More FDI to help India reach highest growth potential: EY

Indian economy is still not out of woods. However it remains comparatively insulated to concerns that are causing ripple effects in global economy. While the economy has seen some positive signs of recovery following spat of reforms over last five months, regaining fast pace of growth may take some more time. 

Increasing foreign direct investment limits in sectors such as retail and aviation, has come across as a key reform initiative. Mark Weinberger, Chairman and CEO, Ernst & Young Global in an interview with CNBC-TV18 said that more FDI is crucial for Indian economy to grow at its full capacity.

"One of the things it is going to have to do is continue to get increased manufacturing. The service sector has been strong here but getting those companies to invest here, create jobs and then bring that capital into India is really important and things like raising the cap are moving in the right direction," Weinberger said.

Also read: Govt releases latest edition of consolidated FDI policy

On recent tax reforms in India, E&Y CEO said that like other countries India is also trying to fill up the fiscal hole created by recession through expansion of its tax base. However he stressed that government must continue its focus on not only simplifying and reducing tax rates but also on having consistent and fair enforcement of tax policy. 

He hopes to see positive development on the immigration visa issue which Indian are currently facing in US and UK due to increased nationalistic tendencies across the world. 

India has kept its barriers high when its comes to sharing information with global auditing firms and also has stringent rules on the entry of such companies. Despite these, E&Y feels that there is tremendous growth opportunity for auditing professionals in the country.

"I think profession is thriving in India. Frankly we are all investing in India because we see growth and opportunity here in terms of markets and companies that will need to be audited," he said.

Below is the verbatim transcript of the interview

Q: The first question is to do with this large debate in India about tax havens, taxing the super rich, ensuring that the tax base does not get eroded for a developing country like India and some moves that have been taken by the Indian government in the past currently of course put on hold which have attracted a lot of global criticism. How do you see this entire debate?

A: The taxes are obviously being debated across the geographies all around the world. Governments are trying to do the same thing, trying to raise enough revenue to deal with the fiscal hole that was created by the great recession. Yet they are trying to attract capital and labour from around the world. There is less of it in this slower economy so everyone is trying to attract investors, employers to come into their markets. So India like the rest of the world is also focused on balancing austerity with trying to raise growth and attract capital and labour. The trends we are seeing around the world are basically lowering corporate tax rates. That discussion is going on now in the US, it happened across almost all the OECD countries and we have seen that in the emerging markets and broadening the base and trying to deal with taxing more elements of the tax base to offset that reduction. We are also seeing increases in indirect taxes such as goods and services taxes to offset some of the revenue loss from trying to attract business either through lower corporate rates or from manufacturing some of the things we have seen in India. So India is really trying to find their right balance. The policy is certainly very important, you want to have a lower rate and to attract that capital but the stability of that right policy and how taxes are enforced are very important. So it is not only what the tax rate is but it is then where is the enforcement, how are the laws enforced and do businesses feel like they have certainty with regard to their planning when they come in the jurisdiction. And India has obviously been in the spot light on that. So both are very important, the overall territory in simplifying and reducing but also consistent and fair enforcement.

Q: Let me ask you a broader question. This is to do with the fact that a lot of Indian companies are going global and they face different regulatory architectures, different tax administrations all over the world and they are internally building up capacities to deal with that. and also the issue of transfer pricing when it comes to overseas companies operating out of India. On a larger time frame next three five years what is it that you would expect from the government of a country like India as far as its tax administration is concerned if revenues are going to come under threat, if fiscal consolidation becomes the imperative need given the slowdown which we have also been bitten hard by? Is it fair therefore for overseas companies to expect a continuous lowering of rates or would you advice them to keep the needs of a country like India in mind when they operate and set up units here?

A: It is a great question. Remember when companies invest in different parts of the world taxes are only one part of the equation and India has a lot to offer. Obviously a great talent base, it has got a very strong and growing population for demographic trends. We are seeing some government reforms start to kick in that would be more favorable for foreign direct investment. All of those things are positive and then how the company is taxed will figure in as well on the margins as to whether or not a business would want to invest. When you look at one of the factors that our clients tell us are most important when they are making tax decisions it is a fair and stable tax policy and as you said India has had stable rates, enforcement and clarity and confidence in how it is going to be administered. It is very important where there has been a lot of issues.
And then how the government of India will deal with other governments? One of the things that is going to be really important going forward is you may be aware of the OECD, at the direction of the G-20 it is looking at a whole range of things about how the tax global corporations and how to allocate their profits and then how to collect taxes. I think being part of that debate, being part of the discussion the emerging markets as you identify need to be part of it, can't just be a western approach to how to deal with those issues. But until the governments come together and figure out how to collectively work and make some decisions, you are constantly going to have global organisations who are taxed in various countries running into conflict as the countries trying claim more and more of the revenue of the global corporation and sometimes resulting in double taxations. So the coordination and discussion amongst tax administrations will be very important and India's government should well presumably be part of that.

Q: Let us talk about another recent initiative proposed by the Indian Finance Minister P Chidambaram in the recent Budget and this is to come up with a pretty fair and new definition of foreign direct investment in terms of the percentage level of the share holding and foreign institutional investment. At 10 percent being the trigger cut off to distinguish between these two kinds of investments. How do you view this? It is still work in progress but those rules and the policy will perhaps soon be finalised?

A: It is a great point that the movement on the reforms need to be implemented to have a real effect but the direction to try and allow for more foreign direct investment is going to be crucial for the Indian economy to grow at its full capacity. One of the things it is going to have to do is continue to get increased manufacturing. The service sector has been strong here but getting those companies to invest here, create jobs and then bring that capital into India is really important and things like raising the cap are moving in the right direction.