When Mr. Chidambaram increased the service tax from 5% to 10% a few years back, most of the MNCs’ were uncomfortable. They felt the income tax rate was higher and with the service tax rates getting increased; their profitability will further get squeezed. On the top of it, a higher interest rate for those who were taking their working capital facility in India made the profitability of the operations a big challenge.
This saw a lot of MNC operators particularly in the service sectors moving their operations to countries with lower tax burden and lower real estate cost. The managerial and white collar remuneration in India is another area of worry. The managerial remuneration in India in certain brick and mortar segment of the industry is higher than Europe and USA today. The white collar employees – the knowledge worker story is no different.
With no cut in corporate tax, increase in service tax and growing salaries, does India remain an attractive manufacturing destination? Sony closed its manufacturing operations in India long back, Noika closed Chennai facility last year and Enfield has decided to open its engineering center in UK – an area where India seemed very competitive.
Of course, India remains an attractive market and the budget may lead to a situation encouraging MNCs to manufacture elsewhere and “Take to India” rather than “Make in India”!