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

Welcome Address by Mr R S Lodha, President, FICCI

I have great pleasure in extending to you all a very cordial welcome to this International Conference.  I am particularly grateful to Dr S Narayan, Finance Secretary for kindly agreeing to inaugurate the Conference inspite of other compelling demands on his time.  His observations will give a constructive lead to our deliberations.  I am also thankful to Shri Anil Ambani, Vice Chairman, Reliance Industries Ltd. for accepting our request to deliver the Key-Note Address.

To begin with, I would express our sincere thanks to the officials of the Ministry of Finance and Company Affairs.  Their participation in the discussion bears out the fact that there is no substitute for a free and frank exchange of views and opinions on a common platform.  I am also thankful to the delegates for attending the Conference.  Today, we have a galaxy of participants both from India and abroad.

FICCI has organized this Conference in association with the Organisation for Economic Cooperation and Development, the International Bureau of Fiscal Documentation and the European Commission.  I would like to thank all the Organisations for joining FICCI in organizing this Mega Event.  All of you would agree with me that without their support, it would not have been possible for us to organize this Conference in such a major way.

Sir, the liberalized economic policies announced over the past few years were a major landmark in India's efforts to accelerate industrialization and progressively integrate the Indian economy with the global economy.  The new economic policies were intended to restructure and rejuvenate trade and industry and initiate vigorous structural reforms in the monetary and fiscal sectors.

Sir, within a short span, the Finance Ministry has taken a number of measures to kick start the economy and send positive signals to create confidence in the economy.  The Finance Minister has constituted two Task Forces on Direct and Indirect Taxes under the Chairmanship of Dr Vijay Kelkar - the leading economist and his Advisor in the Ministry of Finance and Company Affairs.  We are indeed happy that the Task Forces have submitted their Report within the given timeframe and put the same on web, inviting views from corporate sector, professionals and public at large.

Sir, the Finance Minister has also laid down the Road Map for the forthcoming Union Budget.  We in FICCI are indeed happy that he would give top most priority to economic reforms including taxation in a bid to push growth and contain fiscal deficit.

We in FICCI believe that the overall thrust of our reforms should be on : (i) Measures to stimulate demand; (ii) Measures for encouraging private investment and capital formation; (iii) Reduction in taxes to encourage consumer spending; (iv) Cheap availability of development finance; (v) Legal changes to stimulate entrepreneurship; and (vi) Transparency in governance.

I feel I owe an explanation to all of you on why we have chosen the theme for the Conference as India's Tax Competitiveness and organized this International Conference on Taxation Policy for Accelerating Investment : Domestic and Foreign.

I take this opportunity to inform all of you that this is the Platinum Jubilee Year of FICCI.  This is a historic moment for all of us.  We have chosen the theme for this year - India Unbound : Accelerating Growth through Competitiveness with Confidence.  With this theme for the year, we thought that it would be appropriate if we discuss tax related issues, which have a direct bearing on competitiveness.

The World Economic Forum has recently published its Global Competitiveness Report for the year 2000.  The Report places India at 37th position against China's 44^th in the current competitive index.  The current challenge for the Indian corporates is to see as to how to become more and more competitive.

Let me highlight two key factors closely related with Competitiveness.  To my mind, the first factor is internal in nature and the second is external one.  Indian industries are deeply engaged in internal restructuring of business at a radical pace.  As a result, there is a spate of mergers, amalgamations, de-mergers and takeovers.  The external milieu lies in the hands of Government.  The external dimensions of being globally competitive, what I call the LITPITS effect i.e. labour, infrastructure, transaction costs, power, interest, taxes and duties and small scale reservations are being tackled at the root.

In India, the cascading effect of customs, excise, sales tax and other local levies results in the consumption tax of over 35% of the final price to the consumer, double that in U.K. - 17.5%.  FICCI has recently conducted a study to know the total incidence of Indirect Taxes as a proportion of selling price.  The study reveals that the average total incidence on selling price in case of consumer goods is 44.11% capital goods 43.26%, basic goods 30.28% and intermediate goods 30.06%.

