International Tax Conference on Cross Border Transactions
November 17-18, 2005, New Delhi

Welcome Address by Mr Pradeep Dinodia, Chairman, Taxation Committee, FICCI

Good Morning Ladies and Gentlemen and a cordial welcome to all of you to this International Tax Conference on Cross Border Transactions. We are indeed privileged and honoured to have the august presence of Mr K M Chandrasekhar, Revenue Secretary to inaugurate this important event. I am extremely grateful to him. We are confident that his vision statement will set the right tone and tenor of the deliberations at the Conference.

We have organized this Conference, which has now become an annual feature - 5th in the row, in association with OECD and IBFD. I must confess that the event has been becoming increasingly crucial and significant largely owing to the active support and cooperation of both these Organizations.

I am also thankful to Mr Somak Ghosh, Country Head, Yes Bank Limited who has kindly agreed to deliver the Key Note Address. My special thanks to those of you, who have made it convenient to come from far off places. It reflects the earnestness of other country's interest in India.

Friends, as you are aware, over the years, India has undergone a series of economic reforms to usher in a new era of efficiency and competitiveness and in the progressive integration with world economy. There has been a considerable change in the mindset of bureaucracy to adopt a flexible and liberal approach towards interpreting and administering rules and regulations.

The policy initiatives have considerably helped us in attracting foreign investment and accelerating the pace of our economic growth. It is indeed heartening that Indian growth story is now a subject matter of discussion world over and our country is being viewed as an emerging giant on the economic landscape. We have to build upon the good performance seen in the past and ensure that the country's policies, politics and administrative efforts continue to be geared towards economic growth.

According to FICCI's Quarterly Business Confidence Survey for the first quarter of 2005-06, India Inc's outlook for the Industry performance in the near future is very positive with 74% of the respondents looking forward to a much better performance of their industry sectors in the next 6 months.

All of you would agree with me that globalization and disappearing boundaries have led to increase in the cross border trade and worldwide Governments are entering into Free Trade Agreements and taking steps to meet their WTO commitments to promote trade and commerce. The developments in the past have posed new challenges and problems on various dimensions of taxation like tax havens, transfer pricing, tax treaties, e-commerce, software taxation, withholding tax amongst others.

It is important right now that our tax laws and practices are fine-tuned to fit in the global scenario facilitating cross border transactions. With that end in view, I take this opportunity to make a few points for kind consideration of our Revenue Secretary, Mr K M Chandrasekhar :

One : The introduction of FBT has unnecessarily complicated the tax structure and needs to be withdrawn. One is not clear as to how it would fit within the purview of direct taxes. Even the same is not allowed to be deductable from the taxable income of the employer. The intention of the Government, of late, has been to move towards ASEAN level of tax rates and it is important to note that no ASEAN country has the concept of Fringe Benefit Tax in their tax laws. Why should then we deviate and adversely affect the competitiveness of our industry. FBT will involve a number of practical and interpretational problems leading to protected litigation. It is, therefore, against the basic cannons of simplification and rationalization of tax structure.

Two : Cascading effect of Dividend Distribution Tax (DDT) should be avoided. From a foreign shareholders perspective, DDT may not be preferred, since it is generally not eligible for claiming tax credit against his home country tax. Some countries like UK and Mauritius have allowed credit for such tax, the issue is still unresolved for a number of other countries.

Three : International mergers should be encouraged in India by making tax laws more meaningful. Stamp duty rates should be reduced drastically and made uniformly applicable across all States. The period of 5 years for the continuation of the same business of the amalgamating companies should not be stipulated or atleast the period reduced to 2 years to enable the amalgamated company to make the undertaking a profitable enterprise.

Four : In several countries, there is a system of Advance Pricing Mechanism (APM), which enables companies covered by transfer pricing to approach the transfer pricing revenue authorities for fixation in advance the arm's length price. Why should not our law have a similar system?

Five : With the rapid technological advances happening all over the world, plant and machineries are becoming obsolete in a relatively shorter period of time. It would, therefore, be appropriate to consider introducing the concept of "free depreciation" where an enterprise may choose the quantum of depreciation and the years of claim so that it is in a position to plan its cash flows in a better manner to optimize productivity. Countries like UK, Spain, Finland, have had such a system in their tax statutes.

Six : There is a need to encourage research in India otherwise foreign companies will bring their patented products in India at higher prices and take the market away from Indian companies. In countries like Canada, Germany, the Government provide upto 35 per cent grant on research whereas the weighted deduction allowed in India results into a tax advantage of only 7-8 per cent.

Seven : India has tax treaties with a large number of countries, which need to be revisited from time to time keeping in view the emerging global developments and the practical difficulties experienced in their implementation.

Perhaps, the right approach for India may be to draw up a model DTAA. A model DTAA would help crystalize issues on which India wishes to adopt a non-negotiable stance. This could include inclusion of a limitation of benefit clause - which would mitigate treaty shopping by residents of a third country. In addition, a model DTAA would also be useful in providing a broad framework on those issues where India is willing to adopt a give and take approach - such as the rate of withholding tax against royalty income or fees for technical services.

Eight : Sir, while one can appreciate that owing to revenue considerations, the Government has to strike an optimal balance between the tax rates and tax incentives, but in a global economy like ours, some incentives for promoting growth in the desired directions are inevitable and have to be continued and in certain cases revived like the investment allowance.

Nine : After having now the revenue buoyant experience of the State level VAT, perhaps, it may be desirable to have a road map for national VAT with overall incidence of 20 per cent (CENVAT 12% and State VAT 8%) to provide us the competitive edge in the global matrix.

May I now request Mr K M Chandrasekhar, Revenue Secretary, Ministry of Finance to give his Inaugural Address.

Thank you.