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Budget Preview _FICCI_ Feb08

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                               INTRODUCTION


Macro-economic overview

Growth Trends

1.1   The Indian economy has exhibited a robust growth pattern over the past
      few years. The economy grew by 9.4 percent during 2006-07 and an
      average growth rate of 8.6 percent has been recorded over the past four
      years. A growth rate of 9.3 percent was registered during the first quarter of
      2007-08.

1.2   The real GDP growth originating from the industrial sector was 8 percent in
      2005-06, which increased to 11 percent in 2006-07. The buoyancy in the
      industrial sector during the year 2006-07 was primarily driven by the
      manufacturing sector.

1.3   The manufacturing sector registered a growth of 12.5 percent during 2006-
      07. The growth of the manufacturing sector in 2006-07 was primarily led
      by the segments - machinery and equipment, basic metal and alloy
      industries and chemical and chemical products. The relative contribution of
      each of these industries in the total industrial production was 18.3 percent,
      16.6 percent and 14.6 percent in 2006-07. While a substantial part of the
      growth in the manufacturing sector was concentrated in capital-intensive
      sectors, the traditional labour intensive manufacturing sectors showed a
      relatively poor performance.

1.4   In the year 2006-07, the mining sector and the electricity sectors recorded
      higher growth as compared to the growth registered in the previous year.
      The growth rate accelerated from 1 percent in 2005-06 to 5.3 percent in
      2006-07 in case of the mining sector. In case of electricity generation, the
      rate of growth, which was 5.2 percent in 2005-06 increased to 7.2 percent
      during the year 2006-07. However, the growth rate in these two sectors has
      lacked behind compared to the manufacturing sector.

1.5   A look at the growth figures for the year 2007-08 shows that industrial
      growth moderated during the period April to August 2007-08. Industry
      registered a growth of 9.8 percent during April – August 2007-08 as


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      compared to 11 percent growth recorded during the same period last year.
      Manufacturing sector growth also moderated during the fiscal 2007-08 as
      during April - August 2007-08 manufacturing sector grew by 10.3 percent
      as against 12.2 percent growth attained over the same period last year.

1.6   The mining and the electricity sectors however turned out an improved
      performance during the period April – August 2007-08 as these registered a
      growth of 5.4 percent and 8.3 percent respectively. The corresponding
      figures for the mining and the electricity sectors for the same period last
      year were 3 percent and 5.7 percent.

1.7   A look at the growth numbers as per the use based classification show that
      in the year 2006-07 all segments except the consumer goods industry
      improved their performance vis-à-vis 2005-06. While growth in the basic
      goods industry went up from 6.7 percent in 2005-06 to 10.3 percent in
      2006-07, growth in the capital goods industry increased from 15.7 percent
      in 2005-06 to 18.2 percent in 2006-07. The intermediate goods sector
      registered a growth of 12.0 percent in 2006-07, a rate which was much
      higher as compared to the previous years‟ growth of 2.5 percent. The
      consumer goods industry however showed a decline in its growth from 12.0
      percent in 2005-06 to 10.1 percent in 2006-07.

1.8   Latest numbers available for the period April - August 2007-08 show that
      while the basic goods and the capital goods industries have improved upon
      their performance over the last year, the intermediate and the consumer
      goods industries have registered a decline in growth. The basic and capital
      goods industries registered a growth of 10 percent and 21.3 percent during
      the period April – August 2007-08 and these numbers were higher as
      compared to a growth of 8.3 percent and 19.5 percent that was registered
      during the same period last year. In the case of intermediate goods and
      consumer goods, growth registered a decline from 10.4 percent and 11.4
      percent during April – August 2006-07 to 9.3 percent and 6.2 percent
      during April –August 2007-08.

Core sector

1.9   Although the infrastructure sector witnessed some improvement during
      2006-07, still the growth has not been up to the mark. The overall index of
      six core industries (coal, electricity generation, crude petroleum, petroleum
      products, finished steel and cement) registered a growth of 8.8 percent
      during 2006-07, which was higher than the 6.1 percent growth during 2005-

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       06. The improvement during 2006-07 can be attributed to the good
       performance registered in crude oil production, electricity generated and
       refinery throughput. The six core infrastructure industries however grew by
       6.6 percent during April - August 2007-08.

Investments

1.10   The last few years have seen a persistent increase in the investment rate.
       The investment rate, which was 28 percent in 2003-04 rose to 33.8 percent
       in 2005-06. For the year 2006-07, provisional estimates made available by
       the government show that investment rate touched a high of 35.1 percent.
       Further, with the rate of growth of investments in real terms being higher
       than the rate of growth of consumption expenditure during the period 2002-
       03 to 2006-07, it can be said that growth in the economy is largely being
       driven by enhanced investment activity.

Business confidence

1.11   Although the growth performance of the economy appears reasonable, there
       are signs of moderation that are visible in certain segments eg. exports and
       investments. The findings of FICCI‟s Business Confidence Survey and
       FICCI‟s Export Survey for the first quarter of the current fiscal show that
       the combination of rising Rupee and successive hikes in interest rates has
       depressed sentiment at the ground level. The results show that both
       industrial growth and export growth are slowing down and unless we take
       actions to reverse this situation we may face a situation of slowdown in
       overall growth.


Agriculture

1.12   The cumulative rainfall up to 25 July 2007 was 4 percent above normal as
       against 14 percent below normal rainfall during the corresponding period
       previous year. The rainfall from June 1, 2007 to September 05, 2007 was
       normal to excess in 31 meteorological sub divisions and scanty in the
       remaining five sub divisions.

1.13   The growth in the agricultural and allied sectors decelerated from 6 percent
       in 2005-06 to 2.7 percent in 2006-07. The growth rate of food grain
       production has witnessed a decline. The growth rate, which was 22.5
       percent in 2003-04, fell drastically to –7.06 percent in 2004-05. Although

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       the growth rate managed to climb to 5.76 percent in 2005-06, it again
       declined to 1.57 percent during 2006-07. The non-food grain production
       has registered an increase in the growth rate from –3.06 percent in 2005-06
       to 9.69 percent in 2006-07. However this still remains to be much below
       the 19.15 percent growth attained in 2003-04. Also there has been
       stagnation in the production of major crops and decline in the stocks amidst
       rising global food prices, which led to significant hardening of domestic
       food prices during 2006-07.

1.14   The stock of food grains as on July 1, 2007 stood at 23.91 million tonnes as
       against 19.35 million tonnes on July 1, 2006, registering an increase of
       23.57 percent over the period of one year.

1.15   There has been no significant increase in the area under cultivation of food
       grains. The area under cultivation of food grains was 120 million hectares
       in 2004-05, which increased marginally to 121.60 million hectares in 2005-
       06 and further to 124.07 million hectares in 2006-07.

Fiscal situation


1.16   The implementation of the fiscal responsibility legislations at both the
       centre and the state levels has led to improved fiscal situation in the
       country. The combined fiscal deficit of the Centre and the States in 2006-07
       is estimated to be 6.4 percent of GDP, which is lower than the last year‟s
       fiscal deficit of 6.7 percent and 7.5 percent in 2004-05. The budget estimate
       for combined gross fiscal deficit in 2007-08 is 5.6 percent.

1.17   Similarly the other two key deficit indicators have also registered a decline.
       Primary deficit decreased from 1.4 percent in 2004-05 to 1 percent in 2005-
       06 and further to 0.8 percent in 2006-07. Revenue deficit also declined
       from 3.7 percent in 2004-05 to 2.7 percent in 2005-06 to 2 percent in 2006-
       07. The budget estimate for revenue deficit in 2007-08 is 1.2 percent and
       for primary deficit is 0.1 percent.

1.18   The combined total receipts of the centre and the state increased by 9.8
       percent in 2006-07 over the previous year. However this was much lower
       than the 16.11 percent increase registered in 2005-06 over 2004-05. Also
       the tax receipts (direct and indirect) formed a major proportion of the total
       receipts. In 2004-05 the tax receipts constituted 55.4 percent of the total


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       receipts, which increased marginally to 56.8 percent in 2005-06 and further
       to 64.4 percent in 2006-07. Aggregate receipts of the central and state
       governments are projected to go up from Rs. 1133325 crore in 2006-07 to
       Rs. 1325193 crore in 2007-08 showing a growth of 16.9 percent.

1.19   The combined total expenditure of the centre and the state has also
       registered an increasing trend. The total expenditure recorded an increase of
       19.71 percent in 2006-07 over the previous year against 11.61 percent
       increase registered in 2005-06 over 2004-05. Thus it can be said that during
       the year 2006-07, the total expenditure has grown faster than the growth of
       total receipts. Aggregate expenditure of the central and state governments is
       projected to go up from Rs. 1162151 crore in 2006-07 to Rs. 1327296 crore
       in 2007-08 showing a growth of 14.2 percent.

1.20   The combined development expenditure of the centre and state as a
       proportion of total expenditure increased marginally from 51.20 percent in
       2004-05 to 53.25 percent in 2005-06 and to 54.10 percent in 2006-07.
       Whereas the combined non development expenditure of the centre and
       states registered a marginal decline, falling from 47.86 percent in 2004-05
       to 45.65 percent in 2005-06 and further to 44.70 percent in 2006-07.

1.21   The ratio of combined outstanding liabilities of the centre and the state to
       GDP has also registered a decline consistently over the past few years. The
       ratio which stood at 80.5 percent in 2005-06, declined to 77 percent in
       2006-07 and is projected to further go down to 74.2 percent in 2007-08.

1.22   A look at the fiscal performance of the central government for the period
       April - August 2007-08 shows that gross tax revenue of the central
       government grew by 24.1 percent as against a growth of 31.9 percent
       during the corresponding period of the fiscal year.

1.23   The net tax revenue of the central government posted a growth rate of 22
       percent during April - August 2007-08, lower than the 39.3 percent increase
       in the corresponding period of the previous year. The non-tax revenue
       collection has shown a large increase of 157.8 percent during April –
       August 2007-08 but this is largely due to the transfer of profit on account of
       the sale of RBI‟s stake in SBI. Total revenue receipts went up by 53.1
       percent during April to August 2007-08.

1.24   The corporation tax, which contributes about 21.9 percent to the tax kitty,
       registered a deceleration from a 71.2% growth during April – August 2006-


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       07 to 46.1 percent during the corresponding period of the current year.
       Income tax collected, on the other hand, went up phenomenally at the rate
       of 34.4 percent while customs and excise collection rose by 4.9 percent and
       18.6 percent respectively.

1.25   However, the total expenditure of the central government during April –
       August 2007-08 went up by 35.4 percent over the corresponding period of
       the preceding year. This increase was mainly due to the acceleration in the
       non-plan expenditure, which grew by 35.9 percent as compared to the 18.7
       percent growth seen last year. Plan expenditure has gone up at a higher rate
       as compared to the growth registered during the same period last year.

1.26   Of the three key deficit indicators, while the revenue deficit has shown an
       improvement by 32.6 percent, fiscal deficit and primary deficit have
       increased by 14 percent and 1.8 percent during April – August 2007-08 vis-
       à-vis the value during the same period last year.

Monetary indicators

1.27   The growth in the broad money supply during April to September 2007-08
       stood at 8 percent as compared to last year‟s figure of 8.2 percent. A look at
       the figures pertaining to the credit disbursement shows that bank credit to
       both the government and the commercial sector has shown a decline in
       growth when compared to the growth rates last year. During April –
       September 2007-08, bank credit to the government and to the commercial
       sector went up by 4.1 percent and 5 percent respectively. The
       corresponding figures for the same period last year were 4.9 percent and 9.4
       percent respectively.

1.28   In the first six months of the current fiscal, growth in the foreign exchange
       assets of banking sector increased – foreign exchange assets went up by
       11.1 percent during this period as compared to 10.8 percent growth during
       the same period last year.

1.29   Aggregate deposits of scheduled commercial banks went up by 9.8 percent
       during the first two quarters of the current year as compared to 9.6 percent
       rise in the corresponding period of the last year. Investments in government
       securities and other approved securities grew by 14.9 percent as against the
       4.6 percent rise in the same period last year. Credit off-take registered a
       slow growth of 5 percent as compared to the last year‟s growth of 10.2
       percent.


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Inflation

1.30   The annual inflation for the year 2003-04 for all commodities was 5.4
       percent, which rose to 6.4 percent in the year 2004-05 and declined to 4.4
       percent in 2005-06. The inflation based on WPI index stood at 5.2 percent
       during the year 2006-07. Latest numbers available show that inflation has
       come down to 4.7 percent during the period April – August 2007-08. In fact
       during the last few weeks there has been a considerable moderation in
       inflation with the inflation rate touching a five year low of 3.07 percent for
       the week ending October 6, 2007.

External sector

1.31   The merchandise exports in terms of US$ grew by 20.9 percent, while
       imports expanded by 26.4 percent in 2006-07, and the trade deficit widened
       by 40.7 percent in 2006-07. The disaggregated data on commodity
       composition shows that engineering products and petroleum products
       recorded an increase in exports during 2006-07, while exports of other
       commodities like chemical and related products, gems and jewellery, textile
       and related products and ores and minerals registered a deceleration.

1.32   The impact of the appreciating Indian Rupee against the US$ has dampened
       the growth momentum of the Indian exports. During the April–August
       period of 2007 Indian exports recorded growth of 18.3 percent and this was
       slightly lower than the growth registered a year before. Imports grew at 31
       percent during the period and as a result trade deficit widened to US$ 32.5
       billion in April – August period of 2007-08 as compared to US$ 19.9
       billion recorded in the previous year. Exports in the coming months will
       continue to register moderate growth in the wake of pressures of much
       unfavorable rate-of-exchange and slowdown in some of the major
       economies. Oil imports slowed during the five-month period of April –
       August 2007-08; however the oil import bill rose in August 2007 on
       account of increase in the global crude oil prices.

1.33   India‟s service exports primarily comprise of software exports and other
       business services reflecting India‟s emergence as a potential knowledge
       economy with greater competitiveness. The total service exports increased
       from US$ 61404 million in 2005-05 to US $ 81330 million in 2006-07,
       registering an increase of 32.45 percent. Travel, transportation and software


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       exports (excluding software services) are the major contributors to the
       service exports, with their respective shares being 11.6 percent, 9.9 percent
       and 38.5 percent in 2006-07. The shares of travel and transportation exports
       declined marginally while that of software exports experienced a marginal
       increase when compared to the previous year.

1.34   Invisible surplus remained buoyant during 2006-07, primarily due to the
       robust growth of software and other services and increase in private
       remittances. The invisibles (net) as a proportion of GDP increased from 5.3
       percent in 2005-06 to 6 percent in 2006-07.

1.35   FDI inflows registered an unprecedented increase, from US$ 7.7 billion in
       2005-06 to US$ 19.5 billion in 2006-07. The FDI inflows in the first
       quarter of 2007 are estimated to be US$ 4.9 billion and the flows are
       targeted at US$ 30 billion during the current fiscal year. Direct investments
       have more than doubled in the first three months compared to the inflows
       received in the previous year. The rising pace of mergers and acquisitions
       in various sectors has boosted FDI inflow.

1.36   Overseas investment by India also exhibited a significant increase during
       2006-07 with investments going up from US$ 4.5 billion in 2005-06 to US$
       11 billion in 2006-07. The number of acquisitions made by Indian
       companies abroad has consistently gone up since 2004-05. The number of
       firms acquired in 2004-05 stood at 797, which increased to 874 in 2005-06
       and further to 927 in 2006-07.

1.37   Foreign Institutional Investors continued to invest large funds in the Indian
       securities market. However investments in 2006-07 were lower than in the
       previous year mainly on account global developments. In the first quarter of
       2007-08 the country saw foreign investment flowing in little above US$ 12
       billion with about US$ 5 billion coming from the foreign direct investment
       sources and the rest from portfolio investments. Inflows through portfolio
       investments continued to rise, primarily because of Foreign Institutional
       Investments.

1.38   In August 2007, country‟s forex reserves remained unaltered compared to
       the forex reserve position in the previous month However, our reserves are
       enough to cover imports for 11 months. By the end of September 2007
       forex reserves rose by US$ 19 billion to touch US$ 247 billion with US$
       239 billion coming from foreign currency assets and the rest from gold,
       SDR and reserve position in the IMF. Gold reserves have moved up from


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       US$ 6.8 billion in July 2007 to US$ 7.3 billion in August 2007 and SDR
       increased to US$ 8 million from US$ 2 million.

Tax Reforms

1.39   The past few years have seen several progressive changes in the country‟s
       economic policies, which have marked a new phase in India‟s development
       strategy. We had a GDP growth of 9.4% during the year 2006-07, and an
       average of 8.6% during the last four-year span, and thereby emerged as the
       fastest growing economy in the world next only to China.

1.40   The improving macro-economic fundamentals, increasingly skilled labour
       force and greater global integration have gone a long way in enhancing
       India‟s competitiveness. FICCI is confident that the country‟s robust
       growth performance in recent years, would continue well into the future
       and we should be in a position to achieve a higher growth of 10% being
       envisaged in the Eleventh Five Year Plan. What is needed is a fresh
       perspective with regard to the reforms agenda and the adoption of
       more innovative strategies to make growth more broad-based and
       inclusive, targetting a growth of 4-5 percent for agriculture sector and
       14-15 percent for manufacturing sector.

1.41   Our experience has amply demonstrated that a conducive environment
       through motivational regulatory framework has taken the country on a
       higher economic growth trajectory. At this juncture, when business
       confidence in the country is reasonably high and the international
       community is looking at India as a potential economic superpower, we
       must re-orient our taxation policies to put Indian economy on a sustainable
       growth path of 9 to 10%.

1.42   Our policies must facilitate creating a world-class infrastructure and
       pushing up the growth of our agriculture and manufacturing sectors, which
       are supplementary to each other. Towards this end, following are for
       consideration.




a) To meet huge capital investment requirements for expanding
   manufacturing capacities and upgrading infrastructure


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1.43   The key enabler for sustained higher economic growth is upgraded
       infrastructure of the international level. We will also need to expand
       manufacturing capacities in several industrial sectors like textiles,
       automobile, steel, pharmaceuticals, petro-chemicals, process foods,
       engineering and several others, to meet domestic and export demands. For
       this, we need over $ 350 billion in next five years. Therefore, we have to
       increase the rate of investment from the current level of 35% to 40% of
       GDP to sustain a high growth rate, a large portion of which would have
       to be invested on key infrastructure sectors like power, ports, roads,
       airports, mining and for high quality infrastructure for services. It is,
       therefore inevitable to have policy initiatives as under, to promote
       capital investments.

    In view of huge investment requirements, it may be desirable to involve
     and motivate private sector investments.            Investment in key
     infrastructure like power, road, port etc should be zero-rated for tax
     purposes, to reduce its cost and provide positive return on capital
     employed within a reasonable period. Service tax should not be levied
     on services used in building infrastructure like roads, ports, mining
     and railway infrastructure. Tax can be levied only when such
     infrastructure is used for providing any taxable service. The income
     tax holiday currently provided to key infrastructure sectors should
     continue till these attained international standards.

    Reforms in Pension sector which is a good source of long-term
     investment, should be expedited.

    Individuals should be encouraged to make investments in long-term
     saving instruments by enhancing their threshold limits.

    Also, a higher foreign equity be allowed in telecom, insurance, pension
     and other similar sectors to mobilize additional resources for
     infrastructure investment.




b) To Promote India as a preferred international headquarter of
  entrepreneurs

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1.44   Indian entrepreneurs have been making large overseas investment in the
       recent past and acquiring overseas companies in manufacturing and service
       sector. Our overseas investment has gone up from US $ 4.5 billion in
       2005-06 to US $ 11 billion in 2006-07, with acquired number of firms
       going up from 874 to 927 respectively. The profit repatriation from such
       companies into India however is taxed as income in India at the marginal
       tax rate, even when such profit has already suffered tax in the overseas
       country. The underlying profit tax credit is not given while charging the
       tax on dividend remittance, except in one or two countries where the tax
       treatise provide for such credit. This tax treatment causes Indian
       entrepreneurs to park profit earned by overseas subsidiaries and associate
       out of India by establishing a holding company abroad or by retaining such
       profit in the country where it is earned. Thus India is not only deprived of
       the financial capital but is also losing the opportunity to become global
       head quarter of dynamic business organizations. Most of the developed and
       developing countries either fully exempt the repatriation of profit on which
       profit tax has already been paid or tax the dividend at a highly concessional
       rate of 5 to 10% where the share holding is above specified percentage
       ranging between 10% to 50%.

1.45   FICCI strongly recommends that the dividend remittance from
       overseas subsidiaries and associate should be exempted from Indian
       income tax if such profit is already taxed in the source country. This
       will not only increase the remittance of foreign exchange earnings but
       will also encourage companies to choose India as their international
       headquarter along with placement of their key decision makers.

c) Reduction in the excise duty to encourage higher industrial growth

1.46   The indirect tax incidence on the cost of most of the indigenous goods
       ranges between 30 to 40% of their sales price. This is quite high compared
       to other developed and developing countries. High cost adversely impact
       their demand due to limited purchasing power with a large section of Indian
       population.

1.47   FICCI strongly recommends that the excise duty rate should be
       reduced from the current level of 16% to 14% in 2008-09 and later
       reduced to 12% level. The 2% reduction in excise duty with
       consequential lower incidence of state and local taxes will result in 3 to
       5% reduction in prices. This in turn will increase the demand for


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       manufactured goods leading to higher industrial growth and reduced
       inflation. Higher growth will also lead to increased revenue collection
       as has been the experience in the past.

1.48   It is equally imperative to ensure that a 3-tier duty structure i.e. lowest
       on raw materials, slightly higher on intermediaries and highest on the
       finished products, is adhered to. In cases of inversion in duty, it is
       important that the government should evolve a mechanism to refund
       the credit accumulated in Cenvat account which cannot be utilized by
       way of Modvat. This could be on the pattern of refund of excess income
       tax paid under the Income Tax Act. Such refunds, within a stipulated
       time-frame will improve upon the cash flow position of the units for
       day-to-day working without changing the duty structure, as also
       enhance the competitiveness of such units. Alternatively, Government
       may introduce an excise certification/exemption system where the
       manufacturer be allowed to procure his inputs without payment of
       duty to the extent of Cenvat accumulation in his books of account.

d) Initiating the integration of multiple Indirect taxes under GST

1.49   Replacement of multiple state taxes by VAT had a favourable impact on
       trade, Industry and State Governments‟ tax revenue. However, even after
       implementing state level VAT, the indirect tax structure in the country
       continues to remain complex with multiple taxes being levied by central
       and state governments under different legislations and at different rates.
       These are levied at different stages in the supply chain and some time on
       the same base. The multi level taxes without their full vat-ability have
       cascading impact on the cost of production making indigenous goods less
       competitive. As per the present tax structure, excise duty is levied on the
       cost of goods produced, which includes VAT paid on the cost of input
       material used. Similarly, VAT is levied on the sale price of manufactured
       goods which includes excise duty element. Thus, one tax is levied on
       another tax in a supply chain thereby artificially increasing the cost of
       indigenous production as a result of cascading effect of multiple taxes
       levied at different stages. Therefore the present tax structure has adverse
       impact on the competitiveness of Indian industry. Moreover, multiple tax
       structure with different rates makes our tax system complex leading to
       increased litigation, high cost of compliance and prone to tax avoidance.

1.50   In this context, the move towards GST is welcome and would go a long
       way to improve the competitiveness of Indian Industry by eliminating the
       cascading effect of taxes on production cost, simplify the tax structure and


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       reduce the cost of tax administration as also the compliance cost. It is
       therefore, important to ensure that GST is in place within the assured time-
       frame i.e. by 2010.

1.51   While implementing GST, the following points need consideration:

        It is inevitable to have a consensus and proper coordination with
         States and to come out with 2-3 alternative models preferably from
         Asian region adopting one after in-depth debate amongst all
         stakeholders, with suitable modifications in the Indian context.

        There is a need to provide a threshold exemption limit, dispute
         settlement mechanism, and a cooling period of one year in the
         model.

        The Government may even consider having a two-tier model-
         Central GST and State GST with the existing taxing powers
         initially.
        State VAT taxes should be harmonized across sectors. The CST
         should be phased out at the earliest. All local taxes such as Octroi,
         entry tax etc should be made vatable. Procurement of raw materials
         under Deemed Export /Advance License Procedure should be
         completely exempted from the levy of CST with immediate effect. This
         has assumed urgency in view of strengthening of the Indian rupee
         against US dollar affecting adversely our exporters‟ margins in the
         international market.

        The combined impact of all indirect taxes on prices of
         manufactured goods should not be more than 20 per cent (cenvat
         rate of 12 per cent plus state vat rate of 8 per cent). Necessary
         reductions in indirect taxes should be made to achieve this goal.

        To facilitate the introduction of GST by 2010, the process be
         initiated in the ensuing budget by integrating excise and service tax
         into Central Vat.



e) Other salient recommendations




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1.52   FICCI makes the following recommendations for rationalizing the taxes,
       the details of which are given in the enclosed separate dockets relating to
       direct and indirect taxes along with other suggestions received from its
       constituents to accelerate the economic growth especially of the
       manufacturing sector:- .
        Reduce the corporate and personal tax rates.
        Restore investment allowance            or   introduce     technological
         upgradation allowance.
        Restore exemption of income from investment in infrastructure and
         other projects.

        Revive depreciation rate to the earlier limit of 25% or introduce the
         concept of free depreciation.

        Provide weighted deduction benefit for R & D to all sectors of the
         economy and on on-going basis.
        Restore sections 80 L and 80 M.
        Undertakings engaged in infrastructure and other crucial sectors be
         granted 100% tax holiday for 10 consecutive years during the first
         15    years      after    the     commencement        of   commercial
         production/operations. Providing tax benefit only for first seven
         consecutive assessment years without any option in respect of
         undertakings engaged in commercial production or refining of
         mineral oil, is quite restrictive and dilutes the intended tax benefit,
         and must be relaxed.

        Tax benefit period for EOUs and STPIs be extended beyond 2009
         and made co-terminus with SEZs
        No FBT on genuine business expenditure. ESOPs be taxed as perks
         in the hands of employees or the taxable value of ESOPs be made
         deductible in the computation of company‟s taxable income.
        To facilitate agriculture sector achieving 4 percent growth, increase
         investment in it to at least 5 percent of GDP, and grant
         infrastructure status to the establishment of cold chain and other
         modernized technology for upgradation of storage handling and
         transportation etc.      and provide tax holiday accordingly, to
         encourage private investments in the agri-sector.


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       Our healthcare infrastructure in the tertiary sector is grossly
        inadequate. Creation of such infrastructure would require huge
        investments from the private sector. With a view to attract such
        investments, grant „infrastructure status‟ to the healthcare industry
        and thereby provide tax holiday benefit u/s 80-IA. Also, companies
        creating Training and Educational Facilities in Medical, Dental,
        Nursing, Midwifery, Paramedical, Lab Technicians, Biomedical
        Engineering, etc. be made eligible for tax exemption in terms of
        section 10 of the Income Tax Act.

       Higher education sector should also be granted infrastructure
        status.
       Reckoning year of 1981 for indexing capital gains be changed to
        2001.
       Service tax on E & P activities imposed last year is inward looking
        and discouraging global oil giants from investing in our country,
        and must be withdrawn. Alternatively, a mechanism be evolved to
        provide credit for the service tax paid. Also, service tax on
        commercial establishments needs a re-look.
       All inverted duty structure in excise and customs be eliminated to
        encourage domestic value addition in manufacturing.

       Streamline transfer pricing provisions to encourage cross-border
        transactions and to avoid litigations.

       The recommendation of Dr. Kelkar‟s Task Force on Direct Taxes
        for the abolition of wealth tax be implemented.
       Government should once again look at the policy of disinvestments
        of shares in PSUs, and bring the process back on track.
1.53. While the issues and suggestions mentioned above have a bearing on the
      industry as a whole, there are issues specific to sectors which need
      government consideration. We have drawn up a detailed agenda for
      each sector after in-depth deliberations by the experts, economists and
      the business community in the respective sectors. The same is
      presented in the chapters following.




                                     15
                                         II
                             SECTORAL ANALYSIS

Agri and Food Processing – The under tapped Territory

2.1 The food-processing sector is critical to India‟s development, for it establishes
    a vital linkage and synergy between the two pillars of the economy-Industry
    and Agriculture. India is the world‟s second largest producer of food next to
    China and holds the potential to acquire the numero uno status with sustained
    efforts. Processed food consumption in India is estimated at INR 4600 bn,
    however, majority of processed food are primary processed. The level of
    processing and value addition is significantly lower than developed countries
    and many developing countries. The processed food industry is set to grow at
    more than 10% per annum driven by consumer demand, organized distribution
    and policy initiatives by the government.

2.2 One of the thrust areas of concern in agri-food processing sector is the lack of
    cold chain infrastructure. With NDC‟s commitment to achieve 4 per cent
    annual growth in the agriculture sector during the 11th plan, it is important that
    the Indian food chain is integrated with a view to move from a “green” to a
    “food” revolution.

2.3 Under the existing provisions of section 80-IB (11A) an undertaking deriving
    profit from the business of setting up and operating a cold chain facility for
    agricultural produce or from the business of processing, preservation and
    packaging of fruits or vegetables or from the integrated business of handling,
    storage and transportation of food grains is eligible for 100% deduction of its
    profit and gains for five years and 25% (30% in case of company) for the next
    five years in a manner that the total period of deduction does not exceed ten
    consecutive assessment years beginning from the initial assessment year and
    subject to other specified conditions. This incentive has not proved attractive
    enough.
2.4 It is suggested that the establishment of cold chain and other modernized
    technology for upgradation of storage handling and transportation etc.
    should be granted infrastructure status and the tax benefit thereto
    provided under section 80 – IA instead of section 80 – IB for undertaking
    involved in integrated manner.
2.5 100% tax holiday in respect of the profits of the undertaking should be made
    available for a period of at least 10 years and the assessee given the option to
    claim this tax holiday for any 10 consecutive years out of 15 years beginning



                                         16
      with the year in which undertaking commences businesses or commercial
      operations. Tax holiday benefit should be available in respect of the entire cold
      chain infrastructure including :-

      - Cold storages, freezing chambers & cold chain transportation system
      - Dehumidified Temperature Controlled Storage
      - Refrigerated / Insulated Containers for Perishables and Processed Products
      - Cleaning and Grading centers
      - Packaging Centers

2.6      The tax benefit should be available for all activities starting with:

      - Acquisition of seeds/breeds,
      - Plantation,
      - Various aspects of processing,
      - Preservation, including cold chains (specially controlled atmospheric
        storage system).

2.7 Handling, storage, transportation, packaging and repackaging, wholesaling and
    retailing are interlinked and cannot be separated to meet the requirements of
    the end customer and to take benefits of efficient supply chain. This would
    ensure that the tax incentive is available to entrepreneurs who carry out all
    activities in the industry in an integrated manner as well as entrepreneurs who
    are involved in providing one or more out of the entire gamut of activities in
    the supply chain.

2.8 The government has already emphasized on a number of occasions that
    promotion of agri business is one of its key thrust areas in the overall plan of
    economic development of the country. The government has rightly recognized
    that it is essential to promote investment in the food processing sector so as to
    ensure that it leads to increase in India‟s share in the global trade of
    agricultural products, generates employment for large number of people,
    increases the income of the farmers and contributes to the overall economy of
    the country.

2.9 Weighted deduction at the rate of 150%, as in the case of R & D, be
    provided, in respect of expenditure on Agri Infrastructure, esp. in –
    Warehousing; rural godowns; cold storage; freezing chambers; dehumidified
    temperature controlled storage; Cold chain transportation system (e.g. air –


                                            17
   conditioned cargo, coaches in railways, roadways etc.); Refrigerators/insulated
   containers for perishables and processed products; Scientific storage facilities
   to handle seasonal fluctuations in prices; Single-window extension services or
   e-enabled one-stop agri-services; and Consultancy provision centres or farmer
   service centers; Private Research & Development along with the Agriculture
   Universities; and Research Organizations; Reclamation of 24 million hectares
   of land categorized as cultivable; wasteland and permanent fallows by private
   sector; Rural Infrastructure like roads, power etc.

2.10 Under clause (1) of sub-section (2AB) of Section 35, 150% weighted
     deduction in respect of in-house R&D expenditure is available only to
     biotechnology, drugs, pharmaceuticals, electronic equipments, computers,
     telecommunication equipments, chemicals etc. There is a need to extend this
     benefit to all sectors of the economy on an ongoing basis.

2.11 R&D ideas should be supported and incubated by the government. There
     should be incubation centers on different aspects of food sector and located
     across the country.

2.12 The “Ministry of Commerce and Industry” as well as “Ministry of Science
     and Technology” should make necessary efforts to bring renowned
     inventions related to agri-food sector developed by other countries to India
     and the concerned institutes should improvise on them.

2.13 There is a substantial amount of food loss during post harvest due to poor
     storage and food processing facilities. In order to curb this problem, research
     should be conducted to reduce both pre and post-harvest losses.

2.14 A greater emphasis should be laid down for improving the quantity and
     quality of exportable food products, which generate foreign exchange
     earnings. Research should be undertaken to raise the quality of
     exportable food products as it is the main determining factor in the
     world market.

2.15 There is a need to consider the importance of economical and viable
     packaging methods, considering well in advance the advantage they can
     bring in the near future. Taxation on such packages will play a vital role in
     the overall cost of the product. Lowered price, aseptically packaged products
     from Thailand, Malaysia, China, Phillipines and Pakistan are going to
     compete with Indian products that will find themselves more expensive
     because of India‟s high taxes. Australia has an import duty of 5% on
     Packaging equipment, unlike India which has 10%or 15% duty, plus other
     taxes totaling 34% of the value of the goods.

                                        18
2.16 The import duty across the board on all non-agricultural goods has been
     lowered to 10% levels whereas all agricultural goods – raw materials,
     intermediates or finished goods continue to attract the high peak rate of 30%.
     This discrimination at least insofar as agricultural commodity inputs under
     import, largely on account of local unavailability, should be set right. The
     case of a agricultural input such as cocoa beans falling under tariff 1801 with
     no domestic or farmer implications (limited local production) continues to
     attract the duty of 30% and should be reduced to 15% level so also to
     encourage value addition and backward integration of cocoa and ensure
     parity between imported and local prices.

2.17 With regard to packaging, the following suggestions are for consideration:

   - Import duty on packaging machinery should be nil; it will bring in
     efficiency and demand for evolved packaging material requirements.

   - Import duty on finished packaging materials should also be reduced
     (only for the user industries); this will help in developing newer and
     efficient packaging material usage. It will also help in developing initial
     market for new technologies and concepts.

   - Incentive, wherever necessary, should be given to the input side like
     capital goods, infrastructure development, new technology, etc for the
     domestic Packaging Industry.

   - The aggregate import duty on aseptic packaging machinery is 27.48%
     which includes CVD of 16%. Since aseptic filling machines are not
     being manufactured in India, the Government should remove CVD of
     such machines.

   - Central Excise tax on packaging equipment and food processing
     equipment may be reduced from 16% to 8%. This will promote
     innovation in food processing and packaging equipments, thus
     increasing processing efficiency while cutting costs of food products.

   - The present excise and customs duty of 16% and 10% respectively on
     corrugated boxes is hampering the industry badly. Thus, the long
     standing issue of excise and import duty reductions to 8% and 5%
     respectively should be considered.

2.18   Packaged Drinking Water fulfils the basic consumer need of providing
       potable water outside the house. It has also been recommended by the
       Food Processing Ministry that small processors including the street food


                                        19
       vendors should use packaged drinking water instead of tap water in their
       preparations. 16% excise duty and 12.5% VAT on this category is not
       justified as it is an essential item of consumption and the key ingredient
       for the small scale Food Processing sector. Packaged Drinking Water
       should be exempt from excise duty as Processed Fruits & Vegetables.

2.19   The beverage industry which so far has been dominated by the carbonated
       beverages is evolving and many functional beverages are emerging in the
       market place. To encourage this trend, the duty on these functional
       beverages should be kept at 8% especially sports drinks and drinks
       operating in the nutritional supplement area.

2.20   Exemption of customs duty and CVD on plant, machinery and spare parts
       related to the Food Processing Industry and exemption of excise duty on
       plant & machinery sourced from the domestic tariff area.

2.21   To have fair conditions of competition and to create level playing field for
       the domestic producers vis-à-vis the vanaspati imported duty free under
       FTA from neighbouring countries, it is inevitable to make vanaspati more
       affordable. With that and in view and to check the rising trend in
       international prices, it is submitted that:

   - Flat rate of duty of Rs 4000/- per tonne be levied instead of present ad
     valorem duty on Crude Palm Oil (present duty on CPO works out as
     Rs 8500/- per tonne as against Rs 1,000/-per tonne in Sri Lanka).

   - Alternatively, pending the implementation of the first proposal, the
     inverted duty structure be corrected by permitting the domestic
     industry to import CPO at a concessional duty of 20% on actual user
     basis.

2.22   All finished Products, which are made by processing fruits, vegetables,
       dairy, meat, spices etc. should be duty exempt.

2.23   Excise duty on all the inputs and raw materials used for processed foods
       should be exempted.

2.24   Service Tax for the services rendered in connection with the manufacture of
       Processed Foods should be exempted or a mechanism designed for refund
       of the service tax.




                                        20
2.25   The VAT on Processed Foods should be reduced from existing high levels.
       The perishable foods should attract VAT of 0% whereas non-perishables
       should attract VAT of 4%.

2.26   Tea and coffee are the common man‟s beverage in India. Domestic
       consumption of coffee is around 80,000 Tons out of the overall production
       of around 300,000 Tons. In order to ensure a long-term future for the
       coffee growers and protect them from the international market movements,
       it is essential that domestic consumption is substantially increased. Instant
       Coffee, which is an efficient means of processing, is internationally
       recognised as a key driver for conversion to coffee drinking from other
       beverages. In order to make the product competitive, it needs to be
       exempt from Excise Duty, which is presently being charged at 16%.
       Roast and Ground coffee, as well as „Tea‟, which are comparable
       products, are exempt from excise duty. Removal of Excise Duty on
       Instant Coffee will make a significant impact in increasing domestic
       consumption of coffee. This will definitely help more procurement of
       coffee beans thereby helping the coffee growers. It is relevant to
       mention that Instant Coffee has proven health benefits.

2.27   Chocolates use cocoa solids, milk and sugar as the basic raw materials. This
       composition is entirely of agricultural raw materials. Consumption of
       chocolates is very low in India (About 50 gm per capita per year) compared
       to the world average (8 kgs per capita per year). Partly the reason for this is
       the relatively high prices of inputs, which are due to high level of excise
       and other tax levies. Chocolates compete with traditional sweets
       (mithai), which are produced in the unorganised sector which is not
       subjected to excise. Also, these have inefficient conversion (wastage of
       raw materials and energy) and are sometimes unhygienic. Removal of
       excise on chocolates would make them more affordable and boost their
       consumption. This will have a positive impact on demand for cocoa,
       milk and sugar.

2.28   Sugar Confectionery products are mainly based on Agricultural inputs and
       benefit farmers at large as well as reduce wastage of perishable raw
       materials. More than 80% of the raw material in sugar confectionery is
       sugar produced from sugarcane. Due to high excise duty, volumes in this
       sector (approx. 225,000 tonne per year) have been under severe pressure,
       resulting in loss of employment, especially in the hard boiled sugar
       confectionery, which is restricted to the small scale. A number of industries
       are in financial problems and looking for shutdown/bail-outs. Sugar


                                         21
       confectionery at its very low price points (Rs.0.25 – Rs. 1.00) provides
       inexpensive taste experience. Many times this is also a carrier of functional
       benefits (throat lozenges, digestives and in some cases micronutrients) to
       the mass of people. This is one of the most widely distributed products,
       readily available even in the smallest of villages. Per capita consumption of
       these products in India is 225 gms versus a world average of over 1 kg
       annually. The consumption of sugar for this sector is much larger than
       sugar consumed in other areas like carbonated beverages. Removal of
       excise duty is likely to boost the consumption and therefore the demand for
       sugar. These will lead to prosperity of sugarcane farmers, as well as ensure
       the progress of sugar industry and protect its jobs.

2.29   All Sugar Confectionery falling under residual classification 1704.90 is at
       8% rate whereas other low value confectionery products in the Gums
       category under 1704 10 00 (same classification head) attract the high rate of
       16%. The reduced rate of 8% should be made uniform for the entire
       heading 1704 in order to correct distortion in tax treatment of
       comparable products.


2.30   Chocolate confectionery (containing cocoa) attracts 16% duty whereas
       regular Sugar confectionery attracts 8% duty. These products should be
       given the same treatment as Sugar Confectionery without Cocoa viz. either
       full exemption or bring it down to 8%.

2.31   Excise duty rate of Wafers coated with chocolate or containing chocolate to
       8% will give boost to the sale of such Wafers.

2.32   Tea/Coffee Vending machines, falling under Chapter 21 of the Central
       Excise Tariff, be exempted from excise. This will not only lead to rapid
       growth of the industry but will also allow many members of the weaker
       sections of society to earn a living as vending operators.

2.33   Biscuits falling under heading CETH 1905 3100 or 1905 9020 should be
       exempted from Excise Duty in line with pasta, ice creams, branded
       namkeen, etc as biscuits are nutritious and ready to eat food consumed by
       masses in much larger proportion than ice creams and pasta and are
       healthier substitutes for regular food during exigencies. Also, dough
       arising in the manufacture of biscuits/bread should not be excisable.

2.34   “Mixed Condiments and Mixed Seasonings” falling under heading 21.03
       may be included in the exemption notification.


                                        22
2.35   The abatement given for excise calculation for packaged goods does not
       adequately consider the level of post-manufacturing cost incurred by
       FMCG companies. Typically, the post-manufacturing expenses which
       include trade margins, discounts, taxes, advertising, promotion, selling
       expenses, and overheads, account for much more than the current
       abatement of 35% of the retail price and needs a relook.

2.36   While the duty on soap noodles now stands reduced to 10%, the duty on
       PFAD, Non-Edible PKO (with FFA greater than 20%) remains at 15% and
       12.5% respectively. It is submitted to reduce customs duty on non-
       edible oils falling under Chapter 3823 1900 and Chapter 1513 2110 to
       10% (from the current 15% and 12.5%).

