India Should Adopt Residence-Based Taxation to Boost Foreign Investment

India's Attractiveness to Foreign Capital Declines

Key Points:

• The Indian rupee's steady decline against the US dollar reduces dollar returns for foreign investors from their Indian investments.
• Rising tax uncertainty, particularly after the Indian Supreme Court's ruling in the Tiger Global tax dispute, deters foreign investors.
• Net foreign direct investment inflows into India have declined sharply, with a net outflow of $5.8 billion in April-February of the current financial year.

Tax Uncertainty and Discretionary Powers

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

• The Tiger Global judgment denies treaty protection even to investments made before 1 April 2017, creating uncertainty around tax treatment.
• The ruling relies on the concept of "economic substance" without clear definitions, increasing discretionary powers of tax officials.
• This may discourage foreign investors from allocating capital to India, as taxation policy cannot be examined in isolation from the broader economic context.

Impact on Economic Growth

• India remains a capital-scarce economy, and private investment must increase substantially to achieve sustained high economic growth.
• Policies that make India less attractive for investors may prove counterproductive, as foreign capital continues to play an important role.
• With a large share of global investment capital being highly mobile, investors compare countries on regulatory stability, tax treatment, and ease of exiting investments.

Recommendations

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline

• The Indian government should ensure a stable and predictable tax regime to maintain investor confidence.
• Clear definitions and thresholds for "economic substance" should be established to prevent discretionary powers of tax officials.
• India's tax policy should be aligned with its economic growth ambitions, recognizing the importance of foreign capital in achieving sustained high growth.