Foreign Airlines Get Slammed With ₹10,000 Cr. GST Notice, “Could Dampen India’s Aviation Potential”; Adds To The Long List Of Foreign Businesses Struggling In India

The Directorate General of Goods and Services Tax Intelligence (DGGI), the law enforcement agency of the Finance Ministry, has issued show-cause notices to ten foreign airlines in connection with an alleged non-payment of taxes totaling ₹10,000 crore.

Emirates, Lufthansa, British Airways, Singapore Airlines, and Oman Air are among the notable airlines on the show cause notice list. The unpaid tax dues on the import of services by the company’s Indian branches from the head office located abroad were the subject of the legal show cause notices that were sent over the past three days.

Services such as aircraft maintenance, crew payments, and rentals have been managed by the overseas headquarters of these airlines, according to a senior official. The DGGI maintains that these services are subject to GST, as they are rendered from one legal entity to another. However, the airlines have failed to submit the GST.

The tax notices range from the period 2017 – 2024.

Why the Tax Notice to Foreign Airlines

Dr. Xie Xingquan, the Regional Vice President for North Asia and Asia Pacific of the IATA, stated in a press statement that “the DGGI’s assertion that GST should apply to expenses incurred by the headquarters of foreign airlines [with a branch office in India] in the course of providing air transport services is flawed“.

Furthermore, the tax department fails to account for the nature and conventions in the operation of international air transport.

The June 26 circular on the supply of import services valuation does not apply to airlines, even if the recipient is entitled to the full input tax credit, according to IATA.

It asserts that India was the sole nation to adopt this strategy. “This practice is not observed anywhere else in the world.” Mr. Xie stated that Indian carriers that operate to destinations outside of India do not encounter comparable circumstances or requirements.

Aviation Industry Poised for Growth; This Can Inhibit the Potential

According to the Economic Survey 2023-24, the Indian aviation industry is poised for remarkable development, with an aggregate order book of 1,500+ aircrafts across airlines. By 2042, the projected demand for aircrafts is over 2,200.

The domestic passenger traffic in India has grown by more than 125% since 2014, reaching 152 million passengers in 2023, according to data from the Directorate General of Civil Aviation (DGCA). In 2014, the passenger traffic was 67.4 million.

The number of international passengers at Indian airports has increased by nearly 49% since 2013-14, reaching 6.1 million passengers in 2023-24, up from 4.1 million passengers in 2013-14, according to data from the Airports Authority of India.

The IATA (International Air Transport Association) has expressed its “disappointment” regarding the “flawed” show-cause notices issued to 10 international airlines regarding GST dues of ₹10,000 crore. It has cautioned that this move could “inhibit and jeopardize India’s aviation potential.”

The policies do not make it easy for Foreign Businesses to conduct business in india; Many have been shutting shops

India has been the site of numerous failing multinational corporations. General Motors and Harvey Davidson from the United States, Vodafone Group from Britain, Holcim Group (cement-maker) from Switzerland, and BYD from China are among the most notable examples.

It is only reasonable for global giants to invest in India, which has a large and steadily expanding domestic market, a plentiful supply of inexpensive labor, a significant English-speaking population, and economic growth.

However, the list of obstacles they encounter in India is equally extensive: “regulatory flip-flops, high tariff barriers, red tape, a cumbersome land acquisition process, inadequate infrastructural facilities, insufficient and expensive credit, high logistics and infrastructure costs, significantly unorganized manufacturing sector, and others related to the ease of doing business.”

The Indian authorities are not hesitant to subject foreign companies to unjust treatment and even persecution. In Asia’s third-largest economy, numerous foreign corporations are abandoning the nation.

Between 2018 and 2022, nearly 470 new foreign investors established businesses in India. However, during the same period, over 550 overseas firms ceased operations and became inactive.

Commerce and Industry Minister Piyush Goyal informed Parliament late last year that 2,783 foreign companies in India ceased operations between 2014 and November 2021. Since only 12,458 active foreign subsidiaries were operating in India in early 2022, this is a substantial sum.

In 2021, a report by the Parliamentary Standing Committee titled “Attracting investment in post-Covid Economy: Challenges and Opportunities for India” noted that foreign companies that relocated their manufacturing bases from China during the pandemic chose countries such as Vietnam, Taiwan, and Thailand, with only a small number of them choosing to invest in India.

Case Studies

In recent years, the Indian government has intensified its efforts to intimidate foreign companies by presenting them with fabricated allegations. Google, Amazon, Nokia, and Samsung have all been subjected to exorbitant penalties, while Intel, Wistron, and other companies have also encountered difficulties in the Indian market.

In October 2023, ~1,000 foreign subsidiaries of MNCs operating in India were subject to tax demands from GST authorities.

