How Will ‘Russia’s Invasion of Ukraine’ Affect Taxes & Trade in India?

While the European Union, NATO, the United Kingdom, and the United States have announced stringent trade restrictions; and sanctions against Russia, our Hon’ble Prime Minister Sh. Narendra Modi has already begun his strategic action plan to evacuate the stranded 20,000 Indians, including students; in war-torn Ukraine, either by airlift or by road via Poland. Let us truly pray for the safe return of all our trapped Indian brothers and sisters in Ukraine; and may Good Sense and Humanity triumph over Vested Interests in order to avoid a Third World War-like situation.
Before we dive more into the likely trade and tax ramifications of this tragic event in India. It is critical that we first understand the motivation for this unjustified conflict, & How Will ‘Russia’s Invasion of Ukraine’ Affect Taxes & Trade in India?

Origin of Dispute

Ukraine is a democratic country of 44 million people with a history dating back more than 1000 years. Further, it is Europe’s second-largest country behind Russia in terms of land area. Ukraine is seen as a gateway to Europe and shares a shared border with Russia; as such, its geographical location is critical. Following the dissolution of the Soviet Union, Ukraine decisively opted for independence from Russia. Further, Ukraine expressed a desire to join NATO, a defensive military alliance of 30 European countries. Following the overthrow of a Russian-friendly administration in Ukraine in 2014, Russian President Vladimir Putin wanted assurances from Western countries and Ukraine that it would not join NATO.

The origins of this drama may be traced back to Ukrainian President Volodymyr Zelensky pleading with US President Joe Biden to allow Ukraine to join NATO in January 2021. This has upset Russia and caused the escalation of rising tensions between the two nations into a war-like scenario, if not a full-fledged conflict.

India’s Domino Effect

This catastrophic and hazardous trend has far-reaching consequences and a domino effect for the whole planet, including India. The most significant macroeconomic headwind for India is a rise in petroleum prices. Crude oil has risen to $105 a barrel, while gold has surpassed $1,900 due to risk aversion. The inflationary consequence of this may force the Reserve Bank of India to raise the interest rates. The bilateral commerce between India and Ukraine is becoming more important due to rising border tensions between Eastern Europe and Russia.

The majority of Indian exports to Ukraine are pharmaceuticals. In terms of value, India is the third-largest supplier of pharmaceutical items to Ukraine, after only Germany and France. Several Indian corporations, including Ranbaxy, Dr. Reddy’s Laboratories, and Sun Group, maintain representative offices in Ukraine. In Ukraine, representatives from major pharmaceutical businesses have formed the Indian Pharmaceutical Manufacturers’ Association (IPMA).

Ukraine is India’s largest exporter of sunflower oil, followed by inorganic chemicals, iron and steel, plastics, and chemicals. This is the fundamental reason why the shares of all pharmacy businesses and cooking/sunflower oil companies have plummeted to historic lows, as have the benchmark BSE and Nifty indices.

The Impact on Tax

Before delving into the potential tax consequences, I’d want to state unequivocally that nothing comes before human life, and the safety and security of all trapped Indians in Ukraine must be the topmost concern and priority of all of us, including our government. However, this war-like situation may have tax implications, particularly for Ukrainian Expats working in India and Indian Expats working in Ukraine, as well as Indian Pharma companies such as Ranbaxy, Dr Reddy’s Laboratories, and Sun Group with permanent establishments/business interests in Ukraine and Ukrainian leading sunflower manufacturing companies such as Kernel with business interests in India.

Taxation at Different Rates

For non-corporate taxpayers, including people, both residents, and non-residents, Ukraine has a flat tax rate of 15%. In Ukraine, the company tax rate is a flat 18%. Individuals and HUFs in India can benefit from reduced personal tax rates based on their slabs, ranging from 5% to 30%, u/s 115BAC of Income Tax Act, 1961, subject to the foregoing of certain specified deductions. Similarly, business organizations can take advantage of the reduced corporation tax rate of 22 percent under Section 115BAA in exchange for relinquishing certain deductions, exemptions, and credits. Because of the surcharge, this rate becomes an effective corporation tax rate of 25.17 percent.

Individual expatriates who are forcibly trapped in a nation other than their home country in these war-like circumstances may feel the impact of the disparities in tax rates in both countries. The number of days a taxpayer spends physically in a nation determines his or her residence status for tax purposes. In both India and Ukraine, the threshold limit for establishing tax resident status based on the number of days of stay is 182 days.

Thus, this tense situation may result in Ukrainian ex-pats working in India being stranded in India for more than 182 days (with Ukrainian ex-pats now wishing to remain in India), as well as Indian ex-pats working in Ukraine, despite our sincere prayers and our government’s determined action plan, which will undoubtedly result in the evacuation of the stranded Indians in Ukraine.

As a result of the disparities in corporation tax rates between the two nations, the forced presence of stranded expatriates in either country may result in the development of Service Private Entities (PEs), necessitating the appropriation of earnings to this PEs and thereby modifying their tax responsibilities.

Effect of conflict upon the Trade in India

According to Ajay Sahai, Director General and CEO of the Federation of Indian Export Organisations (FIEO), “The majority of the firms affected by this crisis will be MSMEs, as commodities exported to these two nations, such as medicines, machinery, and apparels, are predominantly produced by MSMEs,”. Moreover, According to analysts, the continuing armed crisis between Russia and Ukraine is likely to have an impact on Indian exporters transporting goods to the area. MSMEs account for the majority of India’s exports to Ukraine and Russia, and as a result, the present crisis may pose a number of issues for MSME exporters, including delays in shipments, late payments, damage to consignments, and so on. According to official figures, India’s bilateral trade with Russia and Ukraine was $11.9 billion and $3.1 billion in 2021. During the April-December period of FY2022, Russia was India’s 25th largest trading partner, with $2.5 billion in exports and $6.9 billion in imports.

Effect of conflict upon the Import Export in India

India is the world’s third-largest oil importer, importing more than 80% of its crude oil from other countries. Brent, the global crude oil price benchmark, hit $105 per barrel. This might push up India’s oil import cost, jeopardising the country’s external situation. Increased oil prices in India aggravate inflation, widen the current account deficit, and put downward pressure on the rupee.

If we talk about India’s exports then, we may find that, India exported $510 million to Ukraine, with pharmaceutical items accounting for 32% of the total. Moreover, products shipped include telecom devices, iron and steel, agrochemicals, and coffee.

India purchased $2.6 billion in goods from Ukraine last year, including $1.85 billion in vegetable oils, principally sunflower oil. 70 percent of India’s sunflower oil imports come from Ukraine.

Because India imports more than 60% of its edible oil, and sunflower oil accounts for 14% of those imports, any supply disruption will drive up the price of sunflower oil. That is why all pharmacy and cooking/sunflower oil companies have sunk to nearly zero, as well as the benchmark BSE and Nifty indices also falls down.

Takeaway

The silver lining of the above analysis is the implicit sincere prayer, best wishes, and firm and optimistic belief. Further, it will unjustify and tense situation will soon calm down and settle down, and that both precious human life. Further, the going concern status of corporate businesses/business interests in Ukraine will continue to exist and sustain, as before.