As India’s trade gap continues to widen its government has proposed cutting imports on consumer electronic products and other technology. This legislation could require anywhere between 30% to 100% of specific product markets to go to India based manufacturers.
If this rule were passed, many major foreign producers would scramble to quickly establish manufacturing plants in India to tap into the rapid growing market. India’s technology and electronic markets are projected to grow from $45 billion to $400 billion by 2020.
Corporations have expressed that investment in infrastructure and energy should be provided by the government to support increased domestic manufacturing. Another point raised was that a tax holiday should also be granted.
However, India’s current position on taxing foreign companies doesn’t seem to pave a path for a tax holiday. Tax officials have recently raided Nokia’s facility in Chennai, India with no reason provided by authorities, although it is safe to assume it is related to tax allocation between India and Finland.
In other news, Vodafone Group PLC also received a notice that it owed over $2 billion in taxes on its 2007 controlling purchase of Hutchinson Whampoa Ltd. This comes a year after the Indian government amended a law allowing retroactive taxation of deals involving foreign companies’ takeovers.
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Companies that will be most exposed to this legislation change include Cisco Systems (CSCO), Dell (DELL), and IBM (IBM). Although India offers attractive growth potential, building plants will increase expenses in the short term. We also shouldn’t forget all the red-tape that will go along with these investments and inefficiencies that will arise from India’s lack of infrastructure. India’s aggressive stance on taxing foreign companies will also cause lots of headaches. U.S. companies looking to do business in India may have to walk along a very thin rope to capitalize on the increased demand in the region.
Written by Kapitall’s Nick Sousa