The Foreign Investment Promotion Board (FIPB) today cleared Swedish furniture giant IKEA’s proposal to invest Euro 1.5 billion (Rs 10,500 crore) in India, and recommended it to the Cabinet Committee on Economic Affairs (CCEA) for the final nod. FIPB took the decision at a meeting today, ahead of the scheduled date of January 24. This is the largest investment proposal in the single brand retail category so far.
The Euro 25-billion company has been allowed to set up furniture stores in India, along with the restaurants and cafes that it had proposed. It can also bring in all the product categories that it wants to. This is a departure from the FIPB decision of November 20, when a conditional nod was given to IKEA to invest in India, while more than 50 per cent of the product categories were struck off the list, including restaurants and cafes.
The world’s largest furniture chain had filed its application with the Department of Industrial Policy and Promotion (DIPP) on June 22, 2012, months after 100 per cent FDI was allowed in single brand retail in the country.
During the following months, IKEA resisted the government guidelines on 30 per cent mandatory sourcing from small and medium scale sector. Subsequently, single brand foreign retail chains were allowed, with the changed norm that 30 per cent sourcing must be from India, and preferably from small and medium sector.
Besides the range of product categories IKEA can sell in India, ‘treaty shopping’ also came up as a concern raised by the government.
Even as FIPB over-ruled the issue of ‘treaty shopping’ raised by the Department of Revenue (DoR) on November 20, the department raised the matter all over again.
Treaty shopping refers to the practice of structuring a multinational business in a particular manner so as to avail of favourable tax treaties in certain jurisdictions. India has double taxation avoidance agreements with several countries, including Netherlands; DoR’s concern stemmed from the fact that IKEA’s application was made through Ingka Holding Overseas, Netherlands.
IKEA’s application to FIPB stated the IKEA brand was owned by Inter IKEA Systems, Netherlands, a member of the Inter IKEA Group, sole owner and worldwide franchisor of the IKEA brand. All IKEA retail stores worldwide operate under franchise agreements with Inter IKEA Systems. To open retail stores in India, Inter IKEA Systems had granted exclusive franchise rights to Ingka Holding Overseas.
Although Commerce and Industry Minister Anand Sharma maintained that FIPB was set to clear the IKEA proposal at its next meeting, the finance ministry and the Department of Industrial Policy and Promotion (DIPP) have been engaged in a tussle over the company’s application. DIPP, under the Ministry of Commerce and Industry, is the administrative department for retail trading.