2.37   We appreciate the government‟s intention to provide relief for water filters,
       in order to meet the need of pure drinking water. However, water filters
       use “replaceable water purifying kit” which still attracts 16% Excise duty
       under the classification “84 21 99 00“. It will greatly help the lower
       income consumers, if this replaceable kit is also exempted from excise.
       Entry be suitably amended to include the replaceable “Water
       Purifying kit” used in the water filter. The entry be amended to read
       as:
          Classification           Description             Excise Duty
            84 21 21 20     Water Filters functioning            Nil
                            without electricity and
                            pressurized tap water
                            including     replaceable
                            parts      like      water
                            purifying kit used solely
                            in such water filters
2.38   It is also necessary to insert a suitable Explanation to the entry to specify
       coverage of products under the entry to provide clarity especially to field
       formations and avoid disputes in classification. The Explanation could
       cover ” Food mixes and instant food mixes such as pongal mix, vadai
       mix, pakoda mix, payasam mix, gulab jamun mix, rava dosa mix, idli
       mix, dosai mix, murruku mix, kesari mix, dhokla mix, cake mix, tea
       coffee premixes used in tea, coffee vending machines, etc”

2.39   Tea /Coffee Pre-mixes used in Tea/Coffee Vending machines falling
       under Chapter 21 of the Central Excise Tariff be excise duty exempt
       and also the VAT on the same be reduced to the lowest slab. This will
       not only lead to rapid growth of the industry but also improve the overall


                                        23
       hygienic levels in the country and also allow many members of the weaker
       sections of society to earn a living as operators.

2.40   The packaged drinking water is a common man‟s product.                 The
       manufacturers of packaged drinking water make available clean and potent
       water to the consumers thereby ensuring that the basic need of hygiene and
       hydration of consumers are both met. In fact this dove tails well into
       Government‟s objective of providing clean drinking water to all sections of
       the society. Currently this item is levied an excise duty of 16%. The
       packaged drinking water is a common man‟s product and should be put in
       the NIL category. The benefit to the total system by way of reducing /
       eliminating health concerns more than offset any loss that may occur as a
       result of removal of excise duty. A total macro view would be necessary
       than a sectional view focusing only on the revenue generating potential of
       levy of excise duty on packaged drinking water. However, if the
       government on revenue consideration is not able to remove the excise
       duty completely, it may look at reducing the excise duty in the first
       stage to 8% and gradually taking it down to zero excise duty
       progressively.

2.41   Aerated water industry that is an integral part of food processing sector is
       levied excise duty @ 16%. As a food item of the food processing industry,
       there is a strong case to bring down the CENVAT from rate of 16% to 8%.
       The industry has invested over 2 billion US dollars in establishing
       production facilities mostly in backward areas and wide distribution
       infrastructure across the country. This has helped integrate far flung
       backward areas into the main stream. The industry is a major provider of
       jobs and has the potential to further grow in volumes and contribute to the
       revenues of the government, provided the right fiscal stimulus is given to
       the industry by way of downward revision in taxes. The industry is poised
       to grow the market and thus any relief provided by way of reduction of
       excise will be deployed by the industry to grow the volumes so as to make
       Government‟s proposals revenue neutral over a period of time. In
       addressing this issue the Government is requested to take a macro picture of
       the economy where job creation is one of the key focal areas of the UPA
       government. This sector supports a very large number of jobs and can be a
       significant contributor in further generating job opportunities.

2.42   There are several food items that are exempt from the levy of excise
       duty. This decision was taken recognizing the fact that food processing
       sector needs to be encouraged to grow. The facility so extended should
       be continued as the revenue implications on the same are very minimal.


                                        24
       VAT on all food products should be taxed at 4% through out the
       country. Packaged drinking water is a food item and should be taxed at
       the rate of 4%.

2.43   „Mukhwas‟ or „Mouth Freshner‟ generally constitutes of Badishep or fennel
       seeds (0909 50 19), Dhaniya daal or corrainder (0909 20 90), turmeric
       (0910 30 90) and other items such as crushed dry fruits, dried and peeled
       seeds of watermelon, ajma (a digestive condiment), edible silver foil,
       permitted essence, raw salt, etc. Fennel seeds, corrainder and turmeric
       specifically fall within chapter 9 covering spices. It is mentioned in note
       1(b) of Chapter 9 that mixtures of two or more of the products of different
       heading are to be classified in heading 0910. There is a specific heading
       number 0910 91 00 which refers to mixtures in Note 1(b) to chapter 9
       which attracts nil rate of duty. Also Tribunal in the case of Crane Betel Nut
       Powder (2007 (2008) ELT 376) has classified mouth freshner under chapter
       9 attracting NIL rate of duty. However, diverse positions are adopted by
       excise authorities and the said product is sought to be classified in Chapter
       21 under food preparations note elsewhere specified in 2106 90 99 or under
       2106 90 70 as Churna for pan. A suitable entry in the Tariff by way of
       Notification would help maintain uniformity in classification of the said
       product.


CEMENT – Towards Stronger Infrastructure

2.44   For cement where MRP is > Rs.190 and < Rs.250 per bag, Government has
       introduced an excise duty of 12%. For cement where MRP is < Rs.190 a
       specific rate of excise duty of Rs.350 where MRP is over Rs.250 per bag, a
       specific rate of excise duty of Rs.600 have also been imposed. Whenever
       excise duty is levied on the basis of MRP, abatement is given. Without
       abatement, it results in a tax on Trade Margins and a Tax on Tax. This can
       be corrected by providing abatement on the Excise Duty levied on MRP.
       Such abatement is provided to all products where levy is linked to MRP.
       The NCAER report of 2005 suggested an Abatement of 55% for Grey
       Cement. Even White Cement receives an abatement of 35% on MRP.
       It is submitted that an abatement on these lines be given on the excise
       duty.

2.45   The current rate of VAT on cement which is 12.5% be brought in line
       with similar important construction material like Steel at 4%. This
       would certainly help in containing the cement prices by Rs.20/- per bag.



                                        25
2.46   In view of the imbalance in demand-supply situation of cement and the
       existing cement prices, Government chose to permit easy imports last year,
       by reducing customs duty to zero per cent level and withdrawing CVD on
       import of cement, whereas excise duty on cement was increased by 50%.
       These measures have brought in distortion to level-playing field between
       domestic production and import of cement.

2.47   The growth in cement demand projected by the Planning Commission can
       be met only if domestic capacity and production increases and cannot be
       satiated by imports. The domestic cement players have always responded in
       the past by creating capacity ahead of growth in demand. This led to low
       prices of cement due to intense market competition. Till 2005, there were
       hardly any margins leading to many companies being pushed to BIFR or
       takeovers. With spurt in demand in 2005-06, the capacity utilization went
       upto 94 -96%, some months even 100% in 2006 and with further growth in
       demand need for creating capacities was felt. The domestic players have
       ploughed in their margins, which they witnessed in 2005 end and 2006 in
       creating fresh capacities.

2.48   The cement industry is currently in the process of implementing capacity
       additions through expansions/Greenfield projects to the extent of 100 mn.t.
       in the next 2/3 years to cope up with the growing cement demand. If the
       realizations are affected, the investments in new capacity creation would be
       delayed or even dropped which is not a healthy situation for our growing
       economy. For domestic investments to take place, at least some level-
       playing field be provided by re-imposing CVD. It is submitted that CVD
       should be re-imposed on cement imports, as this would provide a level-
       playing field for the domestic manufacturers.

2.49   To sustain cement production to meet the growing demand, import duty
       on coal and pet coke be abolished. This would correct the inverted
       pyramid structure of duties existing in cement imports.

2.50   Cement remains the highest taxed essential infrastructure input in India.
       Various Government levies and taxes, taken together, constitute over 70%
       of the ex-factory price. These levies are very high when compared with
       17 countries in the Asia Pacific Region where the total average taxes on
       cement is 11.4% - the highest levy of 20% being in Sri Lanka. Reduction
       of central levies and excise duty on cement is important to make this
       product more affordable, especially for Housing and infrastructure
       projects and to provide level playing field with international
       competitors.


                                        26
2.51   A tolerance limit of 1 kg in cement clearances was earlier allowed by the
       Circular No.31/3/54-CX (M) dated 29.09.1955. But recently, the
       Department has disputed that the above relaxation is not available to the
       cement industry. Cement is packed in 50 kg bags by Automatic Packing
       Machines. Cement industry deals in very large volumes and even the best
       of the Automatic Packing Machine cannot fill exact 50 kg cement in each
       of the bags. There will be some error in the weight of each individual bag
       of cement. Under the Standards of Weights & Measures Act, 1976, error in
       relation to all packed commodities not specified in the First Schedule to
       that Act is as specified in Table-1 of the Act. Since 'Cement' is not specified
       in First Schedule of the Standards of Weights & Measures Act, Table-1 of
       the Act is applicable and the error of 1 % on either side is allowed. A
       controversy has recently arisen on this issue of long established position of
       allowing 1 kg tolerance in 50 kg bag of cement particularly in Rajasthan. It
       is submitted that tolerance limit permitted under the provisions of Weights
       & Measures Act and even in Central Excise is being allowed to many other
       commodities like Pan Masala etc. Tolerance limit be allowed to cement
       and earlier circular of 1955 should be continued.



Textile – The Employment Generator

2.52   The excise duty structure on Textiles is distorted. While Synthetic Fibres
       and Filament Yarns attract a mandatory excise duty of 8% (including their
       raw materials and Intermediates), the excise duty on cotton yarns is
       optional at 4% advalorem. Cotton being an agricultural product does not
       attract any excise duty. Cotton Textile Industry using this optional route is
       paying no excise duty at all as the excise duty on cotton fabrics and
       garments is also with the optional route.

2.53   The high and mandatory excise duty on Synthetic Fibres and Filament
       Yarns (including their raw materials and Intermediates) ultimately becomes
       a burden on the common man. The reduction in excise duty on Synthetic
       Fibres and their raw materials/Intermediates would result in increased
       domestic consumption and thus there would be hardly any revenue loss
       through this route.

2.54   In view of the above, it is strongly recommended that excise duty on
       synthetic fibres, PP fibre and filament yarns along with their raw
       materials/Intermediates starting from Naphtha, Benzene, PX, PTA,
       MEG, Caprolacturm be reduced to 4% with optional route. Such a


                                         27
       step would bring about equality in the duty structure. It will also spur
       consumption and growth and ultimately this will be a revenue neutral
       proposal in two to three years‟ time.

2.55   Also, the problem of credit accumulation needs to be addressed on an
       urgent basis. Since in the past, the excise duty structure on Synthetic Fibre
       chain was not reduced simultaneously, it has created an inverted duty
       structure which has resulted in accumulation of over Rs. 1500 crores of
       cenvat for the Synthetic Fibre chain. Over Rs. 800 crores of cenvat
       accumulation is with the Synthetic Fibre producers while another Rs. 700
       cores is with the downstream users of Synthetic Fibres and Filament Yarns.
       It needs to be noted that wherever the duty on raw material is more than the
       duty on finished product, the same cannot be modvated and such
       unmodvated portion continues to accumulate in CENVAT account. This
       cannot even be passed on as a cost because of fierce international
       competition where there is no such inversion in duty structure. Besides the
       duty on product, any capital goods purchased for expansion/diversification
       which carry CVD amounting to 20% value of the machinery also gets
       accumulated in the same CENVAT account on top of it service tax paid
       also gets credited to the CENVAT account. As such, substantial amount
       gets credited to this account, which cannot be utilized. It is neither an
       earning for the Revenue Department because it is liable to be modvated
       whenever possible, nor it can be used by the industry, which suffers in its
       day-to-day working for such huge cash outflow.

2.56   To overcome the problem, it is inevitable to minimize inverted duty
       structure by having duty structure of raw material lower than the
       finished product or at least at par with the later, as also providing a
       mechanism of refunding of credit accumulated in CENVAT account in
       cases of inversion of duty structure, within a stipulated time frame, to
       help in improving the cash flow position of the units for their day-to-
       day working. Alternatively, Government can introduce an excise
       certification/ exemption system where the manufacturer should be
       allowed to procure his inputs without payment of duty to the extent of
       cenvat accumulation in the books of account.

2.57   The custom duty on import of PTA & MEG in countries like Thailand,
       Indonesia & Pakistan is Zero, whereas in India, it is 7.5%. This is blocking
       the way of offering products by the domestic textile industry at competitive
       prices in line with neighboring countries. Therefore, it is suggested that the
       import duty on synthetic fiber intermediates like PX, PTA & MEG should
       be brought to Zero. The import duty on Titanium Dioxide {TiO2}


                                         28
       (Anatase grade) is 10%. It should be reduced to 5%. Similarly, Spin
       Finish Oil is a vital component in manufacture of polyester yarns &
       fibers, which presently attracts a duty of 7.5%, need also to be brought
       to the level of 5%. At present, there is no calamity and PFY is a common
       man‟s yarn. There is no justification in continuing with 1% NCCD. This
       may please be abolished immediately.

2.58   There has been a history of dumping of synthetic fibres for the last several
       years particularly from the Asian countries such as Taiwan, Korea,
       Malaysia, Thailand, Indonesia, China etc. Even now, looking at the
       dumping of these products in the country, Government of India has levied
       anti dumping duty on Partially Oriented Yarns (HS Code No. 5402.46) and
       Fully Drawn Yarn (HS Code No. 5402.47). These countries have very large
       production capacities with large exportable surplus. They are targeting
       India to dump their surplus and the dumping will be continued as long as
       they have exportable surplus.

2.59   The import duty on Synthetic Fibres is only 7.5%. A study carried out by
       NCAER has shown that even with 20% import duty, Synthetic Fibres do
       not get sufficient protection. It is, therefore, suggested that no further
       reduction of import duty is made on Polyester Chips, Synthetic Fibres,
       Fiber Intermediates like PTA, MEG, Caprolactum, ACN etc.

2.60   Excise Duty on Textile Machinery and spares to be reduced. Most of
       the textile mills are taking up modernization / expansion of capacity. The
       levy of 16% Excise Duty on textile machinery is making our machinery
       sector uncompetitive and leading to avoidable imports. The reduction of
       duty from 16% to 8% will help textile and textile machinery industry to
       grow faster and reduce dependence on imported machinery.

2.61   Moreover, 40 textile machinery items falling under List 2 of circular
       No.6/2006-CE dated 1st March 2006 on which exemption from Excise Duty
       was withdrawn and brought under 8% excise duty, the exemption may be
       continued by withdrawing levy of 8% Excise Duty.
2.62   Technology Upgradation Fund Scheme. Although the TUFS has been
       extended till 31st March 2011, but the Scheme has been kept in abeyance
       and under revision. The industry has taken up expansion plans in a big way
       to achieve the targets contemplated in Vision Statement, 2007-12. These
       expansion plans, the Scheme of Integrated Textile Parks [ITP] and
       strengthening of the weak links viz weaving and processing may not give
       results unless the revised TUF Scheme is immediately announced and



                                        29
       sufficient provision is made in the Budget to cover for payments of backlog
       of 2006-07 and 2007-08 also.

Consumer Electronics – Connecting Masses

2.63   CST should be made VATable, as has been done in the case of Additional
       Customs Duty, which has been imposed on imports. This will provide a
       level playing field to the indigenous industry vis-à-vis imports.
2.64   Government should direct NABARD to advance loans to villagers for
       purchase of Television sets and consumer durables.

2.65   IT and non-IT products (Consumer Electronics/Entertainment) should be
       treated at par with regards to Indirect Taxes.

2.66   Some of the consumer electronic products have been included in the Early
       Harvest Scheme of Thailand FTA. These products include Colour TV,
       Colour Picture Tubes (CPT), Air Conditioners & Refrigerators, etc.

2.67   Customs duty on these products imported from Thailand is 0%. It has
       resulted in incidence of inverted duty. With the customs duty becoming
       0%, there has been spurt in import of these products from Thailand. While
       Colour TV set can be imported from Thailand at 0% its many inputs attract
       customs duty of 10%. To rectify the situation, the customs duties on inputs
       should not be higher than customs duty on finished products.

2.68   Raw material should have the minimum customs duty, a component
       should have intermediate duty and finished product should attract
       peak rate of duty. It is suggested that Customs Duty on Raw Material
       should be 0%, on Components 5% and Finished Product 10%.

2.69   Customs Duty on Basic Raw Material such as plastic, aluminum, copper,
       steel, lead and zinc needs to be lowered. Since these materials are used in
       the manufacturing, high Customs Duty makes the Indian products globally
       non-competitive. The Customs Duty on these Basic Raw Materials should
       be brought down to 0%.

2.70   Customs duty should be „zero‟ on all capital goods required by the
       Electronic Hardware manufacturing units, on actual user condition.

2.71   Imports should be brought under VAT net, to provide level playing field to
       indigenous manufacturers.

2.72   Parts and sub assemblies of LCD TV should be levied Nil Customs Duties.


                                       30
2.73   Automatic /Semi automatic/manual conveyor system for assembly of
       electrical and electronics equipment and movement of finished goods
       should attract NIL customs duty.

2.74   Moulds required for manufacture of parts of electrical equipment should
       attract NIL duty. As on date, moulds imported for cabinets for CTV attract
       NIL duty, whereas moulds imported for washing machine attract full
       customs duty.

2.75   Excise Duty on all Consumer Electronic products including components,
       raw materials for components and capital goods for electronic industry
       should be rationalized to 8%.

2.76   Un-utilized CENVAT Credit due to imposition of CVD of 4%, should be
       re-funded to the manufacturing units.



Telecom Industry - making connections stronger

2.77   For the Telecom sector, we have quite a complex and burdensome tax
       structure. There are a variety of taxes and levies including 12% service tax,
       6-10% licence fee, 2-6% spectrum charges, 1.5% access deficit charge, 3%
       education cess, 1-2% due to the huge bank guarantee of the government
       etc., besides customs and excise duty, aggregating to around 26%, which is
       much more than in most of the Asian countries. This has put us at a
       disadvantageous position and adversely affected our competitiveness viz.-a-
       viz. other countries and particularly our neighbour - China.

2.78   It needs no mention that over the recent years we have had a remarkable
       growth of telecom sector, which it is apprehended will be emulated from
       overseas players in this sector. It is therefore imperative for us to act fast
       and initiate corrective measures.

2.79   We have been hammering this point for more than 2 years now and were
       happy when the Hon‟ble Finance Minister assured us to address the issue
       and come out with an investor friendly tax structure for this sector.
       Somehow, things have not so far materialized the way we pleaded. It is
       therefore urged again that the tax structure pertaining to the sector be give a
       fresh look and to bring the taxation level at a reasonable level compatible
       with other countries. In fact, we are of the view that a single taxation
       regime should be introduced to make the tax structure hassle free and
       investor friendly.


                                         31
2.80   Reduction of Customs Duty on all Capital Goods (including used
       equipment with condition for useful life and without age restriction) to
       Zero per cent and also on Raw Materials/Inputs/Components (including
       dual use) required to manufacture electronic items including telecom
       equipment to zero per cent.

2.81   The excise duty on all domestic telecom products should be reduced
       from 16 to 8 percent barring hand made sets. This would reduce the
       cost, and make the products affordable to the common man.

2.82   Abolish CST for telecom equipments.



Tyres Industry – Keeping the Right Pace

2.83   Current Excise Duty rate on tyres and tubes is 16%. There are yet a
       number of taxes on inputs and services used for production, which are not
       Cenvatable. Hence tax element on tyres continues to be high i.e much
       more than 16%. Considering the fact that tyres are essentially fitted in
       vehicles for transportation of common man and his goods, there is need to
       bring down the Excise Duty on tyres to 8%. Such a step would make
       road transport more economically viable, essentially giving relief to the
       common man.

2.84 Reduce Customs Duty on Natural Rubber from the present level of 20%
     to preferably 7.5%. In the Union Budget 2007-08, peak rate of Customs
     Duty was reduced from 12.5% to 10% for tyres and raw-materials of
     tyre industry, except Natural Rubber on which Customs Duty was
     retained at the level of 20% which was the customs duty rate in 1996-97.
     This has resulted in a serious anomaly of customs duty on raw material
     (Natural Rubber @ 20%) being higher than the customs duty on
     finished product (tyres @ 10%).

 2.85 From the Table below, it may be seen that while the Customs Duty rate on
      tyres and the peak rate of customs duty on all materials were reduced in the
      Union Budgets during the last few years, in the case of Natural Rubber the
      rate of 20% customs duty has been retained.

       Year         On Tyres     On Natural Rubber             Peak rate on
                                                             Agricultural goods
       1996-97        50%               20%                         50%
       2007-08        10%               20%                         10%


                                       32
2.86   Tyre industry is raw material intensive and the principal raw material used
       by tyre industry, viz. Natural Rubber, accounts for 42% of raw material
       cost of tyre industry. A higher Customs Duty on key raw material of tyre
       industry distorts the cost structure and is not in line with the accepted
       principle in respect of customs duties, i.e. the lowest rate on raw material,
       higher rate on intermediates and the highest rate on finished product (in this
       case, tyres).

2.87   To compound matters further, concessional / preferential customs duty on
       automotive tyres under Regional Trade Agreements is much lower than the
       applied rate of 10%. With the effective rate of customs duty on tyres being
       even lower than 10%, the inverted duty structure with customs duty on
       Natural Rubber @ 20% becomes even more pronounced.

2.88   Waive customs duty on raw materials for tyres which are not
       manufactured domestically.
   -   Butyl Rubber (HSN 4002 31 00)
   -   Polyester Tyre Cord (HSN 5902 20 00)
   -   Styrene Butadiene Rubber (Tyre Grades – S1500 and S-1700) (4002 19
        00)
   -   Chlorobutyl / Bromo Butyl (HSN 4002 39 00)

2.89   Butyl Rubber is used for the manufacture of inner tubes of tyres. Butyl
       Rubber has better air retention capacity compared to Natural Rubber.
       Hence Butyl Rubber is the preferred choice for the manufacture of inner
       tubes. Waiver of customs duty on Butyl Rubber would enable the tyre
       industry to be more competitive vis-à-vis imports of tubes, especially in
       view of steep increase in price of Butyl Rubber in the international markets
       due to hike in petroleum/derivative prices. Polyester tyre cord is used for
       the manufacture of Radial tyres. Radial tyres, in comparison to bias/cross-
       ply tyres, offer multiple benefits especially greater mileage and reduced
       fuel consumption. This has been experienced in the passenger car tyre,
       segment. However, since the price of Radial tyre is 25% higher and
       commercial vehicle tyre segment is extremely price sensitive, Radialization
       has not gained momentum in the truck/bus tyre segment. It is estimated
       that increase in Radialization level in the truck/bus tyre segment from
       current 3% to 25%, as has been achieved in our neighbouring/several
       developing countries, can result in annual and recurring fuel saving of over
       Rs. 2,000 crores. There is no indigenous production of two grades of
       synthetic rubber, i.e. SBR 1502 & SBR 1712 in India. Synthetic rubber is
       one of the major elastomers used for manufacture of tyres. Synthetic
       rubbers are mainly used for inner liners for tubeless tyres and inner tubes

                                         33
       for tube type tyres. This is a high value polymer particularly suited for air
       retention of tyres. Incorporation of SBR in the product mix for tyre
       increases abrasion and fatigue resistance. There is, however, domestic
       production of only one Grade of synthetic rubber, i.e. SBR 1900. However,
       this Grade is not used by tyre industry. It is used by non tyre rubber based
       sector for some of their products. HSN No. is same for all the three Grades
       of above mentioned synthetic rubbers, i.e. HSN 4002 19 00.


Pharmaceuticals - A Healthy Future

2.90   Indian pharma companies are also aggressively investing in R&D activities
       so as to obtain the regulatory approvals from the countries belonging to
       Western Europe and US. This expenditure, at present does not get 150%
       weighted deduction. It is widely felt that extending the weighted
       deduction for above expenditure will help the Indian pharma
       companies investing in R&D to obtain these approvals and increasing
       the exports to the developed world.

2.91   Reduction in Excise Duty on pharmaceuticals from 16% to 8% to give
       the desired fillip to pharma industry as well as to make healthcare cheaper
       for the patients.

2.92   Special Customs Duty of 4% should be exempted in respect of all life
       saving drugs and not only in respect of certain formulations such as those
       falling under List 4 of Customs Notification No. 21/2002 dated March 1,
       2002

2.93   Customs Duty only on certain life saving and anti HIV-AIDS/Cancer drugs
       were reduced to 5% in the Budget 2006. All lifesaving drugs should be
       exempted from Customs Duty so that such life saving drugs will be
       available to the patients at reduced prices which will help in bringing down
       the cost of treatment for these ailments.
2.94   Presently import of formulations attracts a basis customs duty of 10%. The
       same may be reduced to 5% for formulations. This suggestion is in line
       with the Chelliah Committee‟s long –term fiscal policy recommendation.

2.95   Excise duty should not be levied on physicians‟ samples, since the value of
       the physicians samples is already included in the cost of the sale packs and
       excise duty is paid on the entire sale value, including the cost of the
       samples.



                                        34
2.96   Vide notification no. 02/2007 dated 31/01/2007 an abatement of 42.5% is
       allowed on Medicaments while calculating the assessable value on
       Pharmaceuticals for the purpose of Excise duty calculation. This abatement
       should be increased to 55% as the current 42.5% abatement does note even
       cover the trade margins etc and the value of Research & development costs
       and other costs associated with the Pharma industry.

2.97   Life Saving Drugs and Life Saving Medical Equipment should be included
       in the exempt of goods or zero percent VAT category to lower the price to
       the ultimate consumer.

2.98   It is heartening that the time period for the availability of weighted
       deduction benefit for R & D has been extended by 5 years i.e. from the cut-
       off date of 31st March 2007 to 31st March 2012 by the Finance Act 2007.
       But the cut-off date of 31st March 2007, for the approval of any company
       carrying on scientific research and development by the prescribed authority,
       to be eligible for tax holiday in terms of section 80 IB (8A) has not been
       extended. It needs no mention that private Scientific and Industrial
       Research Organisations (SIROs) have been playing a crucial role in
       promoting knowledge-based competitiveness to maintain and improve the
       competitive edge of Indian manufactures in global environment. The tax
       holiday benefit under section 80 IB (8A) has in fact been a great source of
       support for these SIROs for commercial activities in India. It is therefore
       imperative that, such SIROs should continue to be approved and tax
       holiday provided to them. In this perspective, it is suggested that the said
       cut-off date for the purpose of approval by the prescribe authority be also
       extended by 5 years.

2.99   Now a days various Pharma IT and other companies are incurring
       substantial expenses in creating innovative products/processes which can be
       patented. As a incentive for keeping such patents, technical know-how and
       other Intellectual Property Rights (IPRs) in India, a deduction/exemption
       should be provided in respect of royalty and other income related to such
       IPR. This would help in improving trade balance and also keeps the
       emerging IPRs in India.

2.100 In pharmaceutical industry it is customary and business expediency to
      distribute physician samples (PS) to market the product. Hitherto excise
      duty on samples has been paid on the basis of cost of manufacturing, as the
      same are not meant for sale. There is a new circular issued by CBEC in
      2005, which has created ambiguity about the payment of duty on such PS
      and all the manufacturer required to pay duty with reference to the


                                        35
      assessable value of PS (i.e. on MRP on pro-rata basis). A clear guideline in
      this regard would be welcome by the pharmaceutical industry.

2.101 The current provisions for deduction u/s. 35(2AB) are restrictive in nature
      so as to cover only expenditure incidental to research & development
      carried on at the in-house R&D facility. It is suggested that its scope
      should be widened, so as to also encompass within its fold all
      expenditure incidental to basic research carried on at any outside R&D
      facility, as also Clinical Trials, Bio-equivalence studies etc. that are
      done outside the R&D facility, whether in India or in any foreign
      country.

2.102 Similarly expenditure on obtaining approval from any regulatory authority
      and on filing an application for a patent outside India should also be
      considered for weighted deduction u/s 35(2AB) of the IT Act. This is
      essential with a view to encourage and support R&D by Indian
      pharmaceutical companies.

2.103 The New Drug Discovery Research cannot be undertaken unless the drug is
      tested in animals such as dogs, rabbits, etc. and human volunteers to ensure
      toxicity/safety & efficacy. Such testing have to be conducted in
      Government approved laboratories, which comply with the Standards of
      Good Laboratory Practices / Good Clinical Practices (known as GLP/GCP)
      laid down by the Regulatory Authorities. At times the same are tested in
      overseas laboratories. Further, the Food and Drug Control Authorities
      (FDA‟s) of developed countries like US-FDA, CANIDIAN-TPDA, UK-
      MHRA as well as INDIA –DCGI refer that such testings should be
      conducted on local healthy volunteers/patients.

2.104 In spite of the fact that these testings are conducted by CROs outside India
      and the payments are also received outside India, such income under the
      deeming provisions of Section 9(1)(vii) is considered as „Fee for Technical
      Services‟ accrued in India. Internationally, these testing charges are
      considered as business income and therefore no withholding tax applies.
      Some of the CROs/Universities conducting such tests are tex-exempt
      organizations and therefore, the Indian Companies are forced to gross-up
      the charges and bear the withholding tax cost, which unnecessary increase
      the cost of Research & Development by 10% to 15%. It is therefore,
      suggested that no withholding tax should apply on testing charges
      payable by the Indian Research Companies to overseas CROs for
      testing their New Chemical Entitites.



                                       36
Bio-Technology – An Alternative Emergence

2.105 Under the Customs Act, most of the equipments for bio-technology and
      medical research fall under Not. 21/02 item 248 list 28A and attract nil
      basic custom duty, but are liable for payment of additional custom duty of
      16% plus education cess plus cumulative education cess (some equipments
      exempt under Not. 69/04) and additional duty of 4%, totaling more than
      21% on the CIF value of the equipment imported. The purpose of
      exemption of basic duty to equipment is to promote investment in basic
      research but the same is being nullified by subjecting it to additional duty.

2.106 FICCI fails to appreciate as to why additional custom duty be levied on
      equipment meant for research u/s 3 of the Customs Tariff Act, the
      underlying idea of which is to protect the Indian industry. In the
      instant case, the same is not justified because there is no possibility of
      manufacturing such equipments or similar equipments in the country.
      It is therefore, suggested that till such equipments are manufactured in
      India, the additional customs duty on such equipments be withdrawn.
      FICCI would also like to suggest to extend the tax benefit to new and
      novel molecules which are quite expensive and are life-saving in their
      use for cancer or transplantation patients. FICCI understands that
      DGHS has already made similar recommendations to the Finance
      Ministry, which needs to be accepted forthwith.

2.107 Expenditure incurred on clinical trials by companies is currently not
      accepted as an expense to be included for weighted tax deduction @
      150% u/s 35 (2AB) of Income Tax Act, 1961. It therefore needs to be
      clarified that the tax benefit of weighted deduction would be available in
      respect of expenditure incurred on clinical trials for all companies.
      Since expenditure incurred on scientific research by companies
      engaged in the business of bio-technology is allowed weighted
      deduction; there is no reason why should not it be available for clinical
      trials.

2.108 There is a lack of technical expertise at the airports and ports to handle
      the biological materials. Customs officials may be updated regularly with
      the new policies on issues related to handling of biological materials.
      The registry of chemicals / biochemical of the customs database at the ports
      /airports may be updated.

2.109 Customs duty levied on items falling attract NIL basic Custom duty but are
      liable for payment of Additional Custom Duty of 16%+Educational Cess


                                        37
      2% + Cumulative Educational Cess 2% (some equipment are exempt under
      Not. 69/04) and Additional Duty of 4% which totals 21.312% on the CIF
      value of the equipment imported.

2.110 The Ministry of Science and Technology is promoting much needed
      Research in a big way and it is submitted that the Ministry of Finance to
      look into the prospect of removing the ED component from the total duty.
      This becomes more important especially considering the long gestation
      period of such projects and the possibility of no success at the end. Further
      more, the amount of revenue loss to the government on account of making
      the ED component nil is very miniscule to have any significant impact on
      the gross collection but it would mean a lot to an individual investor. This
      would go a long way in increasing the research output in the country.


Oil and Gas – Fueling Nation’s Growth

2.111 Undertakings engaged in the commercial production or refining of the
      mineral oil, the Legislature has already granted a 7-year tax holiday to such
      undertakings under section 80-IB of the Income Tax Act, 1961. However,
      the deduction of profits earned by an undertaking from the commercial
      production or refining of mineral oil is available for a period of 7 years
      beginning from the year in which the undertaking starts commercial
      production. Since such undertakings require huge capital investment
      for the sophisticated technology and equipments required for setting
      up the production and refining facilities, these undertakings are not in
      a position to generate any profits in the initial 3-4 years after they
      begin commercial production due to heavy depreciation claims. 100 per
      cent tax holiday for a period of any 10 consecutive years out of 15 years
      beginning with the year in which the undertaking starts commercial
      production or refining of mineral oil should be extended to such
      undertakings under section 80-IA to them on par with the Power
      sector. If this is not possible then at least, provisions of section 80-IB of
      the Act ought to be amended to provide that undertakings engaged in
      the commercial production and refining of mineral oil should be given
      the flexibility or option, to choose any 7 consecutive years in which the
      deduction can be claimed, out of the first 15 years beginning with the
      year in which commercial production or refining of mineral oil
      commences.

2.112 Past few Union Budgets have enlarged the service tax net and brought
      within its ambit so many services, some of them are directly or indirectly


                                        38
       related to E&P activities. Gradually, the rate of tax has been increased and
       currently it is levied @ 12.36% (inclusive of education cess). Levy of
       service tax on survey and exploration, site formation, mining services, etc
       inadvertently levies tax on the core activities of E&P business. The current
       trend of government policy in terms of imposing and increasing taxes on
       exploration business is also against the very spirit of fiscal stability
       provided under the PSCs. Levy of service tax is a step backward in
       luring foreign oil giants and would discourage oil companies who have
       shown interest to participate in the future NELP bidding. It is
       submitted that service tax on E&P activities should be abolished.

2.113 Natural gas has emerged as the most preferred fuel due to its inherent
      environmentally benign nature and greater efficiency. Hydrocarbon Vision
      also envisages increased usage of natural gas as a clean and efficient energy
      source. It is also a key industrial input. However, due to high rate of sales
      tax/VAT coupled with entry tax and many restrictions with regard to
      availment of input tax credit, the consumers get adversely affected
      particularly the fertilizer and power sectors. Considering the importance of
      fertilizers as the input for agriculture and the importance of electricity for
      industrial and domestic use in the national economy as also the economy of
      all States, it is imperative that natural gas, as the major input for fertilizer
      and power sectors, should be given due credence as the goods of special
      importance for inter-State trade. Consumption of fertilizers and electricity
      is spread across the country. Therefore, cost reduction by way of sales tax
      rationalization and reform will help the national economy. It is submitted
      that the Central Government may favourably consider inclusion of
      natural gas in the list of „declared goods‟ as provided under section 14
      of the Central Sales Tax Act.

2.114 As recommended by Dr C Rangarajan Committee, there is a need to
      streamline excise duties on MS and HSD from the current level of
      advalorem cum specific rates to only specific rates. This would
      rationalize the impact of burden of duties due to volatility in international
      prices on the domestic consumers as well as on oil companies. This would
      also eliminate uncertainty in forecasting revenue estimates on account of
      price variation.

2.115 One-time reduction of excise duties enables Government to eliminate
      subsidies either in the form of Oil bonds or upstream assistance for
      MS& HSD. In the process, they can revive the ailing private sector



                                         39
      petroleum retail industry and usher in better customer service
      standards through competition.

2.116 Since the intention of the government is to put GST in place from 1st
      April 2010, it is important that Government must bring all items under
      the ambit of VAT regime. Considering this aspect in mind, it is
      suggested that petrol and Petroleum products should also be brought
      under the VAT regime. Since this is an item of Mass consumption, the
      Government may consider taking these items in the list of declared
      Goods. However, if the same is not possible, then the maximum VAT
      rate on these products should be 12.5%.

2.117 NCCD on crude oil should be abolished altogether. However, if the
      same is not possible then at least CENVAT credit may be allowed
      against payment of excise duty on finished petroleum products
      manufactured from crude.

2.118 The Government vide its notification No. 23/2002 dated 1.3.2002 has
      allowed the grant of exemption on imports of goods detailed under List 12
      and 13. However, the list of items provided in the notification is not
      exhaustive and does not cover all goods required to be imported for the
      purpose of the operations. The list should be suitably widened to cover
      all items required for exploration, development and production of
      petroleum products.


Chemicals Fertilizers and Petrochemicals - Supplementing Agro Growth

2.119 Import duty on Polymer is only 5% advalorem. This is creating an
      inverted duty structure and Negative Effective Rate of Protection
      (NERP) as the import duty on inputs like Crude oil, Naphtha, Ethylene,
      Propylene etc. continues to be at 5% while import duty on Catalysts and
      Chemicals and Additives remains at 7.5%. Polymer Industry has an
      investment of over Rs. 60,000 crores and an additional investment of over
      Rs. 80000 crores is required to meet the 11th plan target. The Industry is
      finding it very difficult to survive with the present duty structure and the
      proposed investment is unlikely to come to meet the 11th plan target. It is
      submitted that the import duty on Crude oil, Naphtha, Ethylene,
      Propylene, Catalysts and Chemicals used as inputs in the manufacture
      of Polymers is reduced to 2%




                                       40
2.120 The importance of Polymers for the overall development of the country
      particularly in the agricultural sector has been fully appreciated. Several
      studies including the one headed by Dr. Chandrababu Naidu Committee
      have shown that the availability of adequate water is one of the major
      requirements to increase the agriculture yields. Our agriculture output is at
      35% of the global average due to a variety of reasons, the principal among
      them being insufficient water supply to the farming sector resulting in
      inappropriate usage of hybrid seeds, fertilizers etc. By keeping high excise
      duty on Polymers, the burden on the farmers unnecessarily increases which
      in-turn jacks up the need for increasing the agricultural subsidies. It is,
      therefore, necessary to look at the proposal to reduce the excise duty on
      Polymers to 8%. While doing so, care must be taken to ensure that this
      does not create the problem of cenvat accumulation and hence the excise
      duty may be recalibrated in the vertical chain of polymers starting from
      Naphtha, Ethylene, Propylene, EDC etc.


Paper Industry – Need for All

2.121 A Technology Upgradation Fund for paper industry, on the lines for
      Textile Industry is essential for healthy growth and development of industry
      as also to meet the growing domestic demand for paper products in the
      country.

2.122 Given the domestic raw material shortage/constraints :-
    - Import duties on pulp, wood and bamboo need to be eliminated.
    - Government should take measures to allow industrial plantation on
      degraded forestland enabling industry to have a regular sustainable source
      of raw material for meeting growing demand of paper.

2.123 To encourage environment friendly manufacturing, the Government should
      help industry by–
    - Eliminating import duties on pollution control equipment and/or
    - Providing soft loans for installing these equipments



Automobiles – Accelerating Growth

2.124 CE Rule 19 provides for Dispatch of goods by self-sealing and self-
      certification for export to every country except Nepal (duty paid or
      exempted, both types) and Bhutan (duty exempted type). In case of export
      of vehicles to Nepal and Bhutan, the companies have to take prior approval

                                        41
      of Excise Authorities which delays export and is administratively
      inconvenient. Procedure for export to Nepal and Bhutan should be at
      par with procedure applicable for other countries. Moreover there is a
      unique identification by way of Chasis No. and Engine No. of each
      vehicle and vehicles are not sealed. In light of these facts, it is
      suggested that export procedure for Nepal and Bhutan should be made
      at par with other countries. The special Nepal invoice can be presented
      for the signatures of Range officials, within 24 hrs. of dispatch like the
      ARE-1 forms in case of all other exports.

2.125 Presently motor vehicle is excluded from the definition of “capital goods”
      for the purpose of allowing Modvat credit. However, motor vehicle is
      treated as capital goods only for specified output service provider, like
      Courier Agency, Tour Operator, Rent-a-cab Operator, Cargo Handling
      Agency, Goods Transport Agency, Outdoor Caterer and Pandal/Shamiana
      Contractor. There are some more services, which are dependent solely on
      motor vehicle to provide taxable service or substantially use motor vehicles
      in discharging their role as taxable service providers. For example, motor
      driving training schools use motor vehicles to teach driving skills. Some
      professionals have to visit clients for their professional jobs like Chartered
      Accountants, Architects, Management Consultants, Real Estate Agents. In
      light of this, it is suggested that definition of capital goods should be
      amended to treat motor vehicle as capital goods for service providers
      such as Architect, Chartered Accountant, Cost Accountant, Company
      Secretary, Interior Decorator, Management Consultant, Market
      Research, Coaching (Drivers Training School), Photography, Real
      Estate Agents, Scientific Consultancy, Security Agency.
2.126 Notify the procedure for availing credit by service providers (insurance
      agent) which will avoid cascading effect of taxation. One possible solution
      can be giving option to insurance auxiliary service providers (insurance
      agents) to pay service tax so that they can avail input credit for services
      utilized by them.
2.127 In case of Automobile Industry, the assessable values of components are
      many times provisional due to provisional prices, provisional amortization
      amounts, etc. Subsequently these are finalized. Whatever duties are paid by
      the vendors, modvat of same is availed by vehicle manufacturer. Hence
      even if less duty is paid originally and differential duty is paid
      subsequently; neither vendor nor vehicle manufacturer enjoy any funds.
      Thus charging of interest on this type of transactions is unfair. No interest
      shall be charged on differential excise duty paid on finalization of
      prices. Alternatively this exemption from interest can be given for


                                        42
       modvatable inputs or in the situation where gap between provisionally
       assessed price and finally assessed price is upto 20%.
2.128 Basic spirit of all tax laws (like excise duty, sales tax, customs duty, etc.) is
      that no tax should be levied on goods being exported. However, levy of
      Sales Tax (CST) on items used in manufacturing of export vehicles is
      contrary to above basic spirit of keeping export goods exempt from all the
      taxes. It is suggested that an appropriate procedure/form etc. should be
      introduced for exempting goods from levy of CST, which is to be used
      in manufacture of products to be exported.

Electronic Hardware - A Miniscule Sector

2.129 The global electronics industry today is one of the fastest growth areas in
      international trade. However, the Indian electronics hardware industry is
      still in the development phase, and is able to capture a minuscule share
      of the global electronics hardware as compared to her neighbouring
      Asian countries like the People‟s Republic of China, Taiwan, South
      Korea etc. The Indian production levels are estimated at US$ 11.6 billion,
      less than 1 % a global procurement. India is almost absent in global
      markets with Indian electronics hardware industry needing a major
      boost to compete with China in cost-effectiveness and numbers, which
      exports 100 times more than India. As a result, the huge trade deficits in
      electronics amount to more than $12 billion and growing with more than
      50% of the demands being met through exports.

2.130 The differential duty structure to sustain manufacturing in the Indian
      context is not possible and the inverted duties due to ITA -1 & FTAs is
      plaguing hardware manufacturing. Moreover, domestic taxes and
      levies impose fiscal disabilities, for example, the cascading impact of
      CST on components detrimental for finished products manufacturing.
      Also, the high cost of finance and power add to fiscal and physical
      disabilities.

2.131 Suggestions for consideration:

        Excise duty – 8% for entire electronics industry value chain
         ensuring no Cenvat overflow (Excepting for mobile handset
         manufacturing).
        Abolish CST on all Electronics Hardware immediately.


        4% VAT across the board on entire Hardware value chain.


