Interactive Meeting with Task Force on Direct and Indirect Taxes
November 22, 2002, New Delhi

Welcome Address by Shri R S Lodha, President, FICCI

Ladies and Gentlemen, I have great pleasure in extending to you all a very cordial welcome to this interactive meeting with Task Force on Direct and Indirect Taxes.

Friends, I really feel privileged in welcoming in our midst, Dr Vijay L Kelkar, Advisor to the Minister of Finance and Company Affairs. He hardly needs any introduction to this august gathering. He has been closely associated with the reform process of the country for so long that it is difficult for anyone in the corporate world not to have known his name.

Before taking over as Advisor to Minister of Finance and Company Affairs, he has held various senior positions like Finance Secretary, Ministry of finance; Chairman, Tariff Commission; Permanent Secretary, Ministry of Petroleum and Natural Gas and Chairman, BICP amongst others.

All of you are aware that Hon'ble Minister for Finance and Company Affairs, Shri Jawant Singhji has set up Task Force on both Direct and Indirect Taxes under the Chairmanship of Dr Kelkar- one of the leading economist in the country. The Task Force on both Direct and Indirect taxes has recently made its Consultation Paper public to obtain feedback on the recommendations from various quarters. The Task Force has made, if I may say so, far-reaching recommendations to simplify and rationalise the direct and indirect tax laws and procedures.

The Task Force has envisaged a Revenue Neutral Model for reforming the Direct Tax system by removing exemptions and effecting an overall reduction in tax rates. Out sourcing appears to be the Mantra for the Kelkar Panel on Direct Taxes to reduce transaction costs - be it computerization of tax administration, issuance of Permanent Account Number or processing of Income Tax Returns within four months. The Task Force has focused on three Principles - Efficiency, Equity and Effectiveness. The decision to do away with dividend tax and abolition of MAT are indeed steps in the right direction.

On the Indirect Taxes, the Task Force has recommended a two tier excise duty structure of 16% and 8%, reducing Special Excise Duty to 12% from the current 16%, a 5% cut in peak customs duty from 30% now, besides doing away with a host of exemptions from the next financial year.

The Task Force has addressed the fundamental issue which has been causing a lot of problems for the corporate for quite some time - transaction cost. It has been viewed that if the panel's reform proposals are implemented, the reduction in transaction costs could be as much as 50% with the potential gain being Rs. 4000-5000 crore per annum.

The Task Force's suggestions for establishing a High Level Inter-Ministerial Committee to resolve inter agency issues to expedite clearance of import and export goods based on international norms deserves to be implemented forthwith. 

The Task Force's recommendations, designed to change the very essence of Central Excise Administration with the twin objective of taxpayer facilitation and encouraging compliance towards enhanced revenue, are unexceptionable. So also the overarching need to ensure coordination between the DGTD and the Customs through some institutional arrangement.

The objective of the meeting is to interact, understand and debate on various recommendations of the Task Force both on Direct and Indirect Taxes. This meeting would greatly help in absorbing the corporate response on the Consultation Paper.

Sir, before I conclude I would like to submit the following points for the consideration :

