investment flows, advisor to finance minister Parthasarathi Shome indicated here on Tuesday.

Such a move means there could be an added cost to not just pure foreign direct investment (FDI), but, technically, also to mergers & acquisitions - both outbound and inbound.

The thinking in North Block is that a cost-benefit assessment weighing the effects of FDI needs to be carried out. This is because FDI yields a stream of benefits such as host country tax revenue from increased capital stock and increased employment, while at the same time it has a stream of costs such as revenue foregone from tax incentives.

As competition among countries for attracting foreign direct investment (FDI) hots up and Indian corporates go global in their acquisition spree, the government is faced with the task of ensuring that a fair share of revenue comes to the exchequer without overburdening the taxpayer, Shome told a Ficci conference on “Globalising economies: challenges to tax system”.

Shome said globalisation has led to increased opportunities for cross-border investments. This has implied unilateral scaling back of corporate rates across globalised world.

“Ultimately, we have to look at whether we are able to expand the tax base and the government is continuing its effort to expand the base,” he said.

Jeffrey Owens, the director of the OECD Centre on Tax Policy & Administration, said a major challenge before Indian corporate would be to see how Indian multinationals overseas are taxed.

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