                                          43
        Manufacturers ensuring minimum 30% domestic value addition to
          be given Income Tax Exemption for 10 years – revive Section
          80HHC benefits for DTA units.
        Inverted duties due to ITA-I and FTAs need to be corrected.
        No differentiation between IT and non-IT segments – treat at par
          for domestic taxes / levies to avoid classification conflict.
        Same classification of electronic goods across all States of India
          under VAT as per Customs / Excise HS Code to ensure same
          treatment across the country.
        Set up a Development Fund to compensate for high interest rates
          and other infrastructural disabilities – 5% and,
        Remove condition of minimum 16% applicable duty on DTA sale
          by EHTP / EOU units; allow actual 50% of applicable duty on DTA
          sale.
Information Technology - The Next Level

2.132 In the last Union Budget, 8% excise duty was levied on packaged
      software sold over the counter. This has led to an increase in piracy of
      software, which is already amongst the highest in India at 74% (as
      compared to 53% in the Asia Pacific region and 35% World Wide).
2.133 It is worth noting that the incidence of increase would not only be 8%
      as it would be compounded further due to (i) Cost of compliance; (ii)
      Cost of extra administration and (iii) Distraction from the core activity
      of development of software.

2.134 With regard to software, it is important to note that the same is not taxed in
      this manner anywhere in the world and the levy of this nature would send
      negative signals regarding India being the most favoured destination
      for IT and IT related activities. Although, Indian entrepreneurs are
      getting refunds in the form of duty drawbacks for the taxes paid, they are
      not fully compensated under the existing system and are thus at a
      disadvantageous position vis-à-vis China, Philippines, which already
      provide a conducive environment for software related services to grow in a
      major way. In this backdrop and to nurture the Indian software industry,


                                        44
       which is still in the nascent stage, FICCI strongly submits that the
       government should drop 8% levy imposed last year on customized
       software and packaged software.

2.135 In IT sector there is an anomaly by way of issuance of two notifications
      namely Notification No. 48/06–CE and 49/2006-CE, both dated 30
      December 2006. Notification No. 48/06 amends Notification No. 6/06-CE
      dated 1 March 2006 which exempts customized software levy of excise
      duty (Sr No. 27 thereof) whereas Notification No. 49/06 (supra) puts
      „software‟ under excise duty @8% (Sr No 3 thereof) Software includes
      both packaged software and customized software. Suitable amendment
      should be made to this notification to exclude customized software as
      otherwise there is a danger of both packaged software and customized
      software being subjected to levy by authorities who could ignore
      Notification No. 48/08 (supra). The current situation is anomalous and is
      akin to the bhujia sweetmeat controversy resolved last year by Board‟s
      Circular No. 841/18/2006-CX, dated 06.12.2006.

2.136 Under the service tax legislation, certain services such as in relation to
      „computer software and hardware‟ engineering are specifically excluded
      from the ambit of service tax. However, the input cost of the inputs / capital
      goods / input services used for providing such services is usually very
      significant. Due to the output side being non-taxable, Cenvat credit of the
      various duties / taxes paid is not available for refund in case of „export‟ of
      „computer software and hardware engineering‟ services.




Alcoholic Beverages – Blending the Right Mix

2.137 The sugarcane molasses is the only feedstock available to the distilleries
      producing ethanol in India. It was submitted earlier that the Central excise
      duty on molasses falling under sub-heading 1703.10 of the Central Excise
      Tariff Act, 1985 which is now being charged at Rs. 750/- per M.T. should
      be brought down to at least Rs.150/- per M.T., if not lower. This was
      important to maintain the cost of production of ethanol as low as possible
      and to ensure maximum production and supply of ethanol for admixture
      with petrol.

2.138 Molasses is the basic feedstock for production of ethanol in the country and
      the high rate of duty on this feedstock results in escalating the price of ethyl


                                         45
      alcohol which is used as basic raw material for production of a large
      number of chemicals and ethanol for blending with petrol.

2.139 The Government has also taken up the programme of 5% blending of
      ethanol with petrol which is a programme of high national importance.
      However, this can only succeed if the price of molasses is kept at the lowest
      possible. It is therefore necessary; the Central excise duty leviable on
      molasses should not be more than Rs. 150/- per M.T.

2.140 As a matter of principle the duty on basic feedstock should be normally
      kept as low as possible. The ethanol producing industry should be actually
      extended a complete duty/tax exemption to optimize its production in
      country.

2.141 There is a need for the Government to at least re-introduce this
      concession of 30 paise per litre in the surcharge on ethanol doped
      petrol which was withdrawn from the year 2004. This concession is
      important to encourage the oil companies to lift ethanol for blending
      with petrol to take advantage of this concession.



Organized Retail – The New Wave

2.142 Retail sector is likely to grow up to US$427 billion by 2010 and that
      organised retail could account up to a share of as high as 20%-22% of this
      market. This estimate is based on the fact that incomes and consumer
      demand are likely to grow at a faster pace as the economy performs well,
      lifestyles would continue to change and better product and shopping
      options would become available. Also, the share of organised retail is
      expected to rise significantly because more than US$30 billion of
      investment is being planned by both domestic and foreign players in retail
      space in the coming five to seven years.
2.143 As the biggies get bigger and their market penetration increases around the
      globe, competition among the major players is having a significant macro-
      economic impact. Intensifying competition is exerting downward pressure
      on prices. The retailers are engaged in restructuring their operations
      internally for curtailing unproductive expenses and to reap the benefit of the
      economies of scale. The companies are ploughing back their cost savings
      resulting from increased scale and efficiency improvements to reduce retail
      prices.



                                        46
2.144 Suggestions for consideration:

   - Industry Status: Industry status is the first basic step needed for
     reforming the Indian retailing sector. The advantages of such a status
     include: (i) Greater focus on retailing development, (ii) Fiscal incentives
     for retailing industry, (iii) Availability of organised financing and (iv)
     Establishment of insurance norms. Granting Industry status may
     facilitate the provision of fiscal incentives to this high potential sector.
     A parallel can be drawn here with the hotel industry where
     investments improved significantly after granting of industry status
     and the provision of fiscal incentives.

   - Eliminating Multiple Licenses/Clearances: Retail operations need to
     obtain multiple licenses and permits, ranging from basic trading
     licenses to product specific licenses to pollution clearances. Each
     individual retail outlet has to acquire these, even if it is a part of a chain.
     These are irritants, add time and cost to the process of establishing a
     retail chain. It is important to ensure that clearances are required to be
     taken at one time only if it is a part of retail chain outlet. There should be a
     proper timeframe within which these approvals should be granted. After
     the lapse of the stipulated time limit, the approvals should be deemed to
     have been granted unless there are some queries on the part of the
     Department.

   - Relax SSI Reservations: Though in past, the Government has removed a
     lot of items from SSI reservation list, reservation of large sub-segments for
     small units renders the processing sector inefficient. Therefore, the first
     step should be to continue to relax restrictions and permit larger,
     more efficient players to enter these sectors.

   - Developing Commodity Exchanges: The infrastructure of existing
     Commodities Exchanges should be improved and more powers should be
     given to them. As far as possible, banning any item for the purpose of
     futures market should be avoided. To check inflationary pressures, the
     Government must ensure that speculative transactions should not take
     place in the market. The penal provisions for hoarders and black
     marketers should be made more stringent and an environment
     created to have world class “Commodities Futures Market” in India.

   - Eliminating Archaic Laws: The major stumbling block for the
     development of commodity futures markets in India is a fragmented
     physical / spot market. Apart from this, there are still several barriers to


                                        47
       free movement of commodities in the form of physical restrictions (under
       the Essential Commodities Act, APMC Act, Licensing restrictions) and
       fiscal hurdles (Differential Taxes, Stamp Duties). The hurdles that are
       coming in the way of overall growth of Retail Sector should be done away
       with. In today‟s environment, archaic laws and regulations have no
       place.

    - One Common Market: Time is ripe now to make India “One Common
      Market”. This is possible only when we allow free movement of goods
      across states without any hindrances. It is important that inter-state levies
      should be abolished and uniform VAT introduced in all States at the
      earliest. The Government should formulate a roadmap for GST whereby
      the maximum rate should not exceed 20% and compliance should be
      minimal.



Chlor-Alkali Industry – Towards Power Generation

2.145 The growth of Caustic Soda and Soda Ash Industry is important for the
      Nation and if competitiveness of this Industry is maintained, it can certainly
      grow at a much faster rate.

2.146 The major input in Chlor-Alkali Industry is Power. In case of Caustic Soda,
      power constitutes more than 60% of the cost of production. It is strongly
      felt that this major input should be made available to the industry at
      internationally competitive prices.

2.147 In spite of the fact that generation cost of power in India is Rs.1.36 per
      unit owing to inefficiency and the monopolistic character of the supplying
      agencies, the Industry gets power in some of the States even at Rs.5/- per
      unit. In order to encourage the installation of Captive Power Plants at
      lower capital cost, the duty on Plants and its spares should be brought
      down to 5%.

2.148 Most of the Caustic producers have installed their own Captive Power
      Plants. These power plants use coal/liquid fuel for power generation. In
      order to ensure the availability of coal to these plants, the coal allocation
      should be made by the Government as it is done to other industries like
      Cement so that the coal is available to the industry timely and at a
      reasonable price.




                                        48
2.149 Furnace Oil, LSHS and HSD for generation of power, at present
      attract 10% Customs Duty. Duty on all Fuel Oil and gas used for
      power generation should be fixed at 5%, while duty on Naptha is at
      5%, the duty on Furnace Oils and LSHS should also be brought down
      at 5%.

2.150 In India, most of the Caustic Soda Industry have switched over to
      Membrane Cell technology. While the plants are imported at 5% import
      duty (vide Notification No. 26/2003 Customs dated 01-03-2003, S.No.
      285), the spare parts still attract 10% customs duty plus CVD and 4% SAD.
      It is suggested that since these plants are not manufactured in India,
      the customs duty on spare parts used for maintenance of these existing
      Plants should also be reduced to 5%.



Ceramic Tile - Patching the growth

2.151 Ceramic tiles are assessed to Excise Duty on the basis of MRP. Presently
      the abatement on MRP for the purpose of calculation of excise duty is
      allowed at the rate of 45%. Given the high post manufacturing elements
      especially in view of hefty increase in freight coupled with service tax on
      outward freight which is not cenvatable, this abatement is insufficient. This
      low abatement is hampering the industry‟s competitiveness. It is pertinent
      to note that with the increasing middle class population in the rural and
      semi urban areas, the ceramic tiles have to be transported to longer
      distances from the place of manufacture. This increases the transportation
      cost substantially as tiles are low cost bulky material. It is suggested that
      the rate of abatement should be increased to 55%. The increase in
      abatement will help in making products more affordable to the masses and
      the huge rural population can improve their quality of life by using this
      hygienic product.

2.152 Peak duty on critical raw materials like Clay, Ceramic Colors, Abrasives,
      Diamond Polishing Tools etc are still high when compared to import duty
      on tiles from China. Raw Materials like Clay and Ceramic Colors are
      wholly consumed by the Indian tile industry while Diamond Polishing
      Tools and Abrasives are majorly used by the Indian ceramic tile industry in
      the manufacture of tiles. With a view to providing an impetus to the
      domestic tile industry, it would be just and reasonable to correct the
      anomaly of inverted duty structure for these products and unplift the
      domestic tile industry. It is imperative that the Indian tile manufactures


                                        49
      should be totally exempted from paying Basic Customs Duty on the
      above mentioned raw materials. This will provide an impetus to the
      local manufacturers and enable them to compete with imported tiles.



Cigarette Industry – Substantiating Revenues

2.153 There is a huge difference in excise duty rates between cigarettes and other
      tobacco products. This is impeding revenue growth as it forces cigarette
      consumers to shift to cheaper and low revenue yielding alternatives. Even
      The Ministry of Health and Family Welfare, in its “Report on Tobacco
      Control in India” has recommended, “Extend the ambit of tobacco product
      taxation,…to hitherto untaxed or lightly taxed products such as beedis and
      chewed tobacco products, and bring their taxes on par with those on
      cigarettes…”


2.154 The Specific Duty Structure has proved to be extremely beneficial and
      superior to the earlier ad-valorem structure. It has ensured simple and
      transparent administration and a litigation-free environment with no
      valuation disputes.

2.155 The Specific Duty structure, for a highly taxed product like cigarettes, has
      also been recommended by eminent economists and authoritative studies
      [Chelliah (1992), NIPFP (1994), Sarangi (1999), Kelkar (2002, 2004), and
      Ministry of Health & Family Welfare (2004)].


2.156 In order to prevent under valuation for a highly taxed product like
      cigarettes, it is recommended that the Customs duties should be converted
      to a specific length based levy, equivalent to the applicable domestic excise
      duty rate.

2.157 The most serious implication of allowing cigarette manufacture in EOUs in
      SEZs is of clandestine leakage of stocks into the domestic market, resulting
      in revenue losses. EOUs in SEZs are concessional schemes purely for
      stimulating exports. With almost 50% of manufacturing capacity being un-
      utilised, export orders can be executed using existing capacities. Moreover,
      manufacturers are permitted to exceed capacity for fulfilling export orders.
      There is, therefore, no compelling reason to set up additional capacity for
      exports.



                                        50
WATCH INDUSTRY – Time to Change the Rules

2.158 The levy of Excise Duty on watches on the basis of Maximum Retail Price
      was introduced in the Union Budget of 1999 wherein, watches have been
      included in the table relating to the notification. In view of the cut throat
      competition, trade discounts have increased substantially and liberal credit
      terms have become a necessity. The effective rates of Excise Duty itself
      have gone up over the years, but the abatement has remained unchanged.
      The abatement should be increased from 35% to 45%.

2.159 Vide notification No. 2/2006 CE (NT) dated 1st Mach 2006, watches
      continues to be included under S No. 93 in the table relating to the
      notification. Watches are thus treated as “packaged commodities” by
      bringing them under the purview of Section 4A of the Central Excise Act.
      Generally speaking, watches are put in plastic boxes or in pouches only for
      protection during transportation and for protection of the watches from dust
      and manual handling. To treat a watch as a packaged commodity
      unnecessarily imposes considerable hardship and avoidable inconvenience
      on the industry. It is submitted that while the retail sale price may be
      retained as the basis of levy of excise duty, watches be relieved from
      having to comply with the packaging provisions of the Standard of
      Weights and Measures Act.

2.160 The Power cells/button cells used as replacement in watches are covered
      under CET Heading 85.06”Primary cells and Primary batteries”, and are
      covered under Notification No 2/2006 issued under Section 4A of the CE
      Act 1944. These are imported in bulk, packed in thermoformed trays.
      Serial no. 75 in the table relating to the notification no. 2/2006 CE (NT) 1 st
      March 2006 should not be treated as packaged commodities, by bringing
      them in the purview of Section 4A of the CE Act. Serial No. 75 in the
      table relating to notification should be amended to exclude primary
      cells and primary batteries.

2.161 Rate of excise duty on power cells covered under Chapter 85.06 should be
      reduced from the present rate of 16% to 8%.

2.162 Watch components falling under Customs Tariff Chapter Headings 91;
      attract basic customs duty at 10%.         Even completely assembled
      wristwatches falling under Chapter 91.01 and 91.02 attract a basic customs
      duty of 10%. The Government may consider reducing the rate of



                                         51
      customs duty on watch cases and straps falling under Chapter
      headings 91 from 10% to 5%.

2.163 Government may consider reducing the rate of customs duty on button
      cells covered under Chapter 85.06 from the present rate of 10% to 5%.


WASTE MANAGEMENT SERVICES – Towards Cleaner Management

2.164 To meet the growing challenges of managing the solid wastes for the sake
      of the urbanization, it is important that the Central, State and local
      Governments must work in tandem. For developing countries, recycling of
      waste is the most economically viable option available both in terms of
      employment generation for the urban poor with no skills and
      investments. Indirectly, this also preserves the natural resources going
      down the drains.

2.165 The Government should provide financial incentives to Private Sector
      Companies involved in decentralized solid waste management projects
      providing waste treatment services at source to communities, township and
      SEZ project, bulk waste generators etc.

2.166 To promote the concept of waste management services in our country, it is
      submitted that customs duty exemption should be provided for
      machinery used for the same. While doing so, it is also important that
      VAT and Octroi should also not be imposed on instruments used for
      waste management services.

2.167 It would be in fitness of things to exempt waste management services from
      the purview of service tax net.

2.168 Products, services and equipments for waste management solutions should
      be classified under „infrastructure project activities‟. This would help
      entities involved in waste management services to avail the fiscal incentives
      provided for infrastructure sector.

2.169 Under Central Excise Tariff item 8479.8992 – Chapter 84, similar products
      fall under nil excise rate. The same exemption should also apply to other
      waste management categories as well, such as compositing, biomethanation
      etc.



                                        52
2.170 The government may consider introducing the concept of weighted
      deduction of depreciation for entities setting up in-house decentralized
      waste management facilities.

2.171 Lack of clarity or proper regulatory framework on CDM/CDM revenues
      results in ambiguity and at times hampers the anticipated intensification of
      the CDM process in India. It is important that proper regulatory
      framework should be put in place to address the problem and to make
      our environment citizen-friendly.




                                       53
                                       III
                    GOODS AND SERVICES TAX AND
                        VALUE ADDED TAX

Goods and Services Tax

3.1   Indirect Tax reform is one of the key enabler to improve competitiveness
      for accelerated economic growth in the changed economic environment.
      Therefore 141 countries have already replaced their inefficient tax structure
      by Value Added Tax (VAT) or Goods and Services Tax (GST) structure,
      which remove competitive disadvantages and enhance government revenue.
      Such large scale adoption of National VAT/GST by other countries cannot
      be ignored by us in the changed global environment. The Kelkar Task
      Force (KTF) on the implementation of the Fiscal Responsibility and Budget
      Management Act (FRBM Act), 2003, mooted the idea of a unified VAT on
      goods and services. It also received widespread support and endorsement
      from the Twelfth Finance Commission. The national Level Goods and
      Services Tax (GST) is more important today as the line between goods and
      services are getting blurred, having separate tax is unsound.

3.2   The Hon‟ble Finance Minister in his budget speech of 2005 had clearly
      indicated that the most ideal path to be trodden is a move towards
      nationwide VAT. Again, in 2006-07 Budget Speech it was reiterated to
      move towards consolidated GST the relevant extracts of which is
      reproduced below:

      “It is my sense that there is a large consensus that the country
      should move towards a national level Goods and Services Tax
      (GST) that should be shared between the Centre and the States. I
      propose that we set April 1, 2010 as the date for introducing
      GST. World over, goods and services attract the same rate of tax.
      That is the foundation of a GST. People must get used to the idea
      of a GST. Hence, we must progressively converge the service tax
      rate and the CENVAT rate.”(para 155)

3.3   GST is a comprehensive value added tax on goods and services. It is
      collected on value added at each stage of sale and purchase in the supply
      chain without state boundaries. In GST regime, goods and services are not
      differentiated as it moves through the supply chain. The fundamental
      feature of GST is the eligibility of the manufacturers and dealers to claim
      credit for „input tax‟ paid at each stage without any limit or the barriers of
      state boundaries till it reaches the ultimate consumer. In GST structure,


                                        54
      different stages of production and distribution are interpreted as a mere tax
      pass-through, and the incidence of tax is essentially borne by the final
      consumer within a taxing jurisdiction. A well-designed GST on all goods
      and services is the most efficient method of taxation to eliminate
      distortions. If GST in its real form is implemented in the Indian context, it
      would integrate all taxes currently levied in India by central and state
      governments on goods and services like excise duty, service tax, state
      VAT/sales tax, entry tax or octroi, state excise, countervailing custom duty,
      telecom license fee, luxury tax, tax on consumption/sale of electricity,
      entertainment tax etc.

3.4   In order to ensure that free flow of trade and commerce within the country
      across the states is guaranteed without any barriers, Article 307 empowers
      Parliament to appoint an appropriate authority for the purpose of
      monitoring and ensuring that the Constitutional guarantee on free flow of
      trade throughout the country is adhered to by the states. The provisions
      under the Constitution, promote India as common market with free
      flow of trade and commerce without any barrier within our federal
      structure. It is also important to note that Parliament alone possesses
      exclusive power to legislate on matters relating to inter-state trade and
      commerce (item 42 of Union List in VII Schedule) keeping the above
      objective in mind. In spite of clear mandate under the constitution to keep
      India as one common market, the Centre as well as States allowed the
      Indian market to fragment. Non vat-able tax on inter state sale (CST) @
      4% to 12.5% fragment the market and has substantial adverse impact on
      India‟s competitiveness. Entry tax by states ranging up to 13% has the
      same impact. Even though the states have introduced VAT but due to co-
      existence of CST and non refund of input tax up to 4% on inter-state
      transfer to stocks, the Indian market remains segmented. These tax
      distortions continue to affect India‟s competitiveness. The constitutional
      mandate under Part XIII is ignored and the Centre did not take steps to
      create institutional framework provided under Article 307.

3.5   FICCI is happy to note that Government has constituted Joint Working
      Group to draft the modalities for GST. We in FICCI, believe that GST will
      eliminate the cascading impact of taxes on production and distribution cost
      of goods and services and help in achieving the targeted 10% GDP growth
      in the 11th Plan period. GST is expected to reduce the production cost by 15
      to 20% of several products in view of full input tax credit which will have
      favourable impact on the prices of product increasing the demand for goods
      and benefit to the consumers. GST will widen the tax base and improve the
      tax compliance leading to higher tax-GDP ratio. The Tax-GDP ratio is


                                       55
      expected to increase by 2% as per FRBM report. This works out to rupees
      70,000 to 80,000 crores of additional annual revenue to the Central and
      State Governments. GST will remove the tax distortions from the
      economy. This will lead to sustainable higher growth based on competitive
      strength of the country. Simple tax system will attract more productive
      investment for growth.

3.6   While implementing GST, the following points need consideration:

                         It is inevitable to have consensus and proper
          coordination with States, come out with 2-3 alternative models
          preferably from Asian region adopting one after in-depth debate
          amongst all stakeholders with suitable modifications in the Indian
          context.

                          There is a need to provide a threshold exemption
          limit, dispute settlement mechanism, and a cooling period of one
          year in the model.

                           The Government may even consider having a two-
          tier model- Central GST and State GST with the existing taxing
          powers initially.

                           State VAT taxes should be harmonized across
          sectors. The CST should be phased out at the earliest. All local taxes
          such as Octroi, entry tax etc should be made vatable. Procurement
          of raw materials under               Deemed Export /Advance License
          Procedure should be completely exempted from the levy of CST with
          immediate effect. This has assumed urgency in view of strengthening
          of the Indian rupee against US $ affecting adversely our exporters‟
          margins in the international market.

                         The combined impact of all indirect taxes (cenvat
          rate of 12 per cent plus state vat rate of 8 per cent) on prices of
          manufactured goods should be not more than 20 per cent.
          Necessary reductions in indirect taxes should be made to achieve
          this goal.

Declared Goods Status for Natural Gas

3.7   After introduction of VAT from April‟2005, natural gas has been kept
      under the revenue neutral rate i.e. 12.5%, except in Rajasthan where it is
      levied @4% under industrial input. Some of the States have kept natural

                                      56
       gas out of VAT and are levying sales tax at 20%. VAT laws of some States
       also do not permit availment of input tax credit if natural gas is used as fuel
       and fertilizer feedstock.

3.8    Natural gas has emerged as the most preferred fuel due to its inherent
       environmentally benign nature and greater efficiency. Hydrocarbon Vision
       also envisages increased usage of natural gas as a clean and efficient energy
       source. It is also a key industrial input. However, due to high rate of sales
       tax/VAT coupled with entry tax and many restrictions with regard to
       availment of input tax credit, the consumers get adversely affected
       particularly the fertilizer and power sectors.

3.9    Needless to say, these two sectors consume over 70% volume of natural gas
       available in the country. Under the existing pricing system also the fertilizer
       manufacturers are not allowed to pass on the entire burden of certain levies.
       As these two sectors are highly subsidized, the burden on the exchequers
       increases due to rise in cost and levies.

3.10   Considering the importance of fertilizers as the input for agriculture and the
       importance of electricity for industrial and domestic use in the national
       economy as also the economy of all States, it is imperative that natural gas,
       as the major input for fertilizer and power sectors, should be given due
       credence as the goods of special importance for inter-State trade.
       Consumption of fertilizers and electricity is spread across the country.
       Therefore, cost reduction by way of sales tax rationalization and reform
       will help the national economy.

3.11   Not only the above, from among hydro-carbons, fuels and petroleum
       products, the goods mentioned in column 1 below are already in the list of
       „declared goods‟. Relevance of these goods with reference to natural gas is
       given in column 3 below:

        Declared       Rationale for inclusion of     Relevance of declared goods
         goods          these goods in the list of    mentioned in column 1, with
                            „declared goods‟            reference to Natural gas
              1                     2                               3
       Coal           Coal was the main fuel in the   Natural gas has now
                      country, for domestic and       substantively replaced other
                      industrial use, when the list   fuels and should be treated
                      was prepared.                   on par with coal.




                                         57
       Crude oil      Crude oil was included in the VAT rate on Natural gas is
                      list in 1976 when sales tax   thus higher vis-à-vis other
                      rate raised beyond 4%.        fuels and industrial inputs.
        LPG-          LPG was included in the list  Natural gas used in city gas
       domestic       in 2006 to partially reduce   distribution can substitute
                      the levels of subsidies.      LPG as domestic fuel.
                                                    Increase in its consumption
                                                    would also reduce subsidy
                                                    burden owing to domestic
                                                    LPG.
       ATF sold to    For promoting air linkages to To promote use of natural
       Turbo-Prop     remote areas.                 gas in place of other fuels.
       Aircraft


3.12   Cumulative impact of all the factors mentioned in the preceding paragraphs
       results in cascading, distorting and regressive effect on the cost of
       utilization of natural gas across the country. In this context and also the
       following aspects, it is necessary to enforce uniformity and reasonableness
       in the VAT rate applicable to Natural gas. This can be achieved by
       declaring natural gas as „declared goods‟.

3.13   Natural gas and its extracts are used as feedstock for the manufacture of
       fertilizers, LPG, polymers and other inputs. High sales tax burden on
       natural gas substantively adds to the cost of production of these goods. It is
       necessary to reduce the cost of production of these goods, which are
       important in the national economy.

3.14   Since sale of power does not attract VAT, input tax credit is not available
       on natural gas purchased for power generation. It costs to power sector.

3.15   Increased usage of natural gas would reduce the subsidy burden on
       domestic LPG, fertilizer and power.

3.16   The Central Government amended the Central Sales Tax Act with effect
       from April 2006 for inclusion of LPG in the list of declared goods. This
       was done with a view to partially reduce the levels of subsidies. Use of
       natural gas in the city gas distribution would largely replace use of LPG
       (cooking gas) resulting in reduction in the subsidy component of the
       Central Government. Inclusion of natural gas in the list of „declared goods‟
       is a next logical step in this direction.



                                         58
3.17   Natural gas is the future energy source for the industry.

3.18   Natural gas has long been considered as an alternative fuel for the
       transportation sector. Compressed Natural Gas (CNG) is supplied at many
       places for use as fuel for transportation. CNG replaces traditional fuels such
       as diesel and petrol, which are not environmentally friendly. Natural Gas,
       being the cleanest burning alternative transportation fuel available today,
       offers an opportunity to meet new stringent environmental emissions
       standards.

3.19   Lower VAT rate on Natural Gas would make „Gas to Liquids‟ a more
       viable option, thereby reducing dependence on imported crude oil.

3.20   Indian coal has high ash and sulfur content and low calorific value, which
       are not environmentally friendly compared to natural gas. Utilization of
       coal requires constant solutions of the problems concerning ash generation
       and disposal, dust emission and green house effect.


3.21   In the context of these facts, it is submitted that the Central Government
       may favourably consider inclusion of natural gas in the list of „declared
       goods‟ as provided under section 14 of the Central Sales Tax Act.



Value added Tax

3.22   Value Added Tax is undoubtedly one of the most important fiscal
       innovations of the 21st Century. The Empowered Committee of State
       Finance Ministers‟ on VAT has done a commendable job since its
       introduction. The Union Finance Minister also took a number of bold and
       positive initiatives to ensure that the same is in place.

3.23   Over the recent past, the State Governments have brought number of the
       items under the VAT regime. The Empowered Committee is also taking
       steps to ensure that one item is subject to same VAT rate across all States
       so that seamless movement of goods can take place without any hindrances.
       The ultimate objective is to make India “One Common Market”.

3.24   Since the intention of the government is to put GST in place from 1st
       April 2010, it is important that Government must bring all items under
       the ambit of VAT regime.



                                         59
Interest on refunds under the CST Act

3.25   Section 9(2) of the CST Act was promptly amended retrospectively by the
       Finance Act, 2000 to overcome the SC‟s judgment in India Carbon Ltd v.
       State of Assam – 106 STC 460 to provide for levy of interest on delayed
       payments under the CST Act However, without heed to logical and
       equitable considerations, no suitable provision was made to grant interest
       on refund, if any, under the CST Act. As a result, CST Act, perhaps, is the
       only piece of Central legislation, which denies interest on refund to the
       assessee. This anomaly may be rectified, by providing for interest
       preferably with retrospective effect.



Declaration Forms – Amendment to CST Act

3.26   Till recently only one C form is required to cover a whole year‟s sales, and
       the same can be submitted till assessment. However, as per amendment to
       CST (Registration and Turnover) Rules 2005 vide notification dated 16th
       Sep‟05 which came into force from 1st Oct ‟05. The amended provisions
       are as follows:

        A single declaration may cover sale transactions which take place in a
         quarter of a financial year

        Where a transaction of sale is spread over different quarters in a
         financial year or different financial year, separate declaration is required
         to be submitted in each quarter.

        The declaration in Form C or F or the certificate in Form E-I/E-II shall
         be furnished to the prescribed authority within three months after the
         end of the period to which it relates.

3.27   The procedures are laid down in the laws, presently leaves little time to the
       dealer for collection of forms as compared to the time now allowed. It is
       suggested that suitable time period should be provided for collection
       and submission of the forms to the authority.

Deemed Exports / Advance License


                                         60
3.28   Levy of CST on domestic purchase of raw materials under Deemed Export
       / Advance License Procedure for manufacture of export products is a very
       serious unintended anomaly due to the following reasons:

3.29   It is clearly stated policy of the Government that export products should not
       be subjected to any local taxes and levies.

3.30   ST / VAT is not applicable on domestic purchase of raw materials for
       manufacture for export products (It is adjustable / refundable).

3.31   CST is not applicable on domestic purchase of raw materials by an Export
       Oriented Unit (it is refunded).
3.32   CST is also not applicable if raw materials under advance license are
       imported.

3.33   In any case, the Government has already decided to do away with the levy
       of CST in toto in the near future, even on domestic business activity.
3.34   CST in above situation should be abolished with immediate effect.


3.35   Other issues for consideration :

              Uniform floor rates under VAT are not introduced all over India.
           This has caused lot of inconvenience to the traders engaged in interstate
           transactions. Therefore, uniform floor rates be introduced as promised
           while introducing VAT 2005.

              Government should ensure timely availability of declaration
           forms so that dealers can submit their forms in time to avoid interest
           and penalty. Alternatively, Government should allow dealers to use pre
           printed stationery subject to Government exercising certain controls
           and putting checks and balances in place.

              Form F should be made mandatory only where finished goods or
           bought out items are transferred for the ultimate sale of the same in the
           state in which they are transferred. In other words amendment should
           be made to make Form F applicable only for the transfers of goods
           meant for further manufacturing or sale in the transferee states.

             The VAT on pesticides should be nil else at best, not more than 1%


                                          61
.




    62
                                        IV
       EXCISE DUTY STRUCTURE AND PROCEDURAL ISSUES



Valuation of Excisable Goods Manufactured by a Job Worker

4.1   Central Excise (Valuation) Rules, 2000 has been amended by inserting
      Rule 10A. According to Rule 10A where the excisable goods are
      manufactured by a job worker on behalf of a principal manufacturer and the
      manufactured goods are sold by the principal manufacturer from the factory
      of the job worker, then the value of the excisable goods shall be the
      transaction value of the said goods sold by the principal manufacturer.
      Therefore, the valuation method prescribed under Rule 10A is to be
      reconsidered and amended. The Hon‟ble Supreme Court has held in the
      case of Ujjagar Paints that excise duty is to be calculated on the landed cost
      of the raw material and the conversion cost including the margin of the job
      worker. This is well settled in law and any amendment contrary to the
      decision of the Supreme Court is not fair and justified. Under the job work
      concept apart from the landed cost of the material, excise duty is to be
      levied on the value addition till the stage of completion of manufacture.
      Therefore, the levy of excise duty with reference to selling price of
      principal manufacturer has no relevance and such a provision is opposed to
      the concept of levy of excise duty on manufacture. If excise duty is to be
      levied with reference to the selling price then such levy can no more be
      recognized as excise duty as the same may attain the status of Sales tax.
      Suitable amendments be made to Rule 10A considering the decision of
      Supreme Court in the case of Ujagar Paints.



Abolition of Excise Audit (EA 2000)

4.2   The Ministry of Finance has introduced Excise Audit 2000 applying new
      concepts for audit based on the Canadian method. According to the new
      excise audit concepts, the audit team designated by the Commissioner of
      audit, visits the manufacturer‟s premises, studies the procedure, method,
      system followed by the manufacturers based on which the audit is
      conducted. It may not be desirable that a system merely because it is
      followed in some other countries, be the basis for conducting audit in our
      country. Due to this concept the Central Excise officials are functioning
      according to their own whims and fancies insisting on submission of


                                        63
      irrelevant records, particulars etc. Though all records such as production,
      dispatch, CENVAT record, invoices, account books, files, Excise returns,
      sales tax return, income tax return, cost audit report etc. are made available
      to them they still exercise unauthorized powers and insist on submission of
      irrelevant records which in no way is connected with conducting the audit.
      Thus, it is harassment to Trade and Industry. Government should define
      their role and the area to which they should confine themselves by inserting
      suitable provisions in the Central Excise Rules.



Online E-Filing of Weekly Information by Major Duty Paying Unit

4.3   Central Excise Department has issued Trade Notice for E-filing of weekly
      and monthly return on line. All the major duty paying units are required to
      opt for online E-filing and submit product wise i.e. CETSH-wise weekly
      information i.e. production, clearance, value duty etc. that too within 3 days
      after end of the preceding week.

4.4   The Trade and Industry is of the firm opinion that E-filing, furnishing
      product wise information i.e. CETSH wise weekly information i.e.
      production, clearance, value, duty etc. is consuming a lot of time and there
      is a cost involved in collecting information every week.

4.5   It is submitted that when the assessees are submitting monthly return
      regularly, filing weekly information should be avoided as it does not serve
      any purpose and has no duty implications. This is done at a time when
      government is in a liberalization mode. Many times the assessees are
      compelled to establish a separate department for this purpose even at the
      cost of additional expenses.        It would be appropriate for the
      Government to realize this and do away with weekly E-filing system.
      On the contrary, Department should appreciate the difficulties faced
      by major duty paying units and free them from furnishing certain
      monthly information.



Rationalization of Duty Structure on Petroleum Products

4.6   The Government had notified a new policy for deregulation of marketing of
      Petroleum Products stating that the prices of MS& HSD will be market
      driven. In 2002, it was declared that - Consumer prices of Motor Spirit



                                        64
       (MS) and High Speed Diesel (HSD) will be market determined with effect
       from 1st April, 2002.

4.7    Consequently, marketing rights were granted to private players by MoPNG
       which were high investment oriented and with expectations that market
       determined prices would prevail. Contrary to this, since mid 2004 the
       Government began compensating only the PSU OMCs for selling below
       cost by budgetary support, through Government bonds, refinery discounts
       and discounts on crude by upstream players. This non-transparent process
       compensated PSUs for about one third of their under-recoveries on MS and
       HSD marketing in 2005-06.

4.8    It is important to note that such forced predatory pricing by oil PSUs left
       private companies with no choice but to absorb huge losses in continuing to
       market MS and HSD at the same prices as PSUs or reduce volumes through
       price increase. As a consequence, dealers, who have invested nearly Rs.
       one-and-a-half to two crores in each of these private sector outlets, along
       with transporters are faced with huge idling of assets.

4.9    Jobs are at risk and creating great panic amongst all segments – be it retail
       outlets, company or on the part of the transporters. The consumers are also
       affected as they are forced to buy oil from PSU owned outlets only as this
       is price sensitive item and even a small fluctuation in price diverts the mind
       of consumers. The shift of huge volumes from private oil company outlets
       to PSU outlets has also increased the burden of support to Oil PSUs from
       the Government.

4.10   The solution to the problem lies in the scrapping of subsidies and taxes
       that co-exist. The Government has rectified such co-existence for
       subsidized LPG and PDS Kerosene. Coexistence of subsidies (Oil
       Bonds) along with taxes (excise) virtually eliminates the possibility of
       healthy private sector participation.

4.11   In the above backdrop, it is submitted that a one-time reduction of
       excise duties enables Government to eliminate subsidies either in the
       form of Oil bonds or upstream assistance for MS& HSD. In the
       process, they can revive the ailing private sector petroleum retail
       industry and usher in better customer service standards through
       competition.

4.12   The impact of any subsequent increase in International prices can be
       countered by reducing excise duty by Rs.300/KL on HSD and
       Rs.420/KL on MS for every dollar per barrel increase in international

                                         65
       prices or alternatively in steps of Re 1/ Litre for both MS and HSD for
       every 3 USD / Bbl increase in International prices.

4.13   In case, above submissions are not found viable, it is submitted to grant
       subsidies to all companies whether in public or private sector. A pre-
       fixed subsidy (Rs./litre) can be adjusted by Oil Marketing Companies
       (whether in public / private sector) on the duty payments based on
       excise gate passes for removals from refineries for domestic
       consumption.

4.14   The Government may also consider calculating a uniform subsidy at
       the end of each quarter and reimbursed to all companies (whether in
       public or private sector) as in the case of Fertilizer subsidies based on
       domestic sales volumes of each company.



Large Tax Payers Units

4.15   While appreciating the move of the Hon‟ble Finance Minister towards
       formation of LTU in the country effective from 1.10.2006, we find it
       imperative that certain privileges and preferences should be given to the
       large tax payers coming under the jurisdiction of the LTU.

4.16   It is understood that Central excise and Cenvat Rules are amended in order
       to extend certain preferences and privileges to the LTU formations.
       However, it is also understood that the LTU policy is not brought into the
       Rule book by legislative changes in the Act. Consequent to introduction of
       LTU policy by the Government without legislative amendments, it is felt
       that the true spirit and intention of the Government may not be
       forthcoming.

4.17   For instance, units falling under the jurisdiction of the LTU, as a privileged
       tax payer would like to have the facility of advance ruling in respect of
       ambiguous issues basically to avoid forthcoming disputes. In the absence of
       the provisions of advance ruling under LTU scheme, it cannot be said that
       tax disputes may not be forthcoming. In fact, advance ruling on critical
       issues is a panacea for all tax disputes. It is imperative to extend the benefit
       of advance ruling to the LTU formations.

4.18   It is observed that Anti Evasion and Preventive Wing of Central Excise
       Department routinely issues formal summons under Section 14 to various
       officials of the Companies and make them sit in the excise offices for


                                          66
       hours. They are asked to provide a lot of information through hand-written
       statements, written in the presence of excise officers. It is also observed
       that most of the information collected by them in this manner is already
       available and collected by them either in earlier inquiries or through normal
       monthly returns. Same information can easily be given by computer
       generated statement and typewritten statement instead of hand-written
       statements, which is very inconvenient. Department can visualize what all
       types of information they may need in future and issue a proper
       notification/circular specifying details of all transactions, data, etc. needed
       by them. It is much easier for the Corporates to modify their computer
       systems and file the information on regular basis say monthly, quarterly or
       yearly than preparing ad-hoc information for last 5 years. It is suggested
       that excise officials should not be authorized to summon the
       information which is already available with them as a part of monthly
       returns or otherwise.



Unjust Enrichment

4.19   In Chapter 7, Para 6.7.2, Kelkar Committee has recommended that the
       provisions of unjust enrichment should not be applied for refunds
       consequent to the finalization of provisional assessments, predeposit of
       duty and goods captively consumed. This was not implemented in any of
       the subsequent budgets. There is a pressing need to implement at least in
       the current budget in line with the recommendations and also for
       consequential refunds where duty was paid suo motu under protest or duty
       was recovered by adjustment of refund, pending initiation of
       adjudication/appeal proceedings.




                                         67
                                       V
                      CUSTOMS DUTY STRUCTURE
                       AND PROCEDURAL ISSUES

Customs Duty Structure Especially in
view of Free Trade Agreement (FTA)

5.1   While entering into several FTAs, care needs to be taken to ensure that
      these do not create an inverted duty structure. A detailed study of this has
      already been done by Dr. Anwarul Hoda, Member, Planning Commission
      and by NMCC. Their findings may be kept in view while entering into
      tariff reduction proposals through any of the trade agreements.



Education Cess

5.2   In the year 2004 the Hon‟ble Finance Minister introduced an Education
      Cess of 2% and another additional 1% higher and secondary education cess
      in 2007. This 3% educational cess is calculated on the aggregate of
      customs duty payable on the imported item. Further, this 3% educational
      cess on customs duty is not allowed for the purpose of availing CENVAT
      credit. Consequently, it increases the cost of import. Such costs hinder the
      exporters in the price competition in the international market. Therefore,
      educational cess on customs duty should either be abolished or else
      CENVAT credit of educational cess on customs duty should be allowed.
      The Accounting treatment of two types of education cess also leads to lot of
      complications. Therefore, the education cess may be merged for the
      convenience of the Trade and Industry till the time it is abolished.



Inclusion of Ships Demurrage Charges in the Assessable Value

5.3   The issue of whether Ships Demurrage Charges should or should not
      form a part of the assessable value has been a matter of controversy in
      view of the fact that there was no direct legal sanction for inclusion of
      Ships Demurrage Charges as a part of “assessable value as cost of
      transportation”. But Section 14 of the Customs Act, 1962, as amended
      through Finance Act, 2007, which would come into effect vide a
      notification to be issued by the Ministry of Finance will give the legal
      sanction to the inclusion of Ships Demurrage Charges as part of the
      assessable value. Proviso to the amended Section 14(1) of the Customs

                                       68
      Act, 1962 gives the Department an unqualified power of including any cost
      rendered in connection with the importation of the goods. Once the said
      amended Section 14 of the Customs Act, 1962, takes effect through the
      notification issued by the Central Government, the industries depending
      upon the raw materials imported as a bulk cargo through vessels would be
      badly affected in a way that the cost of raw materials will be more, resulting
      in the increase of price of the finished goods. As the price of the finished
      goods will increase due to cost push of raw materials, export will also be
      affected which will be very much dampening to the growth of industries
      across various sectors of the economy.

5.4   There is no justification for inclusion of Ships Demurrage Charges in the
      assessable value of the imported goods on the following reasons:

       Ships Demurrage Charges is in the nature of penalty and hence an
        extraordinary cost which no importer willfully pays to the shipper.

