The conflict between Russia and Ukraine is predicted to have a substantial impact on India’s economy and trade. The impact will also jeopardise efforts to restore domestic trade from the COVID-19 pandemic, according to the Confederation of All India Traders (CAIT). Russia being major trade partner of India, The pharmaceuticals, organic chemicals, auto components, and electronics are among India’s main exports to Russia. Apart from supplying crude oil, fertilisers, precious stones and metals, Russia is India’s largest armaments supplier in terms of imports. Let us take a close look at how the ongoing conflict between Russia and Ukraine would affect the Indian economy.
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How did the Conflict arise between Russia and Ukraine?
Ukraine is a democratic country with a population of 44 million people and a history spanning over 1000 years. It is Europe’s second-largest country after Russia in terms of land area. Because Ukraine is regarded as a gateway to Europe and shares a common border with Russia, its physical location is critical. Following the disintegration of the Soviet Union, Ukraine decisively opted for independence from Russia and expressed a desire to join NATO, a defensive military alliance of 30 European countries. Following the overthrow of a pro-Russian administration in Ukraine in 2014, Russian President Vladimir Putin wanted assurances from Western countries, as well as Ukraine, that the country would not join NATO.
How this conflict affecting Import and Exports of the Indian economy?
- India is the world’s third-largest oil importer, relying on foreign countries for more than 80% of its crude oil needs. Brent, the global benchmark for crude oil prices, hit $105 per barrel. This might increase India’s oil import bill, putting the country’s external position at risk.
- Increased oil prices exacerbate inflation in India, expand the current account deficit, and put pressure on the currency.
- India’s exports to Ukraine totalled $510 million, with pharmaceutical products accounting for 32% of that total.
- Telecom instruments, iron and steel, agrochemicals, and coffee are among the other items exported.
- Last year, India bought $2.6 billion worth of commodities from Ukraine, including $1.85 billion worth of vegetable oils, mostly sunflower oil. Ukraine is responsible for 70% of India’s sunflower oil imports.
- Because India imports over 60% of its edible oil, and sunflower oil accounts for 14% of India’s edible oil imports, any supply disruption will hike the price of sunflower oil.
This is the fundamental reason why all pharmacy and cooking/sunflower oil stocks have fallen to new depths, and the benchmark BSE and Nifty indexes have taken a dive.
The impact of taxation
As we all know, the military war between Russia and Ukraine could have an impact on the country’s trade in the region, affecting consignment transportation, payments, and oil prices. Similarly, India would be affected, since goods transportation will become more difficult. Oil prices will be pushed up by a war-like situation, and India’s oil import payments will be crippled. This war-like situation may have tax implications, particularly for Ukrainian and Indian expats working in India, as well as Indian pharmaceutical companies such as Ranbaxy, Dr Reddy’s Laboratories, and Sun Group, which have permanent establishments/business interests in Ukraine, and Ukrainian leading sunflower manufacturing companies such as Kernel, which have business interests in India.
Rates of Differential Taxation
Individual expatriates stranded in a country other than their own country in these war-like circumstances may feel the impact of the disparities in tax rates in both countries. The number of days that taxpayers spend physically in a country determines their residence status for tax purposes. Both India and Ukraine have a threshold limit of 182 days for determining tax resident status based on the number of days of stay.
Non-corporate taxpayers, such as individuals, pay a flat 15% tax rate in Ukraine, which applies to both residents and non-residents. Ukraine has a flat 18 percent corporation tax rate.
Individuals and HUFs in India can benefit from reduced personal tax rates based on their slabs, which range from 5% to 30%, under section 115BAC, if they forego certain specified deductions.
Impact on Corporate Entities
The slowing of global commerce as a result of China’s economic difficulties, as well as a probable dramatic decrease in growth in the US and Europe due to stagflation, may harm Indian business earnings. The confrontation between Russia and Ukraine will exacerbate the tendency. In Contrast with differential tax rates The Corporate companies can qualify for a reduced corporate tax rate of 22% under section 115BAA if they waive certain deductions, exemptions, and credits. The existence of a surcharge converts this rate to a 25.17 percent effective corporate tax rate.
The India-Ukraine DTAA allows corporate companies to establish a Service Permanent Establishment (PE) based on the physical presence of key managerial employees for more than six months in a nation other than their home country where business interests exist.
Due to the disparities in corporate tax rates between the two nations, the forced stay of stranded expatriates from either country may result in the formation of Service PEs, requiring the appropriation of profits to this PEs and thereby modifying their tax responsibilities.
Final Words
India has taken a neutral stance in the Russia-Ukraine conflict and has urged both countries to use prudence. However, it is obvious that this will have a negative influence on India’s economy. This is due to the fact that India has trading ties with both countries. After the Covid-19 outbreak, the Indian economy is poised to take another hit if the geopolitical scenario worsens.