Sir, during a meeting organized by FICCI at Mumbai, H.E. Zhu Rongji, the Premier of People's Republic of China stated as under : To quote

Sir, to become more competitive and rather globally competitive, I would like to submit the following points for consideration:

First, Sir, we are happy that the Government is keen to introduce Value Added Tax from 1^st April, 2003.  VAT system of taxation is considered to be superior to other systems of taxation as it avoids / reduces cascading effect of Indirect Taxes. VAT system must be used as a catalyst for growth from the first day itself.  It is important that while moving towards VAT, the concerns of the corporates, various States and consumers at large must be taken into consideration so that we have industry and consumer friendly VAT system in place.  What is important is that all states including the new States of Jharkhand, Uttaranchal, Chhatishgarh and many Union Territories must come out with Draft Bills and Rules for public debate and discussion. Since the system is new, the Government must give training and orientation to their staff as well as the corporates and traders so that they can understand the implications of the same in advance.

Second, there is an urgent need for a massive cut in commodity taxes on demand elastic items to stimulate demand in the economy.  Tax cuts would provide the urgently needed boost to India's manufacturing sector.  The concept of Special Excise Duty (SED) should be done away with.

Third, we also need to see as to whether we should reduce our peak tariff to 20% in another 2-3 years to reach at the ASEAN level.  The Task Force on Indirect Taxes, in its reports has also suggested a Road Map in respect of Custom Duties so that there is no uncertainty in the minds of investors and industry.  The task Force has suggested that Duty should be 10% for raw materials, inputs and intermediate goods and 20% for final goods.

Sir, we in FICCI feel that unless and until disabilities, which I pointed out earlier, are addressed properly, there should not be any general reduction in customs duty structure. What is important is that in the meantime, the anomalies in the duty structure should be removed.  It is important that we should have a three-tier duty structure - lowest on raw materials, slightly higher on intermediaries and highest on finished products.

Fourth, a comparison of corporate tax rate shows that still the tax rate on India Inc is on the higher side and should be reduced to 30%.  Sir, N K Singh Committee has also advocated for corporate tax rate of 30%.  There is also a need to give the much-needed incentives to replace plant and machinery, which have become outdated due to change in technology. The Government may consider restoring investment allowance for the same.  Worldwide, taxation policies have been used to stimulate investments.  Countries like Canada, France, germany, Japan, USA, U.K. etc. provide for Investment Allowance / Accelerated Depreciation Allowance, Carry Back of Depreciation, Tax Holidays etc. to stimulate investments. The South East Asian countries also provide incentives to stimulate capital investment in their country.

MAT has adversely affected the internal resource generation of the companies resulting in a severe blow to their plans of expansion and diversification. Sir, what MAT does is to narrow the picture confining it only to the direct tax contribution, and consequently distorting the overall picture.

Sir, the Task Force on Direct Taxes has recently made the consultation paper containing its recommendations public for debate and discussion.  We in FICCI are in the process of soliciting views from our members on the same.

Fifth, How to restructure corporate sector through economies of scale? Though, the government has taken a number of
measures in the last 2 to 3 years, but these are not adequate. Time and again, FICCI had drawn their attention to the hurdles,
which are coming in the way of mergers, de-mergers and amalgamations and they need to be addressed at the earliest. 

I would like to highlight a few of these hurdles, which are upper most in my mind. First, incentives provided for Corporate
Restructuring is negated by the excessive stamp duty. The rate of stamp duty varies between 10 to 15% of the current
market value of the fixed assets. State Governments should be persuaded to reduce the stamp duty and the same made
applicable uniformly for all States. Second, demergers be also made possible under section 293(1)(a) of the Companies Act
1956 in addition to Sections 391 to 394 route. Further, amalgamated company should be allowed to retain only 50% and not
3/4^th of the value of the assets of the amalgamating company to facilitate prudent utilization of remaining assets of
amalgamating company. 

Sir, what is important is that exemption needs to be given for change in shareholding pursuant to mergers/demergers on lines
similar to those existing under Section 80IB (12) whereby the benefit is continued in the hands of the amalgamated or the
resultant company. This will go towards facilitating business reorganization, spin offs, etc. as well as permit variation in
shareholding. 

Sixth, We are of the view that a fresh look is required as some of the treaties have become the subject matter of discussion
in the recent past. It is imperative that our tax treaties especially those which are outmoded in the context of changing
scenario be suitably revised and rationalized. While doing so, it should be ensured that misuse of tax treaties is adequately
checked. 

Before I conclude, we are confident that your deep understanding of the economic changes at global level will help in providing
further impetus to the economic reform programme and pave the way for second generation reforms in the country in our
relentless journey towards becoming a super power. I am confident that the suggestions, submitted by FICCI from time to
time, will be duly considered by you and your Officials appropriately. We would shortly send you the key recommendations of
the Conference for your kind consideration. 

Thank you