       Usually Ships Demurrage Charges are paid because of the inability
        of the concerned port authority which cannot provide berth to the
        Ships for unloading of the cargo in time or due to reasons of
        mechanical defects of cargo handling equipments or labour
        problems, which are completely beyond the control of importers.



National Calamity Contingent Duty (NCCD) of Customs

5.5   The Ministry of Finance introduced National Calamity Contingent Duty of
      Excise @ Rs 50 per metric ton on indigenous crude oil and simultaneously
      an additional duty of customs at the rate of Rs 50 per metric ton on
      imported crude oil effective 1st March 2003. This duty was to be valid for
      one year i.e. upto 29th February 2004 so as to replenish the National
      Calamity Contingency Fund, but continued. It is submitted that NCCD
      on crude oil should be abolished altogether. However, if the same is
      not possible then at least CENVAT credit may be allowed against
      payment of excise duty on finished petroleum products manufactured
      from crude.




                                        69
Suggestions for modification in lists 12 and 13 of Customs Notification No.
21/02 – customs dated 1st March 2002

5.6    The year 2007-08 would mark the first year of the XIth Plan. The Oil
       Industry has formulated the plan expenditure of about Rs 2,70,000 crores
       during 2007-12. It is important to note that tremendous construction
       activities would be undertaken during this period particularly in building
       Oil & Gas Infrastructure. Estimates show that approximately Rs 1,60,000
       crores would be invested in upstream sector.


5.7    The Oil & Gas Exploration undertakings reveal that major expenditure
       would be incurred in prospecting surveys, exploration, development,
       drilling and production. FICCI strongly urges the Government to support
       investment effort in Exploration and Production activities.

5.8    Department of Revenue has issued notification along with the list of items
       for granting duty exemption for the items imported for E&P activities under
       customs notification no 21/2002-CUS dated 1st March 2002, vide serial no
       214 (Imports by ONGC), serial no 216, serial no 217 (NELP Blocks), serial
       no 218 (CBM Blocks). It is widely felt that the list of items provided in the
       notification is not exhaustive and does not cover all goods required to be
       imported for the purpose of the operations.

       Modifications in List 12

5.9    In serial No. 1 – Land Seismic Survey Equipment and accessories, requisite
       vehicles including those for carrying the equipment, seismic offshore
       survey vessels, global positioning system and accessories, and other
       materials required for seismic work or all other types of surveys for onshore
       and offshore activities, software, hardware, sample bottles and associated
       equipment required for petroleum operations

5.10   In serial No.2 - All types of Drilling rigs, jackup rigs, submersible rigs,
       semi submersible rigs, drill ships, drilling barges, shot-hole drilling rigs,
       mobile rigs, workover rigs consisting of various equipment and other
       drilling equipment required for drilling operations, snubbing units,
       hydraulic workover units, self elevating workover platforms, Remote
       Operated Vessel (ROV) “accommodation units and containers attached
       with the Rigs”

5.11   In serial No. 3 - Aircrafts, Helicopters including assemblies/parts.


                                         70
5.12   In serial No. 4 - All types of Marine vessels to support petroleum
       operations including work boats, barges, crew boats, tugs, anchor handling
       vessels, lay barges and supply boats, Marine ship equipment including
       water Maker, DP system & Diving system.

5.13   In serial No.5 – the words “Requisite Vehicles” should be added before
       the words for specialized services. Further the words “ Equipment for
       riserless building, LWD / MWD tools” should be added after the words
       including wireline. This is required to bring clarity of the items covered
       under this item

5.14   In serial No. 6 – the word “Pipes” should be added before the word
       casing. Further the words “Thread Protectors, Drill Collars and
       Fittings” should be added after the word drive pipes. This would cover
       all types of pipes and fittings required for petroleum operations. Thread
       protectors on some occasions are to be imported separately if they are
       damaged in transit / storage.

5.15   In serial No.7 – All types of drilling bits, including nozzles, breakers and
       related tools should be added before “and related tools”

5.16   In serial No.8 – The word “Processing” should be added before “and
       transportation of oil or gas".

5.17   The serial No. 9 should be recasted to state : Subsea / Flotting / Fixed
       Process, Production and well platforms and onshore facilities for
       storage / production / processing of oil, gas and water injection
       including items forming part of the platforms / onshore facilities and
       equipment / raw materials required like process equipment, turbines,
       pumps, generators, compressors, prime movers, water makers, filters
       and filtering equipment, all types of instrumentation items, control
       systems, electrical equipments / items, soil improvement, construction
       equipment, telemetry, telecommunication, tele-control security, access
       control, waste water & sewage treatment system, and other material
       required for petroleum operations. The said recasting is required to cover
       all types of offshore and onshore facilities and equipment/ material required
       for petroleum operations.

5.18   In serial No. 10 – the word “Jumpers” should be added before the words
       and trunk. The words “All types of” should be added before the words -
       coatings and wrappings. After the word wrapping, the words should be


                                        71
       added – “Pipeline Fittings, Flanges, Connection systems and Associated
       items, Paintings and Insulations”. The said change is required to cover
       all the material required for pipelines both offshore and onshore.

5.19   In serial No. 11 – the word “Operation” should be added before the words
       - of platforms.

5.20   In serial No. 13 – the word “Related” should be added after the word
       safety. This modification is required to ensure that all types of fire and gas
       detection, fighting and suppression systems are covered. The word “and
       Medivac Equipment” should be added at the end.

5.21   In serial No. 15 – the words “and assemblies” should be added before the
       words including high pressure.

5.22   In serial No. 16 – the words “all types of” should be added before
       communication equipment. This is important to cover all communication
       equipments.


5.23   In serial No. 17 – the word EPIRV should be read as “EPIRB”.

5.24   In serial No. 19 – the words “all types of transponders including” should
       be added before the words X-band radar. This is required to include all
       types of transponders.

5.25   In serial No. 21 – after the word panels, the words should be added – “Flow
       meters, sand detectors, DTS, MLS, artificial lift equipment including
       surface and sub-surface equipment”. This would help in covering all
       equipments based on latest technology.

5.26   In serial No. 23 – the words “all types of” should be added before data
       tapes. The word “cartridges / media” should be added before the words
       operational and maintenance. This is required to include new types of data
       storage, media using new technologies.

5.27   In serial No.24 – The word “Installation” should be added before
       “running, repairing”.

5.28   One new serial 25 should be added to state : “All types of material,
       equipments, instruments required for deep water projects and
       associated facilities like control system equipment and materials


                                         72
       umbilical, hydraulic oils, connectors, clamps, sub-sea structures,
       assemblies, control modules, tempers, testing and calibration systems,
       simulators, intervention vessels, instrumented, safety systems.”

5.29   Serial 26 to state as : “All types of pre-fabricated structures like
       manifolds, PLEMS, PLET, decks, jackets, boat landings, buildings,
       flare / vent boom, susea modules and Rig Mats.”


       Modifications in list 13

5.30   In serial No. 1 – the words “and Aeromagnetic Survey” should be added
       before the words equipment and accessories. The word “Geotechnical”
       should be added before the words and Geochemical. Further the word
       “CBM” should be added before the word activities. It is important to note
       that Aeromagnetic Survey is required in CBM for mapping the different
       formations having susceptibility to magnetism. Formation such as dolerite
       can be mapped using aeromagnetic surveys. Similarly, Geotechnical
       Surveys are also used for mapping of CBM.

5.31   In serial No. 2 – after the words drilling rigs, the words “Air Drilling with
       air package consisting of compressors and boosters” should be added. It
       is important to note that coal is susceptible to formation damaged during
       drilling operations; therefore, air drilling is used world wide to minimize
       formation damage during drilling.

5.32   In serial No. 3 – the words “and laboratory” should be added before the
       words equipment, directional drilling. The words “including all types of
       software” should be added before the words solids control, fishing. It is
       important to note that laboratory equipment for measuring gas content and
       carrying out various analyses on coal samples are required.            Further,
       softwares are required for interpretations of well tests, reservoir simulation,
       carrying out geological and other modeling.

5.33   In serial No. 4 – the words “core drilling roads, core barrels” should be
       added before the words production tubing. It needs to be appreciated that
       core drilling roads and barrels are required for taking core samples during
       corehole drilling operations.

5.34   In serial No. 5 – the words “DTH hammers” should be incorporated
       before the words including nozzles. DTH hammers are required for
       carrying out air drilling operations.



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5.35   In serial No. 6 – the term “POL” should be added before the words used in
       coal bed Methane. It is important to note that lubricants, oil and grease are
       required in the equipment used in CBM operations.

5.36   In serial No. 7 - the words turbines, pump generators should read as :
       “turbines, all types of pump generators, all types of electrical,
       electronic and instrumentation equipment.” These equipments are used
       in gas and water measurement and handling in CBM operation.

5.37   Serial No. 8 should read as: “Line pipes for flow line and trunk pipelines
       including weight coating, wrapping and all types of fittings.” It is
       important to note that fittings are required for pipe joiting, bends, hot taping
       etc.

5.38   Serial No. 9 should read as: “Tanks and vessels used for coal bed Methane
       operations, water, mud, chemicals and related materials.

5.39   In Serial No 13 All types off Communication equipment required for
       operations including synthesized VHF Aero and VHF multi channel sets,
       Non-directional radio beacons, intrinsically safe walkie-talkies, repeater
       systems, directional finders, EPIRV, electronic individual security devices
       including electronic access control system.

Customs Duty on Metallurgical Coke

5.40   Metallurgical Coke is a vital input for Ferro Alloy production. The
       Industry requires Metallurgical Coke of low ash with 12% max. and low
       phos with 0.015% max. (phosphorus acts as a “poison” in the steel
       making process), whereas the quality of coke available          through
       indigenous sources are of high ash with 20% and high phos with typical
       levels of 0.14 % and low fixed carbon with 65-70%, which cannot be used
       to produce Ferro Chrome with 0.03 % Max Phos content required by the
       market. Therefore, the Industry has to depend on imports for its
       requirement, as the quality of coke is much superior to indigenous coke
       and which ultimately decides the quality of the Ferro Alloys.

5.41   Moreover, the prices of Metcoke have escalated substantially during last
       two years to US$ 280-290 per tonne (CIF) from US$ 110-130 per tonne
       (CIF) and the availability of the same is becoming very critical by the day.
       Since Metallurgical Coke with low ash 12% and low phos 0.015%, is
       not available indigenously and the Ferro Alloy Industry is depending
       on imports, it is therefore necessary that the Customs Duty on Metcoke



                                          74
       under heading 270400.09 should be brought down to “Nil” from the
       existing level of 5% basic.

Zero Customs Duty on LNG/Natural Gas and its Infrastructure Facilities

5.42   Currently customs duty is payable @5% on import of LNG and enhances
       the landed cost of imported LNG/natural gas. Since landed cost of spot
       RLNG is higher than the Natural Gas indigenously available, desired fiscal
       benefit should be to augment the supply of Gas for consumption in priority
       sectors such as Power & Fertilizer to make its cost competitive with
       comparable goods In the absence of such a fiscal regime, they will not be
       able to compete with the traditional fuels.

5.43   To meet the existing and projected shortfall in power generation and also to
       provide the necessary foundation for growth of Indian economy in an
       environment friendly manner, supply of LNG/NG to power plants at a
       competitive price is essential. Since the indigenous gas supply is not
       sufficient to meet the growing demand, India will have to continue to rely
       on traditional fuels i.e. that are not as environment friendly. Till now, a
       major portion of power supply comes from thermal plants.

5.44   Imported LNG & Natural Gas must be promoted being the cleanest fossil
       fuel, environment friendly and highly efficient. Since a major portion of the
       LNG/NG will be consumed by priority sectors such as power and fertilizer,
       imposition of any tax on this input adversely affects these sectors and at the
       same time it will have direct impact on the subsidy.

5.45   Further, custom duty on import of RLNG for use in power sector by certain
       projects which are being revived like RGPPL has been exempted. In view
       of above, the exemption from custom duty as given to RGPPL may be
       extended in general to all players in above priority sectors namely fertilizer
       and Power.

Customs duty on Cocoa Beans

5.46   Customs duty on cocoa beans falling under classification 1801 needs to be
       reduced to 15% level.

Specialty Vegetable Fats falling under tariff 1516 20 99
5.47   The basic import duty on VANASPATI in 2006 was increased from 30%
       to 80% to perhaps protect the domestic industry from cheaper imports.
       This inadvertently impacted manufacturers of compound chocolates and the
       ice cream/ bakery industries who as Actual Users import nominal

                                         75
       quantities of hydrogenated or fractionated palm kernel oil as specialty fats
       strictly for CAPTIVE CONSUMPTION under tariff 1516 20 99 which
       inadvertently attracts the same high increased duty rate of 80%.
       Suggestion: Duty on hydrogenated specialty vegetable fats imported
       by Actual Users falling under sub-tariff 1516 20 99 be reduced to
       earlier level of 30% rate.


Customs duty on Synthetic fibre intermediates


5.48   The custom duty on import of PTA & MEG in countries like Thailand,
       Indonesia & Pakistan is Zero, whereas in India, it is 7.5%. This is blocking
       the way of offering products by the domestic textile industry at competitive
       prices in line with neighboring countries. Therefore, it is suggested that the
       import duty on synthetic fiber intermediates like PX, PTA & MEG should
       be brought to Zero. The import duty on Titanium Dioxide {TiO2}
       (Anatase grade) is 10%. It should be reduced to 5%. Similarly, Spin
       Finish Oil is a vital component in manufacture of polyester yarns &
       fibers, which presently attracts a duty of 7.5%, need also to be brought
       to the level of 5%.


Customs duty on Vanaspati

5.49   The main raw material, Crude Palm Oil (CPO) is imported at 46.35% of
       customs duty as against this the final product –Vanaspati is permitted to be
       imported under Free Trade Agreement (FTA) from NEPAL, Sri Lanka and
       other neighbouring countries at zero duty.

5.50   Though the government in order to ease prices of edible oil, has reduced
       import duty, the same is inadequate for competing with the duty free
       Vanaspati being imported from neighbouring countries at zero duty under
       FTA. This results into a higher cost of Rs.832/- for 15 kg tin for vanaspati
       produced in India as compared to the cost of Rs.730/- approximately in
       respect of Vanaspati imported from Sri Lanka and neighbouring countries.

5.51   Higher duty on Crude Palm Oil against the duty free import of Vanaspati
       from the neighbouring countries has created a non-level playing field. For
       example in Sri Lanka duty levied is US$ 25 levy per metric tonne,
       i.e. Rs. 1,000 per tonne against this Indian Vanaspati Manufacture has to


                                         76
       pay Rs.8,500/- per tonne. As the margin of vanaspati industry is meager
       Rs.1 to 1.5 per kg, the survival of the domestic units has become a distant
       dream. In order to bring in competitiveness and doing away
       with the ever changing dollar price/international market fluctuations
       resulting into frequent change in duty structure causing instability in prices,
       it is suggested that a flat rate of duty @ Rs.4,000/- per tonne be levied
       instead of present advoleram duty structure on Crude Palm Oil (major raw
       material for manufacture of Vanaspati) for manufacture of Vanaspati on
       actual user basis.

5.52   Therefore, to have fair conditions of competition and to create level playing
       field for the domestic producers vis-à-vis the vanaspati imported duty free
       under FTA from neighbouring countries, needless to say in order to make
       vanaspati more affordable, (to check the rising trend in international prices)
       it is proposed that

          (a)    flat rate of duty @ Rs.4,000/- per tonne be levied instead of
                present advoleram duty on Crude Palm Oil for manufacture of
                vanaspati on actual user basis (present duty on CPO works out as
                Rs.8,500/- per tonne as against Rs.1,000/- per tonne in Sri Lanka).

          (b) Alternatively,  pending the implementation of the first proposal, the
                inverted duty structure be corrected by permitting the domestic
                vanaspati industry to import CPO at a concessional duty of 20%
                on actual user basis.



Prevention of Revenue Loss by restricting the entry of smuggled vanaspati
from NEPAL

5.53   The Government of India in order to check the duty free import of
       Vanaspati from Nepal has put the quantitative restriction by fixing a quota
       upto 1 Lac Tonnes per annum. Over and above this 1 Lac tonne quota,
       around 1.5 Lac tonnes per annum is being imported illegally/ smuggled into
       India, which results not only heavy loss to the government exchequer but
       also adversely affects the domestic industry with present capacity
       utilization of 20%. Further, this results into dumping of the Vanaspati in the
       Eastern regions which is the main cause for closure of industries in this
       region. Therefore, clandestine inflow needs to be checked by keeping
       strong vigil at



                                         77
the Indo-Nepal Border by the Custom Departments and also a monitoring
mechanism at the vanaspati factories at Nepal may be brought in consultation
with Nepal Government.




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                                       VI
                                SERVICE TAX

Service Tax on Commercial Establishments

6.1   The Union Budget for 2007- 08 has widened the scope of service tax net by
      extending it to rentals on immovable properties for commercial use. Now
      service tax is applicable to nearly 100 services.

6.2   Tax on land and building is a subject matter of State and in all fairness
      the Central Government should not levy any tax on the subject covered
      by the State List. States already levy tax in the form of municipal taxes on
      the properties based on their annual values i.e. the sum for which the
      property might reasonably be expected to let from year to year. The service
      tax would be an additional tax on the land and building used for
      commercial purposes and tantamount to double taxation, which is neither
      fair nor warranted.

6.3   Also, one fails to comprehend as to what sort of service element is
      involved in the letting/leasing out a commercial accommodation.
      Rental income denotes just a return from investment in commercial
      accommodation, akin to the interest income from lending or dividend
      income from investing in shares, and construing it as „service‟ seems to
      be a far-fetched imagination and totally uncalled for.

6.4   No doubt, such a tax system is prevalent in some countries, but should we
      introduce a particular taxation system merely because it happens to be so in
      one country or the other without looking into its Indian relevance. Do other
      countries have millions of petty traders/retailers; as we have in India?

6.5   Further, with the given recent spurt in rentals, this would also have an
      inflationary impact of a very wide nature, particularly affecting the
      profitability of small and medium traders called „mom and pop‟.

6.6   The retail sector will be badly hit since there will be no opportunity to
      offset these taxes against output taxes. A similar predicament will be
      faced by a large section of IT and ITES companies who are already
      operating on strict cost-control due to fierce competitive pricing for
      their clients. It may be relevant to mention that CENVAT credit of the
      service tax paid on the „rentals‟ would be available only to
      manufacturers of excisable goods and providers of „taxable services‟
      for setting-off their excise duty and service tax liability, respectively,


                                       79
       and not to the traders and the providers of both „taxable‟ and „non-
       taxable‟ services and manufacturers of both excisable and exempt
       goods. This would thus create discriminatory and iniquitous situations.

6.7    In any case it has to be appreciated that for manufacturers/traders, service
       tax would only be an additional cost and bound to have impact on the final
       market price of the commodity that is bound to soar and ultimately the
       consumer has to bear the brunt. Would it at all be desirable at a time when
       inflation infact needs to be contained?

6.8    Though the Government, while passing the amendments in the Finance
       Bill allowed some deductions, but the same are not adequate. It is
       important that all expenses relatable to rental income be allowed
       deduction from the rentals subjected to service tax.

6.9    Also, service Tax introduced last year on Intellectual Property (IP)
       does not seem to be fair in so far as IP is an intangible asset and not a
       service. The imposition of tax on IP will impede the technological
       development in science and industry.



Service Tax exemption on E&P Activities
including Outsourced Services

6.10   Past few Union Budgets have enlarged the service tax net and brought
       within its ambit so many services, some of them are directly or indirectly
       related to E&P activities. Gradually, the rate of tax has been increased and
       currently it is levied @ 12.36% (inclusive of education cess).

6.11   Levy of service tax on survey and exploration, site formation, mining
       services, etc inadvertently levies tax on the core activities of E&P business.
       While explaining the budget related issues, the Joint Secretary (TRU) in his
       letter D.O.F. No.334/1/2007-TRU dated 28.2.2007 has confirmed that
       services provided in relation to mining of mineral, oil and gas now
       comprehensively covered under the new mining service. From this
       clarification, it is now abundantly clear that all E&P activities will
       cover under service tax net.

6.12   E&P sector is highly capital intensive and from investment perspective, the
       exploration of oil and gas is a risk investment with uncertain return. The
       Government is also making effort to extend exploration coverage to high
       risk areas such as deep water and ultra deepwater areas, which is not cost


                                         80
        effective and would be a major cause of concern for E&P companies.
        Additionally, regressive service tax burden substantively adds to the cost of
        E&P business. At the same time there is no incentive like cenvat benefit as
        available to other types of business. Needless to mention, Indian E&P
        companies are suffering from lack of facilitative environment necessary to
        thriving minimum business. The plethora of taxes heaped on this business
        is taking away whatever margin, therein the business.

6.13    The current trend of government policy in terms of imposing and increasing
        taxes on exploration business is also against the very spirit of fiscal stability
        provided under the PSCs. Levy of service tax is a step backward in luring
        foreign oil giants and not investment conducive and would discourage oil
        companies who have shown interest to participate in the future NELP
        bidding.

6.14    In order to provide a level playing field, it is felt that service tax exemption
        to E&P activities, in the following manner, is inevitable.

   a.      Full service tax exemption to E&P activities, or

   b.      Introduction of provision in the Foreign Trade Policy for availing
           deemed export benefit of service tax paid.

   c.      Alternatively,

            by adjustment of service tax against OID Cess payable on crude
             oil production from the Blocks without any kind of restriction

            by way of refund of service tax in case of unviable/surrendered
             Blocks



Service Tax on Construction Activities

6.15    The Government has been enlarging the scope of service tax. In the
        recent past, as Government has added the activity of construction under the
        service tax net. As a result, it has a bearing on construction of factory shed
        and building, colony, residential complex etc. It should understand that
        construction costs are very high and further levy of service tax will put the
        trade and industry or the citizens of the country to financial hardship.
        Though, Cenvat credit is extended for the manufacturer of excisable goods,
        however, it affects the other categories, which are not in a position to utilize


                                           81
       Cenvat Credit. Even residential complex or apartments having more than
       12 units are required to pay service tax. When Bankers and financial
       institutions are encouraging the housing sector, the levy of service tax
       serves as a stumbling block in the growth of construction industry.
       Therefore, service tax construction activities should be abolished.



Service Tax Credit on Outward Transportation

6.16   Explanation 2 of (K) of Rule 2 of CENVAT Credit Rules, 2004 states that
       [„proviso (i)‟input service‟ means any service:-

 (i)   Used……………

(ii)   Used by the manufacturer, whether directly or indirectly, in or in relation to
       manufacture of final products and clearance of final products from the place
       of removal, and includes…….. outward transportation upto the place of
       removal.

6.17   From the above, it is evident that any input service used by the
       manufacturer in or in relation to manufacturer of final products from the
       place of removal are eligible for availing as Cenvat credit. In other words
       even service tax paid on freight paid on the outgoing consignments to
       be delivered at the place of customers shall also qualify for availing
       Cenvat credit. The items mentioned in the definition given in the
       Cenvat Credit Rules are only illustrative and not exhaustive. However,
       the Central Excise officials interpret the definition in a restrictive manner
       that the service tax paid on outward freight is not eligible for Cenvat credit.
       Therefore the definition of “input service” under Cenvat credit Rules 2004
       should be suitably amended to enable Cenvat credit on service tax paid on
       outward transportation charges upto the customers place. Also, appropriate
       Cenvat credit should be allowed to the principal manufacturer in respect of
       service tax paid in relation to goods manufactured for or on its behalf by a
       contract manufacturer or converter.

6.18   Consequent to usage of the expression “ from the place of removal” under
       the objective / main clause of the definition input service under Rule 2 (i)
       (ii) and usage of the expression “upto the place of removal” in the inclusive
       / illustrative clause of this Rule, divergent views have been expressed by
       the co-ordinate benches of the Tribunal. This issue could be legally settled
       only by the apex court and until the issue goes before the apex court,



                                         82
       manufacturers availing input service tax credit               on   outward
       transportation will be in multi dimensional quandary.

6.19   It is a well settled position of law by the various Apex court judgments that
       by any level of understanding inclusive/illustrative clause should be read in
       conjunction with the main clause and the inclusive clause cannot prevail
       over the main clause. Moreover, it is only illustrative and exhaustive and
       not restrictive. Considering the settled position of law, Government may
       suitably amend the Cenvat credit Rules for removal of ambiguity and
       to make it clear that input services credit on outward freight is
       cenvatable. Amendment/clarification is also required considering the
       fact that input service tax credit related to all business activities of the
       manufacturer is the objective of cenvat scheme under cross sectional
       input / input service credit scheme effective from 10.9.2004 and this
       scheme is nothing but a pre-cursor for introduction of comprehensive
       Goods and Service tax as proposed by the Government from 2010.



Dredging Services

6.20   Dredging constitutes a substantial part of any Port building / construction
       activity. While construction services to the Ports are exempted by way of
       Notification No. 16/2005 – ST dated 07-06-2005, dredging services to the
       Ports are not exempted.

6.21   To reduce the development costs of the Ports and thereby make the
       transaction costs of their services competitive it is suggested that
       Dredging services to the Ports be exempted by issue of a Notification on
       the same lines of the exemption granted to construction services to the
       Ports.



Exemption to Input Services Availed by Merchant Exporters

6.22   While Manufacturer Exporters are entitled to take CENVAT Credit on
       Input services availed for Export goods, the Merchant (dealer) Exporters
       who buy from Manufacturers and then export goods cannot avail any Input
       Service Tax Credit on Input taxable services like courier, GTA services,
       banking and financial services etc., on which service tax is charged by input
       service providers.



                                        83
6.23   In order to reduce transaction costs and to make Indian goods
       (exported by Merchant Exporters) truly competitive in the
       international market it is suggested that all taxable Services availed /
       received by the Merchant

6.24   Exporters be exempted at source by issue of a suitable Exemption
       Notification.

6.25   Besides, FICCI would also like to submit:-

        Vide the Finance Act 2005, Service Tax has been imposed on
         membership subscription of Clubs and Association with specified
         exclusions. Trade and industry associations, it has to be appreciated,
         provide a common forum and help crystallize the Government-
         Industry dialogue to understand and appreciate each other‟s
         perspective to arrive at optimal solutions for policy changes to
         accelerate industrial growth in the overall interest of the economy,
         the significance of which is well-recognised by the Government and
         that is why such associations are granted exemption for income-tax
         purposes. Why should then there be service tax on the laudable
         services rendered by such associations? The Government has,
         granted exemption from payment of Service Tax to Trade Unions,
         Charitable, Religious and Political Organisations and also the bodies
         which provide agriculture, horticulture or animal husbandry. It is
         submitted that exemption from payment of Service Tax should
         also be extended to the recognized Trade and Industry
         Associations, whose sole objective is to promote their respective
         trade and industry and consequently to accelerate the national
         economic development.

        It is submitted that exemption from Service Tax of service providers
         engaged in service exports, i.e. in rendering of professional services
         outside India, should be unconditional. Presently, certain conditions
         have been stipulated, such as the place of entering into the Contract with
         the Client, the issue of whether either of the parties to the contract with
         the client, the issues of whether either of the parties to the Contract has
         an establishment in India, etc. The conditionality of the nature
         dilutes the earlier provision for entirely exempting the export of
         services from the ambit of Service Tax levy, which should be
         restored.




                                        84
    The earlier provision laid down that in the event of the main / primary
     Consultant engaging Sub-Consultant for rendering of the services, the latter
     was under no obligation to bill Service Tax. The subsequent amendment
     brought in the concept of vatability, pursuant to which the primary
     Consultant, while paying Service Tax billed to him by the Sub-Consultant,
     could claim credit for the same in his assessment. It is found that this
     adjustment is not easy to bring about in practical terms, and is bound to
     create numerous difficulties during the course of assessment. As such, it is
     felt that the previous exemption of Sub-Consultant from charging Service
     Tax to be the main Consultant should be restored, particularly as this shall
     not lead to any loss in the overall revenue obtained by the Government.

    Service tax legislation provides for maintenance of separate accounts for
     input/input services used for rendering both taxable and exempt output
     services for utilization of credit on such input/input services. However,
     there is no clarity as to what constitutes maintaining separate accounts in
     respect of input services or inputs used for rendering both taxable and
     exempted services. Presently, service provider should maintain details of
     receipt and consumption, inventory of the inputs and input service meant
     for utilization in rendering taxable services. However, in case separate
     accounts are not maintained, the service provider shall be allowed to utilize
     service tax credit for payment of service tax on any output service only to
     the extent of an amount not exceeding 20% of the amount of service tax
     payable on such output service. Viewed practically, it is difficult to
     ascertain the details of receipt and consumption of input services in
     rendering taxable and exempted services. Accordingly, it could not be
     possible to maintain separate inventory of input/input services meant for
     rendering taxable/exempted services. A mechanism to claim credit of tax
     paid on input/input services used in rendering exempted and taxable output
     service where separate accounts are not maintained should be provided.
     This will help bring out clarity in the procedure to be followed by the
     service provider engaged in rendering exempted and taxable output services
     and help avoid litigation. Presently a mechanism has been provided in the
     statute only to insurance service provider referred to in sub-clause (d) of
     clause (105) of section 65 of the Finance Act which can be referred to in
     this context.



Import of services




                                       85
6.26   There is an apprehension that services availed outside India & consumed
       outside could be subjected to Service Tax on the basis that recipient of
       service in India could be treated as “Deemed to have been received”
       Service in India. If the aforesaid apprehension is true, there would be
       double taxation implications, whereby a transaction would be taxed in a
       foreign country as well as in India. It is, therefore suggested that the Act
       should be amended to specifically provide that only services received and
       consumed in India would be liable to Service Tax in case of Import of
       Services. Apart from that, provision for avoidance of double taxation ought
       to be introduced meaning that if a service is taxed in a foreign jurisdiction
       on the basis that the service is provided in that jurisdiction and is also held
       to be liable to Service Tax in India, Service Tax liability in India would be
       reduced by VAT/GST paid in the concerned foreign jurisdiction based on
       the proof provided by the service provider of the same having been taxed in
       India.




                                         86
                                       VII
                          CENVAT CREDIT RULES

Accumulation of Cenvat Credit

7.1   The CVD and excise duty paid on all imported and domestic purchases of
      capital goods continue to get accumulated in a major way as CENVAT
      credit without the companies being able to get the refund of this huge
      amount. It is therefore imperative that the Government should come out
      with a mechanism to re-fund this amount rightfully belonging to the
      Industry so that cost of capital is confined to the bare minimum. The
      amount so refunded, it may be mentioned, will go a long way in improving
      the cash flow position of the industry and its competitiveness.

7.2   FICCI feels that this said refund mechanism could be on the pattern of
      refund of excess income tax paid under the Income Tax Act. Such
      refunds, within a stipulated time frame will take care of cash flow
      position of the units and its competitiveness, without changing the duty
      structure.



Cenvat Credit on High Speed Diesel (HSD)/Light Diesel Oil (LDO)

7.3   The government has been liberalizing the Cenvat credit norms on all the
      inputs and also inputs service used directly or indirectly in or in relation to
      manufacture of final goods. However, under the Cenvat credit Rules, 2004
      there is specific bar on availing Cenvat credit on High Speed diesel and
      Light diesel oil. In other words, High Speed diesel and Light diesel oil
      although are inputs as these are used in or in relation to manufacture of
      dutiable goods, the facility of Cenvat credit is denied to the manufacturer.
      It is important to note that HSD and LDO is widely used by all the
      industries as fuel for the purpose of generation of electricity and the
      electricity so generated is in turn used in or in relation to manufacture of
      dutiable final product.

7.4   The government is encouraging captive generation of power to tackle
      growing energy needs of the country. Therefore, allowing Cenvat credit on
      this essential input will be a step in the right direction. Further when
      Cenvat credit is allowed on other fuels such as furnace oil, lubricants etc.
      there is no logic in excluding HSD/LDO from the purview of Cenvatable
      input.


                                        87
7.5   It is submitted that HSD/LDO should also be allowed as eligible inputs
      for the purpose of availing Cenvat credit. Cenvat credit Rules 2004 be
      amended to permit availing of Cenvat credit on LDO and HSD.

100% Cenvat Credit on Capital Goods in the Year of Receipt

7.6   The Cenvat Credit Rules, 2004 provides for availment of Cenvat credit on
      inputs, service tax and capital goods. Even though 100% Cenvat is allowed
      on the input at the time of receipt, 50% Cenvat credit is only allowed on the
      capital goods in the year of receipt and the manufacturer has to wait till the
      next financial year for availing the balance 50% Cenvat credit. There is no
      logic behind the discrimination with regard to availment of Cenvat credit
      on inputs and capital goods.

7.7   In fact, the assessees are made to pay 100% excise duty on inputs as well as
      capital goods at the time of procurement. When, 100% Cenvat is allowed
      on receipt of input there is no reason why the balance 50% Cenvat credit on
      capital goods is deferred till the succeeding financial year. The Trade and
      Industry is put into severe hardship till the availment of balance 50%
      Cenvat credit. Cenvat credit Rules should be suitably amended to
      extend 100% CENVAT credit on capital goods also at par with inputs.
      After all, the assessees are paying 100% excise duty and as such Cenvat
      credit also should be allowed on such excise duty paid by the assessees.



Difficulty in Availing Cenvat on Sale in Transit Transaction

7.8   Section 3(b) of the Central Sales Tax Act provides for the circumstances
      under which a sale or purchase of goods is said to take place in the course
      of interstate trade or commerce. As per the Section, a sale or purchase of
      goods shall be deemed to take place in the course of interstate trade or
      commerce if the sale or purchase is affected by a transfer of documents of
      title to the goods during their movement from one state to another. Thus,
      the sale is affected by a transfer of documents of title to goods during their
      movement from one State to another. Where the property in the goods has
      passed/the movement has commenced, the sale will not evidently be within
      Section 3 (b) or when the property in the goods passes after the movement
      from one State to another, such sale will not also fall within the section.
      Accordingly, the section provides for endorsement in the documents during
      the journey or movement of goods and not earlier to that.




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7.9    Under Central Excise, where a Registered person places an order on a
       manufacturer for supply and delivery of goods directly to
       customer/assessee     and      the    goods    are     also    accordingly
       transported/dispatched from the manufacturers‟ premises to the users‟
       premises without being brought to the Registered persons‟ premises, the
       manufacturer has to issue an invoice under Central Excise Rules,

7.10   The prescribed invoice under Central Excise should also contain (in
       addition to specified detail), the consignee‟s name and address for the
       purpose of availing Cenvat credit. Thus, before the goods move from one
       State to another or one place to another, the consignee‟s name (second
       buyer) also should be incorporated in the documents of title of goods to
       make him eligible to avail Cenvat. If this condition is satisfied in order to
       avail the Cenvat credit, then the transaction will not qualify as an E1 sale
       under the Central Sales Tax Act.

7.11   A close comparison of mandatory requirement under the Central Sales Tax
       Act, 1956 and Central Excise Act, 1944/Rules, 2002 will lead us to find a
       contradiction between these two Acts as far as sale in transit is concerned.
       Both the Acts are Central legislations and as such there should not be any
       anomaly or contradiction on the same issue. When sale in transit is
       recognized or accepted under Central Excise Act, 1944/Rules, 2002, the
       same should have been allowed under Central Sales Tax Act also as per
       Central Excise requirement. At present, the industry faces hardship in
       cases of sale in transit under Central Sales Tax Act as documents of
       title to goods are to endorsed during the course of transit whereas the
       Central Excise Act requires such endorsement for such sale in transit
       to be done before commencement of such movement. Statutory
       provisions in this respect be reviewed to remove the contradiction in
       the statutes.



Cenvat Credit on Imports through Courier

7.12   At present there is no specific provision for availing Cenvat credit based on
       courier receipts or package receipts though countervailing duty is paid on
       such imports through a common Bill of entry prepared for all imports by
       Courier Agency belonging to different importers. Now days, it has become
       inevitable that urgent requirements of spare parts of plant and machinery or
       other inputs are to be met by import through courier. The importer also
       promptly discharges the countervailing duty against such couriers or


                                        89
       baggage. However, there is no provision under Cenvat credit Rules to
       recognize the countervailing duty payment made against such imports
       through courier. The courier will file a combined Bill of entry for all the
       consignments belonging to different importers and discharge the import
       duty also together. However, the courier agent will forward a photocopy of
       the Bill of Entry to each importer. However, Cenvat is not allowed to be
       taken on such copy. As duty has been paid, an appropriate provision
       may be inserted in the Cenvat credit rules to avail the Cenvat credit
       based on certified copies of such Bill of Entry. This will help
       manufacturer/exporters to avail Cenvat on duty paid by them.

Cenvat Credit on Endorsed Bill of Entry

7.13   At present Cenvat credit is allowed on Bill of Entry against import.
       Sometimes, there are many traders who are not registered under Central
       Excise, who import material and forward the goods to the registered
       manufacturers for the purpose of conversion of the material on job work
       basis.

7.14   As the non-Registered unit/trader cannot issue cenvatable invoice against
       such import, the situation forces such trader to get registered under Central
       Excise so as to issue cenvatable invoice. Consequently, such registration is
       only a procedural compliance under Central Excise and does not serve any
       other purpose except for issuing cenvatable invoice. This has caused
       immense hardship to genuine small traders. Therefore, the Rule should be
       amended to provide that the Bill of Entry duly endorsed by such non-
       Registered trader should also be recognized for the purpose of availing
       Cenvat credit when the material is sent to the registered manufacturer
       for the purpose of conversion of material on job work basis.



Removal of Capital Goods after Use

7.15   Provisions of Rule 3 (5) apply when inputs or capital goods are removed
       „as such‟. The rules make no provision for removal of capital goods after
       use. Under the changed scenario, the manufacturer who removes capital
       goods „as such‟ will have to reverse the credit taken at the time of receipt,
       irrespective of the price at which it is sold. It is to be noted that these
       capital goods are not removed „as such‟ but are removed after putting such
       capital goods into use for a long time say 5-10 years or even more.
       Effectively, such goods cannot be sold at the same price at which it was
       purchased. In other words, due to depreciation or use, in case, such capital

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       goods are to be sold at lower rate. Therefore, paying the duty equivalent to
       the amount availed as Cenvat credit is not fair and logical. Rule may
       suitably be amended to levy excise duty on the transaction value for the
       capital items which are sold or cleared after putting into use. However,
       certain restrictions can be imposed regarding period. Goods are sold within
       2 years of its commissioning, full duty may be recovered. Beyond this, the
       duty should be on value of goods.



Non availability of Cenvat credit of Education Cess paid by 100% EOU for
domestic clearances

7.16   Benefit of Cenvat credit is not available for Education Cess paid by the
       100% EOU towards domestic clearances as the formula for availment of
       Cenvat credit in such cases stipulated under the Cenvat credit Rule 3 (7)
       does not indicate the Education Cess. The formula as stipulated under
       proviso to Rule 3(7) of Cenvat credit Rules 2004 to work out credit
       eligibility in respect of goods supplied by 100% EOU to domestic sale
       may be recast as under by including the element of Education Cess

       (X ) multiplied by 1 + BCD /400 x (CVD + EC ON CVD /100)
       (where “X” is Assessable Value)



Credit of service tax payment

7.17   Under the Cenvat Credit Rules, 2004 as of now service tax paid on only 16
       specified services are eligible for full cenvat credit, whereas in respect of
       other services credit can be availed only in respect of those services which
       are utilized for providing/producing taxable output service/products.
       Removal of this restriction would be desirable.



Interest demand on suo moto credit reversal on account of clerical errors in
availment of modvat

7.18   Interest is demanded on the suo moto credit reversed by the manufacturer
       on their own noticed clerical errors in the cenvat availment in order to
       ensure that it is only the eligible credit availed. Even though interest
       demand is made on these instances thus reversed credit will not have any


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       implication on the cenvat balance. It is the settled position of the law that
       interest is not payable if the cenvat credit is reversed to set right the clerical
       mistakes and adequate cenvat balance is maintained in the books of
       accounts. It should be clarified that interest is not payable on suo moto
       credit reversal to set right clerical errors of cenvat account.

7.19   Rule 4(2)(a) of Cenvat Credit Rules 2004 (CCR) provides that Cenvat
       credit in respect of capital goods received in a factory or in the premises of
       the provider of output service can be availed by the manufacturer or service
       provider, as the case may be. Certain industries are finding it practically
       impossible to adhere to this condition of receipt of capital goods in the
       factory premises or the premises of service provider e.g. Rent a cab
       operators are eligible to avail Cenvat credit of duty paid on motor vehicles.
       However, the said operators are not in a position to satisfy this condition
       that the motor vehicles should be received in their office premises.

7.20   Further, in cases of Fixed Wireless Phone (FWP) in the telecom sector and
       motor vehicles for Rent a Car operator, the capital goods on which credit
       has been availed are required to be removed from the premises of the
       service provider. In case of FWP, the same needs to be located in the
       premises of the telecom subscriber and in the case of Rent a cab operator,
       the motor vehicles are located at the premises of their client and do not
       return back to the premises of the service provider By strict interpretation
       of the provisions of CCR, an amount equivalent to the Cenvat credit
       attributable on such capital goods needs to be paid by the output service
       provider by debiting the Cenvat credit or otherwise thereby defeating the
       very purpose of allowing Cenvat credit on such capital goods. The above
       anomalies need to be addressed by suitably amending the relevant
       provisions of CCR.



Inclusion of Provisions in Cenvat Scheme/Rules on Cenvat Eligibility
Production Inputs Damaged/Destroyed during Production

7.21   Under the erstwhile Modvat Rules clear cut provisions were incorporated
       for retention of Modvat/credit availed production inputs wasted /damaged
       during production. But such provisions are not available under the present
       Cenvat credit Rules. Consequent to absence of such provisions for retention
       of Cenvat credit on the production inputs wasted during production, audit
       objections are taken frequently and which is avoidable. Required
       amendments are to be carried out in the cenvat credit Rules duly


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incorporating the cenvat credit eligibility on the inputs damaged
during production.




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                                      VIII
           OTHER ISSUES RELATING TO INDIRECT TAXES

8.1   Central Sales Tax should be abolished on Sports Goods as per the recent
      Sports Policy where Sports has been declared a Compulsory subject and the
      Government to ensure implementation. Present abatement of 40% on
      MRP is low and need to be suitably increased.

8.2   In the year 2005-06 the Government of India announced a “Focus Market
      Scheme” wherein an incentive of 2.5% of F.O.B. value was provided as
      incentive to exporters if the export was made to the notified countries.
      During this year 2007-08, a few CIS countries have been included in the list
      along with Latin American Countries and African countries but the name of
      „Russia‟ was not included in the eligibility list for getting this benefit.
      Exporters who are exporting to Russia under the Government of
      India‟s Loan Repayment Scheme and not getting any incentive under
      the DEPB Scheme should also be made eligible under the “Focus
      Market Scheme”.

