Welcome Address by Mr Onkar S Kanwar, Vice President, FICCI

I have great pleasure in extending to you all a very warm and cordial welcome to this International Conference. I am particularly grateful to Mr R R Shah, Secretary, Department of Industrial Policy and Promotion, Ministry of Industry for kindly agreeing to inaugurate the Conference inspite of other compelling demands on his time. His observations will give a constructive start to our deliberations.

To begin with, I express our sincere thanks to the officials of the Ministry of Finance and Ministry of Industry. 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. Today, we have a gathering of persons with diversified backgrounds, experience and expertise, and as such, we can with confidence look forward to stimulating and constructive discussions.

FICCI has organized this Conference in association with Organisation for Economic Cooperation and Development, International Bureau of Fiscal Documentation and European Commission. This is third Conference in the series. I would like to thank all the three organisations that have joined 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.

Friends, all of you are aware that since 1991 India has undergone a sea change in its outlook towards foreign investment and global collaboration. The Tenth Five Year Plan marks the return of visionary planning to India after a long interregnum of cautious optimism. During the past two decades, India has, no doubt, been one of the ten fastest growing economies in the world, but we cannot be content with that.

The Hon'ble Prime Minister of India has set the stage for formulation of the Tenth Five Year Plan by indicating a vision in which the per capita income is to be doubled within the next ten years. The Prime Minister has also perceived a goal of creating 100 million employment opportunities over the next ten years.

To achieve the much-desired acceleration in economic and industrial growth, it is imperative that our industry must be competitive. The idea of this Conference is to understand the various dimensions and concepts of competitiveness. The moot question for consideration is as to whether the Indian industry is really competitive? Considering this aspect in mind, we thought that the theme of this Conference should be "India's Competitiveness as a Business Destination".

In order to make the Indian industry competitive, a number of initiatives have been taken by the Government over the last five years and more particularly in the recent past. The economic and fiscal statutes have been re-structured and are now comparable with other countries of the world.

No doubt, due to reforms initiated in the recent past, India's position in the global economy has improved from the eighth position in 1991 to the fourth place in 2001 when the gross domestic product is calculated on a Purchasing Power Parity basis. The perception about India as a destination of international investment is fast improving. This is supported by recent development, which has helped the country record a positive growth in Foreign Direct Investment last year, when globally FDI had negative growth.

It is also important to note that during the 90s, India had the third largest average annual growth rate of 5.6 per cent amongst the major developing countries. Only China and Korea had higher growth rates than India during this period.

In developing countries like India, FDI is seen as a means to supplement domestic investment for achieving a higher level of economic growth. FDI benefits the domestic industry as well as the consumers by providing opportunities for technological upgradation, access to global managerial skills and practices, optimal utilization of human and natural resources, opening up export markets and access to international quality goods and services.

India has the potential to attract as much as $100 billion Foreign Direct Investment over the next five years. From the same, the domestic and export sector has the potential to attract $45 billion and $10 billion respectively. However, FDI inflows depend upon a number of factors like the assurance of safe recovery of capital, regular repatriation of dividends, overall sound economic climate, exchange rate and price stability, availability of raw material and other inputs like skilled manpower, infrastructure facilities etc.

Today, not every entrepreneur is willing to deal with multiplicity of local taxes and this positively 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 our GDP. Under pressure to reduce deficit and raise tax revenues and our inability to tax agricultural income, the burden has fallen disproportionately on tax revenues from incomes generated mainly by the industrial sector. This distortion lies at the root of the low tax GDP ratio for India and this needs to be seriously addressed. Such a situation, prima-facie, leads to inequity in income taxation.

Let me also take this opportunity to say few words about the India's legal system and Corporate Governance practices and the developments, which have taken place in the recent past in this area. India's legal and judicial system are highly sophisticated and well developed. India is also fortunate that it's judiciary is manned by highly qualified and learned judges. Also, there are enough laws to safeguard the rights of people and provide justice to them.

In spite of the same, India's legal and judicial system has not kept pace with the changing needs. Ever increasing population, increase in number of laws, increase in the industrial activities and other changes are resulting in inordinate delays in disposal of cases.

We all know, Corporate Governance is an essential pre-requisite for wealth creation. Wealth itself has a cyclical tendency to rise and fall, like a Charka, a Wheel, in a competitive market. The amplitudes can be reduced by good Corporate Governance. Corporate Governance is determined not by competence, but by dharma, ethics.

