An Overview of the Impact of Tax Incentives on Foreign Direct Investment in India

Abstract

At present in a globalized scenario, Foreign Direct Investment (FDI) is crucial in stimulating economic growth and development of a country. Government of India for the purpose of accelerated growth of the Indian economy and in order to attract FDI has extended incentives in the form of tax holiday, investment tax allowances, depreciation allowances etc. Foreign investors are generally interested to take the benefits of differences in tax rates across various countries. This has resulted in an increased competition among government of different countries to attract foreign investors by offering tax incentives. Empirical research on tax incentives shows that they sometimes work in attracting FDI, but it remains unclear whether they are beneficial overall. Some studies concludes that developing countries do not need to offer tax incentives to attract Foreign Direct Investment (FDI) because the decision to invest in a country depends on the country's overall investment climate and some other factors. This paper attempts to analyse the effect of using different business tax incentives on Foreign Direct Investment in India based on the overview of theoretical and empirical findings. Through an in-depth analysis it might be concluded that despite insufficient findings regarding its effectiveness, tax incentives plays a key role in the policy initiatives which are being used to increase their appeal to foreign investors. Investment by MNCs has made a significant contribution in the economic development of India.