8.3   At present Motor Starters used in the Agriculture sector suffer Central
      Excise duty rate of 16%. However goods used for the installation of
      cold storage, cold room or refrigerated vehicle used for preservation,
      storage or transport of agricultural produce are exempted from Excise
      duty. So also power driven pumps designed for handling water attract
      Excise duty of only 8%. It is suggested that the rate of Central Excise
      Duty for Motor Starters be reduced to 8% from the present rate of 16%.
      This ensures uniformity in the rate structure for all products meant for
      agricultural sectors.

8.4   It is suggested that the procedure of Customs endorsement of the Bill
      of Entry EDI copy for availment of CENVAT Credit by the end user
      unit, be restored at the earliest by way of a suitable Customs Trade
      Notice to this effect. Or alternatively a provision should be made in the
      Bill of Entry format for indicating the details of the consignee (end user
      receiver) of the goods in addition to the details of the Importer as is
      being done in the case of Excise invoices where the Invoice is made on
      the buyer with the consignee indicated as the end user.

8.5   Suitable amendment be made retrospectively w. e. f. 14-01-2007 to the
      SWM (PC) Rules, 1977, in particular in Chapter II of the said Rules, to
      the effect that commodities meant for industrial consumers, whether


                                       94
      purchased directly from manufacturers / packers or from the dealers
      in the retail net work would be excluded from the application of Rule 2
      A of the SWM (PC) Rules, 1977 and accordingly also excluded for
      valuation for discharge of Excise duty under Section 4 A of CEA, 1944.

8.6   Duty rate of 8% be charged for corrugated Board (480810), Corrugated
      Board Boxes/ Cartons (48191010, 48191090), other containers & fitments
      etc (48195010).

8.7   Excise duty on corrugated boxes be reduced to 8% ad valorem.


8.8   Reduce Import Duty on Kraft Paper to Nil or at least to 5% so that these
      can be imported on competitive cost to make boxes of requisite quality at
      minimum cost.

8.9   Tractors, fertilizers and seeds are completely exempted from excise duty
      and thereby there is every justification to reduce the excise duty from 16%
      to 8% on chemical pesticides, if not complete exemption.




                                      95
                                       IX

                               DIRECT TAXES

                                INCOME TAX

Tax Rates

Companies

9.1   Corporations, the world over, play a crucial role in the economic
      development. Of late, it has been increasingly realized that in the emerging
      competitive business environment moderate tax level is inevitable for
      industrial and economic growth, encouraging voluntary compliance,
      widening the tax base and enabling the corporates to plough back for their
      expansion and diversification. Corporate taxation therefore has been going
      quick changes both in the developed and developing countries to create a
      favourable tax regime.
9.2   The Corporate Tax rate in our country at present is 33.99% for domestic
      companies and 42.23% for foreign companies, inclusive of surcharge and
      education cess. Domestic companies with taxable income upto Rs 1crore in
      a year are exempt from surcharge and thus liable to tax at 30.9% (corporate
      tax 30% plus eduction cess at 3% there on). The companies have also to
      pay Dividend Distribution Tax (DDT) and Fringe Benefit Tax (FBT). A
      rough estimate reveals that the corporate tax burden goes up by 4-5
      percentage points (varying with the percentage of post-tax profits
      distributed as dividends) on account of DDT and another 4-5 percentage
      points by FBT. Additionally, FBT is not a deductible expense in computing
      taxable income. The reduction in depreciation rate from 25% to 15% in
      2006 has also impacted the tax burden. All taken together, the tax
      burden is now exceeding 42% (exclusive of FBT cost), which is
      considerably on higher side compared to what it is in other countries.
9.3   As per the recent study of KPMG International, globally average corporate
      tax rate is now 26.8%, coming down from 27.2% last year. The recent trend
      worldwide has been of corporate tax rates falling year after year. Several
      significant reductions were in the EU, where seven of the 27 States reported
      a cut, the largest being Bulgaria which cut rates by 5% to stand at 10%,
      taking the EU average rate to just over 24%, 1.6% lower than last year.
      The OECD‟s average rate is 27.8%, nearly 1% less than the last year.
      Corporate Tax Rates in Europe are still being driven down and there may
      be further significant reductions in UK, Germany and Spain in 2008.


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9.4   Even in the Asia-Pacific region, of which we are a part, the average
      corporate rate is around 30% which is likely to be reduced next year when
      the full impact of China‟s planned tax reductions is felt. It is to be noted
      that China with which we have to compete for inbound investments, is all
      set to strengthen its position as an attractive destination for foreign
      investments by bringing down next year the Standard Tax Rate for
      companies, both domestic and foreign, to 25% as against the current level
      of 33%, with 15% rate for high-tech and advanced technology enterprises
      and 20% for small companies. Singapore has also announced the reduction
      in its rate from 20% to 18%.

9.5   In this comparative international tax scenario, it is inevitable that our
      Corporate Tax Rate is at least reduced to 25% which along with
      surcharge and eduction cess, will calculate at 28.33%. While the same
      would still be higher than the average global rate of 26.8%, it would be
      compatible with the average rate of Asia-Pacific region after the
      proposed reductions by China and Singapore. If we have to be
      competitive and attractive investment destinations, we have, of
      necessity, to be in tune with others. There is no gainsaying that as
      economies integrate further and the capital acquires global mobility, tax
      practices and legislation of a particular country vis-à-vis the other country
      would play a crucial role in investment decisions of both domestic and
      foreign investors, and the country with better tax regime would have the
      competitive edge.

9.6   FICCI, is therefore, strongly of the view that our Corporate Tax Rate
      inclusive of surcharge and education cess plus FBT should not be more
      than 28%. The assertion of the Government that the effective corporate
      tax rate in India is only around 19%, in spite of the statutory rate of 34%
      does not seem to be well-founded. While FICCI is not aware of the modus
      operandi for its computation, the feeling is that this reflects the percentage
      of the total tax realisation with reference to the gross profits of the
      companies including those engaged in infrastructure, core sectors, IT,
      EOUs, etc. which are eligible for tax incentives designed for accelerating
      the pace of growth in the desired directions. It hardly needs any emphasize
      that such incentives are inevitable in any developing economy and are
      provided world over. A comparative study of the availability of such
      incentives in other developing economies may reveal to that effect. It is to
      be observed that all the developed economies of today have had a variety of
      incentives when these were at the developing stage as we are today.



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9.7   A higher tax rate puts a company at a comparatively disadvantageous
      position when it is not eligible for any tax incentive and is subject to an
      effective tax rate of over 42%. It would therefore be in fitness of things
      that our corporate tax burden is considerably brought down and
      rationalised and the incentives which Government think have lost their
      economic rationale in today‟s context, be withdrawn.               Equally
      important is that our tax administration is strengthened, modernized
      and made more effective.


Individuals

9.8   On the personal front, FICCI has two suggestions: One, the maximum
      rate of tax should be reduced from 30% to 25%, and two maximum
      rate should be made applicable at least on income beyond Rs 5 lakhs in
      the ensuing budget, with a target of Rs 10 lakhs over the next 5 years,
      and in between slabs restructured accordingly. Viewing its impact
      from a broader economic perspective, this will put more purchasing
      power in the hands of the people and thereby stimulate demand in the
      economy. The suggestion for applying maximum rate of tax on a
      higher income slab is also desirable in view of the international
      practices where maximum rates get attracted over a significantly
      higher income level. For instance, it is equivalent INR lakhs -- 92.59 in
      Singapore, 68.41 in China, 66.41 in Japan, 42.87 in Canada, 33.29 in
      Australia, 30.50 in Netherlands, 28.92 in UK, 11.07 in Poland, 5.87 in
      Brazil and 5.09 in Hongkong, as against only Rs 2.5 lakhs in India.

9.9   FICCI believes that the rationalisation and moderation of tax system further
      both for the corporate and individual assesses would, in ultimate analysis,
      lead to larger revenues because tax base would be considerably widened
      through better voluntary tax compliance, leading to manifold increase in the
      number of assesses as also owing to the operation of Laffer Curve. Our
      experience, in past, has amply demonstrated that whenever tax rates were
      rationalised and modified, the tax revenues only went up. This is also clear
      from the fact that the tax --- GDP ratio has been moving upward after the
      initiation of economic reform process, and more particularly in recent few
      years when this ratio has gone up from 8.3% in 1998-99 to around 12% at
      present. In this scenario, FICCI of the view that the Laffer Curve
      operation has not yet reached its optimal level and there is certainly a
      scope of reducing the tax rate both for companies and the individuals
      further to 25%.


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9.10    FICCI also feels that the discontinuation of „Standard Deduction‟ to
        salaried employees on the premise of it being a personal allowance; not in
        conformity with the international practice and having become unnecessary
        after re-adjustment of tax brackets is iniquitous and against the „Rule of
        Reason‟, is neither based on facts nor warranted and needs
        reconsideration.

9.11    It may be mentioned that standard deduction is not a personal
        allowance and is being given as a lump sum for meeting employment
        related expenses.     In many countries like Malaysia, Indonesia,
        Germany, UK, France, Japan, Thailand, etc. allowance in the form of
        standard deduction is available for salaried employees for expenses
        connected with salary income. It has to be appreciated that the benefit of
        adjusted brackets is available to all taxpayers, and not only to salaried
        employees. Why should salaried employees be deprived of standard
        deduction when other entities are eligible for deduction of expenses
        incurred for earning incomes? This does not seem to be fair.

9.12    FICCI also feels that the threshold limit should be raised to 1.5 lakhs
        instead of 1.1 lakh at present and correspondingly enhanced for
        women and senior citizens. FICCI would like to suggest tax rate of
        10% for income slab between 1.5 to 3 lakhs and 20% on income
        exceeding 3 lakhs to 5 lakhs and 25% on income beyond Rs 5 lakhs.


Firms

9.13    Section 40(b (i) & (ii) provides that in the computation of income
        chargeable under the head “profits and gains of business or
        profession” any payment of salary, bonus, commission or
        remuneration, to any partner who is not a working partner or any
        payment of remuneration to any partner who is a working partner, or of
        interest to any partner, which, in either case, is not authorised by, or is not
        in accordance with, the terms of the partnership deed, shall not be
        deductible. Such restrictions FICCI feels, have lost relevance in today‟s
        competitive business environment and should be removed.

9.14    In any case, the percentage limits with reference to book profits
        provided under clause (v) of sub-section (b) of Section 40 for remuneration
        to any working partner which have remained unchanged since 1992
        needs to be revised upward.


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9.15   Also, the interest payable to a partner on his capital contribution at a rate
       over 12% is not deductible. The 12% rate was reduced from 18% by the
       Finance 2002 in the context of general decline of interest then. In view of
       the recent rising trend of interest rate it may be desirable to increase the
       interest rate from 12% to at least 15%. It may be equally desirable
       that the expenses incurred by a partner which have not been charged
       to the firm be deductible in the hands of artner while computing his
       salary & interest income.
       Surcharge and Education Cesses

9.16   It may be recalled that long-term fiscal policy of 1985 had succinctly
       spelled out in para 5.5 as below:-

       “Under certain compelling circumstances, such as an external emergency, it
       may be necessary to mobilise additional revenues through taxation. In such
       an extra-ordinary situation, the Government will take recourse to levying a
       surcharge on Income Tax and other taxes, as necessary, without disturbing
       the basic rate structure. Any such surcharge will be a temporary measure
       and will be phased out over a period of time.”

9.17   We had in past such emergencies, like droughts, the Gujarat earthquake, the
       Kargil War, etc. which justified levy of surcharges. But continuing with
       such a levy even after emergencies were over and to make it an
       additional source of revenue along with Income Tax is not fair. If the
       Government needs more revenue on a permanent basis, the proper course is
       to hike the statutory tax rate, instead of surcharges, the rate of which
       changing year after year through the Finance Act and complicating the tax
       structure.

9.18   Moreover, there is no consistency and uniformity in its imposition. Till
       last year, we had surcharge exemption upto Rs 10 lakhs for individuals but
       no exemption at all for companies and firms. Last year, companies and
       firms with a taxable income upto Rs one crore were exempted from
       surcharge on their income tax, while the exemption upto Rs 10 lakhs for
       individuals remained unchanged. It would have been in fitness of things
       that the individuals were also exempted from the surcharge upto the
       same income level of Rs one crore to bring in uniformity for all
       categories of assesses.

9.19   Discriminatory treatment meted out to such individuals vis-à-vis firms and
       companies is neither fair nor warranted. Ideally such individuals should be


                                        100
       exempted from the levy of surcharge altogether. It may be relevant to
       mention that in today‟s competitive environment for attracting talented
       quality personnel, even a fresher from business institutes at times is offered
       an annual salary package of over Rs one crore and an annual salary package
       of about Rs 1.5 lakhs is a normal phenomena. Hence, subjecting them to
       surcharge may not be equitable. In any case, the said monetary limit of
       Rs 10 lakhs for the purposes of surcharge must be reconsidered &
       raised to Rs one crore to make it at par with firms and companies.

9.20   Besides, we have now the tendency of levying cesses for one purpose or the
       other. In 2004, we introduced an education cess of 2% on income tax
       including surcharge to fulfil the commitment of the Government to provide
       and finance universalised quality education, again in 2006, there was an
       additional cess called “Secondary and Higher Education Cess on income
       tax” at the rate of one per cent of income tax and surcharge (excluding the
       above mentioned education cess). The imposition of such cesses has
       unnecessarily created uncertainty about the stability of the taxation
       system and apprehensions for such new levies. In fact there was a report
       sometime back in the media that the Chemical Ministry had mooted a
       demand for a 2% Healthcare Cess to subsidise healthcare for the poor as
       well as to give subsidised medicines to all cancer and HIV/AIDS patients,
       had the same been accepted, there would have been a spate of demands
       from other Ministries, which would have led to a heavier burden on the tax
       payer. We must give a stop to such tendencies.

9.21   FICCI firmly believes that funds for improving educational standards,
       or for that matter, any other purpose, howsoever laudable it may be,
       should come either from the general budget, or from a dedicated fund
       created from the disinvestment of PSUs and not through cesses.

9.22   What is particularly disturbing is that the said two education cesses one at
       2% and the other at 1% has to be computed separately on income tax and
       surcharge, as also to be shown separately in the income tax return. FICCI
       feels that at least for the sake of simplicity we should have only one cess
       at 3% (instead of two separate cesses at 2% and 1%) which would be
       tax neutral but still simpler in calculations. Multi-level calculations
       must be avoided.




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Fringe Benefit Tax

9.23   The concept of Fringe Benefit Tax (FBT) was introduced by the Finance
       Act 2005. The relevant provisions thereto are contained in section 115W to
       115 WL of Chapter XII-H of the Income Tax Act, 1961, effective from 1st
       April 2006.

9.24   While doing so, the Union Finance Minister, Shri P Chidambaram in his
       Budget speech stated:-

       “I have looked into the present system of taxing perquisites and I have
       found that many perquisites are disguised as fringe benefits, and escape tax.
       Neither the employer nor the employee pays any tax on these benefits
       which are certainly of considerable material value. At present, where the
       benefits are fully attributable to the employee they are taxed in the hands of
       the employee; that position will continue. In addition, I now propose that
       where the benefits are usually enjoyed collectively by the employees and
       cannot be attributed to individual employees, they shall be taxed in the
       hands of the employer. However, transport services for workers and staff
       and canteen services in an office or factory will be outside the tax net. The
       tax is not a new tax, although I am obliged to call it by a new name,
       namely, Fringe Benefits Tax. The rate will be 30 per cent on an
       appropriately defined base” (para 160).

9.25   It may be seen from the above that the underlying objective of
       introducing the FBT was to tax those benefits enjoyed collectively by
       the employees which cannot be attributed to individual employees,
       thereby completely escaping the tax liability.


9.26   The Memorandum of the Finance Bill, 2005- Clause 37 further
       explained the provisions as:-

       "The rationale for levying the FBT on the employer lies in the inherent
       difficulty in isolating the 'personal element' where there is collective
       enjoyment of such benefits and attributing the same directly to the
       employee. This is especially so where the expenditure incurred by the
       employer is ostensibly for the purpose of the business but includes, in
       partial measure, a benefit of a personal nature.”



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       "In cases, where attribution of the personal benefit poses problems, or for
       some reasons, it is not feasible to tax the benefits in the hands of the
       employee, it is proposed to levy a separate tax known as the fringe benefit
       tax"
9.27   It may be mentioned that even earlier, a number of such benefits used
       to be taxed in the hands of the employee in terms of section 15-17 of the
       Income tax Act, 1961 and some others indirectly, by way of
       disallowance of expenditure in the computation of taxable income in
       the hands of the employers. Since this led to lot of confusion, ambiguity
       and litigation, such system had to be withdrawn.

9.28   Additionally, in a cross-border transaction scenario, it is unlikely that either
       the employer (the corporate entity) or employee would be able to claim tax
       credits in the overseas home country for FBT paid in India and thus results
       in multiple taxation of income, even in the presence of tax treaties. For
       example, in case of an Indian branch of a foreign entity, (a) the expense is
       first taxed as FBT in the hands of the employer (Indian branch) in India
       plus such FBT paid cannot be claimed as a deductible expense in its hands
       in computing taxable income (b) the foreign entity may not be able to claim
       credit for FBT paid in India against its corporate taxes in its home country
       (where it is a corporate tax in India, the foreign entity would generally be
       allowed to claim foreign tax credits against its taxes payable in its home
       country) thereby resulting in taxation of such income of the foreign entity
       again in its home country (c) the employee could also be taxed on its fringe
       benefits in its home country and such FBT (being paid by the employer)
       may not be allowed as credit against taxes payable on his salary income
       that would generally include fringe benefits. This cascading effect and
       multiple points of taxation of income increases the tax cost of doing
       business in India and portrays India as an unfavourable destination purely
       from a tax cost perspective. Therefore, levy of taxes such as FBT, DDT,
       STT are best avoided. A single corporate tax rate is generally appreciated
       internationally from the perspective of simplicity, certainty and prevention
       of cascading tax effect, this change by itself would be “revenue neutral”
       from an India perspective.

9.29   The FBT – a sort of surrogate tax on employer was perhaps intended to
       address the problems faced earlier, expand the tax base and to maintain
       equity. However, this was not so and a number of clarifications had to be
       sought and the Government had to come out with a circular 8/2005 dated
       29th August 2005 responding to over hundred queries frequently posed.
       Unfortunately however some of the responses/clarifications went much


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       beyond the scope and objective for which it was designed. Over the last two
       years, FICCI has been taking up these contentious aspects, pleading for
       the abolition of FBT altogether and in case it has to stay, all genuine
       and legitimate business expenditure to be taken out from its preview
       with a view to rationalizing it. Admittedly, some amendments have been
       carried out during the last two years, but these have not gone far enough.

9.30   What is particularly disturbing now is that Employees Stock Option
       Plans (ESOPs) which were categorically stated as not falling within the
       ambit of FBT in the circular 8/2005 referred to hereinbefore, has been
       brought within its ambit by the Finance Act, 2007, which has dismayed
       the India Inc. and has particularly given a big setback to the IT/ITES
       sector for which the ESOPs are the main motivational tools for
       attracting and retaining talented personnel where high attrition in
       workforce is common phenomena. ESOPs are particularly critical for
       start-ups to attract people. Without this option, why should anyone
       join a start-up? Obviously, this would adversely affect the growth of
       knowledge-driven businesses. While India has been doing well with
       regard to the growth and development of software but the same is still
       in the nascent stage in the global matrix. Taxing the IT sector, at this
       juncture, through the mechanism of ESOPs, FICCI feels, will dampen
       its growth and thus not desirable.

9.31   It is relevant to mention that till 1999 ESOPs were taxed as a perquisite in
       the hands of the employees as the difference between the Fair Market Value
       (FMV) of the stock on the date of vesting of the options and the exercise
       price in the hands of the employees. During 1999-2000, the benefit from
       stock options were taxed on the date of exercise, at the difference between
       the FMV of the shares on the date of exercising the options and the exercise
       price, in the hands of the employees.

9.32   From 2001 onwards, the government notified a set of guidelines to which
       stock options plans were required to conform. The benefit from the ESOPs
       has been taxed in the hands of the employee as a perquisite only if the
       allotment plan was not as per Central Government ESOP Guideline
       (unqualified plan) on the difference between the FMV on the date of
       vesting/exercise and the exercise price as „income from salary‟ and in case
       the allotment is as per the ESOP Guideline (qualified plan), no tax liability
       on the employee at the time of vesting/exercise. And only Capital Gain Tax
       was payable as per the provisions (either long term @ nil in case of listed
       companies with Securities Transaction Tax paid, or short term @10% plus


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       surcharge and cess, as applicable) at the time of the sale of these shares. In
       other countries also the ESOPs are taxed at the employee level and not at
       the employer level. In the case of US and UK, qualified ESOPs do not
       suffer tax in the hands of the employee either on the date of grant or vesting
       or exercise. In both the US and UK, the employee pays tax only at the time
       when he transfers the shares received upon exercise of his option under the
       head capital gains. Taxation of ESOPs as hitherto, has been consistently
       similar to the provisions prevalent in the US and UK i.e. no taxation in the
       hands of the employee on the date of exercise but taxation only as capital
       gains on the date of sale of shares received by the employee upon exercise
       of the option. FICCI is of the view that the tax treatment on ESOPs as
       consistently followed for the last six years should not be disturbed.

9.33   It is to be noted that the objective of FBT was to levy a tax on all benefits
       that cannot be individually attributed to employees, particularly in cases
       where the benefit is collectively enjoyed. Options granted can be identified
       with individual employees and options are non- transferable under law. The
       benefit arising out of exercise of option by each individual employee can be
       easily determined and hence should be taxed only in his hands as perks
       and/or capital gains and not in the hands of the employers as FBT. It is of
       course a matter of satisfaction that the Government has now allowed to
       recover the tax from employees by way of agreement with them or
       making a suitable provision to this effect in this stock option scheme.
       In this context, it is imperative that where the employer opts for not
       recovering the tax from employees apprehending that the same would
       not achieve the underline objective of the ESOP for which it is designed
       i.e. motivating the employees and reducing attrition rate, the taxable
       value of the ESOP for the purpose of FBT is allowed deduction in the
       computation of the company‟s taxable income in so far as, it is in the
       nature of salary payment to the employee and cost to the employer. In
       case this is not found acceptable the Government may at least consider
       a concessional tax treatment say, a flat rate of 10% or 15% of the
       taxable value of the ESOP for the purpose of FBT so that the
       underlying objective of ESOP of motivating employees is not totally
       defeated.

9.34   Moreover, it has now been provided that the fair market value (FMV) of the
       ESOP for the purpose of taxation will be reckoned on the date of vesting of
       the option and the liability to tax will be attracted on the date of allotment
       or transfer of shares and the period of holding of the ESOP would be
       calculated with reference to the date of such allotment or transfer for the


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       purpose of capital gains taxation. FICCI fails to appreciate as to whether
       we are determining FMV of the option or the shares as on the date of
       vesting the employees do not have any shares. Would it not be in
       fitness of things that the FMV of the ESOP for the purpose of taxation
       is determined on the date of allotment or transfer of the shares and not
       on the date of vesting?

9.35   Another aspect which needs careful consideration is that at times, there
       could be situations where an employee who is granted stock options by
       his employer may be required to exercise employment in many foreign
       tax jurisdictions between the date of grant and the date of
       vesting/exercise. This feature is commonly found in the IT sector,
       where on-site development of software is undertaken. The employee is
       under a legal obligation to discharge the tax liability in these jurisdictions
       on the value benefit derived in the proportion of the days actually spent to
       the total number of days that lapsed between the date of grant and the date
       of vesting/exercise. These principles are explained in the OECD guidelines.
       The rate of taxation may vary but typically the range is from 25% to 35%.
       With employees suffering a tax in these foreign jurisdictions, levy of FBT
       on the employer on the fair market value on the date of vesting and
       recoverable from the employees on the date of transfer would obviously
       result in double taxation of the same income. The issue gets accentuated, as
       the tax paid by the employee cannot be set-off against FBT or vice-versa.
       Similar will be the position for expatriate employees of multinational
       companies who have received stock options, they will be tax twice, once as
       FBT and the second time as income tax in the homeland. Since the FBT is
       not eligible for foreign tax credits, almost 50-60% of their gains, and that
       too notional gains, would be gone. This would certainly make the
       expatriates reconsider their deputation in India which would not be
       desirable from Indian perspective. It is therefore, imperative that the
       Government should make all efforts to ensure that FBT recovery is eligible
       for tax credits under the double taxation avoidance agreements. Apart from
       ensuring the avoidance of double taxation, it is necessary to have some
       threshold for FBT.

9.36   Valuation norms have now been led down by the Central Board of
       Direct Taxes vide notification 264/2007, dated 23-10-2007, which will
       become effective from 1st April 2008. According to it, options of
       companies listed in India would be valued (this valuation is called the Fair
       Market Value, or FMV) at the average of the opening price and closing



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       price of the share on the recognized stock exchange where such shares are
       listed, on the date of vesting of the option.

9.37   Where on the date of vesting of the option, the share is listed on more than
       one recognized stock exchanges, the fair market value shall be the average
       of opening price and closing price of the share on the recognised stock
       exchange which records the highest volume of trading in the share. And
       where on the date of vesting of the option, there is no trading in the share
       on any recognized stock exchange, the fair market value shall be (a) the
       closing price of the share on any recognised stock exchange on a date
       closest to the date of vesting of the option and immediately preceding such
       date; or (b) the closing price of the share on a recognised stock exchange,
       which records the highest volume of trading in such share, if the closing
       price, as on the date closest to the date of vesting of the option and
       immediately preceding such date, is recorded on more than one recognized
       stock exchange.

9.38   And where on the date of vesting of the option, the share in the company is
       not listed on a recognized stock exchange, the fair market value shall be
       such value of the share in the company as determined by a category I
       merchant banker registered with SEBI, on the specified date.

9.39   While the above valuation norms for listed securities are simple and
       straightforward, these would pose practical problems for unlisted
       companies. In case of unlisted companies, the guidelines have only
       specified that valuation is to be done by a merchant banker on the specified
       date. In the absence of any specified method to be followed, it may lead
       to debate as to which method or a combination of methods is most
       suitable in a particular case or situation. As different valuation
       methods could give different results, this may lead to possible dispute
       on FMV valuation and the method itself. Since the onus is entirely on
       the merchant banker to choose the most appropriate method, it is not
       clear whether, in cases of differences in the matter of valuation, the tax
       authorities can review/reject the valuation.
9.40   FICCI has been expecting that the Government would prescribe exact
       methodology, which has not been done and would thus entail further
       clarifications. Since there are a number of ways of arriving at a
       valuation, it is inevitable that government should come out with a
       specific method to be adopted by merchant bankers for valuing
       unlisted shares. One fails to appreciate as to why cannot it be done,
       especially when we had specific methods prescribed for valuation of


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       unlisted shares under the Wealth Tax Rules. There are also no guidelines
       for valuation of ESOP of those companies whose shares are not traded for
       six months prior to the day of vesting of option.
9.41   It also appears that companies whose shares are not listed in any stock
       exchange in India will have to resort to a valuation by an Indian merchant
       banker even if their shares are listed in an overseas stock exchange and the
       opening and closing prices are available.           The logic behind not
       recognizing overseas stock exchange is not understandable. Why
       should the FMV for ESOP given by such companies to employees in its
       Indian subsidiaries, be made subjective when their overseas stock
       exchange trading prices are amply known? In such cases, it is also not
       clear as to whether the valuation is required to be done only by the
       merchant banker registered with SEBI or whether an independent valuation
       done by any foreign merchant banker/other experts which are recognized
       for the purpose of valuation in the foreign country where it is listed, would
       be treated as sufficient compliance for the purposes of valuation of ESOPs.
9.42   To mitigate the hardships involved and make the system simpler, the
       Government should consider overseas stock exchanges on selective
       basis, at par with our recognized stock exchanges for valuation
       purposes.
9.43   Besides, since FMV is to be calculated on the date of vesting and tax paid
       at the time of exercise, valuation will have to be based on past parameters.
       In this perspective, the provisions have retrospective operation, which
       means they apply to options that would have been vested many years ago.
       Listed companies that have long history of stock options and a large
       employee coverage will be hard put to go back in time and cull out opening
       and closing prices for each vesting date. Since the rules are specific, they
       do not allow tax authorities to be liberal in their enforcement even if they
       want to. It would therefore be in fitness of things to have some
       flexibilities provided in such cases.



Dividend Distribution Tax
9.44   The Finance Act, 2007, increased the rate of tax on distributed profits -
       called Dividend Distribution Tax (DDT) - from 12.5% to 15%. In other
       words, the incidence of Dividend Distribution Tax (DDT) would go up
       from 14.025% to 16.995% i.e. about 3 percent which would translate
       into additional corporate tax burden by almost one percent and the


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       total impact of DDT on the corporate tax incidence be in the range of 4
       - 5 percentage points depending upon what percentage of the post-tax
       profit is ploughed back for expansion and how much of it is distributed
       amongst shareholders.
9.45   While giving justification for increasing the rate of DDT, the Finance
       Minister in his Budget speech stated:-
       “I believe that my direct tax proposals have brought about more horizontal
       equity. It is also necessary to improve vertical equity. Having regard to the
       capacity to pay, I propose to raise the rate of dividend distribution tax from
       12.5 percent to 15 percent on dividends distributed by companies.” (para
       176).
9.46   One however fails to understand and appreciate as to how the said concepts
       „horizontal equity‟, „vertical equity‟, „capacity to pay‟ are sub-served by the
       Amendments and surprisingly these were also not elucidated in his Budget
       Speech.
9.47   FICCI believes that DDT is in itself a distortion, leading to double
       taxation, and increasing its rate every time is only perpetuating the
       distortion further. In case of a foreign shareholder in an Indian
       company, it results in higher effective tax rate for the foreign
       shareholder as DDT is an additional tax cost that may not be creditable
       against dividend income in his home country. Hence, it results in
       increased exposure to juridical double taxation as DDT is not
       considered as creditable in most countries and has cascading impact in
       case of multiple tier holdings. It is to be recalled that Income-tax on
       dividends was exempted on the ground that such taxation leads to
       double taxation because a company pays tax on the income and when
       that income is distributed to the shareholder as dividend, it is subjected
       to tax again in the hands of the shareholders.
9.48   Having realized the double taxation element involved in the taxation of
       dividends, government exempted the dividend income in the hands of the
       shareholders and as a surrogate introduced the DDT policy in 1997,
       providing for a reasonable level of taxation of 10% on profits distributed by
       the company, which was removed in 2002 and taxation of dividends in the
       hands of the shareholders revived and the DDT reintroduced in the very
       next year at the rate of 12.5%.
9.49   Such frequent changes were all because of divergent thinking in the
       Finance Ministry on the exemption of dividend income. The


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       contentious aspect of double taxation still persists. As per the pervious
       practice, the recipients of income were two different tax entities – the
       company and the shareholders. In the case of DDT, the same entity is
       subjected to double taxation - once by way of corporate taxation and
       again when post-tax profit is distributed to the shareholders by way of
       DDT. FICCI feels that this is neither justified on the ground of vertical
       equity nor on the ground of capacity to pay.
9.50   The increased rate of DDT will only result in reducing the tax arbitrage that
       was available to individuals investing in companies vis-à-vis bank deposits.
       This is so, because the companies would now be distributing lesser
       dividends to the extent of higher payment of DDT. Also, shareholders
       falling within the threshold exemption limit or whose average tax
       liability is less than 17% would be at a disadvantage in so far as had the
       dividend income been taxed in their hands instead of the company, their tax
       liability would have been either nil or lesser than the DDT. This again is
       not fair.
9.51   Moreover, over the last decade the rates of income-tax both in respect
       of individuals and companies have been significantly reduced and
       moderated but the rate of DDT has only been going up, from 10% in
       1997 to 12.5% in 2003 and 15% now, which again is iniquitous and in
       fact a retrograde step. FICCI has for long been stressing that if DDT is
       to stay, its rate must be moderated and stabilized at 10% level.
9.52   That apart, it is also now provided that where the income is distributed by
       a money market mutual fund or a liquid fund, such fund shall be liable
       to pay additional income tax on such distributed income at the rate of
       twenty five percent. This, it is stated, has been done because dividends
       distributed by money market mutual funds and liquid mutual funds enjoy
       concessional tax rates, which give rise to huge arbitrage opportunities. This
       argument doesn‟t seem to be well-founded, because most corporates
       borrow funds for mergers and acquisitions where they buy out equity shares
       of the target company. Even while floating subsidiary companies for
       different businesses, funds are provided by the holding companies. As the
       scale of businesses go up, the equity funding in the equity structure of the
       subsidiary companies is mostly financed through borrowings.
9.53   The result is that the dividend that is likely to be earned on the equity
       investment in the hands of the holding company being tax free; the interest
       payable on borrowings is disallowed under section 14A, which provides
       that no deduction shall be allowed in respect of expenditure incurred by the
       assessee in relation to income which does not form part of the total income


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       under the Income Tax Act. Therefore, if the cost of borrowing is, say, 10%
       per annum which is not allowed as a business expenditure due to dividend
       being exempt income, burden on the shareholder becomes quite heavy and
       in case of corporates‟ holding companies, the tax rate now being 33.99%, it
       will translate into 3.4% additional cost. Consequently, the total tax on a
       holding company will be 20.4% (17% DDT plus 3.4% additional cost).
       Similar will be the case of individual shareholders who would borrow
       money to buy equity shares or mutual funds. FICCI feels that since
       DDT is a surrogate tax in lieu of taxing the dividend income in the
       hands of the shareholders, the said section 14A should have no
       relevance in this context.
9.54   Still worse, the DDT framework, as it exists today penalizes the sharing
       of wealth by holding company with its subsidiaries as tax is imposed at
       multiple points. The Indian economy given its growth and development
       has become more and more differentiated. And we are seeing the rise
       of companies whose activities span across borders. The natural
       corollary of this is the rise of multi-layered corporate intermediations,
       where one corporate becomes a subsidiary to another and another
       becomes subsidiary to third and so on. In such a business scenario, the
       DDT has huge cascading impact and any increase in its rate only
       worsens the position. FICCI has for long been pleading for the removal
       of this cascading impact. Unfortunately, instead of addressing this issue
       in a positive manner, the government has only been accentuating the
       tax imposition and moved further away from the solution sought.
9.55   FICCI would like to reiterate that the solution to the problem lies in
       reintroducing section 80M in the Income Tax Act, which we have had
       prior to 2004. Under this section, where the gross total income of a
       domestic company, in any previous year, included any income by way of
       dividend from another domestic company, a deduction was allowed in
       computing the total income of such domestic company of an amount equal
       to so much of the amount of income by way of dividends from another
       domestic company as did not exceed the amount of dividend distributed by
       the first mentioned domestic company. FICCI feels that a provision of
       this sort would go a long way in avoiding the cascading impact of DDT,
       which has been causing lot of anxiety and frustration amongst India
       Inc.




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Minimum Alternate Tax

9.56   Section 115JB provides that in case of a company, if the tax payable on the
       total income as computed under the Income tax Act in respect of any
       previous year relevant to the assessment year commencing on or after the
       1st April, 2007, is less than ten percent of its book profit, such book
       profit shall be deemed to be the total income of the assessee and the tax
       payable for the relevant previous year shall be ten percent of such book
       profit. In common parlance such a tax is called Minimum Alternate Tax
       (MAT). The credit of MAT thus paid is eligible upto seven years.

9.57   MAT has adversely affected the internal resource generation of the
       companies and thereby is coming in the way of their expansion and
       diversification plans.

9.58   The issue of MAT has been a topic of intense discussion amongst tax
       payers and the tax authorities all over the world. While FICCI per se is
       not against the basic philosophy that everybody who is earning should
       contribute to the exchequer, it feels that the MAT rate of 10% is on
       higher side and should be restored to the earlier rate of 7.5%. This is
       in line with the principal that moderate tax leads to higher revenues to the
       exchequer, owing to the operation of the laffer curve which has been amply
       demonstrated over the recent years.

9.59   Besides, inclusion of long-term capital gains from securities transaction
       in the computation of book profit for MAT companies and taxing such
       gains at 10% is iniquitous being discriminatory as other tax payers
       would not have to pay any tax on long-term capital gains for securities
       transaction which are tax exempt as also would tantamount to double
       taxation in as much as STT would be payable in respect of such
       securities transaction. Also, investment companies whose core
       business is investment will not be able to take credit of the MAT paid,
       as their only source of income is either dividend or trading in shares.
       This has thus caused great discomfort for the investment companies.
       Depreciation charged to the profit & loss account being now required
       to be adjusted on revalued asset basis has also resulted in higher profits
       and higher MAT.

9.60   The Finance Act, 2007 has also provided that the amount of income to
       which section 10A and 10B apply, shall not be reduced from the book




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       profit for the purposes of MAT. All this has led to the widening up of the
       tax base for MAT.

9.61   FICCI, is of the view that the profits derived by an undertaking which
       is tax exempt u/s 10A, 10B, 80-IA, 80-IB or 80-IC, etc should not be
       brought within the ambit of MAT because otherwise, the very purpose
       for which these incentives have been designed would be defeated and
       the viability of their long-drawn projects would be adversely affected
       because these would have been based on the continuity of the tax
       benefit which would be diluted by attracting MAT provisions. It would
       also be in fitness of things that companies are allowed to set-off entire
       past book losses including unabsorbed depreciation before they are
       subjected to MAT.


Securities Transaction Tax

9.62   Tax on Long-term capital gains from transacting in listed securities was
       abolished from the year 2004-05 and a new tax called the „Securities
       Transaction Tax‟ (STT) -- a tax on any transaction in securities on the
       Stock Exchanges was introduced. While the intention was to abolish tax
       on long-term gains arising from securities transactions altogether, in
       drafting the relevant provisions, a reference is made to the security
       transaction entered into through recognized stock exchange only. But,
       there are other routes also for a valid and genuine transaction of
       securities on which capital gains emerged, which are chargeable to tax.
       Such transactions inter-alia include i) shares offered and sold for sale
       in buy-back scheme of the companies, ii) shares offered and
       transferred under open offer scheme iii) such other transactions which
       are made under any other scheme approved by SEBI and iv) sale of
       shares by Indian promoters to foreign partners as per the agreement
       etc.

9.63   It is common knowledge that one of the most efficient tools for Financial
       Managers to restructure Balance Sheets and improve valuations is the
       technique of share buy-backs. Buy back and open offer schemes are valid
       transactions like other transactions and should be entitled for the same tax
       benefits as applicable in respect of securities transacted through recognized
       stock exchange. The charging and collection of STT on such securities
       could be either through company or merchant bankers involved in such
       scheme of buy-back or open offer. It is, therefore, in fitness of things that
       such transactions also fall within the purview of Sections 10(38) and


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       111A of the Income Tax Act and eligible for capital gains tax benefit.
       Also, there are now a number of companies raising funds from the
       overseas markets, the shares of such companies listed on stock
       exchange overseas should also qualify for capital gains tax benefit.



Banking Cash Transaction Tax

9.64   Banking Cash Transaction Tax (BCTT) was aimed at unearthening black
       money and assets. It is not clear as to how far we have achieved this
       objective. Black money hardly flows through the banking channel. Tax has
       become a penalty only on honest taxpayers who need to withdraw cash for
       legitimate day-to-day business needs, e.g., payment of salaries to casual
       labor etc. The tax could have the perverse effect of encouraging businesses
       to keep funds outside the banking system for transactions, which need to be
       settled in cash.

9.65   The need for the BCTT is all the more questionable, given the extensive
       rules already in place that permit tracking of transactions. For example, all
       high value transactions are to be supported by PAN identification numbers.
       Further disclosures are required under the Money Laundering Act. Even in
       Income Tax Act, there are already stringent provisions for tax evaders.

9.66   It may not be out of place to mention that in other countries like
       Argentina, Colombia, Ecuador etc. where this form of tax is levied, the
       tax was introduced at a time of fiscal crisis. In no case was it introduced
       as a measure to deal with black money.

9.67   While FICCI fully shares the concern of Government for curbing /
       tracking black money, it feels that the BCTT may not serve the
       intended objective which could be better achieved by effectively
       utilizing the information about financial transactions provided by the
       banks and other authorities. The Government may even provide for
       more information in this regard. What is, of course, important is that
       the tax administration should have the capacity to analyze the available
       data and effectively utilize the same with a view to tracking black
       money and curbing tax evasion. It is equally important that tax
       compliance be effectively enforced by an honest and efficient
       administration. While doing so, it has to be ensured that honest
       taxpayers are not unnecessarily harassed and the environment of
       mutual trust between the taxpayers and tax administrators is
       maintained.

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9.68   In any case, this levy should be made applicable only in those cases
       where people buy drafts from banks without quoting their Permanent
       Account Number (PAN). All other assesses should be outside the
       purview of this levy.



Fiscal Incentives

9.69   Tax incentives by way of exemptions and deductions are provided in
       our Statute to create economic security, promote asset creation,
       provide employment opportunities and social welfare. These have
       always been motivational tools for people to save and invest in the
       desired channels and to contribute significantly in the overall growth of
       our economy. In this perspective, it is crucial that they are not only
       continued but strengthened further, as also new incentives introduced
       for „Sunrise Industries‟. Tax holiday for multiplexes and telecom
       services needs to be revived.
9.70   It may be mentioned that China which is a growing economy like ours
       has a variety of tax incentive and particularly realize the need to
       incentivise investment in key growth areas, especially in or operation of
       public infrastructure projects. In this context, withdrawal of tax
       holiday to sub-contractors for infrastructure development and to
       reorganization of companies engaged in development operation and
       maintenance of specified infrastructure facilities may need a relook.
       Looking at the huge funding requirement of over $ 300 billion for
       infrastructure in the next 5 years and the government‟s realization of
       the need for involving private sector by way of PPP model, these
       amendments are instead acting as dampener.
9.71   Needless to mention that we have embarked upon a new path of
       economic progress that seeks to make the country an attractive
       investment destination both from within and outside. Fiscal incentives
       play a crucial role in investment decisions and therefore a favourable
       tax regime is inevitable.
9.72   It may be observed that many developed countries of today, had
       successfully attracted private capital in designated areas through fiscal
       incentives, when they were at the developing stage as we are today and
       there is no reason why should not we act accordingly. It has to be
       appreciated that we have to compete with other countries in the Asian
       region for attracting foreign investments for building up the infrastructure
       of the international level as also for our economic growth.


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9.73   In this scenario, it is imperative that our tax incentives are really
       meaningful and attractive enough to the undertakings engaged in
       infrastructure and other crucial sectors.

9.74   FICCI is conscious that these would have some revenue implications
       but only from a short-run angle. We are confident that in the ultimate
       analysis the Government would stand to gain considerably by way of
       manifold direct and indirect tax collections arising out of improved
       competitiveness of our manufacturing and service sectors.

