New Delhi: Moscow is working on tax concessions to try and attract businesses from India and other friendly nations as European and US firms continue to exit the country over geopolitical concerns, two people aware of the discussions said.
This comes amid growing trade between the two countries, driven by India’s rising appetite for discounted Russian oil and efforts to settle bilateral trade in rupees. Russia has emerged as India’s fifth-biggest trading partner from 25th in the previous fiscal with total trade swelling to nearly $40 billion from $8 billion.
“The Russian authorities plan to make it easier for investors and companies from friendly countries to enter the Russian market under a special tax condition that includes reducing the tax rate. The details of the initiative will be further explored with the professional community,” said one of the two people cited above.
“Tax concessions have been discussed but the major concern still remains in the form of a payment mechanism. Rules were announced by the Reserve Bank last year, vostro banks have also been opened but no transactions have taken place,” the second person said.
The first person said several solutions to the payment problem are being considered, including forming a new common electronic currency that would not be pegged to the dollar. Details of such a currency are not known.
Government officials had admitted that the rupee settlement mechanism is still in its early stages and that there are “teething troubles“ over the exchange rate and repatriation of money.
About 20 Indian banks, both private and public, have opened special vostro accounts to facilitate rupee trades. Accounts have been opened by lenders such as UCO Bank, State Bank of India, HDFC Bank, Yes Bank and IDBI Bank along with Russian lenders like Sberbank, Gazprombank, Credit Bank of Moscow and VTB Bank.
However, most of the banks are awaiting standard operating procedures from the RBI with regard to the rupee settlement mechanism .
Last month, external affairs minister S. Jaishankar warned that two-way trade between India and Russia has surged to a record $45 billion between April 2022 and February 2023 on the back of Indian purchases of cheap Russian oil and that the imbalance needs to be combated on a “very urgent basis“.
Jaishankar said addressing the imbalance meant addressing the impediments —whether they are market access impediments, non-tariff barriers, or related to payments or logistics. According to a Social Science Research Network report, at the end of November 2022 about 8.5% of EU and G7 companies had divested at least one of their Russian subsidiaries.
“In April 2022, a total of 2,405 subsidiaries owned by 1,404 EU and G7 companies were active in Russia. Our findings show that less than 9% of this pool of companies had divested at least one of their subsidiaries in Russia,” the report added. However, the research observed that even after a western firm decides to exit and commits publicly to do so, it may still ultimately fail to exit as it may not be able to find a buyer that is prepared to pay a high enough price.
Moreover, even when a buyer is found and the price agreed, the Russian government may put in place obstacles that impede or delay the sale, or ultimately prevent transfer of proceeds abroad, the report added. Queries sent to the Russian embassy in India and the commerce ministry remained unanswered till press time.