“Opaque corporate tax practices still are a barrier to too many companies that want to be here… Every CEO is saying: ‘Tell me about India.’ They want to invest,” said US Ambassador Eric Garcetti at a seminar organized by the Indo-American Chamber of Commerce on strengthening the Indo-US relationship on January 30, 2024, in New Delhi.

Garcetti also highlighted a telling anecdote about a US shoe manufacturing firm bypassing India in favor of Vietnam for its production needs, citing Vietnam’s more conducive business environment. This story underscored the challenges India faces in attracting foreign direct investment (FDI) and highlighted the need for reform.

India has been hailed as the “America of South Asia.” As Garcetti pointed out, there is immense potential for economic collaboration between the two nations.

Garcetti emphasized the importance of reforming export policies and export controls as key steps toward bolstering the trade partnership between India and the United States. He called for dismantling bureaucratic, taxation-related, regulatory and federal system barriers. “We want the foreign direct investment from China to shift, but FDI is not flowing into India at the pace it should be. Instead, it’s going to countries like Vietnam. I would selfishly like to see more of that happening in India,” Ambassador Garcetti said.  Removing these impediments, he argued, would pave the way for increased job creation, prosperity, investments and overall strength in both countries. 

India’s challenging business environment

Nicknamed the “graveyard of foreign companies” in recent years, India’s notoriety for its challenging business environment is famous, particularly for foreign enterprises. Indeed,  opaque market regulations and unpredictable law enforcement practices characterize its regulatory landscape.

One of the primary concerns for foreign businesses operating in India is stringent tax inspections. Companies like Foxconn, Samsung and Walmart face hefty fines for alleged concealment of investments, tax evasion and falsification of accounts. The Indian government employs these tax issues as policy, using them toregulate and restrict foreign investment.

In June, Indian regulators slapped Amazon with a hefty $24 million (two billion rupee) fine for obscuring its investment in a retail group. Japanese and South Korean firms have faced similar probes. Last year, Foxconn was raided for concealing income and evading taxes. Regulators handed giants like Nokia and IBM exorbitant fines, and others like Vivo and Wistron have encountered hurdles in the Indian market.

Tax enforcement has become a tool for Indian authorities to regulate foreign investment. The phenomenon has even earned the moniker “tax terrorism.” India’s aggressive stance on tax compliance underscores its determination to safeguard revenue and scrutinize foreign corporations. However, critics argue that the heavy-handed approach could deter foreign investment and stifle economic growth.

The scale of these tax investigations and fines is leading to growing apprehension among Western nations and investors. Between 2014 and 2021, nearly 2,800 foreign firms operating in India terminated their operations, amounting to approximately one sixth of the total number of multinational companies registered in the country, as per Indian government data.  As India seeks to position itself as a favorable destination for foreign investment, addressing these regulatory challenges is imperative to fostering trust and confidence among international businesses. 

India must overhaul its business environment to attract foreign companies 

Despite India’s allure as a sizable and promising consumer market, the reality for foreign investors is fraught with uncertainties and obstacles. The exodus of companies reflects a growing perception among foreign firms that the risks of doing business in India outweigh the potential rewards. This sentiment raises concerns about India’s ability to fulfill its potential as a preferred destination for foreign investment and economic growth.

To reverse this trend, India must address the systemic issues undermining its attractiveness to foreign investors. This entails implementing reforms to improve market transparency, enhance infrastructure development, upgrade labor skills and foster a more conducive business environment. 

By addressing these challenges, India can regain the confidence of foreign companies and reposition itself as a competitive and sustainable investment destination on the global stage. As India aspires to position itself as a global economic powerhouse, it must address these systemic issues to foster an environment conducive to sustainable economic growth and foreign investment. Failure to do so will not only jeopardize India’s economic prospects but also undermine its credibility as a reliable partner in the global business community.

[Mitchelle Lumumba edited this piece]

The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.