Spanning between FY18 and FY22, these pertained to payments made by foreign parent companies to expats employed in Indian subsidiaries of multinational corporations. The demands ranged from ₹1 crore to ₹150 crore.

The issue was identified during examinations of local subsidiaries of multinational corporations (MNCs) in a variety of industries, such as smartphones, automobiles, software, FMCG, consumer durables, and cosmetics.

Many investors in the country have expressed their regret that they are unable to return home with the money they have earned here. It makes it financially non-viable for them, as they are better off exiting India altogether.

Unfortunately, this has been the case for decades, with no improvements in sight.

In 2005, Devas Multimedia, a multimedia service provider with both Indian and global investments, entered into a contract with a commercial branch of the Indian Space Research Organization to provide ground broadband network services and satellite launches. A few years later, the Indian government revoked the agreement, resulting in Devas losing all of its investment.

The Indian government was sued by the investors, who subsequently submitted the case to international arbitration. After a protracted process, they were granted favorable rulings.

In order to circumvent compensation, the Indian government promptly fabricated economic charges against Devas and instituted bankruptcy liquidation proceedings against the company. In certain countries, pertinent cases are still unresolved in the courts.

Conversely, the Vodafone case serves as an illustration of the potential arbitrariness of India’s legislation.

In 2007, Vodafone, the British mobile communication giant, acquired Hutchison Telecommunications, a Hong Kong-based company. Consequently, Vodafone possessed a controlling stake in Hutchison Essar, India’s fourth-largest mobile carrier.

Vodafone was requested to pay a capital gains tax of up to 2.2 billion U.S. dollars by the Indian tax department, on the grounds that the assets in India had appreciated at the time of the transfer. Vodafone appealed to the Indian Supreme Court and was ultimately exempted from tax liability. The court determined that the Income Tax Act of 1961 did not authorize the taxation of foreign entities in this manner.

Nevertheless, the Indian Parliament amended the Income Tax Act in 2012 to allow the tax authorities to retrospectively tax the 2007 transaction. Vodafone was promptly assessed a penalty of 5.6 billion dollars by the Indian tax department.

Is This What The Govt. calls Ease of Doing Business?

Prime Minister Narendra Modi has devoted significant energy to the necessity of enhancing India’s ranking in the World Bank’s Ease of Doing Business (EODB) index. World Bank stopped publishing EODB rankings in 2021.

India’s ranking had increased from 142 in 2014 to 100 in 2017 and to 63 in 2021.

However, the notion that India’s ranking improved as a result of the government’s implementation of substantial economic policy reforms that have benefited the business environment is an exaggeration.

The EODB indicators do not accurately reflect the general business environment of a country, as they do not account for critical factors such as “security, macroeconomic stability, corruption, labor skills of the population, the underlying quality of institutions and infrastructure, or the strength of the financial system.”

“Ease of doing business … there are very few countries we can compete with, obviously from the bottom. Probably, this is the worst country to do business in. That is a very frank statement I want to make,” remarked Pankaj Mohindroo, chairman of the Indian Cellular & Electronics Association, criticizing the business environment in India.

They also concentrate on specific objectives, such as securing creditor rights, which may be advantageous for investment and development in certain circumstances but can also serve as a hindrance in others (e.g., when a debt overhang impedes investment).

Policies that are promoted as “best practices” may ultimately result in a reduction in freedom or the creation of additional expenses.

As demonstrated by the Washington-based Center for Global Development, the improvement in India’s classification was significantly more attributable to changes in the World Bank’s methodologies than to any actual improvement in the country’s performance in the underlying indicators. 

India turns into “graveyard for foreign companies”

While lamenting the high import tariff that Harley-Davidson was required to pay in India, former U.S. President Donald Trump remarked that “India is probably the highest tariff nation in the world.” Companies have also been compelled to exit India due to regulatory fluctuations.

It is now a common occurrence for foreign companies in India to be subjected to substantial penalties for a list of violations that is both extensive and continuing to expand. These violations frequently incite controversy within the business community.

“The smooth flow of ideas, organization, money, and entrepreneurship has been impeded by the legislation, rules, and regulations implemented by the union and state governments, resulting in the creation of jobs, wealth, and GDP,” stated Gautam Chikermane, VP of the Observer Research Foundation.

“Strategic investors have refrained from investing in India, despite the fact that foreign direct investment continues to flow into the country”, stated Manish Agarwal, the former infrastructure chief at PwC India.

Despite the country’s problems, many companies are interested to invest given the large consumer market, which is only growing in number. Their investment can benefit the country greatly.

The government has to rethink their proposition to businesses. The tax policy needs to be made more transparent.