Tax breaks for greenfield FDI

Govt looking at China model to encourage investments by foreign companies.

The Centre is examining the option of extending tax holidays and corporate tax exemptions to foreign companies to attract foreign direct investment (FDI) in greenfield manufacturing and services.

Government officials told Business Standard that India could take a leaf from China's book in attracting FDI through a mix of tax holidays and corporate tax benefits for foreign companies.

"We are looking at the Chinese model to see if it can be implemented in India. We have to look beyond just restructuring FDI caps. Sectors like telecom or insurance, which are restricted in India, also face restrictions in other countries," an official said.

China offers several tax incentives for foreign investors in its special investment areas, including special economic zones, economic and technological development zones, high-tech development zones and bonded zones.

Tax incentives granted by China to foreign companies include a lower corporate tax rate, tax holidays and exemptions""on the basis of location, investment duration, high-tech content and industrial sector.

In manufacturing, in particular, enterprises with a contract term longer than 10 years are exempt from income tax in the first two profit-making years and are charged 50 per cent of the applicable tax in the next three years.

Commerce and Industry Minister Kamal Nath has said the government will seek to attract FDI in greenfield sectors like manufacturing and services to attain the objective of a job created by every dollar of foreign investment.

"There is a strong case to grant fiscal sops to attract foreign investment. The World Competitiveness Report for 2004 highlights the fact that in business efficiency India is ranked higher at 22 compared with China at 35, but in terms of conducive government policies, India is ranked 33 and China 21," the official said.

While FDI inflow into India is around $ 4 billion, China receives over $45 billion dollars annually.

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How the Chinese sweeten the deal
For foreign firms in manufacturing sector:

• Income tax exemption for first two profit-making years.
• They pay 50% of the tax for the next three years.

For Foreign firms in SEZs:

• Two-year tax holiday for productive ventures.
• 50% discount on corporate tax for the next three years.
• Corporate tax rate of 15%, reduced to 10% for exporting enterprises.
• Reduced 10% withholding tax on interest, rentals and royalties.