FICCI feels that "the route to better Corporate Governance does not entail in a complicated rule based approach and any rule making will not go a long way in improving the ground realities and enriching the ethical dimension of Corporate Governance. FICCI is of the view that the Corporate Governance should not be mandatory and cannot be enforced by legislation.

To make the Indian economy more conducive both for domestic and foreign investment, the Government need to consider the following suggestions:

First, there is a need to instill some basic essential attributes in the tax system. These include simplicity, stability, equity, efficiency, neutrality, flexibility, progressivity, acceptability and revenue elasticity etc.

Second, world over, taxation has gained acceptance from tax economists and policy makers and is viewed not only as a resource generation mechanism but also as a tool for enabling social and economic development. Tax planning and policy making helps reforming socio economic status of a country by focusing at (i) industrial growth; (ii) encouraging export promotion and import substitution; (iii) promoting inflow of foreign investment and (iv) providing additional employment through provision of suitable fiscal incentives. For this, it is important that the country should have a Long Term Fiscal Policy at least for five years focusing on these aspects.

Third, FICCI for a long has been advocating that much desired incentives should be provided in the tax laws to stimulate investment. This is all the more necessary as increased investment in the core sector in India is the key to industrial growth. The restoration of investment allowance / development rebate needs to be thought about. Simultaneously, the Minimum Alternative Tax which has adversely affected the internal resource generation of the companies resulting in a severe blow to their plans of expansion and diversification needs to be withdrawn.

Fourth, as a matter of principle, there should not be any tax on dividend distribution as we have presently in place. World over, the countries are moving towards abolishing the tax on dividend income both in the hands of corporate and shareholders.

Fifth, the amendment in the definition of "Resident but Not Ordinary Resident" will have major negative effects. It is not clear as to when the Indian Government is taking various measures to attract NRI investment, why such an amendment is needed in the Income Tax Law. It would be in fitness of things that status quo ante should be restored in regard to the definition of "Not Ordinary Resident" and the law should be amended to do away with the interpretation given by Gujarat High Court to this phrase.

Sixth, 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. Further, we also need to see as to whether we should reduce our peak tariff to 20 per cent in another two years to reach at the ASEAN level. We in FICCI feel that unless and until the glaring problems concerning labour, infrastructure, transaction cost, power, interest, taxes and duties and small-scale reservation are addressed pragmatically, there should not be any general reduction in customs duty structure as the same would seriously affect our economy and industrial growth.

Sir, in nutshell, efforts will have to be made to give the much-needed thrust to the economy not by lit bits but in a major way. We in FICCI do believe that investment by Government must be focused in areas, which are very much relevant for the acceleration of the growth augmenting sectors and should be used not for the objective of achieving ownership but for leveraging private sector participation also in the same sectors. Thus, the total capital, which is attracted to the concerned sectors, would be significantly greater than what the Government puts up by itself.

To my mind, a uniform taxation policy for different sectors, irrespective of the widely differing impact on enhancement of social security, capital formation, employment creation and earning of foreign exchange appears inappropriate atleast till the time country reaches key milestones in terms of economic growth, overall global competitiveness and increase in per capita income. Once these milestones are reached and national priorities met, the framework can certainly be reviewed and modified to be in line with the then prevailing needs of the economy.

Seventh, it is important that we should review our various economic legislations and make them more industry and consumer friendly. To illustrate a few - Companies Act, 1956, Prevention of Money Laundering Act, Securitisation Act, Competition Act, etc. There is also a need to review the Takeover Code and the Regulations pertaining to insider trading.

FICCI welcomes the withdrawal of the Companies (Amendment) Bill, 2003 and recommends the automatic withdrawal of Clause 49 of the Listing Agreement. It is important that the scope of the Regulator should be limited to the extent of framing regulations. The Regulators should not exceed its boundaries and, at best, provide broad guidelines, framework and regulations for the corporate sector.

With this background in mind, the three-day Conference would focus on topics such as Development of Investment Friendly Taxation Regime, Direction of India's Tax Reforms, Cross Border Investment and Tax Treaties, Transfer Pricing and E-Commerce, Value Added Tax, Reforms in Customs and Central Excise, Corporate Governance and Emerging Issues in Corporate Laws.

I have confined myself to some important general issues, which I believe, are inter related and relevant to the discussion on the specific items on the Agenda.

Thank you.