"India's Tax Competitiveness" - International Conference on Taxation Policy for Accelerating Investment : Domestic and Foreign
November 13-14 2002, New Delhi

Keynote Address by Mr Anil Ambani, Vice Chairman, Reliance Industries Ltd.

Respected Finance Secretary, Dr. S. Narayan, FICCI President, Shri R.S. Lodha, and distinguished guests:

Whenever I come to Delhi in November, I sense an extra chill in the air. One reason, of course, is the onset of winter. The other reason, I suspect, is that by then budgetary exercises have started in North Block, leading to anxious thoughts about the new taxes industry will have to bear, come February 28!

So, I would first like to compliment the Finance Minister, Shri Jaswant Singh, for promising to remove this sense of mystery from the budgetary process - and for assuring us transparency and public debate in the formulation of budget proposals - leaving only one reason to blame for the chill in Delhi's November air - the changing weather!

I must confess that, when Shri Lodha invited me to deliver the keynote address at this International Conference on Taxation Policy for Accelerating Domestic and Foreign Investment, I wondered, not being a tax expert myself, what new thoughts I could bring to this distinguished audience. Only two kinds of people complain about excessive taxes - men and women.

Over the next 2 days, the Conference is going to debate some very complex taxation issues in detail, including those dealing with e-commerce transactions, harmonisation of double taxation policies, especially those relating to cross-border transactions, and measures to accelerate the pace of consolidation and restructuring of Indian industry.

I propose to discuss only some of the broad underlying features of existing taxation policies and the environment in India. I will leave it to the more learned members of this distinguished audience to grapple with the intricacies of specific tax clauses over these next 2 days!

Tax competitiveness is of course just one aspect investors consider, when evaluating alternative investment destinations. The other criteria, including factors such as political stability, availability of human and intellectual capital, and access to markets, are well known.

Nonetheless, the tax environment is a very critical factor for every investor - as it deals with the share of revenues and income that will accrue to the Government, from the returns earned on investments.

Before we discuss Indian taxation policies, let us take a look at what the country has achieved in the past 10 years, since the time economic reforms began in 1991.

GDP has increased from US$ 267 billion to US$ 478 billion - a growth rate of 6% per year.

Exports have more than doubled, from US$ 18 billion to around US$ 45 billion.  So have imports, increasing from US$ 20 billion to over US$ 50 billion.

Our foreign exchange reserves have multiplied over 10 times, from US$ 5.6 billion to US$ 64 billion.

Yet, what has been created so far is really only a strong foundation.  A period of far more accelerated growth is required over the next 10 to 20 years, to realise the true potential of our country and our people.

Our respected Prime Minister and the Finance Minister have stressed the need for the country to move beyond the historic GDP growth rate of 5-6% per annum, and achieve a GDP growth rate of not less than 8-10% per annum in the future.

In this context, it is natural that a country like India, with its diversity of resources and capabilities, should target to achieve this growth in a multiplicity of sectors - from manufacturing to services.

I would like to take this opportunity today, to briefly talk about the continuing importance of investments in the manufacturing sector, which have a significant multiplier effect on GDP growth, and consequent all-round economic benefits.

Investments in the manufacturing sector also enhance the economic security of the country-which the Finance Minister has stressed as being amongst our key priorities, given the volatile environment in our region, and indeed, globally.

If we create the right environment in India, these investments, capital formation and growth, can take place right here in our country.  Millions of jobs can be created here, and the benefits can flow to millions of our own people.

Of course, the reverse holds equally true.  If we do not create the right climate, value addition will continue to take place overseas, at the cost of India.  Jobs will continue to be exported overseas, not products - and we will remain dependent forever on imports of goods, instead of earning foreign exchange through exports.

Accordingly, at the present stage of our economic development, when our manufacturing output is less than 1% of global manufacturing output, and our exports represent less than 1% of total global trade, it is appropriate for India to adopt a desirable taxation framework, to substantially accelerate investments.

This would be simply in line with what other countries the world over have practised, at similar stages of their economic development.  The measures that have been widely adopted all over the world are well-known, and include, amongst others, accelerated depreciation, investment rebates, and tax holidays.

It is also appropriate, at this juncture, for India to strengthen the existing sector specific framework, for accelerating investments in thrust areas.

A uniform taxation policy, for different sectors, irrespective of the widely differing impact on enhancement of economic security, capital formation, employment creation, and earning of foreign exchange, appears inappropriate - at least till the country achieves key milestones, in terms of economic growth, overall global competitiveness, and increase in per capita income.

Once those milestones are achieved, and national priorities met, the framework can certainly be reviewed, after a definitive timeframe of 5 to 10 years, and modified to be in line with the then prevailing needs of the economy.

I note that a country like China, which has been successful in attracting investments running into several hundred billions of dollars in the past decade, even today offers differential lower tax rates for investments made in specific locations as well as for exporting enterprises; and also for high technology, energy, port, transport and communications ventures.

India will have to offer an even more attractive tax regime to attract large investments, if we are to capture the window of opportunity, and target leadership in the global economy.

Let me now turn to the question of complexity in taxation policies in India. Simplicity in tax laws is certainly a desirable objective.

I am informed by my friends in the international taxation advisory business that US tax laws are 5 times the size of Indian tax laws, in terms of the number of clauses! Yet, the US tax laws are considered more simple than Indian tax laws.

