Mumbai: China’s decision to raise income-tax paid by foreign companies from 15% of profit to 25% will not affect most Indian firms that have a presence in the country.
Companies contacted by Mint said several factors, including the relative newness of their operations in China, tax incentives provided by the local government, the inability to penetrate the Chinese market, and losses, would leave them largely unaffected by the increase in tax rate.
“We have just started our operations in India, and it will take time before we start showing a profit there,” said S. Mahalingam, chief financial officer of Tata Consultancy Services, India’s largest software services firm, which entered the Chinese market through a 2005 joint venture with Microsoft and three local firms.
China said late last week it will drop corporate taxes on domestic companies to 25% from 33% while raising taxes on foreign companies. Foreign investors have poured in $600 billion in foreign direct investment since reforms began in 1979. Some $60 billion comes in each year.
While potentially impacting nascent Indian companies in China, some also see the tax hike as a potential opportunity for some investment to now be diverted to other countries, even though China’s economy will remain a major draw.
Over the past few years, China has emerged a popular destination with Indian software firms such as Wipro Ltd, Infosys Technologies, Satyam Computer and TCS, all of which hope to use their development centres in the country to cater to a growing domestic market as well as serve as an alternative offshore destination to their centres in India.
“Our business in China will be exempt from tax for the next four years,” said a spokesperson for Chennai-based Orchid Chemicals and Pharmaceuticals, which entered China in 2002 through a joint venture with North China Pharmaceuticals. The spokesperson added that the JV’s revenue from sales in the Chinese market was still low at $36 million (net profit: $2 million).
Videocon, India’s largest consumer electronics company, has two factories that make colour picture tubes in China. “These plants are in tax-free zones and we will not be affected by any tax hike. According to the original agreement, there are certain tax breaks for these plants which cannot be changed for another five years,” Videocon chairman Venugopal Dhoot said.
The company earned $500 million in revenue in 2006 from two plants, both of which are profitable. Videocon acquired these plants from French firm Thomson in 2005.
While the recency of their Chinese operations and tax incentives will insulate some companies from the increase in tax rate, others have their own dismal performance to thank. Asian Paints entered China in November 2002 after it acquired Singapore’s Berger International which had a factory in the country. Although the Chinese market for decorative paints, the category in which Asian Paints operates, is growing at the rate of 8-10%, the company’s local operations continue to make losses. “Our market share, leave alone in China, but even in the eastern province (where the factory is located) is insignificant as we are new entrants. We have been running losses in China for the last two years. We are still in the learning mode in China as the paint market is extremely fragmented,” said Ashwin Dani, vice-chairman and managing director, Asian Paints.
Some Indian companies said the tax wouldn’t hurt them because they were prepared for it. Ashok Goel, vice-chairman of Essel Propack, the world’s largest manufacturer of lamitubes (used in the packaging of consumer products such as toothpaste), said his company, which derives 20-25% of its revenue and profit from the Chinese operations, was prepared for the increase in tax rate because the government had been telling about it for four years. “We don’t believe the hike will be a serious threat to any Indian firm operating in China as it is unlikely to have taken them by surprise.” Partha Sarthi, the head of Mahindra & Mahindra’s international operations agreed with Goel, although he admitted that the tax would increase his firm’s tax liability.
Meanwhile, Larsen & Tourbro hopes it will be able to offset the rise in taxes by increasing the price at which it sells to customers. The firm has a factory in the country that makes air-circuit breakers and is in the process of building another one, to make industrial valves.
“The competitive advantage of having these factories in China goes beyond tax,” said R. Shankar Raman, vice-president, finance, L&T. Both factories, he added, would generate $25 million revenue each from sales in the Chinese market.
Sagar Malviya, Shilpa Shree, C.H. Unnikrishnan and Jeetha D’Silva also contributed to the story.