T N Ninan: Failing the smell test

Such is the general preoccupation with domestic issues, economic and political, that even business people are mostly unaware of how much the rest of the world's (especially American) perceptions of India have changed in the last couple of years - in particular, its loss of attractiveness as a place for doing business. This is not because of one or other isolated issue; rather, it is a range of issues that have come to sour the international business mood - from policies that mandate local sourcing to massive tax disputes, from the violation of intellectual property rights to poor quality regulation, and from delayed and/or arbitrary government decision making to (yes) widespread corruption.

Each time an issue has erupted, India has scrambled to address it, but usually not fully. It has modified and limited some (not all) local sourcing requirements, and it has pushed back some contentious tax changes or simply dropped them. On other issues (as with the compulsory licensing of drugs, ignoring the patent holder), it has argued that it is within its rights, in this case under the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). While that is true, the fact is that India has begun to fail the smell test at just the time when its plunging growth rates have made it a less attractive market. As the finance minister said not long ago, many of the complaints would disappear if India could show eight per cent economic growth (which is one reason why you don't hear loud complaints about China's many infractions). The unhappy fact, though, is that eight per cent is not on our horizon, so the complaints have got more vociferous. Indeed, they were aired on Thursday at a special hearing mandated by the US Congress (the third in a year!), where the once overwhelmingly pro-India mood began to moderate after the perceived failure to pass domestic liability legislation that would facilitate US companies getting orders for nuclear power equipment. If India does not heed the warning signs, some real damage could be done.

What has caused more heartburn than anything else are the tax disputes. A recent report said that tax disputes over transfer pricing in India accounted for a massive 70 per cent of the global total, by number of cases, with the tax demands under this category totalling a staggering Rs 70,000 crore for just one year (2012-13). In comparison, the report by the Indian Council for Research on International Economic Relations said, the US had only six pending cases, while places like Germany and Singapore had none. The companies India has targeted have marquee names that resonate around the world - IBM and Nokia, Vodafone and Shell. It is no one's case that international businesses don't play clever tax games, but Indian tax officials have acquired a reputation for the most aggressive interpretation of the rules, a hostile attitude to the taxpayer (sounds familiar, doesn't it?), and the lengthiest dispute settlement procedures anywhere.

The irony is that, often enough, India has a case to make, or an equally valid counter-complaint; but ham-handed overreach gives the other side the opportunity to demonise Indian actions, and put the country on the defensive. For instance, the same US tech companies that complain about India's rules on local content have lobbied in Washington to impose visa rules that put Indian software companies at a disadvantage - ie protectionism through immigration rules. Also, Indian companies with operations in the US pay about a billion dollars each year as social security benefits to employees who do not stay in the US long enough to enjoy any social security. The US has done "totalisation" agreements with other countries to take care of the issue, but won't do it with India. As things stand, though, such issues are on the back burner, while the heat is turned on India.