9.75   Specific suggestions for the development of certain infrastructure and
       other vital industrial undertakings :-

(a) Strengthening sops for commercial production or refining of mineral oil

9.76   Under section 80-IB (9), an undertaking which begins commercial
       production or refining of the mineral oil is allowed a deduction of
       hundred per cent of the profits for a period of seven consecutive
       assessment years including the initial assessment year. Such
       undertakings are however not able to avail of this tax benefit for the full
       tenure of seven years. This is owing to the huge depreciation claims in the
       initial 3-4 years and more particularly because of the permissible
       deductions under section 42 of the Act, where-under all capital and revenue
       expenditure incurred on drilling and exploration activities is fully
       deductible. As a result, such undertakings are not in a position to make any
       profit in the initial few years and get deprived of the full tax benefit in
       terms of the said section. It is therefore imperative to have a relook at the
       provisions so as to make the incentive more meaningful and attractive
       enough to encourage companies to venture into the high-risk business of
       exploration of mineral oil where huge capital investment is required for the
       sophisticated technology and equipments for the setting up of production
       and refining facilities.

9.77   It is indeed gratifying that the government has already recognized the
       significance of power sector for supplying quality and uninterrupted power
       to the industry and the consumers, and granted 100 per cent tax holiday
       in respect of profits derived by undertakings engaged in the generation
       or generation and distribution of power for a period of any ten
       consecutive years out of fifteen years beginning with the year in which
       the undertaking starts generation or distribution of power. Such ten-
       year tax holiday benefit has also been extended this year to profits


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       derived by undertakings laying a network of new transmission or
       distribution (T&D) lines or undertaking substantial renovation or
       modernization of existing T&D networks, which was utmost necessary
       to improve upon the T&D infrastructure of power in our country.

9.78   There is no gainsaying that hydrocarbon sector is quite critical for the
       speedy and balanced growth of any economy, especially ours in the context
       of the over- dependence on oil imports to meet our domestic demand which
       has significantly increased over the recent years in view of the robust
       growth. In this scenario it is important that adequate measures are initiated
       to quickly increase our domestic capacity of production of crude oil and
       petroleum products to meet the growing demand. Corporates have to be
       encouraged and sufficiently motivated to undertake commercial production
       and refining of mineral oil.
9.79   FICCI is of the view that hydrocarbon sector should be at par with the
       power sector in the matter of fiscal incentives, for, undertakings engaged in
       commercial productions or refining of mineral oil are equally (if not more)
       capital intensive as power plants.

9.80   It is therefore suggested that the undertakings engaged in commercial
       production or refining of mineral oil should also be granted 100 per
       cent tax holiday for a period of any 10 consecutive years out of 15 years
       beginning with the year in which the undertaking starts commercial
       production or refining of mineral oil under section 80-IA instead of 80-
       IB to make them on par with the Power sector.

9.81   It would be equally desirable that undertakings which have already started
       commercial production or refining of mineral oil are also given the option
       of claiming the 10-year tax holiday beginning with the year in which they
       start earning taxable profits so that they are in a position to enjoy the
       incentive for the intended period of 10 years.

9.82   In any case, it has to be ensured that such undertakings are able to avail of
       the tax-benefit for the full term of seven years intended by the Legislature.
       Towards this end, section 80-IB (9) should be amended to provide
       flexibility or option given to undertakings to choose any seven
       consecutive years in which the deduction can be claimed, out of the
       first fifteen years beginning with the year in which the commercial
       production or refining of mineral oil commences. This would take care
       of the provisions of sections 32 and 42 providing certain deductions and



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       section 80-IB (9) providing tax holiday benefit which in between
       themselves are over- lapping and reducing the intended tax-holiday period.

9.83   Also undertakings which have already started commercial production
       or refining of mineral oil be given the option of choosing the 7-year tax
       holiday period beginning with the year in which they start earning
       taxable profits so that they are in a position to enjoy the incentive for
       the intended period of 7 years.

(b) Infrastructure status for cold chain establishments
9.84   Under the existing provisions of section 80-IB (11A) an undertaking
       deriving profit from the business of processing, preservation and packaging
       of fruits or vegetables or from the integrated business of handling, storage
       and transportation of foodgrains, is eligible for 100% deduction of its
       profits and gains for five assessment years beginning with the initial
       assessment year and thereafter 25% (or 30% where the assessee is a
       company) in a manner that the total period of the deduction does not exceed
       ten consecutive assessment years and subject to the fulfillment of other
       conditions.
9.85   It has been observed that this incentive has not proved attractive
       enough for the investors. It is therefore suggested that the
       establishment of cold chain and other modernized technology for up-
       gradation of storage handling and transportation etc. be granted
       infrastructure status and the tax benefit thereto provided under section
       80-IA instead of section 80-IB.

9.86   In view of huge investments involved, and the associated benefits
       therefrom to the Indian economy, it is inevitable that we must have a
       meaningful incentive package to the enterprises engaged in such
       facilities, in the form of 100% tax holiday in respect of the profits of
       such undertaking for a period of 10 years and the assessee given the
       option to claim this tax holiday for any 10 consecutive years out of 15
       years beginning with the year in which undertaking commences
       businesses or commercial operations.



9.87   FICCI would like to mention the following positive externalities that would
       emerge from such infrastructure:-



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 Employment Generation : The multiplier effect of investment in food
  processing industry on employment generation is 2.5 times higher than in
  other industrial sectors, higher than any other sector. With the cold chain
  establishment, a number of economic activities would take place, as the
  true cold chains would start at the farm level only with pre-cooling facility,
  which would generate rural employment. Further, due to value addition in
  the food processing industry, a large number of jobs would be created for
  people living in rural and semi-urban areas of the country, thereby
  increasing purchasing power in the hands of such people, and increasing the
  standards of living.
 Better Price Realization for Farmers : The enormous amount of wastage
  of agri-produce annually due to gaps in the cold chain such as poor
  infrastructure, insufficient cold storage capacity, unavailability of cold
  storages in close proximity to farms, poor transportation infrastructure, etc
  leads to instability in prices, farmers not getting remunerative prices, rural
  impoverishment resulting in farmers‟ frustrations and suicides. Tax benefit
  for cold chain infrastructure would enhance the shelf life of agricultural
  products as well lead to a substantial amount of value addition to the
  products sold. This would reduce not only wastages of produce but also
  lead to greater value in the hands of the farmer and the income levels to go
  up by 20% over a period of 5 years through the strengthening of cold chain
  and integration of supply chain.
 Improvement in Quality : Apart from containing the loss of agri and
  horticultural produce, one of the larger benefits would be improvement in
  the quality of the produce. The improved quality would result in increasing
  export of horticultural products and indirectly realizing in better prices for
  the farmers.
 Impact on subsidies : The Government has to provide enormous amount
  of food subsidy and input subsidies such as on fertilizers, seeds, credit,
  irrigation etc., which in practice, is not fully reaching the real beneficiaries
  and the government has to bear again and again the additional brunt of
  subsidies to fill the gaps created in meeting the demand of consumers. This
  FICCI feels would hardly be needed after the cold chain establishment. It
  may be noted that nearly 35-40% of the agri and food produced valued at
  around Rs 58,000 crore is wasted before reaching the end consumer owing
  to the lack of adequate storage facilities. FICCI is of the view that grant of
  tax holiday to cold chain establishment would not only reduce wastage of
  agri produce, but would also curtail the burden of subsidies that the
  government doles out at various places at present.



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    Economic Multiplier : The development of adequate cold storage
     capacity/cool chain would help not only in increasing the shelf life and
     minimizing post-harvest losses through proper preservation but would also
     help the farmer in taking timely marketing decisions. Value addition
     through food processing can generate demand for agricultural raw materials
     and also have a multiplier effect on the rural economy. The FAIDA report
     of McKinsey says that food has one of the highest economic multipliers for
     any industry. In India, the multiplier for food industry is 2.4. This is much
     higher than that for industries such as power and telecom. A multiplier of
     2.4 means that for every Rs 100 of new revenue generated in the food
     industry, Rs 240 worth of revenue would be generated elsewhere in the
     economy, i.e. in industries such as transport, refrigeration, pesticides,
     fertilizers, etc.
       It may be seen from the above that granting of infrastructure status to „Cold
       chain establishments‟, would go a long way in generating job opportunities
       in rural areas, containing loss of agri & horticultural produce, improving
       their quality and demand and accelerating the pace of agricultural growth.


(c) Housing Sector

9.88   The government has aptly revised the FDI policy and guidelines for the
       Housing sector and permitted FDI upto 100 per cent under the automatic
       route in a range of segments including townships, housing, built-up
       infrastructure and construction-development projects (which would include
       housing, commercial premises, resorts, educational institutions, recreational
       facilities, city and regional level infrastructure). This revised policy has
       given a major boost to the industry with several global investors started
       looking at India as an investment destination.

9.89   It is felt that to facilitate and motivate the development of housing sector
       further, we also need to rationalize some of our tax provisions and other
       related stipulations, on the following lines:
          Section 80-IA of the Income-tax Act provides that where the gross
            total Income of an assessee includes any profits and gains derived
            by an undertaking or an enterprise from any of the business
            referred to in sub-section (4), then a deduction equal to 100% of
            the profits and gains derived from such business shall be allowed
            for ten consecutive assessment years.




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         Sub-section (4) covers the business of either (i) developing or (ii)
           maintaining and operating or (iii) developing, maintaining and
           operating any infrastructure facility, which fulfills all the
           conditions, laid down in the said section.

9.90   The Explanation in the said Sub-section defines "infrastructure facility" as
       under:
         a road including toll road, a bridge or a rail system;
         a highway project including housing or other activities being an
           integral part of the highway project;
         a water supply project, water treatment system, irrigation project,
           sanitation and sewerage system or solid waste management system;
         a port, airport, inland waterway or inland port.
9.91   Some companies are engaged in undertaking large scale urban development
       projects including purchasing raw land and developing it for the purpose of
       construction of houses, multi-storied buildings, creation of infrastructure
       and social facilities such as laying of roads, systems for water supply, water
       treatment, sanitation and sewerage, solid waste treatment and also to create
       educational, medical and recreational facilities as an integral part of
       development of satellite townships, in accordance with the elaborate rules
       and regulations and with the specific approval from the State Governments.
       Such projects tend to reduce the pressure on existing cities by providing
       low priced alternatives and value for money to the customers.
9.92   While according to the approval, the State Governments specifically directs
       that these infrastructure facilities shall ultimately be handed over and shall
       not remain with the developer. After purchasing agricultural land, these
       companies provide and create most of the infrastructure facilities mentioned
       in the Explanation. It is only by creating all these infrastructure facilities
       that the raw land gets converted into developed land, fit for construction of
       houses and multistoried buildings for residential and commercial purposes,
       thus augmenting the housing stock of the nation. It is presumed that the
       activities of these companies are already covered by the definition of
       'infrastructure facility' but the position may become debatable unless
       such activities are covered by a specific clause.
9.93   It is suggested that in the definition, the following may be added to clause
       (c)




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         Water supply project, water treatment system, irrigation
         project, sanitation and sewerage system or solid waste
         management system, electrification system, street lighting,
         parks and landscape

9.94   It is suggested that in the definition of 'infrastructure facility' the
       following additional clause may also be added:

         "an integrated township development involving provision of
         residential, educational, medical, community, commercial or
         institutional buildings and creation of required facilities
         including roads, water supply, water treatment, sanitation
         and sewerage systems, solid waste treatment and management
         systems, electrification, landscaping and afforestation and
         other civic services needed in an integrated township".

9.95   Section 80-IB(10) provides incentives for development of housing projects.
       One of the prescribed conditions is that the built-up area of the shop and
       other commercial establishments included in the housing projects shall not
       exceed 5% of the aggregate built-up area of the housing project or 2000 sq
       ft, whichever is less. In large housing projects, 2000 sq. ft. may not be
       adequate, particularly in view of high density as may arise from
       restriction of maximum built up area of 1000/ 1500 sq. ft. per
       residential unit. The absolute limit of 2000 sq. ft. may be deleted.

9.96   It is satisfying that some states have brought down the Stamp Duty to
       8-15%. Stamp duty needs to be brought down further to 4-5% and
       made uniformly applicable across all states. Also, if stamp duty has
       already been paid on one transaction, there should be a mechanism to
       provide concession or a system of credit for any subsequent
       transactions. This would avoid the resultant cascading effect of Stamp
       Duty, thereby reducing the cost of a property. The concept of credit for
       taxes paid on subsequent transactions already exists in other statutes
       such as CENVAT, VAT, MAT, etc.

9.97   Service tax in relation to construction of residential complexes having
       more than 12 houses has been imposed. Services in relation to
       construction of residential bungalows, not forming part of a „residential
       complex‟, are excluded. Taxing the construction of such residential
       complex will now entail a higher cost of construction. The discriminatory
       tax treatment is not understandable. Also, what is the sanctity of the
       threshold of 12 dwelling units in a residential complex. Service Tax


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       should not be imposed in the case of construction industry as the said
       industry is already paying a number of taxes on different inputs
       purchased for constructing the houses in addition to taxes such as
       Works Contract Tax (WCT).

9.98   The Government may consider signing up of more FTAs with other
       countries in the interest of the Real Estate Segment. However, while doing
       so the interest of domestic players in that particular segment should also be
       kept in mind, including uniformity regarding permission to issue a Form-C
       for the purpose of purchasing the goods to be used in the works contracts.
       The State Governments should abide by the Central laws regarding the
       issuance of Form-C. According to the CST norms, the sale definition
       includes works contract. Hence, any goods moving from one State to
       another for the purpose of usage in execution of works contract now falls
       under the ambit of inter-state works contract and the State from which
       goods move is liable to impose a tax. Consequently, the trader ends up
       paying tax in the State from which the goods moved, on the same item the
       tax has already been paid in the place where the execution of the contract
       has taken place. This portrays a dichotomy in taxation. The actual legal
       position should be that the trader need not pay the tax in the State
       where the work contract is executed on the inter-State purchases.

9.99   Section 50C inserted by Finance Act, 2002, provides that where the
       consideration received or accruing as a result of the transfer by an assessee
       of a capital asset, being land or building or both, is less than the value
       adopted or assessed by any authority of a State Government for the
       purpose of payment of stamp duty in respect of such transfer, the value
       so adopted or assessed shall be deemed to be the full value of the
       consideration received or accruing as a result of such transfer. For the
       purpose of payment of stamp duty, State Governments have from time to
       time fixed value on land or building in their jurisdictions through the
       issuance of guidelines. Quite often, the value so fixed are not the real
       market value owing to the following :

         -   Guideline value is not adopted in a scientific manner by the State
             Government authorities.

         -   Guideline value is fixed with reference to a particular survey number
             or division number encompassing several properties whose market
             value can never be the same.




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        -   The concept of real income gets affected and capital gains is
            unjustifiably computed on the basis of notional figure.

        -   Guideline value is reviewed and enhanced periodically without any
            corresponding increase in the market value.

        -   Guideline value is still influenced by the peak rates prevailing during
            F.Y.1996-97, after which the real estate market crashed down but
            guideline value not reduced correspondingly.

        -   Any understatement of consideration should be addressed by
            investigation mechanism and not by such an amendment.

        -   Invariably, the buyer has to bear the stamp duty. If he goes on appeal
            against the value adopted for stamp duty, it is unjust to deprive the
            seller assessee in getting the benefit of reference to valuation officer.

        -   Reference to valuation officer and the value so estimated can be
            subject matter of prolonged litigation without ultimate increase in
            revenue.

        -   Computation of capital gains on the basis of such unrealised notional
            value unnecessarily create difficulties in availing of exemption by
            making eligible reinvestment.

        -   This provision is prone for subjective assessment and prolonged
            litigation on complex issues/disputes.

9.100   In certain States like Maharashtra, Andhra Pradesh, Tamil Nadu,
        Karnataka and other States, the guideline value for stamp duty is
        more by 50% to 100% of the actual sale consideration. Hence, it
        causes undue hardship resulting in taxing notional income. Often,
        the notional income chargeable exceeds the net consideration in
        respect of the transaction. Central legislation placing reliance on
        State Guidelines, which are not uniform affects harmonious
        implementation and leads to discrimination.


9.101 In the light of the above, it may be desirable to have a relook at the
      said Section 50C for suitable amendment. It is noteworthy that long
      back Section 52(2) had almost similar provision, which was withdrawn
      owing to practical difficulties.



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9.102 That apart, it is imperative that the cut-off date 31st March 2007, for
      according approvals to housing projects in terms of section 80-IB (10) be
      extended by at least 5 years i.e. till 31st March 2012 to encourage the
      construction of small dwelling units upto 1000 sq. ft. which should go a
      long way in uplifting the social status of „AAM AADMI‟.

(d) Tourism Industry

9.103 It has been observed that the amount allocated in the budgets for the
      tourism sector is often insignificant for the development and growth of this
      particular sector. There is immense potential in tourism sector and we
      must allow it to grow and for the same much needed funds and
      regulatory framework must be provided in the forthcoming budget.
      According to World Travel and Tourism Council (WTTC) estimate, India‟s
      investment in tourism is in the range of 0.8% to 1 % of the budget.
      Contrary to this, our neighbouring countries are investing huge amount for
      the development of tourism sector in their countries. For example -
      Malaysia 5.1%, China 3.8% and Singapore 9.1%.

9.104 There is an urgent need to modernize and upgrade our existing
      International Airports. The same should be done within a prescribed time
      period. Simultaneously, other airports should also be upgraded to make
      them of international standards. This is important to attract tourists from
      other countries. A model needs to be worked out with the urban
      development authorities on the basis of public private partnership (PPP) to
      create better civic amenities, which would help in attracting tourists in a
      major way from India as well as other countries. The Air Turbine Fuel
      (ATF) tax needs to be looked into if the states are keen to incentivise the
      low cost domestic carriers by reducing the ATF tax, lower air travel costs
      and generate more tourist inflow to the state. Interstate movement of buses
      are hampered by the system of road taxes thereby making it uneconomical
      for the coaches to ply on certain routes. This needs to be looked into.

9.105 In the context of Commonwealth Games, the Government has realized the
      need for additional hotel rooms in the next three years and with that end in
      view the Finance Act, 2007 has inserted section 80-ID to provide that
      where the gross total income of an assessee includes any profits and gains
      derived by an undertaking from the business of hotel or from the business
      of building, owning and operating a convention center, such assessee
      shall be allowed hundred percent deduction of the profits and gains
      derived therefrom for five consecutive assessment years beginning
      from the initial assessment year.


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9.106 It has been stipulated that such hotels and convention centers should be
      constructed and start functioning within the period 1st April 2007 to 31st
      March 2010 in the National Capital Territory of Delhi and districts of
      Faridabad, Gurgaon, Gautam Budh Nagar and Ghaziabad. The hotel, for
      this purpose, shall mean a hotel of two-start, three-star and four-star
      category as classified by the Central Government.

9.107 It is suggested that the tax benefit be also extended to newly
      constructed hotels of five-star category. Also, since the owners of such
      hotels and convention centers would be undergoing a big risk being
      uncertain as to what would be the occupancy and profitability level
      after the Commonwealth Games and their construction would involve
      large investment, it would be desirable to strengthen the tax stimulus
      by providing a 100% tax holiday benefit for ten years instead of five
      years.



(e) Shipping Industry

9.108 Tonnage based taxation scheme has been introduced by Finance (No.2)
      Act, 2004, with a view to make Indian shipping industry more
      competitive and in line with many other international maritime
      nations. It is provided in Section 115V-I(1) that relevant shipping
      income of tonnage tax company means profits from core activities [as
      defined in Sub-Section (2)] and income from incidental activities [as
      defined in Sub-Section (5)] not exceeding 0.25% of the turnover from
      core-activity. Since income by way of profits is defined in relation to
      „activity‟, it is not clear whether passive incomes such as interest, etc.,
      inextricably linked to the respective activities, would be construed as
      part of “relevant shipping income”. It may be clarified by way of
      Explanation to Sub-Section (1) of Section 115V-I that passive incomes
      such as interest, etc., inextricably linked to the core or incidental
      activities, respectively, would be construed as part of “profits from
      Core activities” and “profits from incidental activities”, respectively.
9.109 As per Sub-Section (1) of Section 44B, notwithstanding anything to the
      contrary contained in Sections 28 to 43A, in the case of an assessee, being a
      non-resident, engaged in the business of operation of ships, a sum equal to
      seven and half per cent of the aggregate of the amounts specified in Sub-
      Section (2) shall be deemed to be profits and gains of such business
      chargeable to tax under the head „Profits and gains of business or



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      profession‟. Sub-Section (2) of said Section provides that the amounts
      referred to in Sub-Section (1) shall be following, namely:

      -      The amount paid or payable (whether in or out of India) to the
      assessee or to any person on his behalf on account of the carriage of
      passengers, livestock, mail or goods shipped at any port in India; and

      -      The amount received or deemed to be received in India by or on
      behalf of the assessee on account of the carriage of passengers, livestock,
      mail or goods shipped at any port outside India.

9.110 Further, the provisions of Section 44B(2) covers only the following:
      -     Incomes, which are derived by a non-resident in respect of
      carriage of goods, shipped at any port in India, and

      -     Income received or deemed to be received in India for carriage
      of goods shipped at any port outside India.


9.111 Accordingly, payments made by telegraphic transfer / wire transfer to
      non resident shipping companies in respect of carriage of cargo from
      outside India into India (i.e. in case of imports) is not chargeable to tax
      under Section 44B because said freight is not paid in India to the non-
      resident shipping company or its agents. This has also been supported by
      clarification No. F.No.480/6/83-FTD dated 12th April, 1984 issued by
      Foreign Tax Division, Department of Revenue, Ministry of Finance which
      was again reiterated vide its letter dated 10th October, 1994. Further, vide
      instruction No. 1934 dated 14th February, 1996, CBDT has also clarified
      that if 90% of the freight income to a non-resident shipping company is
      received outside India by way of a Telegraphic Transfer, no Income Tax
      liability arises to the non-resident shipping company in respect of such
      receipt.

9.112 The Income Tax Department has however been taking the stand that the
      freight paid to non-resident outside India by telegraphic transfer
      tantamounts to payment received or deemed to be received by non-resident
      shipping company in India. The Department is maintaining that the freight
      paid to non-residents for import of goods is taxable in India as per the
      provisions of Section 44B(2)(ii) and accordingly, the Department is
      deducting tax @ 7.5 per cent of freight amount as per the provisions of


                                       127
        Section 44B. To avoid unnecessary litigations, it is suggested that a
        suitable Explanation be inserted in Section 44B clarifying that
        payments made by telegraphic transfer / wire transfer to non-resident
        shipping companies for carriage of goods shipped at a port outside
        India and imported into India is not liable to tax in India and
        accordingly no tax is required to be deducted at source.


(f) Extension of Infrastructure status to City Pipelines and Healthcare

 City Pipelines

 9.113 It is gratifying that the Finance Act, 2007 granted „infrastructure status‟ to
        pipelines for cross-country trunk routes. It would be in fitness of things
        that the same benefit is also made available for city pipelines for the
        supply to the end consumer, as it is impossible to segregate the two and
        more particularly because both play an equal role in the delivery
        process. It would be equally desirable to extend the infrastructure
        status to cover distribution network of other energy fuels as well.


 Healthcare

 9.114 Good health is a pre-requisite to human productivity and development
       process. A healthy community is the infrastructure upon which an
       economically viable society can be built. The Indian healthcare industry is
       undergoing phenomenal expansion. Increase in the Private healthcare
       centers and continued investment in the public health programmes are
       driving the boom. Together, this health infrastructure serves a population of
       over 1 billion, growing at about 2 per cent annually. India‟s over 300
       million strong middle class, is driving unprecedented demand for quality
       healthcare.

 9.115 The Indian Healthcare Delivery market is estimated at US$ 18.7 billion.
       Nearly 65 per cent of the healthcare services market has been captured by
       the private sector. The industry is growing at about 13 per cent annually
       and is expected to grow at 15 per cent over the next four to five years.

 9.116 Further, the Government contributes only 0.52% of GDP for the healthcare
       sector, whereas most established economies spend 7-10 % of GDP on
       healthcare. US spending on the healthcare is over 14% of GDP. According
       to the current growth pattern in India the investment should be a minimum


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       of 6%. The healthcare sector contributes 6.05% of GDP and will contribute
       around 7-8% by the next five years, if considerable importance is given to
       the sector.

9.117 Even our current bed to thousand population at 1.11, compares poorly even
      with our neighbouring countries. For example China, Korea and Thailand
      have about 4.3 beds per thousand population. To reach up to that level, we
      need over 3 million beds with a requirement to invest US$ 240 billion.

9.118 Each year around 28000 doctors pass out from 269 colleges in India, still a
      shortfall of about 45,000 doctors by 2012 and 3,50,000 nurses by 2015 has
      been estimated. With the current growth pattern, the healthcare industry
      will not only be able to train more doctors and nurses but also provide jobs
      to over 9 million people by 2012.

9.119 With very few multispeciality and superspeciality healthcare centers in the
      country are having a monopoly and the healthcare prices are rising
      continuously. Accordance of Infrastructure status will lead to mushrooming
      of corporate and private run tertiary healthcare centres, giving good healthy
      competition to one another, which in turn will the keep the prices under
      control and within the reach and affordability of common public.

9.120 Even from less than 10,000 patients visiting India for medical treatment
      five years ago, the medical tourism market in India is worth US$ 333
      million, with about 100,000 foreign patients coming in every year. The
      combination of high quality services and low cost facilities is also attracting
      a regular stream of international patients. Costs of advanced surgeries in
      India are 10-15 times lower than anywhere in the world. India has the
      potential to become a global healthcare hub with its offering of most
      competent doctors, world class Medical facilities and competitive charges
      for treatment. Strategic opportunities for foreign investment and
      collaboration mark the sector, as leading Indian players draw out global
      expansion plans. The Medical Value Travel / Medical Tourism is poised to
      grow at 22% annually. It is estimated that the value of the industry will
      reach US$ 1.48 billion by 2012.

9.121 From the above it may be noted that our healthcare infrastructure in the
      tertiary sector is grossly inadequate. Creation of such infrastructure would
      require huge investments from the private sector. With a view to attract
      such investments, it may be necessary to grant „infrastructure‟ status
      to the healthcare industry and thereby provide tax holiday benefit u/s


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      80-IA. Also, companies creating Training and Educational Facilities in
      Medical, Dental, Nursing, Midwifery, Paramedical, Lab Technicians,
      Biomedical Engineering, etc. should be eligible for tax exemption in
      terms of section 10 of the Income Tax Act.



(g) Tax Benefits for IT and software sector

9.122 Tax holiday benefits under Section 10A, 10BA and 10AA for undertakings
      in Free Trade Zones, Export Oriented Undertakings and units in Special
      Economic Zones are crucial for the generation of export earnings and
      creation of job opportunities and thereby providing the much needed boost
      to the Indian economy. The tax benefits under Section 10A, 10B and
      10BA to export-oriented units (EOUs) and the software technology
      parks of India (STPI) are presently available till 31st March, 2009,
      while the same is available for 15 years in a phased manner for SEZs
      under section 10AA.

9.123 FICCI feels that the tax benefit period for EOUs and STPIs needs to be
      extended beyond 2009 and in fact made co-terminus with SEZs. This is
      necessary to provide visibility to this sector to plan future activities
      inter-alia including raising of financial resources, taking investment
      decision, all of which have long-term implications.

9.124 It may be mentioned that the tax benefits u/s 10A and 10B has
      considerably helped in the growth and development of software. We
      are still around 2% of world‟s production of electronics and computer
      software and we have yet to climb the value chain into advanced
      embedded software. Withdrawal of tax exemption after 2009 would
      dampen the growth of knowledge-based industries. It is therefore
      imperative that the tax holiday benefit period should be extended
      beyond 2009.

9.125 The desirability of extending the period for availing the tax benefit has
      assumed added significance in view of the fact that such Units especially
      the smaller ones would not be able to shift their operating venues to
      new Special Economic Zones (SEZ) u/s 10AA owing to the proposed
      stipulations that the undertaking thereto „not formed by the splitting up, or
      the reconstruction, of a business already in existence, or not formed by the
      transfer to a new business of machinery or plant previously used for any
      purpose‟. In other words, if an undertaking eligible for tax holiday u/s 10A


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       and 10B plans to switch over to SEZ, it will have to set up altogether a new
       unit involving huge capital investment, which might not be a viable
       proposition particularly for middle-level and start-up units.

9.126 It is heartening that the Ministry of Commerce and the Ministry of
      Communication & Information Technology hold the same view and are
      pursuing the matter with the Union Cabinet for extending tax benefits
      period for this sector. It is being increasingly realized that if the benefits
      are allowed to lapse, the tax liability of such firms would increase
      substantially, which they can hardly afford and the benefits from the tax
      breaks are far more important than the revenue loss.

9.127 Interestingly, even ICRIER that had been commissioned by the Finance
      Ministry to conduct a study on this crucial aspect, has concluded that the
      tax exemptions should be extended. According to it, while the 4200
      small & medium enterprises registered with STPI are contributing 41% of
      its total exports, these companies are already facing margin pressures
      on account of increasing salaries and decreasing average billings.
      Taking a similar stance on EOUs, the ICRIER study projects that between
      2006-07 and 2009-10 the revenue loss to the Government would be of Rs
      5468 crores, but it aptly observed that “these losses are notional. If there
      is any diversion of investment from EOUs to SEZs the government will
      incur losses in any way.”

9.128 In this backdrop, it is important that the tax holiday period be extended
      in the ensuing budget.

(h) Tax holiday for transferred undertakings under amalgamation/demerger
scheme:-

9.129 The Finance Act, 2007 has inserted a new sub-section (12A) in section
      80-IA to withdraw tax holiday in respect of undertakings which are
      transferred in a scheme of amalgamation or demerger on or after 1 st
      April 2007.

9.130 In this context, it has to be appreciated that in today‟s global business
      environment where companies have of necessity to reposition
      themselves to be competitive, mergers/demergers/amalgamations have
      become increasingly crucial. These need to be encouraged and not
      discouraged.

9.131 It is therefore imperative that the earlier position be continued and the
      tax holiday benefit which was permissible to the amalgamating


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      company should continue to be made available to the amalgamated or
      the resulting company.

9.132 It may be mentioned that the judicial opinion in respect of transfer of
      undertakings enjoying tax holiday benefit has been that since the tax
      holiday is attached to the undertaking and not to the taxpayer, the
      benefit of the tax holiday will be available to the transferee for the
      remaining period in case the undertaking is transferred during the
      currency of the tax holiday.

9.133 It is also suggested that the scope of sub section (12) be expanded by
      including all forms of corporate restructuring, in line with the spirit of
      Board Circular Letter F.No. 15/5/63-IT (AI), dt. 13-12-1963; and
      specifically providing that in the year of such corporate restructuring,
      the benefit shall be available to transferor entity upto the date of
      transfer and to the transferee entity for the remaining period of tax
      holiday.

9.134 In any case, there are a number of cases where
      mergers/demergers/amalgamations were in pipeline prior to April 2007
      based on the availability of tax holiday but the transfer of undertaking
      has not yet taken place. It would therefore be in fitness of things that
      the cut-off date of 31st March 2007 be extended by another three years
      i.e. upto 31st March 2010.


Reintroduction of Investment Allowance

9.135 It is high time that Government should revive investment allowance. The
      benefits of Investment Allowance on the economy need no emphasize,
      particularly for capital-intensive projects. It is based on the concept of
      inducing the entrepreneur to plough back his profits back into business
      primarily for creation of assets. At the present juncture where the economy
      is geared up for investment in highly capital intensive fields like
      Infrastructure, Power, Hydrocarbon, Petrochemicals, Telecom projects,
      development of ports and roadways which are very essential for the
      development of the economy, it is necessary to provide incentive by way of
      Investment Allowance to the entrepreneurs to enter such fields.
9.136 It may be recalled that the investment allowance was abolished on the
      ground of removing tax on minimum profits. Since the MAT has been
      reintroduced, there is no justification for not reintroducing investment
      allowance. It may be mentioned that a study of the tax structures of


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      the developing countries in the last forty years reveals that in order to
      encourage capitalization and growth of industry, each of the OECD
      countries had been providing incentives for the growth of industries in
      their countries by way of Investment Allowance. Countries like Spain,
      Australia, Denmark, Finland, Norway, Sweden, USA and Canada,
      which have been classified as high-income i.e. developed economies by
      the World Bank, were providing the above incentives. In fact, some
      countries like Australia, Austria, Greece etc. still continue to provide
      this incentive. After such countries achieved the targeted
      industrialization and growth of economy, they have withdrawn some of
      the aforesaid incentives. In the case of India, Investment Allowance
      provisions were withdrawn much before we reached a targeted rate of
      growth and industrialization.
9.137 It is therefore, imperative that Investment allowance provisions are re-
      introduced. With the inflationary trend of Indian economy and the
      high cost of borrowing capital, the replacement value of Plant and
      Machinery is increasing day-by-day and to enable the industry to
      recoup such losses, it is imperative that Investment Allowance of
      atleast 30% of the cost be granted.

9.138 Effectively, the Revenue will stand to gain by giving such incentives as the
      Investment Allowance reserve created has to be mandatorily invested in
      Plant and Machinery in a specified period. This will not only boost the
      industrial growth of the country but will increase employment
      opportunities and, in turn, will generate revenue by way of customs
      and excise levies. Thus, a relief in direct taxes will be more than
      adequately compensated by indirect taxes while serving other socio-
      economic needs.

Restoration of exemption of income from investment in infrastructure and
other projects


9.139 Sub-section (23G) of section 10 provided for tax exemption in respect of
      any income by way of dividends, interest or long-term capital gains of an
      infrastructure capital fund or an infrastructure capital company or a
      cooperative bank from investments made on or after the 1st day of June,
      1998 by way of shares or long-term finance in approved eligible businesses
      including infrastructure projects, developers of Special Economic Zones,
      hotel projects of not less than three star category, hospital projects with at



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      least one hundred beds for patients and certain housing projects. This
      exemption ensured low cost of raising capital for thrust area projects.

9.140 The said exemption was however withdrawn by the Finance Act, 2006
      on the grounds of reduction in the corporate tax rate, reduction in
      interest rates, exemption from tax for dividends distributed by
      domestic companies (covered under the provisions of section 115O)
      and exemption from long-term capital gains on transactions subject to
      STT.

9.141 In this context, it may be mentioned that the tax rate has come down only
      marginally being 33.99% at present. But over the last two years, the
      rates of tax for DDT and MAT have gone up. Also, the tax base for
      MAT has been widened to include income by way of dividends, interest
      or long-term capital gains from investments made in approved eligible
      businesses. FBT has been introduced and its scope widened to include
      ESOPs. The rate of depreciation reduced from 25% to 15%. The
      rates of interest are also now moving upwards. Corporate tax burden
      has in fact gone over 42%.

9.142 Besides, there are a number of cases where the investee
      company/undertaking engaged in infrastructure activity may not be a
      listed company and not subject to STT and consequently long-term
      capital gains may not be exempt from capital gains tax.

9.143 In this scenario, it has now become imperative to restore the exemption
      of income from investment in infrastructure and other projects. Its
      withdrawal has led to increase in the cost of funds for such projects
      and jeopardized the viability of such projects, particularly because the
      investors usually provide the funds on the condition that the rate of
      interest would increase if the income-tax exemption is withdrawn.
      Further, the withdrawal is also affecting future infrastructure projects
      and thereby derailing the momentum desired for ramping up
      investment in the infrastructure sector.

9.144 FICCI, therefore, strongly feels that the exemption of income from
      investment in infrastructure and other projects under section 10 (23G)
      be revived in the ensuing budget.




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R&D and Technological Upgradation

9.145 In the emerging competitive environment, Research & Development and
      Technological upgradation have assumed added significance and become
      key drivers for enhancing the competitiveness of global economies. It is
      common knowledge that economies that do not innovate, ultimately
      stagnate. We have to adequately motivate researches in India otherwise
      foreign companies will bring their patented products in India at higher
      prices and take the market away from our domestic companies. The
      existing tax incentives for R&D, are inadequate and quite restrictive.
      We should not only continue our R&D incentives but strengthen them
      enough to encourage our corporates / entrepreneurs to undertake such
      research activities.

9.146 Under clause (1) of sub-section (2AB) of Section 35, 150% weighted
      deduction in respect of in-house R&D expenditure is available only to
      biotechnology, drugs, pharmaceuticals, electronic equipments, computers,
      telecommunication equipments, chemicals etc. FICCI feels that this
      benefit of weighted deduction should be extended to all sectors of the
      economy on on-going basis. This is so because in the emerging global
      scenario, every company has to get itself involved in the research
      activities to achieve competitive edge. The measure would greatly help in
      increasing the R&D activities in the country and facilitate us in being
      recognized as an R&D centre for the world. In countries like Canada,
      Germany, UK, the Government provide upto 35% grant on research and
      almost on permanent basis. As against this, the weighted deduction allowed
      in India is estimated to result in a tax advantage of only around 10%. The
      weighted deduction benefit therefore, needs to be further strengthened.

9.147 As a developing country, India has to invest not only in the discovery
      research (NCE – New Chemical Entity), but also in the Process
      Development to develop non-infringing process. Indian companies also
      need to invest in Product Differentiation (NDDS – New Drug Delivery
      System) for commercial success in the global market. Due to the
      introduction of Product Paten regime, the industry in India is at a crucial
      juncture. To promote R & D in the Pharmaceutical Sector the rate of
      weighted deduction should be raised from 150% to 200%.

9.148 The current provisions for deduction u/s 35 (2AB) are restrictive in nature
      so as to cover only expenditure incidental to research & development
      carried on at the in-house R&D facility. It is suggested that its scope
      should be widened, so as to also encompass within its fold all expenditure

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      incidental to basic research carried on at any outside R&D facility, as also
      Clinical Trials, Bio-equivalence studies etc. that are done outside the R&D
      facility, whether in India or in any foreign country. Similarly expenditure
      on obtaining approval from any regulatory authority and on filing an
      application for a patent outside India should also be considered for
      weighted deduction under the said section. The same would encourage
      Indian pharmaceutical companies to undertake R&D activities in a major
      way.

9.149 It is heartening that the time period for the availability of weighted
      deduction benefit for R & D has been extended by 5 years i.e. from the cut-
      off date of 31st March 2007 to 31st March 2012 by the Finance Act 2007.
      But the cut-off date of 31st March 2007, for the approval of any company
      carrying on scientific research and development by the prescribed authority,
      to be eligible for tax holiday in terms of section 80 IB (8A) has not been
      extended. It needs no mention that private Scientific and Industrial
      Research Organisations (SIROs) have been playing a crucial role in
      promoting knowledge-based competitiveness to maintain and improve the
      competitive edge of Indian manufactures in global environment. The tax
      holiday benefit under section 80 IB (8A) has infact been a great source of
      support for these SIROs for commercial activities in India. It is therefore
      imperative that, such SIROs should continue to be approved and tax
      holiday provided to them. In this perspective, it is suggested that the said
      cut-off date for the purpose of approval by the prescribe authority be
      also extended by 5 years.

9.150 In a global economy, corporates have to upgrade their technologies to
      minimize their manufacturing cost with a view to achieving competitive
      edge, which is absolutely necessary for the survival. In this perspective,
      FICCI believes that technological upgradation allowance should be
      introduced in our country. Company should be permitted to set apart a
      certain percentage, say, 5% of their profits, by way of deduction in the
      computation of taxable profits, for being exclusively used for the
      upgradation of their technologies.


Depreciation

9.151 The Finance Act, 2006 reduced the rate of depreciation for general
      machinery & plant from 25% to 15%, perhaps, to align the rate of
      depreciation under the Income Tax Act with that under the Companies Act.



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9.152 It has however not been appreciated that the two different sets of
      depreciation under these two enactments were designed to serve altogether
      different objectives. While the depreciation rate under the Companies Act is
      aimed at reflecting a „true and fair view‟ of the affairs of the company, the
      underlying objective under the Income Tax Act is to provide funds for
      replenishment and replacement of assets. In the context of rapidly changing
      technology and the need for having state-of-the-art machineries and plants
      in the competitive economy, the need for such funds will continue to be
      increasingly more. Besides, there is also an incentive aspect; the
      depreciation rates under the Income Tax Act have often been designed
      to encourage core and priority sector industries, facilitating funding of
      such projects through appropriate debt-equity ratios, and to generate
      cash flows for timely debt servicing.
9.153 That apart, under the Companies Act, the depreciation rate for
      machineries working on triple or double shift basis calculates at
      27.82% and 20.87% on WDV basis respectively, whereas under the
      Income Tax Act, the depreciation would now be only at the rate of 15%
      irrespective of whether the machinery is used for single / double /
      multiple shift. It is common knowledge that plant and machineries are
      generally used for double / triple shift basis and it would be in fitness of
      things to allow depreciation atleast at the rate permissible under the
      Companies Act in such cases. Also, seasonal factories should be
      allowed full depreciation at the normal rate and not at 50% in cases
      where these have worked for less than 180 days in any year because
      such factories have, of necessity, to work double/triple shift during the
      period of their peak season and by that process they would have even
      worked more than a year‟s working.
9.154 It may be mentioned that the rates of depreciation in India are
      comparatively on lower side than those in other countries. For instance,
      in Australia, the depreciation rate for assets depends on its effective life.
      The effective life of the asset can be determined either by the assessee
      himself or by the tax authorities. In Bangladesh depreciation on Plant and
      Machinery is allowed at the rate of 20%. In Brazil, the rate of depreciation
      varies between 15 to 25%. In Canada, depreciation on Plant and Machinery
      is allowed at the rate of 20%. However, for Plant and Machinery used in
      manufacturing and processing, the rate is 30%. In Finland, machinery and
      equipment are combined into a pool for depreciation purposes. Companies
      may vary the annual depreciation in this pool from zero to 25%. All
      machinery and equipment with a life of more than three years are classified
      as depreciable assets. In Hong Kong, in case of prescribed Plant and
      Machinery - companies may immediately write-off 100% of expenditure on

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       manufacturing Plant and Machinery and on Computer Software and
       Hardware. In case of other Plant and Machinery and office equipment - an
       initial allowance of 60% is granted for non-manufacturing Plant and
       Machinery and office equipment in the year of purchase. In UK, there is a
       system of free depreciation. Spain, which also had free depreciation
       system earlier, provides free depreciation now for certain specified assets.
       Finland had followed this system until the late 70's.
9.155 In this scenario, it is important to have a re-look with a view to
      restoring the depreciation rate to the earlier rate of 25%. It will be
      equally desirable to provide 100% for pollution control and energy
      saving equipments, as was the position prior to 2002. Investments in
      physical assets like infrastructure development by the private sector in
      agriculture and the entire agri-value chain should equally be eligible
      for 100% depreciation. Also, machinery and plant (including
      equipment) used in cinemas are allowed a higher rate of depreciation
      at say 40%. Higher rates of depreciation will help in conserving funds
      for repairs and replacement, which will need to be carried out more
      frequently to preserve the quality of assets and level of service
      provided. This will only lead to better upkeep of the facility. Moreover,
      in the case of hotel building, the usage is for commercial purpose which
      is round the clock for 24 hours, when compared to other buildings.
      Obviously, this results in more wear and tear. It would therefore, be in
      fitness of things to allow higher rate of depreciation at 20% on hotel
      building as used to be the position earlier.

