Though FDI inflow has been on the rise in the past three years, it is mostly on account of services
The decks have been cleared for the roll-out of the goods and services tax (GST), but experts feel the reform measure is unlikely to result in an immediate increase in foreign direct investment (FDI).
Shankar Khasnis, chief operating officer of the Bengaluru-headquartered Feedback Business Consulting Services, said the GST was merely a beginning.
“This is not the ideal GST. It was, however, needed from a tax reforms perspective and the government has made a beginning with this slightly diluted version. One should not expect big-bang FDI inflow with this. It will, however, send a strong message regarding a transparent and predictable tax ecosystem that is developing in India.
The catalytic impact will be felt in the next two-three years. To comprehensively draw FDI into manufacturing, current policies on land acquisition and environment clearances need examination,” Khasnis said.
Though FDI inflow has been on the rise in the past three years, it is mostly on account of services. The increased FDI also does not mean creation of more jobs.
“Manufacturing requires infrastructural incubation. The laundry list of problems starts from land acquisition, which is a huge challenge,” Khasnis said. Manufacturing, which creates jobs, is largely suffering in the country because of lack of infrastructure and complex labour laws.
Foreign companies, however, may pump in more money to expand their footprint in the country by setting up more warehouses, launching new products and expanding their existing capacities.
The GST is expected to felicitate both domestic and global investors by eliminating many indirect taxes such as central excise, central sales tax, additional customs duty, special additional customs duty, service tax, central surcharges and cesses.
The state taxes such as value-added tax, octroi, entry tax, purchase tax, luxury tax, entertainment tax, and state cesses and surcharges will also be subsumed in the GST.
Companies will also benefit from less bureaucratic hurdles, automation of compliance procedures, reduction of tax, interstate movement, and increased competition among states to attract investment as the GST will create a level playing field.
Investors’ worries about uncertainty surrounding various state taxes will be over because of a uniform tax rate across the country. The maximum benefit is expected in sectors such as FMCG, pharmaceuticals, consumer durables, automobiles and engineering goods.
The government is expecting to gain from a possible increase in tax collection and improve its ranking in ease of doing business.
Photograph: Rupak De Choudhuri/Reuters