Tax Foreign Brands

Dear Mr Manmohan Singh, You have the unenviable task of formulating a budget which sticks to long-term economic sense while accommodating the populist election year. I intend over the next few weeks to give some suggestions on how you can do this.

Consider foreign investment. The rural masses know and care little about your deregulation of trade and industry, and urban folk generally favour greater competition and choice. But all are fearful of multinationals. Suspicion of foreigners is an inevitable result of having been conquered so many times by foreigners over the centuries, body knows that British colonialism was ushered in by the East India Company. Economists may argue that such fears are irrational today, and that the gains from foreign investment are much greater than the costs. But human beings have never been perfectly rational profit maximisers, and thank heavens for that. Human beings have gut feelings about identity and ownership, and you must take heed of this even while trying to change attitudes through public education.

So you need to find ways of showing that you favour Indian business without frightening foreign investors away. Such techniques must be have an economic rationale that will be understood abroad even while assuaging fears about foreign investment within India. One such method is to tax brand foreign names. I first suggested this a year ago, and it now looks highly topical since an election budget is round the corner.

BRAND VALUE: Brands add value to a product. If you break up the cost structure of a bar of Cadbury chocolate you will find that cocoa accounts for a tiny part but the brand name for a big chunk of total value. Unbranded products sell much more cheaply than branded products the world over.

If we levy a flat percentage tax of 30 per cent on chocolate, we will be taxing all components including the brand name. This is not the case if we levy a specific duty (like so many rupees per kilo). So we need to shift to flat percentage taxes (like VAT).

Imports present greater complications. Import duty is levied on all components that go into the production of say a Honda motor- cycle. But no duty is levied on the import of the brand name. Unlike other components, a brand name does not pass through customs, and so this high-value item escapes import duty altogether.

This is an unwarranted loophole that needs to be closed. Some people think that withholding tax on royalties (of 20 per cent) amounts to a tax on brand names. This is not so. Royalties are paid for know-how, and are frequently paid on unbranded products like chemicals or alloys. Some other companies have arrangements to use foreign brand names without paying any royalty.

The simplest way of collecting the brand tax is as a percentage of ex-factory cost. It can be collected by excise staff with additional administrative hassles.

APPLY TAX: The tax should apply to all foreign brand names even if used by Indian companies (like Rothman cigarettes made by the Modis). On the other hand multinationals should not be taxed if they develop brand names in India, which may in due course become global brands. This means Hindustan Lever will pay a brand tax on Surf (an imported brand) but not on Wheel (an Indian brand name which our tax laws need to encourage to become a global name).

Some people will argue that such a tax should apply only to new foreign brands. I disagree. But I concede that almost all the brand value today of Lux soap or Gold-flake cigarettes can be ascribed to marketing efforts for decades within India, not the original importation. So perhaps brands in use for more than 20 years can be exempt from brand taxation.

Well, Dr Singh, this gives you an excellent opportunity to play the swadeshi card. The idea is unquestionably swadeshi, and so will be its impact. You can justify the brand tax to foreign investors as the plugging of an unforeseen tax loophole, and, provided the tax rate is modest, I am sure they will accept it after some initial grumbling. You can present the same tax to the domestic audience as a way of curbing an unfair advantage enjoyed by multinationals, and express your determination to see that Swadeshi brand names are promoted (amidst cheers from the audience).

Indeed, you can propound a new theory of infant protection for Indian brand names. Economists have long recognised the need for tariff protection for industrial infants. And the Generalised Scheme of Preferences recognises the need to extend infant protection to Third World exports. On the same logic, we surely need infant brand protection too. You may win international notice for this rational extension of the infant protection theory. And this will go down well in India too. Even the BJP will be forced to cheer (while moaning in private that you have stolen another plank of its electoral platform).

What do you think?