9.156 The Government should extend the initial depreciation under Section
      32(1)(iia) to service industries as well which is currently allowed to
      manufacturing sector only. The steady growth in the contribution by
      various service industries to the Country‟s GDP should be augmented by
      incentive in the form of extending the initial depreciation benefit to service
      industries.

9.157 The present section has the wordings “any other business or commercial
      right of a similar nature”. It is unclear whether the term would include
      goodwill. A clarificatory amendment should be made to provide that
      business or commercial rights would include goodwill. Amount received on
      transfer of goodwill as in the case of other intangible assets is taxable under
      the Act. Hence, from a tax neutrality point, the payment for goodwill
      should also be allowed to be written off over a period as in the case of other
      intangible assets. This provision affects all capital-intensive entities across
      industry segments, and to provide specifically “Goodwill” would be a


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       welcome measure from the point of view of investing companies,
       especially in the service industry where consideration is paid upfront
       by the investing companies for novating the revenue generating customers
       in the name of the acquirer which would be accounted for as goodwill in
       accordance with the accounting standards.

9.158 Ideally, it would be in fitness of things to introduce 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 optimise productivity. Since the total
      depreciation allowed to the enterprise will not exceed the cost of the
      asset, there would not be any revenue loss to the Government. To avoid
      any misuse, it should be provided that the provision so made for
      depreciation would be used only for the purpose of replacement of
      Plant and Machinery.

9.159 That apart, there is a tendency amongst the assessing authorities to disallow
      the assessee‟s claim of depreciation in relation to assets given on lease
      on the ground that such transactions are merely finance transaction
      and lessor is not the real owner of the assets leased. In the process,
      neither the lessor nor the lessee is allowed any depreciation with regard to
      the leased assets. On the top of this, in few cases, even the lease rental paid
      by the lessee to the lessor are not allowed as deductible expenditure. It has
      been observed that such a view by the assessing authorities of disregarding
      lease transactions in general, by holding them as finance arrangement,
      without disputing the genuineness of such transactions, have been followed
      in all the cases – lock stock and barrel. The Explanation 4A to section
      43(1) which was inserted with the specific object of curbing the perceived
      evil practice in sale and lease back transactions and Circulars issued by the
      CBDT clarifying the issues relating to claim of depreciation on leased
      assets are also disregarded by the assessing and appellate authorities while
      disallowing the depreciation claim. To avoid litigation on the issue, the
      provisions of section 32 read with section 43(1) and 43(6) of the Income
      Tax Act, should clearly spell out the allowance of depreciation at the
      prescribed rates and subject to fulfillment of certain conditions, in
      respect of leased assets --- under operating lease/finance lease/sale &
      lease back cases.




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Weighted deduction under section 42 of the Income Tax Act

9.160 The introduction of NELP resulted in opening up of the Indian deepwater
      sedimentary basins which were hitherto unexplored. A substantial number
      of deepwater blocks under the NELP are either in the
      exploration/development stage or would be taken up for
      exploration/development in the coming years. Considering that most of
      these blocks are located in the challenging geological terrains and/or deep
      water, considerably higher degree of technical inputs and investment is
      required for carrying out exploration activities in these blocks. Likewise,
      exploration in some of these blocks is a risky proposition in view of lack of
      authentic data being available on the existence of oil reserves in these
      blocks. As per recent DGH estimates, around 28 per cent of India‟s total
      sedimentary area is unexplored. Major thrust is being laid on stepping up
      exploration initiatives in the deepwater and frontier areas which till now
      have remained unexplored or poorly explored.
9.161 While the Government has recognized the need and has accordingly
      provided fiscal incentives for carrying out oil exploration activities,
      some additional fiscal incentives need to be provided to further
      strengthen the hands of companies engaged in the hydrocarbon sector
      to encourage them to continue their aggressive pursuit in this
      financially challenging and high risk sector.
9.162 Under the provisions of the section 42, all expenditure incurred on drilling
      and exploration activities including capital expenditure is allowed as a
      deduction to the assessee beginning with the year in which commercial
      production commences. Any expenditure by way of infructuous or abortive
      exploration expenses in respect of any area surrendered prior to the
      beginning of commercial production is also allowed as a deduction to the
      assessee. The fact that capital expenditure is also otherwise allowed as a
      deduction beginning with the year of commercial production this provision
      only amounts to an accelerated deduction of the expenditure incurred and
      does not amount to any additional deduction or incentive being granted to
      the assessee. Since the drilling and exploration expenditure incurred by the
      assessee (including capital expenditure) is a genuine business expenditure
      incurred by the assessee, it would have been allowable as a deduction under
      the normal provisions of the Income Tax Act, either directly or by way of
      depreciation.
9.163 However, as per the provisions of the Production Sharing Contracts (PSCs)
      signed by the Government with the various oil exploration companies, the
      entire expenditure incurred on drilling and exploration activities is to be


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      borne by the oil exploration company. In the event the efforts of the oil
      exploration company are unsuccessful, the entire expenditure would be
      a loss incurred by the said company and is not cost recoverable.
      However, if the oil exploration company strikes oil in the exploration
      block, a certain portion of the profits earned by the oil exploration
      company from the production and sale of the oil from the block has to
      be shared with the Government.
9.164 In this perspective it has to be recognized that any further incentive
      granted to the oil exploration companies would in fact lead to their
      making higher investments in exploration and drilling activities,
      especially in riskier blocks where the probability of discovering oil
      reserves is unknown or low. This would be a win-win situation for the
      Government since it will not only lead to a better exploitation of the
      vast unexplored potential of our exploratory basins; but will also
      provide additional revenues to the Government in the form of share of
      profits from the oil reserves discovered in these blocks.
9.165 It would therefore be desirable to provide a suitable encouraging
      weighted deduction of say, 150% of the actual expenses incurred by the
      assessee, in respect of drilling and exploration activities etc. covered
      under section 42. This would lead oil exploration companies to adopt a
      more aggressive approach for making more investment in areas even
      where the probability of striking oil reserves is much lower than the
      other areas. In fact the trend of the last few years since the NELP was
      introduced has proved this point as oil exploration companies have
      only focused to make investments in blocks where the probability of
      striking oil reserves is reasonably higher. The weighted deduction of
      150% of actual drilling and exploration expenses will provide a cushion to
      these companies to take care of their sunken investment in the areas where
      their efforts are unsuccessful.

9.166 Moreover, the following amendments should be made in section 42 of the
      Income Tax Act.

       Certain apprehensions have been conveyed by investors that any losses
        incurred in exploration and attraction of mineral oils due to write-off u/s
        42 may not be allowed to be set off against other incomes in accordance
        with sections 70 and 71. A sub-section may therefore be inserted in
        section 42 to clarify to allow set-off/ deduction of losses incurred in
        exploration and extraction of mineral oils from other sources of
        income in accordance with the provisions of sec 70 and 71 and that



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        such losses will be eligible for set-off in the year in which such
        expenses are incurred.
       Additionally, section provides for deduction of “expenditure by way of
        infructuous or abortive exploration expenses in respect of any area
        surrendered prior to beginning of commercial production” in
        computing the profits and gains of any business consisting of
        prospecting for or extraction or production of mineral oils. It is
        suggested to delete the word “surrender” from section 42(1)(a), since it
        is not always possible to “surrender” an area in view of possible further
        evaluation work.
       Currently there is no provision in the section to allow for deduction of
        expenses incurred in acquisition of interest in a hydrocarbon block,
        whether in India or overseas. In view of the opening up of the sector,
        and in order to attract more E&P companies, such payment should be
        made deductible. It is proposed that a new para (d) may be added to sec
        42 to cover deduction of such expenses.
       Section 42(2) provides for taxing assignment income in the hands of the
        assignor, arising out of assigning his interest in any block. However, a
        corresponding provision to allow for deduction of assignment expenses
        from the income of the assessee has not been provided. This is
        anomalous and should be rectified.
Grant of deduction u/s. 42 of the IT Act in addition to normal deductions for
exploratory oil fields
9.167 Under the provisions of section 42 of the Income Tax Act, the Government
      is empowered to exercise its discretion to grant allowances under that
      section to an assessee proposing to engage in the business of prospecting,
      extraction etc. of mineral oil, either in lieu of or in addition to the normal
      allowances admissible under the Income Tax Act. This can be achieved by
      clarifying in the Production Sharing Contract (PSC) entered into by the
      Government with the exploration company. So far Exploration block PSCs
      signed by the Government, have been carrying over the taxation provisions
      more or less as they existed in the PSCs for producing blocks. Therefore all
      PSCs reiterate identical provisions that the allowances under section 42 of
      the Income Tax Act would be granted in lieu of (and not in addition to) the
      normal allowances admissible under the Income Tax Act without drawing
      any distinction between discovered and exploration block PSCs. However
      as Exploratory Blocks have a great deal of risk and uncertainty
      associated with discovery of hydrocarbons as opposed to Producing
      Blocks where reserves are already established and, any investment in
      these blocks carries the risk of ultimately proving to be a dead

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      investment. The PSCs for Exploratory Blocks thus stand on an entirely
      different footing as compared to PSCs signed for Producing Blocks. In
      order to meet the objective of the Government of encouraging speedy
      investment in exploitation of acreage in India to reduce the dependence on
      imports, the PSCs for Exploratory Blocks need to acknowledge the
      necessity for restoring the overall benefits of Sec 42 of the Income Tax Act
      in addition to the tax incentives already in place under the PSCs framed
      originally for discovered fields.
9.168 This can be done by one of the two methods.
 First is by a clarification in concurrence with the Ministry of Finance that in
  respect of PSCs for Exploratory Blocks, the allowances specified in the
  PSCs with respect to section 42 of the Income Tax Act would apply in
  addition to the allowances provided under the Income Tax Act under
  other provisions while computing income tax payable by a Contracting
  Party under the PSC. In case this suggestion finds favour no change may
  be required to be made to the Income Tax Act.
 Alternatively, in order to incentivise the exploration of the country‟s huge
  unexplored sedimentary basins the coming Finance Bill may introduce an
  amendment to Section 42 of the IT Act specifying that “notwithstanding
  anything contained elsewhere, in the case of an assessee engaged in and
  being assessed for the business of prospecting/ exploring/ development and
  production for mineral oil, the incentives allowable under this Section
  shall be in addition to any other benefits provided under any other
  agreement”


Development of Agricultural Sector

9.169 The Government has undoubtedly been making sustained efforts to
      accelerate the pace of agricultural growth. But we are still far behind the
      targeted growth of 4%. We have to make huge investments for building up
      proper computerized infrastructural facilities and electronic highways for
      procurement, dissemination of best agricultural practices, storage practices
      etc., cutting down intermediaries / middlemen, reducing transaction costs
      and offering the best possible prices to the farmers. For this, we need to
      involve private sector in a big way through fiscal motivational tools, the
      Government may consider providing Weighted deduction at the rate of
      150%, in respect of expenditure on Agri Infrastructure, esp. in :

                  Warehousing


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                 Rural godowns
                 Cold storage
                 Freezing chambers
                 Dehumidified temperature controlled storage
                 Cold chain transportation system e.g.
                 air – conditioned cargo
                 coaches in railways
                 roadways etc.
                 Refrigerators/insulated    containers   for   perishables   and
                  processed products
                 Scientific storage facilities to handle seasonal fluctuations in
                  prices
                 Single-window extension services or e-enabled one-stop agri-
                  services and
                 Consultancy provision centres or farmer service centers
                 Private Research & Development along with the Agriculture
                  Universities
                   and Research Organizations
                 Reclamation of 24 million hectares of land categorized as
                  cultivable
                   wasteland and permanent fallows by private sector
                 Rural Infrastructure like roads, power etc.

9.170 Besides, the private sector should be enabled to have soft loan at
      concessional rate of interest for investing in this sector. It is equally
      imperative that corporates involved in such agricultural activities be
      eligible for tax holiday under section 80-IA /80-IB.




Abolition of withholding tax on interest on foreign currency borrowings made
by units located in Special Economic Zones as well as developers of Special
Economic Zones

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9.171 The Special Economic Zones Act, 2005 (“SEZ Act”) provides for certain
      fiscal incentives for the development of SEZs in India. Export profits
      earned by a unit located in an SEZ are eligible for tax holiday u/s 10AA of
      the Income Tax Act. Simultaneously, developers of SEZs have also been
      granted a tax holiday for a certain number of years. Section 80 IA has also
      been amended to provide for a tax holiday in respect of income earned by
      Offshore Banking Units (OBUs) and unit of an International Financial
      Services Center (IFSC) located in an SEZ in respect of profits earned from
      certain specified banking and financial activities carried on in the SEZs. To
      give a further fillip to offshore banking and other financial services to be
      carried out by OBUs and IFSCs in the SEZs, the provisions of section
      197A have also been amended to provide that no withholding tax will be
      deducted by an OBU from interest paid on deposits made by, or
      borrowings made from, non-residents or persons not ordinarily
      resident in India.

9.172 Development of SEZs as well as units which will set up businesses in
      SEZs would require investment of substantial amount of funds. In the
      current global financial scenario, such developers or units would also
      be raising funds from foreign financial institutions and other lenders, if
      overall cost of the borrowing in respect of foreign loans is more
      attractive than financing the project by domestic debt.

9.173 As per the normal commercial practice prevailing in the international
      financial markets, any withholding tax deductible on interest paid on
      cross-border loans in the country of source is to be borne by the
      borrower and, accordingly, constitutes a part of the cost of the funds
      for the borrower. It is precisely for this reason that SEZs developed by
      other countries ensure that the units located in SEZs or the developers of
      the SEZs are not unnecessarily burdened with extra cost of such
      withholding tax, that the interest paid on such borrowings made by units
      located in SEZs or developers of SEZs are exempted from withholding tax
      at source.

9.174 In order to make the SEZs to be set up in India commercially more
      attractive to foreign and private investors, it is necessary that we
      provide a level playing field to all developers of SEZs as well as
      business units set up in SEZs in India. Towards this end, it is suggested
      that the provisions of section 195 of the Act be amended to provide that no
      withholding tax would be applicable to any interest paid by a developer

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       of an SEZ or a unit located in an SEZ, as defined under the SEZ Act,
       on the borrowings made by them from non-resident lenders for the
       purpose of carrying on their business in the SEZ. This would go a long way
       in ensuring that foreign capital is available at attractive interest costs to
       developers of SEZs and units to be set up in SEZs in India and that they are
       not put to a disadvantage as compared to SEZs located in other countries.

Deduction under section 40(a)(ia)

9.175 Any amount payable to a resident for interest, commission or brokerage,
      rent, royalty, fees for professional services or fees for technical services or
      amounts payable to a contractor or a sub-contractor on which tax is
      required to be deducted and has not been deducted or the tax deducted has
      not been paid is not allowed as a deduction.
9.176 This provision places a very heavy burden on an assessee, even when he
      has inadvertently not deducted tax. The disallowance is made for the entire
      expenditure although the default forms only a small percentage (10%, 15%
      etc. depending on the rate of tax deducted at source) of the said expenditure
      incurred by the assessee and the assessee does not derive any pecuniary
      benefit by not deducting the tax.

9.177 Hence, it should be provided that the disallowance if any should be
      restricted to the amount of the TDS not deducted/paid by the
      payer/payee.

Interest not „actually paid‟ not eligible
for deduction under section 43B

9.178 Under the existing provisions contained in clause (d) and clause (e) of
      section 43B, any sum payable by the assessee as interest on any loan or
      borrowing or advance referred to in the said clauses is allowed as deduction
      in the computation of income if the sum payable as interest is „actually
      paid‟ by the assessee.



9.179 Two explanations, namely, Explanation 3C and Explanation 3D were
      inserted by the Finance Act, 2006 with retrospective effect from 1st April
      1989 and 1st April 1997 respectively, to clarify that if any sum payable by
      the assessee as interest on any loan or borrowing or advance is converted
      into a loan or borrowing or advance, the interest so converted and not


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      „actually paid‟, shall not be deemed as „actual payment‟ and not allowed as
      deduction in the computation of income under section 43B. The same has
      greatly dismayed the corporate sector. Conversion of interest payable to
      financial institutions/banks into loans was earlier a normal business
      phenomena and not deeming it payment of interest for the purpose of
      section 43B is neither fair nor warranted.

9.180 Still worse, the said amendment does not envisage/provide for
      methodology of deduction of said converted interest as and when the
      loan is repaid. It has not even provided the mechanism as to when and
      how the assessee can claim deduction of such converted interest. It may
      kindly be noted that where unpaid interest was converted into a
      Funded Interest Term Loan etc.; it was deemed to have been paid by
      legal authorities. The rationale of this amendment, especially its
      retrospective application, is not understandable.

9.181 The Reserve Bank of India has issued various policy statements, as well as
      circulars, requiring the Banks to make one time settlement of non-
      performing assets i.e. loans, which are of doubtful recovery. Secondly, in
      order to clean up the balance sheet and in order to become more
      competitive globally, there has been a practice in the Corporate Sector to
      restructure high rate loans from Banks and Financial Institutions to
      moderate / lower interest rate loans, whereby the arrears of interest are
      converted into a loan, which is funded and is repayable at the revised rate of
      interest after lapse of about 5 – 7 years. Effectively, therefore, the arrears
      of interest are deemed to be constructive payment of interest in
      discharge of the borrowers‟ liability. In case if such interest is not
      allowed on the basis of constructive payment at the time of conversion
      into a new loan, the assessee shall forever lose its right to claim such
      interest payment when even it is repaid as part of principal.

9.182 It would therefore be desirable to delete the said amendment. Atleast,
      suitable clarification be provided to enable the assessee to claim
      deduction of interest as and when principal amount of loan is, to the
      extent, of interest converted into loan repaid. FICCI is strongly of the
      view that non-issuance of such clarification is causing permanent loss
      of claim of deduction in respect of said converted interest.

Individuals & HUFs having Turnover or Gross Receipts in
excess of Rs. 40 Lakhs per annum to Deduct Tax at Source




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9.183 Individuals or Hindu Undivided Families, whose total sales, turnover or
      gross receipts from the business or profession carried on by him exceed the
      monetary limits specified under Clause (a) or Clause (b) of Section 44AB
      during the financial year immediately preceding the financial year in which
      the income is to be credited or paid, will now be required to deduct income
      tax at source under Sections 194A, 194C, 194H, 194-I and 194J.

9.184 These self employed entrepreneurs (individuals) or small families (HUFs)
      running small-scale enterprises were, hitherto, exempt from deduction of
      income tax from various payments except on salaries. Small
      entrepreneurs, who handle their enterprises single-handedly are
      finding practical difficulties in complying with various formalities in
      this context. These are also causing unbearable compliance cost and
      unnecessary hardships by way of additional Inspector Raj, which the
      Government has been repeatedly assuring to reduce. TDS requirement
      for them may therefore be withdrawn.

9.185 Also the existing limit of rupees forty lakhs, introduced as far back in
      1984 needs to be substantially increased to rupees one crores and for
      professionals sum ten lakhs to rupees twenty five lakhs.

Carry Backward of Business Losses

9.186 Under Section 72 of the Income Tax Act, business losses are allowed to be
      carried forward and set off against future profits upto 8 years. Such a carry
      forward facility is available in almost all countries. In some countries
      including Australia, Belgium, Denmark, Germany, Malaysia, Netherlands,
      New Zealand, Singapore, Sweden, Hong Kong, Kenya, Mauritius, etc.,
      business losses are allowed to be carried forward for an indefinite period to
      enable setting off of losses fully.
9.187 More importantly, taxation laws of a number of countries including
      Canada, France, Germany, Japan, Netherlands, USA, UK provide for carry
      backward of business losses for varying periods, whereas we in India do
      not have such facility, which is very much needed.

9.188 In the wake of opening up of the Indian economy and reduction in
      import duties and the removal of most of the import restrictions, the
      Indian industry is facing stiff global competition. Some companies
      which could not face the competition in the transitional phase, became
      temporarily sick. To assist such companies in their bad times, it is
      necessary to provide some temporary financial help by way of


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      providing for carry backward of the business losses to the preceding 3
      to 4 years in our taxing statute.
9.189 Alternatively, a scheme may be formulated to provide option to the
      company to deposit a part of its profits in any given year in a separate
      fund and the company should be at liberty to withdraw the amounts
      from such funds for meeting business losses and rehabilitating itself. It
      is suggested that the amounts so deposited should be allowed as a
      deduction in computing the total income of the company.

Charitable Trusts / Educational Institutions

9.190 Charitable trusts covered under Section 10 (23C) (iv), (vi), (via) and
      Section 11 of the Income Tax Act are required to invest their funds in the
      manner prescribed under Section 11(5) of Income Tax Act. In view of the
      amendments to the Income Tax Act, such institutions cannot hold equity
      shares/preference shares or invest in any manner other than that
      prescribed. The same does not fit into the emerging liberalised
      environment and reduces the cash inflow of such institutions, which is
      neither fair nor warranted. It is suggested that trusts covered under
      Section 11 /10(23C) be permitted to invest their funds in any manner
      they deem fit. Atleast, 20% of each year‟s income of such trusts be
      allowed to be invested other than as prescribed under section 11(5).
9.191 Section 10(23C) has become more onerous than provisions of Sections 11,
      12, 12A and 13. Section 11(1) (d) provides that income in the form of
      Voluntary Contribution made with a specific direction that it forms a part of
      the Corpus of the Trust or Institution are not includable in the total income
      of a Trust. Such provision however is not available u/s 10(23C). Voluntary
      contribution made with a specific direction that the same would form
      part of the Corpus should not get included in the income under section
      12 of the Income Tax Act. Since provisions of Sec. 10(23C) and Section
      11/12/12A/13 are now more or less similar, all provisions for
      Charitable Tax exemption be brought at one place.
9.192 The Finance Act 2001 reduced the maximum period for which trust income
      could be accumulated for utilising the same for charitable or religious
      purposes, from 10 years to 5 years. This has created avoidable hardships to
      charitable trusts, since in many cases, it may not be possible to complete
      the projects for which such funds were accumulated within a period of 5
      years. It is therefore, suggested that the earlier period of 10 years be
      revived.



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9.193 That apart, Section 80G of Income Tax Act, 1961 provides for deduction of
      a certain amount, donated to certain funds / charitable institutions, etc.
      However, Explanation 5 to the section provides that no deduction shall be
      allowed in respect of any donation unless such donation is of a sum of
      money. Accordingly, in case an assessee gives any donation in kind, the
      same is not allowable as a deduction since the same is not a donation of
      money. At times, an assessee feels proud in donating a product
      manufactured by him, which also serves the public at large and for the
      benefit of the Society / Community. The restriction for allowing the
      deduction towards donation, which is only in cash and not in kind, is
      against the spirit of charitable activities, which requires suitable
      modification.

9.194 Moreover, it is provided that the aggregate amount of “annual receipts”
      of any hospital or educational institutions should not exceed Rs one
      crore in a year. The term “annual receipts” has neither been defined in the
      Act nor in the Rules. To avoid ambiguity and litigation, it is suggested
      that “annual receipts” be clearly defined as income of the
      hospitals/educational institutions arising regularly/every year like fees
      collected in the case of educational institutions, treatment charges
      collected in the case of hospitals, income from past investments by way
      of interest, dividend but excluding value of donation received in kind
      by way of shares, other movable assets, land, hospital/educational
      equipment, sale consideration received on disposal of land, shares or
      other movable property, hospital/educational equipment etc.

9.195 Further, it may be specifically provided that donations received
      towards corpus by way of land, shares or other movable assets are
      excluded from computation of “annual receipts” as prescribed under
      Rule 2 BC of Income Tax Rules.

9.196 It may not be out of place to mention that various restrictions imposed in
      the working of charitable institutions impinge charitable activities which is
      not desirable. Tax concessions provided to these institutions should not be
      viewed as tax foregone because the laudable social activities they are
      carrying on, are in fact the primary responsibility of the Government. It
      may be mentioned that a few years back in the context of concessions
      permissible for charitable contributions under the US tax law, the House
      Ways and Means Committee in USA in one of its Reports succinctly stated:




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       “The exemption from taxation of money or properly devoted to charitable
       and other purposes is based upon the theory that the Government is
       compensated for the loss of revenue by its relief from financial burden,
       which would otherwise have to be met by appropriation of from public
       funds and by the benefit resulting from the promotion of the general
       welfare.”

9.197 It would therefore be in fitness of things to take a liberal and relaxing
      approach in the matter of providing restrictions on the investment pattern
      “annual receipts” period and the extent of accumulation, etc.


Superannuation Funds

9.198 Rule 85 read with Rule 67 of Income Tax Rules prescribe investment
      pattern for Recognised Provident Funds and approved Superannuation
      funds. Accordingly, recognised funds are compelled to invest mainly in
      Government Securities and Bonds, which has low returns. This restricts the
      income earning capacities of the recognized funds. It is suggested that
      funds should be permitted to invest according to their own choice in
      securities, which are certified by credit rating agencies like ICRA,
      CRISIL, etc. for superannuation fund investments. Suitable checks and
      balances in choice of investment instruments could be introduced to protect
      the corpus of the funds and the interest of the beneficiaries (i.e. the retired
      employees).



Corporate Restructuring

9.199 In today‟s global business scenario, it is atmost necessary for the corporates
      to reposition themselves to obtain the economies of scale to be competitive
      for survival. Mergers, amalgamations, demergers, acquisitions and
      similar other forms of corporate restructuring are increasingly becoming
      viable ways for India Inc. to consolidate and create positive synergies
      across the value chain in this globalizing economy. In order to move in
      consonance with the larger aim of building a regional investment and
      financial hub in India, these exercises should be encouraged. In this
      relation, it is widely felt that the stipulation of continuing the same business
      of the amalgamating company for a minimum period of 5 years in order
      to obtain the benefit of accumulated depreciation, or set-off or carry
      forward of its losses, should either be removed or the period reduced to 2


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      years. Section 72A should be suitably modified to clarify that as in the case
      of an amalgamation, the accumulated loss and the allowance for
      unabsorbed depreciation of the demerged company, shall to the extent
      permitted to be carried forward by resulting company, be deemed to
      be the loss or, as the case may be, allowance for depreciation of the
      resulting company for the year in which de-merger takes place and
      allowed to be carried forward and set off accordingly in the hands of the
      resulting company.

9.200 Incentives provided for corporate restructuring are more or less
      neutralized by excessive levies of stamp duty. The rate of stamp duty
      varies from 8% to 15% of the current market value of the fixed assets. It
      would be desirable to persuade the State Governments to reduce the stamp
      duty and make the same applicable uniformly for all States. A suitable
      legislation should be drafted that permits / levies a uniform rate of
      stamp duty on the fair value of the transaction. The mechanism for
      recovery by each individual State can be based on the proportionate
      value of immovable property located within each State. The company
      should be allowed a credit against the total stamp duty when mutating
      property in each individual State.

9.201 In spite of increasing cross border mergers and amalgamations, Indian
      laws still do not recognise Indian companies merging into foreign
      companies (the vice-versa is recognised). It is important that mergers into
      foreign companies are recognised as a legal process. What is important is
      that the interest of Indian shareholders should be aligned with the interests
      of shareholders of foreign companies by simplifying the laws relating to
      Indian Depository Receipts (IDRs), the Indian equivalent of ADRs. Indian
      shareholders should be permitted to receive IDRs. A non-obstante
      provision to ensure that the assets and liabilities of the transferor
      company absolutely vest in the transferee company notwithstanding
      anything to the contrary in any other law for the time being in force,
      should be put in place. Consistency and uniformity in the rules should be
      formulated to facilitate transactions. Not only will this allow the retail
      investors to participate in the growth of foreign companies and provide
      more investment avenues for them, but it will also enhance valuations
      given by foreign companies to prospective Indian targets.

9.202 In the case of a company undergoing restructuring under the Corporate
      Debt Restructuring (CDR) scheme, if 75% of the secured creditors have
      consented to the scheme, then notwithstanding the minority dissent, such a


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       scheme should be sanctioned. The same position be also applied wherein
       shareholders / creditors with insignificant stake raise objections in a
       High Court Forum.

9.203 There is a need to encourage international mergers by making the tax laws
      more effective. In the new liberalized scenario, tax treatment of
      financial instruments as well as securitization transactions calls for a
      special dispensation particularly in the context of the current legislation on
      Asset Reconstruction Companies (ARCs) and the recent developments in
      financial instruments.

9.204 A single window forum for approving scheme of mergers should be
      evolved and valuation carried out by independent registered valuers
      rather than by court appointed valuers.

9.205 That apart, contractual and short form mergers should also be
      introduced. This would clearly differentiate the process of group
      company / private company mergers and mergers between public
      companies. In the former, the management / shareholders only should
      be able to effect the transaction, whereas in the later, the current
      approach may be adopted.
9.206 There is no clarity on the issue whether retirement benefits such as gratuity,
      leave encashment etc. of the employees prior to the date of de-merger
      would be allowable deduction to the resulting company at the time of
      payment. The stand of income tax department on this issue so far has
      been that in regard to services rendered in de-merged company prior
      to de-merger, deduction is not allowable to de-merged company
      because it is not paying the same and in the hands of resulting
      company it is capital expenditure relating to the period prior to
      takeover. This is not fair. Deduction must be allowed to the resulting
      company when paid by it.

Ceiling on investment in certain bonds u/s 54EC

9.207 Section 54EC of the Income Tax Act provides tax exemption on capital
      gains rising from the transfer of a long-term capital asset if invested in
      long-term specified assets within a period six months from the date of such
      transfer. Long-term specified assets for this purpose mean any bond
      redeemable after three years and issued on or after 1st April 2006 by
      National Highways Authority of India and Rural Electrification


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      Corporation Ltd. The Finance Act, 2007 has provided for a ceiling on such
      investment by an assessee. Investments in such bonds will not exceed Rs
      50 lakhs in a financial year to be eligible for exemption u/s 54EC.

9.208 FICCI fails to appreciate the rationale behind prescribing the
      monetary limit of Rs 50 lakhs per investor per year, especially in the
      context that such funds would in any case be used for meeting the
      infrastructure requirements. It is therefore submitted that the said
      monetary limit be withdrawn.


Widening up of tax base for additional resource generation

9.209 Over the recent years, a great deal of qualitative progress has been made
      through tax reforms to set the stage for a growth of the Tax - GDP ratio
      in a way that is consistent with rapid economic growth, but we have not
      gone far enough. Our fiscal policies must be assessee-friendly and facilitate
      the widening up of the tax base. Our goal should be to have 15 crore
      taxpayers over the next 5 years as against only three crore plus at
      present.

9.210 A wider tax base leads to enhancing the tax-GDP ratio of a country because
      it is usually followed by an aggressive move of reduction of tax rates, a
      strategy which increases revenues of the state without evoking irrational
      behaviour from the assessees wherein they decide to evade tax due to
      excessive tax compulsions causing inefficiencies to creep into tax system.
      In fact, OECD from mid-1980 onwards assiduously propagated the idea of
      broadening the tax base as they firmly believe that: “High tax rates if
      applied to a narrow tax base would create undesirable distortion in the
      economy leading to aggressive tax planning efforts.”

9.211 In this perspective, there is a need to simplify, rationalize and modernize
      our tax structure and streamline our administrative procedures to
      reduce tax burden and compliance cost to encourage voluntary
      compliance and to induce persons to come forward in the tax net. Dr.
      Kelkar has aptly observed in his Task Force Report that „establishment of
      simplistic tax structure with minimum incentives, rationalized tax rates and
      modernization of tax administration would lead to a downward impact on
      compliance cost of the taxpayer.‟




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9.212 What is needed is that our fiscal policies should be compatible with the
      core economic policy goals of promoting efficiency, equity, rationality and
      high quality growth. There is need to generate additional resources only
      through a non-distortionary tax regime supportive of savings and
      growth-oriented investments. In this perspective, tax burden on the
      manufacturing sector, which today has to face the brunt of
      disproportionately higher share of total tax revenues, be suitably brought
      down and equitably passed on to service sector, which is more than 50 per
      cent of GDP now. These growth-oriented policies should certainly help in
      generating more and more employment and thereby more assessees. This
      needs further consideration.

9.213 There is need to reduce corporate tax and individual tax rates further as this
      would lead to larger revenues because the tax base would be considerably
      widened through better voluntary compliance leading to a manifold
      increase in the number of assessees as also owing to the operation of the
      Laffer Curve. Our experience has revealed that whenever the tax rates
      were reduced, the tax revenues went up and the tax base widened.

9.214 All services should be brought within the tax net, barring basic essentials
      and public utility services. Time is also ripe to bring agricultural income
      within the taxation net. FICCI is conscious that agriculture is a State
      subject and its taxation by Central Government would entail
      Constitutional amendment, which would need political will and great
      persuasions and consultations with States as has been done in respect
      of VAT. Al least rural rich and those having income from commercial
      crops be subjected to tax. To begin with such persons be made liable to
      tax at a flat rate of 15% on income exceeding Rs. 5 Lakhs.

9.215 Huge funds required to meet election expenses are financed, to a great
      extent, by corporate and other wealthy persons. While taxpayers are
      permitted deductions of contributions to any political party in computing
      their taxable income, contributions to candidates nominated by such parties
      for contesting elections are not allowable deduction. This has necessitated
      keeping on huge funds in black for giving to such contesting candidates. It
      would be desirable that the contributions to even candidates contesting
      elections, nominated by recognized political parties, are also permitted
      deductions.
9.216 High rates of Central and State imposts are contributory factors to evasion
      of income tax in the country. High rates of VAT, stamp duty, excise duty,
      octroi, cess and the like, induce many persons to avoid recording the


                                        155
      transactions altogether to avoid payment of these levies and in the process
      also evade income tax. At times, a person willing to pay income tax avoids
      doing so owing to complexities and procedural hassles. It is important
      that our tax laws are simple, transparent and stable with moderate tax
      level so that anyone can discharge his tax obligations without any
      difficulty. This would certainly encourage voluntary tax compliance. We
      must ensure that our indirect tax burden does not exceed 20%.

9.217 A congenial and conducive environment in the Income Tax Office can go
      a long way in encouraging voluntary tax compliance. The existing irritants
      like non-availability of Assessing Officer / relevant file even on the
      scheduled date of hearing, inadequate infrastructure etc., are discouraging
      factor which have to avoided. The taxpayers should be encouraged and
      motivated by according due recognition as contributors in the civilized
      society. The positive steps initiated in this behalf in recent past have to
      be carried further. There must be mutual trust amongst the taxpayers
      and tax gatherers. Taxpayers should be viewed as honest tax paying
      citizens and not unnecessarily suspected. Search, seizures and scrutiny of
      cases needs to be avoided and resorted to only where there are sufficient
      reasons for doing so. Apart from creating harassment and
      embarrassment to the taxpayers, these send wrong signals to others
      who would be reluctant to come forward.

9.218 A thorough study of the working conditions in the Department through an
      independent body and implementation of its constructive
      recommendations to improve the tax administration would be desirable.
      The prudent suggestions made by various Committees such as Chelliah
      Committee, Parathasarthi Shome Committee, Kelkar Committee, etc. to
      improve the tax administration should be given effect to expeditiously.
      There should be least interface between the taxpayers and tax gatherers.
      To doggedly pursue the objective of widening the tax base, the tax
      administration must equip itself with the requisite infrastructure.
      Computerization with database and latest information technology is
      inevitable. There would also be need for de-centralization of the
      administrative and financial powers at the regional and the state levels.

9.219 It has often been observed that unrealistic revenue targets are fixed for the
      assessing officers who in turn make over-pitched assessments. There
      should be proper consultation between the field formations and the
      Department of Revenue before any target of revenue collections is fixed.
      The parameters so fixed should be transparent and perceptible to trade and


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      industry so that there is proper understanding and cooperation. This will
      assist in avoiding last-minute pressure on corporates to deposit huge
      amounts of tax in the exchequer at the end of the year and to seek refunds
      afterwards. These hardships, at times, come in the way of making truthful
      presentations.

9.220 It has also been observed that whenever a case is decided in favour of
      the assessee, the Department, to be on safer side, prefers the appeal in a
      routine manner. Commissioners of Income Tax should be accountable
      for unsuccessful appeals to deter making frivolous and unwarranted
      appeals, as also the taxpayers adequately compensated for litigation
      cost and mental torture.



Taxation of Foreign Dividends and Capital Gains

9.221 In the context of liberalization and globalisation of Indian economy, a
      number of Indian companies have established subsidiaries outside India
      especially in European and American markets. This is particularly evident
      in regard to Information Technology sector, Pharmaceutical sector etc.,
      where a number of leading corporates have established subsidiaries abroad.
      However, these companies are reluctant to bring back the profits earned by
      their foreign subsidiaries in the form of dividends paid to their Indian
      holding companies, since the said dividends are taxable in the hands of the
      Indian holding companies at the high rate of tax of 34%. Similarly, the
      Indian holding companies do not also repatriate the capital gains made by
      them by selling the shares of the foreign subsidiaries, because the same
      would be taxed in India @ 20%.
9.222 We are thus, deprived of their accumulated earnings which could be an
      important source of funding in our core and infrastructure sector, i.e.
      energy, telecommunications, water supply and distribution, roads, housing
      etc. where we need huge investments for development. We will therefore
      have to make suitable provisions in our taxation statue to encourage them to
      bring back/repatriate their earnings into India.
9.223 It would therefore be desirable to have a new provision inserted in the
      Act to provide that, dividends received from, as well as capital gains
      arising on the sale of shares in foreign companies in which an Indian
      company has an equity interest of 10% or more, will be fully exempt
      from income-tax or at least concessionally taxed.



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9.224 It may be mentioned that the taxation laws of Netherlands, Denmark,
      Belgium, Spain, Switzerland, Luxembourg and Malaysia contain extremely
      attractive provisions of participation exemption under which dividends
      declared by investee company in these jurisdictions as well as capital gains
      arising on the sale of shares of the investee company, in which the investor
      company has more than 5% - 10% equity interest, are exempt from
      corporate tax in the hands of investor company, subject to fulfillment of
      certain conditions. In cases where participation exemption rules are not
      applicable, the parent – subsidiary Directive of the European Union
      prevents EC Member States where parent companies are established, from
      taxing profit distributions received from companies established in other EC
      Member States as well as capital gains arising on the sale of shares of these
      companies, if the parent company holds more than 5%-10% equity interest
      in the other company.

9.225 It is common knowledge that many Indian companies are now investing in
      shares of foreign companies or entering into joint ventures. At times these
      foreign companies either merge with other foreign companies or demerge a
      division into a separate company. Though such transactions are generally
      not taxable in the foreign country, in the absence of a specific provision in
      section 47, exchange of shares arising from such merger or demerger by the
      Indian parent may be regarded as a transfer liable to tax under the Indian
      tax laws, which govern the Indian shareholder.

9.226 It is, therefore, suggested that Section 47 be expanded to cover transfer
      of shares in a foreign company by a resident or domestic company
      pursuant to a merger or demerger abroad, provided that such merger
      or demerger is exempt from tax under the domestic tax laws of the
      foreign country in which such merger or demerger takes place.

9.227 Further, taking into account the increased globalization of the Indian
      economy, and consequent holding of Indian assets by many foreign
      companies, the following transactions in respect of Indian assets should
      also not be regarded as transfer for the purposes of capital gains under
      section 47:

      a) amalgamation of a foreign subsidiary with foreign parent company;
      b) transfer by a foreign parent company to a wholly-owned foreign
      subsidiary;




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       c) transfer by a wholly owned foreign subsidiary to its foreign parent
       company;
              provided that such transfer does not attract tax on gains in the
              country in which the transferor company is incorporated.

Taxation of Foreign Companies Investing in India

9.228 Taxation of the investment income by the foreign companies investing in
      India is one of the most important criteria to decide whether to invest in
      India. Many countries, such as Malaysia, Thailand and China have had at
      various times, tax rates that favoured foreign direct investment over
      domestic direct investment. In this scenario, our tax laws have to be
      attractive enough for encouraging Foreign Direct Investments. This is
      inevitable in view of the need for huge overseas investment in our country.
9.229 Our tax laws, however, treat all companies incorporated in India equally,
      irrespective of the proportion of foreign equity holding. In fact, tax rates are
      higher in respect of Indian branches of foreign incorporated companies -
      Foreign airlines and banks operating in India through such branches. The
      current effective rate for foreign companies is 42.23% as against 33.99%
      for domestic company. The rationale for this higher rate is that foreign
      companies neither pay DDT nor distributions made by them treated as
      dividends arising in India. The Report of the Steering Group on the foreign
      direct investment has, however, recommended that the tax rate for foreign
      companies should be the same as for domestic companies. The government
      may consider this aspect in the context as to how far this would have
      positive impact on attracting investment opportunities from foreign
      companies to benefit the country and to what extent it would be in the
      interest of the economy as a whole.
9.230 Clarification is also called for in respect of Foreign companies having
      business connections in India, there is a concern that a non-resident
      outsourcing IT enabled BPO work to India has the obligation of filing a tax
      return in India and also being assessed to tax in India. It would be in the
      interest of the industry to clarify to the effect:-
        The non-resident shall not be liable to tax in India for such
         outsourced work and consequentially shall not be required to file
         any return of income in India. CBDT Circular No 5 dated
         September 28, 2004 on BPO taxation does not explicitly put to rest
         the concerns of overseas companies.




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        Arm‟s length price for activities outsourced shall be determined
         only on the basis of activities performed by Indian BPO unit
         without attributing any profits of the non-resident; AND
        For shortfall in “Arm‟s length price”, if any, consequential
         adjustment shall be made only in the hands of Indian BPO unit (not
         non-resident).
Tax on income of Foreign Institutional Investors from securities and capital
gains

9.231 Section 115AD provides that the income received by Foreign Institutional
      Investors in respect of securities (other than units referred to in Section
      115AB) is to be taxed at the rate of 20%, the income by way of long-term
      capital gains arising from the transfer of the said securities is to be taxed at
      10% and income by way of short-term capital gains arising from the
      transfer of the said securities is to be taxed at the rate of 30%.

9.232 These rates of tax will apply on the gross income of the nature specified
      above without allowing any deduction under sections 28 to 44C, 57 and
      Chapter VI-A, namely sections 80A to 80U. The first and second provisos
      to section 48 relating to computation of capital gains will not apply in the
      case of transfer of the aforesaid securities by the Foreign Institutional
      Investors. However, for and from the assessment year 2005-06, capital
      gains arising from the transfer of a short-term capital asset, being securities
      and where the transaction of sale of such securities is entered into on a
      recognized stock exchange in India shall be chargeable to tax at 10%.

