Prime minister modi has been urging foreign companies to set up manufacturing bases in India. But Nokia India’s exit shows that this is easier said than done [/h2]
By Vishwas Kumar
Prime minister Narendra Modi has made the concept of “Make in India” the cornerstone of his government’s policy. It is focu-sed on luring foreign investors to set up manufacturing units in India. Will it succeed? If past experiences are an indicator, the answer is no. Till bottlenecks like complicated taxation policy, land acquisition and labor policy are removed, this concept will remain only on paper.
The Modi government could draw valuable lessons from the failure of Nokia India, one of the biggest foreign investments. After operating a highly successful manufacturing unit in India from 2006-2012, Nokia shut it down following several tax-related disputes and shifted it to Vietnam, which provided it better facilities.
The Nokia India story started in Dec-ember 2004, with then Tamil Nadu chief minister J Jayalalitha wooing the Finland-based company to set up shop in the newly created SEZ (Special Economic Zone) at Sriperumbudur. It signed a memorandum of understanding with the government on April 6, 2005, and started production in 2006.
The Nokia India unit, which closed down following taxation mess
Between 2005 to 2012, the company’s total turnover was `1,51,000 crore and it provided employment to around 30,000 people. It was one of the largest foreign exchange earners for the country in the technology sector, exporting phones worth more than $2 billion a year.
Initially, the plan was to make three to four million hand-sets a month for export to neighboring countries. But the Nokia India’s factory exceeded expectations and produced 15 million phones a month, exporting them to over 80 countries.
Impressed with its success, Congress president and UPA chairperson Sonia Gandhi visited the factory in 2010 along with then finance minister P Chidambaram. The visit was meant to highlight the UPA government’s investment policy of Made in India, of which Nokia was the biggest success story. For Tamil Nadu, the company’s stupendous success was a matter of great pride. After all, Jayalilitha had joined hands with her bitter political rival, DMK leader and then telecom minister Dayanidhi Maran to walk the extra length to lure Nokia to invest in the state.
The first salvo against Nokia India came in January 2013 when the IT department slapped a tax notice of `15,258 crore, along with interest and penalties.
However, from 2012, the business environment started turning against Nokia India. It coincided with Jayalilitha becoming CM in May 2011 (Karunanidhi was the chief minister between 2006 and 2011). The UPA government at the center was facing its worst political crisis and economic challenges.
We were granted several export awards over those years to recognize our contribution to Tamil Nadu’s economy by way of exports….” DOWNSLIDE BEGINS
The first salvo was fired by the Income Tax Department, coincidentally, when Chidam-baram was finance minister. In January 2013, it raided the Nokia factory and slapped a tax notice of a whopping Rs. 15,258 crore, along with interest and penalties. It was related to Nokia’s import of software from its head office in Finland.
Nokia’s level of manufacturing was huge. Each mobile handset has more than 400 parts and the average production capacity of each manufacturing unit is around 20 million units. This involves eight billion components per annum. Also, whenever MNCs set up subsidiary companies in Third World countries, they keep design patents in First World headquarters, be it the US, the UK, etc.
In the case of Nokia, all design and software patents were held in Finland. All software components were obtained from the main company at a cost. It is this “cost”, which is at the center of the dispute. Nokia says the “cost” comes under the category of “purchased transactions”, not “royalty payments”, as claimed by the IT department. Thus, payment was made to the “parent” company without paying tax in India. The reason is that in a purchase transaction concluded outside India, there is no tax liability in India.
Then, in February 2014, the Tamil Nadu Sales Tax Department accused Nokia of not having exported any of the mobile phones it manufactured at the plant between 2009 and 2011. It maintained they were sold locally and were thus subject to sales tax of Rs. 2,400 crore, which Nokia had not paid.
Nokia’s corporate communications head, James Etheridge, has released a statement saying that “this claim was surprising since we have customs documentation showing we exported more than 400 million phones in that period. We were also granted several export awards over those years to recognize our contribution to Tamil Nadu’s economy by way of exports. Unfortunately, local authorities have been reluctant to see this documentation and give Nokia a hearing so we can present this information.” The matter is now entangled in court.
The question is, why did the IT department and Tamil Nadu wake up after five-six years to detect non-compliance of laws by Nokia India? The accumulative tax demands with arrears and interests are resisted by foreign investors, who say it is the result of non-transparent tax laws.
Rajeev Suri, CEO, Nokia Corp, in a recent interview to Hindu Businessline said: “We are optimistic about India’s future under the new government. I personally see great potential in the ‘Digital India’ views and ideas… Of course, to really tap the potential of Digital India and the recent ‘Make in India’ call by the Prime Minister, the new government needs to move fast to address regulatory and other issues that inhibit investment and job creation. Some of these issues are the creation of the previous government, but the new government has the opportunity to swiftly make things right, to the benefit of all,” he said. “…Tax policy that does not include retroactive changes and that treats software sales in a way consistent with international norms would also be a very positive step,” he added.
A KPMG- CII report released in May last year on “Ease of Doing Business in India” highlighted that the country’s position in the “Doing Business 2014” annual report of the World Bank was less than favorable. The latest rankings place India 134th among 185 countries, lower than BRICS (Brazil, Russia, India, China, and South Africa) counterparts.
The report argued for urgency in improving the business environment and arresting the decline in performance. It put forth the corporate world’s grouse that the Indian direct tax regime is not conducive to fostering growth and that reduction in corporate taxes could provide an impetus to growth. In the “Doing Business 2014” report, India fared poorly on total tax rate, time to comply and number of payments. The country ranked 158 in terms of overall ease in tax payment.
Ninety percent respondents believed that tax authorities were not proactive in promoting investments and 60 percent felt that neutralization of the tax decision by the Supreme Court through a retrospective amendment could have a damaging effect on investment sentiments. Sixty-five percent respondents agreed that companies were willing to enter an advance pricing agreement.
The report recommended taxation in India needs structural, operational and administrative reforms.
Amitabh Kant, secretary, industrial policy and promotion, who was in Washington to attend the Indian Conference on “Make in India” a week before US President Barack Obama came to India, reportedly argued that the government urgently needs to carry reforms in labor, skills training, land acquisitions and taxation. The government, he said, needs to bring in greater consistency and predictability of tax policies.
According to Charan Reddy, a US-based businessman and BJP member: “Make in India is a well-thought-out concept to lure foreign investment so that it will bring the brand name to India and reduce unemployment.” But why should MNCs come to India when there are other countries who adapt easily to the needs of MNCs?
Reddy points out that any MNC’s sole motive is profit with less headache. When at least 55 approvals are needed to start a manufacturing unit here, how is that possible, he asks. The government needs to streamline approval methods so that the babu culture, political patronage, local and state regulations don’t hinder business. A centralized policy and speedy approvals would also help.
Can Modi replicate his Gujarat model across India?