There is only one reason - constant change, and lack of continuity, in Indian tax laws, creating uncertainty on the applicability of different tax provisions. Add to that, the multiplicity of inspectors, the voluminous records to be maintained, the limited role of computerisation, the vagueness in wordings of rules and regulations, leading to subjective interpretation, and, thereby, the uncertainties with respect to compliance - and you have a level of complexity beyond what rocket scientists ever encounter!

It is the constant amendments to taxation provisions, recurring changes in interpretation and application of the tax provisions, and the opacity and delays in the process of tax administration, that have led to the complexity of Indian tax laws - per se, the laws are fairly straightforward.

Accordingly, I have a suggestion to make. The Companies Act does not undergo major amendments every year with the Union Budget. Why then should the Income Tax Act suffer this fate every year? Let us have a stable taxation policy framework, and let the Union Budget prescribe only the tax rates from year to year, not amendments to the Act.

If there is a need to amend the Income Tax Act, let it be on the same lines as the Companies Act - once in 4-5 years, by circulating draft amendments, inviting comments from experts, and by an appropriate mechanism of reference to Parliamentary Committees. This elimination of annual changes to tax laws will usher in the much-sought simplicity!

I would now like to mention one specific area in direct taxation, which I believe requires the consideration of this distinguished gathering - measures for revival of India's capital markets - critical for accelerating the pace of economic growth.

Some of the important steps that merit consideration are - removal of taxation on dividends, abolition of capital gains tax, and introduction of tax deductions linked to investments made in equity shares, whether directly or through equity schemes of mutual funds. I am confident that such measures, if introduced, will go a long way in restoring vibrancy to the Indian capital markets.

In a lighter vein, I would add, if these measures are not introduced, our one billion people may be tempted to all become non-residents - because nonresidents, by routing transactions through Mauritius, can enjoy tax free dividends and tax free short term and long-term capital gains even today! And nonresidents can enjoy a further benefit of getting their tax interpretation issues cleared through an Advance Ruling mechanism - which cannot be availed by resident Indians!

I now move on to the indirect taxation policy framework in the country. The world over, we are seeing a move towards creation of unified markets, such as the European Union, NAFTA and ASEAN. The success of the EU is truly remarkable, creating a common market of 377 million people from 15 countries.

Unfortunately, we in India have moved in the opposite direction. Our common market has become fragmented on the basis of boundaries of States, each having its unique taxation policies!

Competition between States to achieve higher growth is welcome, but it should be based on commonly agreed principles, providing for equal access to markets. Otherwise, the fabled creativity of Indian intellectual capital is needlessly being diverted to evolving the most efficient movement of trucks between different locations in the country, to minimise the sales tax burden, instead of being deployed in more useful pursuits!

The creation of a unified market in the country, devoid of the bewildering array of different local taxation policies, and replaced by a Central VAT regime, covering both, excise and sales tax, will go a long way in accelerating the pace of investment in the country. Today, not every entrepreneur is willing to deal with this cobweb of local taxes, and this discourages investments.

There is also a need to increase the contribution of the services sector to taxes, in line with the increased share of services in GDP. Under pressure to reduce its deficits, and raise tax revenues, and unable to tax agriculture income, the government has relied disproportionately on tax revenues from incomes generated in the industrial sector. This distortion lies at the root of the low tax/GDP ratio for India, and needs to be addressed.

Finally, I believe that significant cuts in excise duties and sales taxes across the board are essential to stimulate demand growth in the country, thereby paving the way for accelerated investments, which will ultimately lead to industrial growth, increased employment, and more revenues for the government.

Today, the cascading effect of customs duty, excise duty, sales tax other local levies, account for over 35% of the final price to the consumer. This is double the level prevailing in a country like the UK.

Apart from impacting demand growth, these high taxation rates act an incentive for tax evasion in the unorganised sector. The Government loses on two counts. Firstly, it does not get revenues on this production. Secondly, investments are not made in the organized sector, because there in no way the organized sector can compete against smaller units that are evading these tax payments. The textile industry is a prime example of this situation.

Reduction in the level of excise duties and sales taxes will remove these anomalies, and ensure healthy development of industry, alongwith providing a stimulus to the broader economy.

Having spent my entire time today on discussing direct and indirect taxation policies, I would like to conclude by touching upon a related subject - whether the pace of investments in India is constrained by the scarcity of capital.

I firmly believe that India is blessed with an abundance of resources. We often talk about the low level of annual FDI into the country, at barely around US$ 4 billion. Let us not forget that our domestic savings are estimated at a staggering over US$ 100 billion per year!

These numbers relate only to the official economy. It is no secret that there is a huge parallel "unofficial" economy, born out of nearly 50 years of a high tax regime. According to some estimates, that parallel economy is as large as our official economy - which means there are huge resources that could be available for investment, from that economy as well.

Then, we have the huge flight of capital from the country - estimated at several hundred billion dollars, illegally held overseas by resident Indians, and awaiting a favourable regime for repatriation to the country.

The challenge before us is to formulate an appropriate framework, which will attract these mind-boggling resources, away from idle channels, and into productive avenues, leading to accelerated economic growth. This talk about a "new source of revenue" simply means tapping the same old taxpayer in a brand new place.

Apart from the several other steps required to achieve this objective, an appropriate taxation policy framework is clearly one of the key areas that needs to be addressed.

And, the key elements of such a taxation policy framework, should be:

• Simplicity
• Stability and Continuity
• Certainty
• Reasonable tax rates
• Ease of Compliance