• First, it is important that the tax incentives granted for specific purposes should not be withdrawn in an arbitrary and ad-hoc manner. The sudden withdrawal would upset the long term planning process of corporate and severely reduce the credibility of the Government in respect of going back on its own commitments. Therefore, it is suggested that all sunset clauses appearing in the Income Tax Act under various provisions such as Section 80IA, 80IB, 10A, 10B etc. should be fully honoured and changes, if any should be only prospective.
• Second, on the Corporate Tax Rate Front, the Committee has recommended a reduction of tax from 35% to 30% under Option I. However, considering that the Committee is suggesting removal of a host of exemptions / deductions and also since the effective tax rate was around 22% in 1999-2000 and 2000-01 (as per the report) against the statutory rate of 38.5% and 39.5% respectively, it is suggested that the Corporate Tax Rate should be reduced further to 25%. 
• · Third, the depreciation rates under the Companies Act and the Income Tax Act serve very different objectives. The former uses the rates to reflect a 'true and fair view' of the affairs of the company in the interest of shareholders, creditors and other stakeholders. Therefore, its objective is to create long-term corporate value for the shareholders. To do so, the Act recognizes the need to gradually write off assets over a number of years. The Income Tax Act uses depreciation to calculate net taxable income. Equally importantly, tax depreciation rates are universally recognized as fiscal incentives to promote investment in desirable areas.
• The economic focus of the government is to spur growth in the industrial sector. It was for this reason that accelerated depreciation was allowed as an incentive so that companies are able to grow by making investments on one side and side by side reward the shareholders by being able to give sufficient returns and thus be able to tap the capital markets. Withdrawal of this incentive would have a negative impact on the growth of the industrial sector.
• Fourth, at present, interest paid on capital borrowed for the purpose of business is wholly allowed under Section 36 (1) (iii) of the Income Tax Act. The Task Force has recommended for the abolition of the said Clause without any discussion and justification in the Consultation Paper. 
• Recently, at the International Tax Conference organized by FICCI, it was clarified that these expenses are basically in the nature of business expenditure and should be claimed for deduction under the general provisions of Section 37(1) of the Income Tax Act. It was also pointed out that the Task Force has proposed to delete the earlier Section 36(1) (iii) to discourage misuse of this provision by certain companies. 
• Sir, to my mind an established law need not be removed because the administration is not able to check its misuse. In this perspective, the existing provision should continue so as to retain the specificity of the conditions provided therein.
• Fifth, The recommendation of the Task Force to withdraw the benefit provided under Section 35 for scientific research expenditure is not at all justified. Research and Development deserves to be encouraged for industrial growth and in house R&D will enable the domestic industries to withstand the global competition in an effective manner. In most of the developed countries including United States, Australia, France, Canada etc. tax incentives are provided for promoting Research and Development. We must continue with the existing incentives. Science has to be placed in the vanguard of our society if we have to let knowledge and technology lead our growth.
• Sixth, the Task Force has recommended that the deduction for mortgage interest in respect of loans for acquiring a owner occupied dwelling will be phased out. The recommendation will have a negative impact not only on the housing sector but also in other sectors like steel and cement. It may kindly be noted that other countries such as United States, Sweden, Netherlands, Japan, Italy and Argentina also provide deduction in case of interest on Housing Loan. Further, it may be noted that the tax benefits in the housing sector has helped in encouraging its growth in the last few years inspite of recessionary pressures. Further, the limit for deduction of interest on housing loan should be enhanced as in developed countries like the US. This would give further impetus to the burgeoning middle class who would be able to borrow at competitive rates, which in turn will provide the required fillip to the construction industry. 
• Seventh, Sir, scrapping exemptions on long-term savings is definitely retrograde and unfair. This is also a negative step since there is a definite need to encourage the savings habit and savings as a percentage of GDP has not grown over the last few years. In fact, the Report itself states that in most of the countries personal savings are encouraged through tax incentives. Tax incentives are especially effective in the context of savings since it results in forced savings in the form of provident fund, life insurance etc.
• Eighth, in India, the cascading effect of various levies results in the effective consumption taxes amounting to over 35% of the final price to the consumer, double that in U.K. 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%.
• FICCI is of the view that there is a need for 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.
• · Ninth, on the Customs duty, FICCI is of the view that any further reduction without proper study about the cost aspects of different industrial sectors would render Indian products uncompetitive in the domestic markets vis-à-vis imported goods. Before reducing the peak tariff, Sir, there is a need to remove disabilities in the case of domestic industry. The disabilities in the case of Indian industry, as I had pointed out earlier also at different fora, are labour, infrastructure, transaction cost, power, interest, taxes and duties and small scale reservation. Sir, in your Consultation Paper you have addressed the issue of transaction cost in a major way. What is important right now is to remove the anomalies in the duty structure. We must have three-tier duty structure - lowest on raw material, slightly higher on intermediates and highest on finished products.
• · Tenth, the Task Force has called for major structural changes including a lower protection level for domestic refineries. There is a general feeling that if the tariff recommendations are accepted, the protection level for Indian refineries could be as low as 3%. Also, it would then be attractive for multinationals to operate their refineries overseas at full capacity and sell the product in India. In fact, this could lead to under cutting of prices with each company wanting to offer a better price.