India must pull all stops to attract foreign direct investment (FDI) and make itself more attractive to overseas investors through tax certainty and stability in matters like Advance Pricing Agreement (APA), the Economic Survey said.
The APA enables taxpayers operating in multiple countries certainty of taxation. It is an agreement between a taxpayer and tax authority and lays down the pricing method that the taxpayer will apply to its related-company transactions.
APAs minimise tax-related disputes and enhance transparency in the taxation regime, which can in turn attract FDI in India, Rudra Kumar, partner, Shardul Amarchand Mangaldas & Co, said.
“There is room to improve tax certainty and tax stability in matters such as APAs,” the Survey stated.
There has been an upsurge in the APAs, particularly during 2023-24 wherein the Central Board of Direct Taxes (CBDT) entered into a record 125 APAs – marking the highest ever signings in any financial year since their introduction. Further, 2023-24 also recorded the highest number of bilateral APAs (39) – which were signed as a consequence of entering into bilateral agreements with India’s treaty partners Australia, Canada, Denmark, Japan, Singapore, the UK and the US.
The bilateral APA involves the taxpayer, associated enterprise (AE) of the taxpayer in the foreign country, tax authority of the country where the taxpayer is located, and the foreign tax authority.
“The Indian government should therefore focus on expanding the bilateral APAs with more countries which will help in attracting more FDI from these countries,” Kumar added.
Most sectors in the country are open for foreign investors under the automatic route and the large amount of repatriations of investments in the recent years also suggest that it is easy to transfer the returns on investment made in India, which reinforces the attractiveness of the country, but it still needs large investment and reasonably large FDI should supplement domestic savings, the Survey added.
It, however, pointed to the large amounts of FDI taken out of India by investors in recent years and said ‘the country has to pay heed to the numbers’.
The repatriation in April-November this financial year has been $39.6 billion and at this rate will cross last year’s figure of $44.5 billion, the Survey pointed out. In 2022-23, the repatriation of FDI was $29.3 billion. The reparations and overseas investments by Indians has brought down net FDI to $0.48 billion in April-November despite the gross FDI of $55.6 billion. In April-November of 2023, the net FDI was $8.5 billion.
All statutory and regulatory authorities must bear in mind that international investors benchmark countries cross-sectionally and not longitudinally. That will determine the success of the government’s goal to make global companies produce in India for the world, making India a part of the global supply chain.
“The second option is to make the available and existing investments deliver more. If the investment rate cannot be increased because of capital constraints, then investment efficiency has to go up. That is where deregulation and ‘Ease of Doing Business’ come into play,” the Survey added.