9.233 Under section 115-I, a non-resident Indian may elect not to be governed by
      the provisions of Chapter XII for any assessment year by furnishing that the
      provisions of this chapter shall not apply to him for that assessment year
      and if he does so, the provisions of this chapter shall not apply to him for
      that assessment year and his total income for that assessment year shall be
      computed and tax on such total income shall be charged in accordance with
      the other provisions of the Act. Thus, section 115-I gives a right to a non-
      resident Indian to elect to be governed by the provisions of that
      Chapter or by the general provisions of the Act. Such an option is not
      contained in Chapter XII so that the FIIs can opt out of section 115AD
      in case if the FIIs total income is „loss‟.
9.234 Section 115AD no where states what happens if the Foreign Institutional
      Investor incurs loss from the transfer of the capital asset. The interpretation
      given by some quasi-judicial authority is to the effect that, even if the FII
      incurs loss, the provisions of section 115AD still would apply.

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9.235 It would be in fitness of things if section 115AD be amended and the
      provision similar to section 115-I be inserted to the said section with
      retrospective effect and define „Foreign Institutional Investor‟ by way
      of an Explanation in section 115AD.


Taxation of Non-residents

9.236 Sections 115A and 115AD provide for taxation of non-residents / FIIs at
      rates varying between 30–10% depending upon the nature of income sought
      to be taxed. Examples of such income include income from Royalties, Fees
      for technical services, dividends other than dividends covered u/s 115-O,
      interest received from Government or an Indian concern, etc. The 10% rate
      of tax applicable to Fees for technical services and Royalties is only in
      respect of agreements entered into on or after 1st June 2005. Further, the tax
      rates of 20-30% under the domestic tax laws are unrealistic as it assumes a
      profit margin of over 50-60% respectively of revenue.

9.237 The said provisions should provide a uniform tax rate of 10% in respect of
      all types of income earned by all the non-residents/ FIIs, whether by way of
      royalties, fees for technical services, dividends, interest, short term capital
      gains, etc irrespective of the date of agreement. In such case the rates for
      dividends (other than those referred to in section 115-O), interest,
      royalty and FTS would be in line with certain tax treaties that India
      has signed like with Ireland, Sweden, Germany, etc. which provide for
      a lower withholding tax rate of 10%.

9.238 Section 115A be amended to clarify that all payments to non-residents
      under any approved agreement, FTS or in accordance with FEMA
      shall be taxed at the concessional rate prescribe therein.
9.239 It may also be clarified that MAT provisions and those relating to tax audit
      u/s 44AB shall not apply to non-residents not having a PE in India, where
      they are taxed on presumptive or gross basis u/s 115A / DTAAs. In cases of
      non-residents not having a PE in India, where they are taxed on
      presumptive or gross basis u/s 115A / DTAAs, there are practical
      difficulties in compliance with transfer pricing requirements. The transfer
      pricing requirements to maintain documentation and furnishing of
      report should apply only to the payer and not to the recipient of such
      income. Only in cases where the assessee is entitled and opts for


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       taxation on net basis at the time of filing of return, the provisions of
       documentation requirement in relation to transfer pricing in respect of
       international transactions should apply.
9.240 There is also a need to replace the concept of Business Connection with
      treaty based concept “PE” as threshold for taxing active/business
      incomes. Further, “source” should be taken as a basis for taxing
      “Passive Incomes” with clear definition of source rules for each
      category of passive income.
9.241 Under the provisions of section 195 of the Act, any sum payable to a non-
      resident and chargeable to tax under the Act requires tax withholding by the
      payer. The deductor or recipient can apply for a lower / Nil rate under
      section 195(2) / 197 of the Act. While attempts have been made to speed up
      the process of issue of these certificates, delays still occur. In some cases
      where payments have to be made by a particular date to a non-resident the
      delay impacts the business adversely.
9.242 It is therefore suggested that an option be provided to the deductor to
      remit 80% of the amount sought to be remitted and furnish a
      certificate from the bank for holding 20% of the balance amount as
      „good for payment‟ towards the tax liability to be determined pursuant
      to the order under section 195/197. The Assessing Officer would
      thereafter determine the tax required to be deducted under section 195
      on receipt of application along with bankers‟ certificate for 20%
      amount being good for payment. The deductor would, thereafter,
      present this order along with a challan to the bank to deposit the tax
      quantified in that order. The bank would, thereafter, remit the tax to
      the Tax Department and release the balance to the payee or deductor
      (in case tax is borne by deductor).
9.243 That apart, it is important that the provisions of section 195 of the Act
      be amended to provide that no withholding tax would be applicable to
      any interest paid by a developer of an SEZ or a unit located in an SEZ,
      as defined under the SEZ Act, on the borrowings made by them from
      non-resident lenders for the purpose of carrying on their business in the
      SEZ. This would go a long way in ensuring that foreign capital is available
      at attractive interest costs to developers of SEZs and units to be set up in
      SEZs in India and, they are not put to a disadvantage as compared to SEZs
      located in other countries.
9.244 Additionally, in a cross-border transaction scenario, it is unlikely that either
      the employer (the corporate entity) or employee would be able to claim tax
      credits in the overseas home country for FBT paid in India and thus results


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       in multiple taxation of income, even in the presence of tax treaties. For
       example, in case of an Indian branch of a foreign entity, (a) the expense is
       first taxed as FBT in the hands of the employer (Indian branch) in India
       plus such FBT paid cannot be claimed as a deductible expense in its hands
       in computing taxable income (b) the foreign entity may not be able to claim
       credit for FBT paid in India against its corporate taxes in its home country
       (where it is a corporate tax in India, the foreign entity would generally be
       allowed to claim foreign tax credits against its taxes payable in its home
       country) thereby resulting in taxation of such income of the foreign entity
       again in its home country (c) the employee could also be taxed on its fringe
       benefits in its home country and such FBT (being paid by the employer)
       may not be allowed as credit against taxes payable on his salary income
       that would generally include fringe benefits. This cascading effect and
       multiple points of taxation of income increases the tax cost of doing
       business in India and portrays India as an unfavourable destination purely
       from a tax cost perspective. Therefore, levy of taxes such as FBT, DDT,
       STT are best avoided. A single corporate tax rate is generally appreciated
       internationally from the perspective of simplicity, certainty and prevention
       of cascading tax effect, this change by itself would be “revenue neutral”
       from an India perspective.

9.245 Besides, sub-section (2) of section 195 of the Income Tax Act provides that
      where a person responsible for paying any sum chargeable under this Act to
      a non-resident considers that the whole of such sum would not be income
      chargeable in the case of the recipient, he may make an application to the
      Assessing Officer to determine the proportion of the sum so chargeable and
      that when the Assessing Officer makes such determination, tax shall need
      to be deducted only on such proportion. However, no limit for disposal of
      the application, or the consequences if the application is not disposed off
      within a reasonable time by the Assessing Officer, have been specified.
9.246 As delay in payments to non-residents (while awaiting determination by the
      Assessing Officer) not only makes the Indian payer liable to interest but
      could also make non-residents charge a higher consideration for their future
      services which would be detrimental to the national interest, it is felt that a
      reasonable time limit, say 15 days should be specified within which the
      Assessing Officer should pass the order making the determination.
      Simultaneously, to ensure that Assessing Officers adhere to the time
      limit, the consequences that would arise if the application is not
      disposed off within the stipulated time limit, also need to be spelt out.
      Therefore, it is felt that it should also be provided in the said section
      195 that if the Assessing Officer does not dispose off the application

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       made to him the stipulated time limit, the application shall be deemed
       to have been allowed as prayed therein by the payer.
9.247 Similarly, section 248 of the Income Tax Act provides that, any person
      having deducted tax at source in accordance with the provisions of section
      195 and 200 deducted and paid tax in respect of any sum chargeable under
      this Act, other than interest, who denies his liability to make such
      deduction, may appeal to the Commissioner (Appeals) to be declared not
      liable to make such deduction. This section, as is presently worded does
      not specify the manner in which refund of tax can be obtained by the person
      who had deducted at source but who is later declared not liable to make
      such deduction. As a consequence, even after succeeding in an appeal u/s
      248, the person who had deducted tax at source can only issue a TDS
      Certificate to the payee and then it is left to the payee to claim refund of the
      tax by filing a Return of Income. This not only result in long delays in
      getting back the amount of tax deducted which was not deductible at all
      but, in some cases, also forces the payers to deposit tax from their own
      funds when the non-resident payees refuse to render services/make
      supplies, if tax is deducted. This could also make non-residents charge a
      higher consideration for their future services which would be detrimental to
      the national interest.
9.248 It is, therefore, felt that it should be provided in section 248 that on
      succeeding in an appeal, the person who had deducted tax would be
      entitled to refund of the amount which had been deducted and
      deposited by him on furnishing an undertaking/indemnity to the effect
      that the TDS certificates issued by him to the non-resident have been
      received back by him and cancelled. The provision could alternately
      require that all such TDS Certificates be submitted to the Income Tax
      Department before refund is issued to the person who had deducted
      and deposited the tax.


Taxation of E-Commerce Transactions

9.249 Today‟s economy is evolving into a new business environment in which
      money, goods, services and information exchange electronically. E-
      commerce has emerged as the fastest growing form of business and has
      become an important tool to create business efficiencies as they help
      opening up of distant markets at low cost. World over, there has been a
      robust increase in retailing, which is growing at a significantly faster rate
      than even expected.



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9.250 Yet, legislations including tax laws have not been evolved sufficiently to
      adapt with the fast changing situations. Even several developed countries
      lag behind. Tax issues arising from E-commerce are indeed complex due to
      the uncertainties entailed in their application. It is not necessary that the tax
      laws have to be modified to suit this new emerging area of doing business.
      What is needed is to explicitly spell out how domestic tax laws would be
      applied when commerce is conducted electronically.

9.251 It is important to note that United States pursues a minimalist policy
      towards intervention with internet-based transactions and is generally
      against imposing any restrictions on E-commerce transactions. Taxes,
      wherever imposed, are simple and transparent with a view not to hinder
      commerce. We need to spell out expeditionally our stand on E-Commerce
      deals.

9.252 An important impact of e-commerce relates to tax treaties. The committee
      on Fiscal Affairs of the OECD has developed Taxation Framework
      conditions setting forth-governing principles in relation to taxation issues
      related to e-commerce. In the tax treaty area, the framework provides that
      the present international norms are capable of being applied to e-commerce
      with some clarifications as to how these norms, particularly the Model Tax
      convention, would apply. Besides, setting forth governing principles, the
      Committee has specified a detailed work programme, to study and then
      decide upon implementation options, listed with respect to subjects covered
      by the agreed framework conditions. We may modify these in the Indian
      context.

9.253 Permanent Establishment (PE) concept plays an important role in
      determining tax jurisdictions. This has lost much of its significance in the
      context of e-commerce and the relevance of fixed place of business and the
      agency rules are crumbling. E-commerce does not recognize either and
      does not fit within the traditional concept of PE. In this regard, issues have
      arisen such as whether a „server‟ could qualify as a PE and the
      consensus seems to be that it may not.

9.254 In the Indian context, the High Powered Committee has recommended
      to substitute the residence Rule by source Rule. Whether this would be
      fair and equitable? The jurisdiction of Indian tax authorities cannot
      extend to those who are located outside India and in whose cases the
      income is neither derived from a business controlled from, nor a
      profession set up in India, nor have a PE in India. Such situations


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      generally arise where the seller is in one country, the buyer is in
      another and payment is received in a third jurisdiction. Taxing
      incomes having connection in various countries is causing problems.
      Also such situations have to be carefully analyzed and debated before
      taking a final view.


Transfer Pricing
9.255 Tax avoidance by the pre-ordained transfer of income from high-tax to low-
      tax country by the multinational enterprises has been the concern of the tax
      administrations in different countries over all these years. Transfer pricing
      is the major device for such transfer of profits. The solution that has been
      evolving is that the pricing of intra-group transactions within an MNE
      group operating from two or more countries should be the same, as would
      have been applied on unrelated parties in similar transactions and
      circumstances in the open market. The underlying idea of this “arm‟s length
      principle” is that the hypothetical condition of an open market, rather than
      the tax considerations, should determine the pricing. Transfer pricing
      Rules in tax laws, therefore, are intended to counter the underpayment
      of tax including withholding tax by pricing the transactions on the
      basis of what independent parties acting independently would have
      done in the circumstances of the taxpayer. Countries like, Australia, UK
      and the USA have detailed transfer pricing regulations that prescribe
      adherence to the arm‟s length standard and impose severe penalties for non-
      compliance.

9.256 In India, Sections 92A to 92F in Chapter X were inserted in the Income Tax
      Act with effect from 1st April, 2002 for computing reasonable, fair and
      equitable prices, profits and tax from Indian‟s perspective, for businesses
      carried on by multinational enterprises. With a view to making these
      provisions investor and consumer friendly, the following aspects are for
      consideration :

       Our Income Tax Act, lays down detailed stipulations in respect of
        determination of the arms length price in the context of international
        transactions with associated enterprises, within the limits of (+) / (-)
        5% of the arithmetic mean of the price computed as per the methods
        prescribed. Whereas, in various developed countries e.g. USA, it
        would be sufficient if the arms length price falls within an inter-
        quartile (IQ) range of the various comparable prices. With regard to



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   computation of the arm‟s length price and range, the following may be
   considered:

 The present provision which requires the taxpayer to take the
  arithmetic mean of prices may be modified to use other statistical
  methods such as median of prices.

 There is some amount of ambiguity with regard to application of
  the +/- 5% range. While the proviso refers to application on the
  “price”, certain officers apply the range on the “margin”. Further,
  in case the range is to be applied on the “price”, it could create
  practical difficulties when the TNMM is applied at a business
  segment level (covering several closely linked international
  transactions). Accordingly, the concept of range may be modified to
  permit application of IQ range on margin/ price as the case may be.

 Our law should be flexible enough to adapt with the emerging
  developments in the Group‟s business, taking into consideration the
  enterprise‟s perception of the risks of adverse tax assessment, as also
  considering both planning opportunities and risk management and
  weighing effective tax rate optimization against fiscal authority
  challenges and the cost compliance.

 Transfer pricing regulations applicable to transactions between
  associated enterprises also cover transactions of purchase and sales.
  There are many situations where non-resident associated enterprises
  help Indian Companies to promote and establish export market. The
  Government itself has been providing a variety of incentives to promote
  exports. Prices of Indian entities are not competitive. Many of the
  „associated enterprises‟ are large MNC‟s having global presence and
  capable of creating markets for its Indian affiliates. In this context, the
  application of arms length principle for such export sales disregarding
  the practical situations would be detrimental to Indian entities. It may be
  desirable that the transactions of export sales to non-resident associated
  enterprise do not fall within the purview of the above regulations. The
  scope of the definition of „Associated Enterprises‟ also needs a review.

 Transfer Pricing regulations are also applicable to purchase and sales of
  intangibles between the associated enterprises. Since intangibles such as
  royalty, technical service fee, fee for use of license, trademarks etc. may
  not be comparable; it would be difficult to arrive at the arm‟s length
  price based on the valuation methods prescribed. Valuation of


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   intangibles is very much subjective and depends on various factors
   affecting a particular transaction and the Associated Enterprises.
   The CBDT may have to notify specific guidelines pertaining to
   valuation of intangibles.

 Our Transfer Pricing Regulations are mainly based on US legislation. In
  Indian scenario, there are certain cases where we have experienced that
  the comparables are not easily available. In India, we have all along
  been an information-starved country where availability of information,
  particularly about our competitors, is quite difficult. To overcome the
  problem, the Government may have separate guidelines for cases
  where no comparables are available.

 While fundamentally our transfer pricing regulations are consistent with
  the OECD guidelines, we still have to do something on the application
  side. There are some basic issues such as multiple year analysis that
  need to be resolved. Since transfer-pricing issue is not a single year
  transaction issue and all multiple year transactions have to be taken into
  account, companies‟ business cycles need to be acknowledged.
  Internationally, some countries allow averaging of business cycles by
  adopting a multiple year analysis. In India, a single year is taken for
  evaluating transfer prices, while in the United States some flexibility is
  given to taxpayers.

 The other issue that needs consideration is that of comparability. There
  is lack of data on comparables, thus requiring a more broad-based
  analysis with a larger acceptable range of results. In the absence of the
  right comparables, there could be adjustments. More focus should be
  placed on business realities, commercial considerations and economic
  principles.

 Many countries in the world have adopted Advance Pricing
  Arrangements (APAs). Many countries in the world have adopted
  APAs.       These arrangements avoid controversies and associated
  litigation costs. For companies such arrangements bring certainty and
  predictability. India can go for bilateral APAs wherein the two
  countries are involved in the discussions and are party to the agreement.
  Administratively, APAs should be the way to go for India. In India
  rules are being discovered through audits. This approach brings about
  uncertainty for taxpayers. Also, it is better to carry out any negotiation
  on APA of any kind at the central level to bring about consistency.
  National level best practices should be formulated. Also, it is better to


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   try out alternate means of dispute resolution like arbitration and mutual
   agreement procedure. Some governments such as the US also call
   industry experts to examine the documents filed by company. Transfer
   pricing rules and practices need to be certain. Advance pricing
   arrangements allow companies and the government both certainty on the
   quantum of tax and regulations with regard to transfer pricing.

 Section 92D requires that sufficient information and necessary
  documentation in respect of the international transaction have to be
  maintained and furnished to the Assessing Officers when required by
  them. Since confidentiality of information is important for the
  survival of business, it must be provided that such crucial
  information / details be allowed to be retained by the assessee after
  examination, verification and authentication by the Assessing
  Officer.

 Documentation requirements should be such as to enable the tax
  authorities to arrive at arm‟s length price without subjecting the
  concerned parties to undue cost, time and harassment. Elaborate and
  unnecessary documentation requirements would lead to inconvenience,
  wastage of time and may involve the tax department and trading parties
  in long drawn litigations besides high costs. The possibility of
  introduction of Advance Pricing Agreements (APA) and having a
  separate authority for granting advance rulings on transfer pricing
  (for certain types of transactions) may be considered.

 The safe harbour concept is designed to relieve small taxpayer from
  administrative burden and compliance cost and the tax administrator to
  maintain the cost benefit ratio. US Regulations offer a safe harbour
  for intra-group services. In Australia, also the concept of safe harbour
  is in practice. For management services, they have two types of safe
  harbours. In Australia, safe harbours are provided by way of
  administrative practices. It may be in fitness of things that our tax
  regulations also provide for safe harbours.

 The regulations provide for a 100-300 per cent penalty on the tax
  payable on the amount of adjustment. Nowhere in the world, the penalty
  is so high. UK has a maximum penalty of 100%, with a lot of leeway
  given. For instance, if an assessee has maintained or attempted to make
  an honest effort to arrive at an arm‟s length price then no penalty is
  levied and only tax is recovered. In United States, which has been
  implementing transfer pricing for quite some time, penalty provisions


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   are broadly in two parts. A penalty of 20% is leviable in case of
   substantial mis-valuations and 40% for gross mis-valuation. Also, a
   wide margin of error is allowed to a taxpayer. They also have a penalty
   oversight Committee consisting of senior persons above the assessing
   officers and penalty provisions are filtered through this Committee
   whose views though not legally binding, have great persuasive force. In
   China, normally no penalties are imposed for transfer pricing
   adjustments, unless tax evasion / refusal to pay tax is involved. It may,
   therefore, be necessary to have a fresh look at the penalty
   provisions.

 Present Documentation Rules of Transfer Pricing are attracted if the
  aggregate value of the transactions exceeds Rs.10 million. This
  monetary limit is on lower side especially for software, which has
  associates in various countries, and should be enhanced substantially to
  say Rs. 50 million. The Rules should also be modified so that the
  documentation requirement arises only where the value of
  international transactions between the associate enterprises with
  respect to a particular country exceeds Rs. 50 million.

 The Government should make it clear that, only those comparables
  which are in the public domain and that too prevailing as on the date of
  a transaction with an associated enterprise, or as the case may be,
  around that date can be used as a comparable. TPOs use data, which are
  not available in the public domain for the purpose of arriving at CUP.
  They use their powers u/s 133(6) to gather data from private domains,
  and that too as on the date of their making the TP Order. An Assessee
  cannot be expected to have the magical power to predict the conditions
  that would prevail when his TP is being audited by the TPO.

 At times, it has been observed that custom authorities and transfer
  pricing officers take all together a different and extreme view in the
  matter of valuation of imported goods. While the custom officer
  increases the value, TPO reduces it. Resulting in, harassment and
  double taxation. It is therefore, inevitable to amend the rules to provide
  that the valuation adopted by one tax authority would be binding on the
  other.

 Since intangibles by nature are unique, the problem of ascertaining the
  correct arm‟s-length price is particularly challenging when the
  transactions are between related parties. An interesting question is
  whether the definition of intangibles should be broadened to include


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          business processes – such as efficient management systems,
          procurement systems, inventory control systems etc. In the Indian
          context, intellectual property law does not recognize business processes
          as intangibles. Japan makes a case-by-case determination of an
          intangible and is more flexible in this regard. Divergence on this issue
          pose problems particularly where one country would characterize
          receipt from the licensing of a business process as income, while
          another country would not consider it as an expense. Inconsistency on
          the definition thus pose danger of economic double taxation.
          Determining ownership of intangibles is equally crucial to allocate
          incomes from such intangibles. Also, valuation of intangibles is a
          difficult task to find similar or comparable transactions in the market to
          arrive at an estimate of the intangibles‟ value. In this backdrop it is
          important for our tax administration to find tune and clarify the law on
          transfer pricing on intangibles.

9.257 During recent transfer pricing audits, the tax payer(s) were required to
      provide evidence availing the service and to establish that each of the
      payments made under a management services/ cost sharing agreement have
      resulted in benefit to the tax payer. The taxpayers are asked to
      demonstrate satisfaction of the “benefit test” with evidences. In this
      context it may be mentioned that in the case of Dow Sverige AB (Dow
      AB) by the Swedish Supreme Administrative Court (SAC ruling 7338-
      7339-01), the Supreme Court held that income adjustment rules are
      specific rules and hence, the burden of proof is to be borne by the tax
      authorities. Under the Indian transfer pricing regulations, the initial
      burden of proof is on the tax payer to justify that the transactions
      entered into with related parties are at arm‟s length. The taxpayer can
      discharge and shift their burden of proof by maintaining prescribed
      documentation.




Double Taxation Avoidance Agreements

9.258 The principles of international taxation are governed by tax equity and tax
      neutrality within the national economic sovereignty of each nation. A
      taxpayer is subject to taxation rules in more than one jurisdiction on cross
      border transactions. He may be liable to double (or even multiple) taxation
      due to diversified and conflicting taxing rules prevalent in source country


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      and country of residence. In order to avoid such double taxation, the relief
      is provided in the form of tax exemption or a tax credit or very often, an
      expense deduction for the foreign taxes suffered. This is done through
      bilateral or multilateral tax treaties, also called as Double Taxation
      Avoidance Agreements / Conventions. Such tax treaties are internationally
      binding obligations between sovereign States, which are party to it.

9.259 Section 90 of the Indian Income Tax Act empowers the Central
      Government to enter into an Agreement with the Government of any
      country outside India, for the avoidance of double taxation of income under
      this Act and under the corresponding law in force in that other country.
      India has so far entered into tax treaties with around 70 countries including
      USA, UK, Germany, France, Singapore, Japan, etc. There may be a need to
      review these treaties in the light of the deficiencies experienced, and to fit
      into the developments, which have taken place the world over.

9.260 Section 115-O of the Income Tax Act, 1961 levies distribution tax on
      dividend distributed by Indian Companies at the rate of 15% (plus
      surcharge), whereby the subsidiaries of US MNCs who declare dividends in
      India also have to pay this distribution tax. However, the existing DTAA
      with USA specifying the coverage of taxes, does not take into account the
      Dividend Distribution tax. DTAA should be amended to include the
      distribution tax within its purview and to enable the US holding
      companies, having their subsidiaries in India, to offset the distribution
      taxes paid in India from tax payable by them in the US.

9.261 Also, the possibility of developing an India Model Treaty (with
      commentary) providing guidance on intent of certain treaty provisions
      may be explored. This would help provide clarity to investors both
      from an Inbound and an outbound perspective. Additionally the
      following suggestion for improving the effectiveness of MAP (an
      international obligation of international law) may be considered :

    Publication of MAP guidance for taxpayers

    Provide for more involvement of taxpayer in MAP process

    Time limitation to be specified

    Suspension of collection of taxes during MAP consultation provided for

    Procedures for coordination with domestic tax law appeal process
     prescribed

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    Guidelines on implementation of MAP resolution



Foreign Tax Credit

9.262 The Current provision is general in nature and no guidance on specific
      issues has been provided. It is important to note that tax treaties provide a
      general rule that taxes paid by a resident in the other Contracting State, in
      accordance with treaty provisions would be eligible for Foreign Tax Credit.
      The specific rules for applying this principle are left to the domestic tax
      legislation. The OECD Commentary also clarifies that specific issues are
      subject to the domestic tax legislation. It is important to note that
      inadequate guidance results in ambiguity and litigation and exposing Indian
      residents to the risk of double taxation. This can also have an impact in
      eroding India‟s tax base. It is important to provide under the domestic
      law a unilateral tax credit of proportionate amount of corporate tax
      paid overseas.

9.263 With regard to above, for effective application of foreign tax credits,
      guidelines would need to be prescribed in respect of the following
      rules/procedural aspects:

    Aggregate approach v Country-by-Country approach

    Pooling for all categories of income v computation for each category of
     income

    Allocation of expenses, between domestic and foreign income

    Carry-over of excess FTC (excess FTC is currently a sunk cost)

    Conflicts in characterisation

    Non-availability of underlying tax credit

    Whether FTC can be used to set-off MAT

    Proof of foreign tax payments

    Difference in tax years

    Difference in year of foreign tax payment and inclusion of income in India


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    Exchange rate differences



9.264 Presently, group companies, entities are not permitted to consolidate for tax
      purposes. Group consolidation eliminates the effect of intra-group
      transactions within a group. Permitting group consolidation can also lead to
      a more effective tax administration. Hence, provisions permitting fiscal
      units may be considered.

Other Issues and Suggestions

Long term fiscal policy

9.265 Time is ripe when Government should consider having long term fiscal
      policy say, of at least five year duration. This will create stability and
      certainty in our taxation provisions. In today‟s scenario, confidentiality of
      Finance Bill proposals especially relating to direct taxation has lost its
      relevance. It may be worthwhile to have direct tax proposals publicly
      debated beforehand so that their implications are well understood with
      a view to have proposal in the Bill in right perspective. This will also
      minimize the withdrawal or dilution of any proposal during the
      passage of the relevant Bill.

Indexation of threshold limits

9.266 Threshold limits in terms of total sales, turnover, gross receipts, and
      monetary values in the Income Tax Act should be reviewed periodically
      to raise them upward in the context of inflationary trends. It is to be
      seen that some monetary limits fixed decades back have remained
      unchanged and needs to be raised upwards substantially. In fact it
      would be better to have these limits provided in the Rules instead of the
      Act to facilitate speedier reviewal.

Doctrine of estoppel

9.267 Whenever any incentive or concession is sought to be withdrawn or diluted,
      it should be ensured that the incentive continues to be available to those
      entrepreneurs who would have already taken all the initial preparatory steps
      like obtaining regulatory approvals, arranging the finance, acquisition of
      land etc., for setting up units / businesses in the hope of the continued
      availability of the said incentive. Otherwise, their ventures would be
      adversely affected and become unviable, which would be neither fair nor


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      warranted. Also, the amendments proposed in any Finance Bill should not
      have any retrospective application especially where such amendments
      would have adverse impact on the viability and continuity of the business
      as also on the completed assessments. Such amendment unnecessary
      creates uncertainties and shakes the credibility and reliability of the
      Governments‟ tax provisions.

Authority of Advance Ruling

9.268 The scope of Authority of Advance Ruling should be expanded to cover
      transaction undertaken or proposed to be undertaken by resident
      assesses to have advance knowledge of likely tax implication of
      transaction in cases of ambiguity and uncertainty, thereby to minimise
      wasteful and protected litigation.

Threshold limit under section 80C

9.269 In view of widening up of the areas of deduction including long term
      investment, children education expenses and the repayment of
      installment of housing loan with other traditional savings, the
      aggregate deductible limit of Rs.1 lakh under Section 80C needs to be
      increased to at least Rs 2 lakhs. Alternatively, a separate additional
      deduction limit of Rs 1 lakh be provided therein exclusively for long-
      term investments like life insurance premium/pension/annuities, etc.
      There must be a clear distinction between long-term and short-term
      savings. So far there has not been any significant support in tax policy
      to actively encourage “long-term savings” which is very much needed.
      Life insurance and pensions are the main segments of the financial
      services that address the needs of individuals in the long-term.




Restoration of sections 80L and 80M

9.270 FICCI feels that section 80L and 80M which were withdrawn from April
      2004 needs to be revived. While section 80L provided deduction upto Rs
      12,000/- in respect of interest on certain securities, section 80M provided
      deductions in respect of certain inter-corporate dividends. The latter has
      particularly become crucial in the context of cascading effect of dividend
      distribution tax.



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Taxation of long-term capital gains

9.271 Under section 112, capital gains arising from the transfer of a long-
      term capital asset is taxable at the rate of 20% (plus surcharge). It has
      been observed that owing to this high taxation cost on long-term
      capital gains, there is always a temptation to understate the value of
      sale consideration. It is, therefore suggested that we should have a
      uniform rate of tax on long-term capital gains at 10% on all assets
      other than listed securities which are subjected to Securities
      Transaction Tax (STT). This, it is felt, will result in higher revenues to
      the Government because of fuller disclosures and better compliance.

9.272 For computing the said capital gains, “indexed cost of acquisition” is
      deductible from the full value of the consideration received from the
      transfer of the capital asset. For this purpose, “indexed cost of acquisition”
      means an amount which bears to the cost of acquisition the same proportion
      as Cost Inflation Index for the year in which the asset is transferred bears to
      the Cost Inflation Index for the first year in which the asset was held by the
      assessee or for the year beginning on the 1st day of April, 1981,
      whichever is later. Cost Inflation Index is notified every year having regard
      to 75% of average rise in the Consumer Price Index for urban, non-manual
      employees for the immediately preceding previous year to such previous
      year. It may thus be seen that such indexation benefit is notional and does
      not take care of full inflationary impact and causes inequities to the
      taxpayers. It is, therefore suggested that the reckoning year of 1981 for
      indexation is now almost 26 years old and must be changed to 1st April
      2001, and changed thereafter every 5/10 years.

Investment in certain new shares

9.273 Section 80CC needs to be reintroduced to provide for a deduction in
      the computation of tax payer‟s total income by an amount equal to
      50% of cost of equity share forming part of eligible issue of capital.

Tax Exemption in respect of Leave Travel Concession

9.274 Presently, the actual fare incurred upto 1st AC rail fare by shortest
      route or economy class air fare for going to anywhere in India is tax
      exempt (twice in block of four years). However, this exemption is being
      allowed only for travel within India. Of late, owing to very low airfares
      and package tours, a number of Indians prefer to avail LTC for going
      abroad particularly to neighbouring countries like Thailand, Malaysia,


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      Sri Lanka, Mauritius, etc., as the fares thereto are at times less than for
      traveling to some far away destination within India. It would, therefore,
      be in fitness of things to grant tax exemption for economy class airfare for
      travel abroad also on holidays so long these are within the overall airfare
      tax exemption limit for traveling in India. Under Rule 2B of the Income
      Tax Rules, the amount exempt in respect of LTC by air is to the extent
      of the economy fare of National Carrier i.e. Indian Airlines. It is
      suggested that word “National Carrier” should be deleted from Rule 2B.

Reimbursement of Medical Expenditure

9.275 Under Section 17, any sum paid by the employer in respect of any
      expenditure actually incurred by the employee on his medical treatment or
      treatment of any member of his family to the extent of Rs. 15,000 per
      annum is exempt from tax. Considering the increased cost of medical
      treatment, the exemption limit needs to be increased to equivalent to one
      month‟s salary of the employee or Rs 30,000, whichever is higher.
      Today people are quite health conscious and invariably adopt
      preventive healthcare practices. It would therefore be in fitness of
      things to also allow the reimbursement of expenses relating to such
      preventive healthcare. To safeguard against any misuse, it may be
      provided that such payments should be either through a pre-paid
      voucher or directly by the employer to the service provider. Needless
      to mention that preventive healthcare pro-active practices by the
      employee has a huge positive impact on his productivity which is in the
      interest of his employer as also the economy as a whole. This has now
      been well-established in a recently released study report by the
      ICRIER. It is equally imperative that such benefits are also made
      available to the retired employees.

Interest income exemption for retired government employees

9.276 Under Section 10(15)(iv)(i), interest payable by Government on
      deposits made by a retiring employee of the Central Government or
      State Government or a Public Sector Company out of his retirement
      benefits in the notified schemes with a lock-in period of three years is
      exempt from tax. It is surprising that inspite of it being a retiral benefit
      measure the benefit of the scheme is not made available to the
      employees in the private sector. Denial of the interest income
      exemption benefit to the employees in the private sector has caused
      unwarranted disparity. It is suggested that Section 10(15)(iv)(i) may be



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       suitably amended to extend the benefit of interest exemption to the private
       sector /retiring employees as well.

Perks value for rent free accommodation
9.277 There should not be any perks value in respect of accommodation provided
      by the employer on concessional/rent free basis to his employees in the
      vicinity of factories located in remote areas. It needs to be appreciated that
      the employees would be reluctant to go in remoted areas without any such
      accommodation facility. Ideally, even employers setting up employees‟
      colonies near their remotely located factories should be provided fiscal
      incentive.


Age limit for Senior Citizens
9.278 The age limit of 65 years, for being eligible for higher threshold income
      exemption limit of 1.95 lakhs, should be reduced to 60 years, which is
      normally the retiring age limit. In other words, all those who have attained
      the age of 60 years and above should be treated as senior citizens and tax
      benefit provided to them accordingly.


Disabled persons
9.279 Section 80U provides for additional deduction of Rs 50,000/- for a person
      with disability and Rs 75,000/- to one with severe disability. It may be
      simpler and more equitable to treat such persons at par with senior citizens
      for the purpose of threshold exemption limit and to delete the said section.

New ITR Forms

9.280 Over the recent years, Government has been moving towards simplifying
      and rationalising the taxing procedures and had evolved „Saral Income Tax
      Return‟ forms which were assessee friendly. The new income tax return
      forms introduced this year are however a reversal of the trend, as these are
      lengthy and complicated in filling. Small and middle-level tax payers have
      of necessity to engage the services of tax consultants/chartered accountants.
      The services of tax return prepares (TRPs) have not been much of
      assistance in filling up these forms as these were not in use when TRPs
      were trained.




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9.281 Moreover, there is no clarity as to which return No. 3 or 4 would be
      applicable for an individual who is a proprietor in one concern and a partner
      in another, as each return is meant for single source of income. There is
      also no specific column in part A – profit & loss in ITR form for showing
      the interest and remuneration paid to the partners in the firm. Similarly, in
      Balance Sheet there is no place for showing the investments held as short-
      term capital assets. It is also noticed that the software for uploading the
      returns electronically is not yet available on the website of the Income-tax
      department. Even the option for furnishing return in bar- coded paper
      forms has not been implemented.

9.282 Assessees are also compulsorily required to make discloser of certain
      transactions exceeding specified monetary limits. These monetary limits
      are uniformly fixed for all categories irrespective of the amount of their
      taxable income. A financial transaction involving say Rs 2 lakhs or Rs 4
      lakhs in a year by a taxpayer say with taxable income of Rs 5 crore, is
      meagre needing no focus as compared to one with taxable income of say Rs
      10-15 lakhs. It is therefore important that these monetary limits must
      have a relationship with the taxable income i.e. it must be a specified
      percentage of the taxable income rather than a fixed monetary value.

9.283 Also there are thousand of assesses, though retired, are re-employed in the
      same or any other organization as consultant/advisor or in any other
      capacity on an ad-hoc monthly remuneration. Such employed person
      should not be construed as professionals and required to file ITR form No.
      4 instead of ITR form 1, merely because they get TDS certificate in form
      16A and not in form 16 from their employers. It has to be appreciated that
      for such persons most of the columns in form No. 4 are not applicable and
      thus involves wastage of paper and time. It may therefore be desirable to
      allow such persons to file their income tax returns in „Saral Form 1‟ as they
      have been doing so far.

9.284 It would therefore be in fitness of things to give a relook at these forms
      with a view to simplifying and rationalising them and meanwhile to
      provide options to those who have not yet filed their returns, to do so in the
      earlier returns applicable to them.   In fact, these forms should be kept
      in abeyance till the introduction of Direct Tax Code and then revised
      them in line with the provision of the new Code.

E-filing of Return



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9.285 In the context of practical difficulties still being paid in regard to
      shortcomings of software and other technical teething problems; should not
      we have one more year optional for E-filing of returns.

Filing of tax returns by Defunct companies

9.286 Defunct companies which are not engaged in any business activity and
      do not have any income or loss assessable under the Act, should be
      exempted from filing tax returns and other compliances. At best these
      be required to file declaration that they will start filing returns from
      the year of assessable income/loss.

Refunds

9.287 In spite of streamlining the refund procedure, the refund amount is not
      being credited into the assessees bank accounts specifically mentioned
      in the return. Refund vouchers, at times predated to escape interest
      liability, are sought to be handed over personally to the assessee for
      obvious reasons. Assessing Officers should be obliged to give credit in
      the assessees given bank account, and for default made accountable.
      Also, considerable delay is made in giving the effect of order of
      CIT(A)/ITAT/Court by Assessing Officer (AO), particularly in case
      relief/refund is allowed by CIT(A)/ITAT/Court. Due to not giving the
      effect of appellate order, substantial refund to be allowed to the
      assessee is withheld by the department, which puts into considerable
      difficulties by the taxpayer/ assessee. Though section 244A provides for
      payment of interest @ 6% p.a. for delay in grant of refund, no time
      limit has been prescribed within which the appeal effect is to be
      given/refund is to be granted by the AO. Due to above reason, whereas
      assessee is required to pay the advance tax as per provisions of tax
      laws, he is not able to get the refund allowable to him while making
      payment of such advance tax. At times, assessee is required to borrow
      at heavy rate of interest to pay advance tax. Therefore, suitable
      provision should be made in tax laws so as to make the AO accountable
      to give the effect of CIT(A)/ITAT/Court‟s order within reasonable
      period, say one month, failing which the assessee should be entitled to
      adjust the amount of refund as per his own calculation while making
      payment of advance tax. Moreover, instead of interest @ 6% p.a.,
      interest @ 12% p.a. should be paid to the assessee for any delay in
      grant of refund.




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9.288 At times, refund of tax is adjusted by one office of the Income-tax
      Department against the demand created by another office of Income-tax
      Department. Refund order is sent by the office, which is granting the refund
      to the office by which the demand is created. Such refund order is sent in
      turn for collection, which takes substantial time. Collection charges for
      collecting the proceed is also recovered from the assessee. Meanwhile
      whereas the interest under the provision of section 220 is payable by
      the Assessee for the outstanding demand, interest allowable to the
      assessee under the provisions of section 244A ceases on the date the
      refund order is issued. Accordingly, instructions should be issued to the
      tax authorities to adjust the demand on the same day on which the
      refund order is issued by the income- tax department. Also, a
      clarificatory amendment may be made to section 244A to the effect that
      interest would be allowable not only on refunds of tax and penalty but also
      on the amount of interest wrongly collected and later refunded being not
      chargeable.

Interest for deferment of advance tax u/s 234C

9.289 No interest should be leviable on shortfall of installment of advance tax u/s
      234C, if any, to the extent that such shortfall is attributable to the
      fluctuations in the international prices of crude oil, movements in the
      exchange rates for foreign currencies and Government directives on subsidy
      sharing.

Survey

9.290 Survey under section 133A should be conducted only after obtaining
      the approval of the Chief Commissioner of Income Tax and the
      explanation in the section amended to exclude Inspectors of Income
      Tax from the term „Income Tax Authority‟ to minimize harassment
      and also corruption. Also, instead of impounding and retaining in
      custody the books of accounts, the Surveying Officer may sign each
      page of the books of accounts and or take photocopies of such books of
      accounts and ask the assessee to sign such photocopies. Alternatively,
      before removing the impounded books of accounts, the Officer should
      allow the assessee to get the books of accounts & other papers
      impounded photocopied so that the assessee can continue his business
      with the help of the photocopies.

Tax deducted at source



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9.291 At times, difficulties and confusion about deduction of tax at source arise
      because of various dates of payment and different rates of TDS and
      issuance of TDS certificates spread over in a number of sections. It would,
      therefore, be in fitness of things that the Governments may think in terms of
      restructuring the entire system of TDS with a view to consolidating
      sections, reducing varying rates of TDS and different dates of payments so
      that the existing harassment to persons responsible for such deductions and
      payments is minimized. It has to be appreciated that such persons are
      only facilitating the Government in revenue collections and should not
      be unduly penalized.



Method of accounting in certain cases (section 145A)

9.292 The conflicts in the provisions of Section 145A of the Income Tax Act,
      1961, the Accounting Standard and Central Excise Act, 1944 result in
      avoidable complications and increase the paper work in making
      adjustments to the value of closing stock of inventories as per
      Accounting Standard, to determine the income under the provision of
      Income Tax Act, 1961 and then make corresponding changes to the
      opening stock of next year and so on. It would be in fitness of things to
      harmonise the provision of section 145A with the Accounting Standards
      and the provisions of Central Excise Act. In fact, it should be deleted
      because in ultimate analysis, it would have no revenue implications.

Definition of “Manufacture”

9.293 The term “Manufacture” has been used in several Sections - 10A,
      10AA, 10B, 80HH, 80HHA, 80HHC, 80-IA, 80-IB etc, under the
      Income Tax Act but has not been defined therein, leading to varied
      interpretation and confusion. It is therefore, suggested that the term
      “manufacture” be comprehensively defined so that assessees can
      understand as to what constitutes “manufacturing” activity. The term
      may be defined as :

      “Manufacture” means and includes any process or activity,
      carried on with the help of power – mechanical, animal or human,
      on any material, substance, article or a thing, which has the effect
      of changing the physical form, characteristics, properties or use
      thereof or which makes it a commodity known with different
      commercial description.



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9.294 It may also be clarified that:-Explanation :

      Manufacturing process would include the process of extracting,
      altering, ornamenting, processing, treating, cutting, assembling of any
      material, substance, article or a thing which has the effect of changing
      the physical form, characteristic, properties, or use of the material,
      substance, article or thing on which the said process has been applied.
      Recording of any computer programme or any digital information on
      any electronic or electromagnetic media would constitute the process of
      manufacture.

Amortisation of certain preliminary expenses

9.295 Section 35D needs to be amended to provide for amortization of all
      share/Bond, ADR, GDR issue expenses even when incurred for Working
      Capital, technical upgradation, modernization or otherwise.

Reassessment

9.296 Where an assessee has made full and true disclosure of all material fact
      necessary for the purpose of assessment of his income, the Assessing
      Officer should not be allowed to reopen the assessment under section
      147 of the Act, without bringing on record any fresh facts, evidences or
      reasoning justifying reopening of his assessment. Also, time limit of not
      less than 30 days should be provided for filing the return of income for the
      purpose of reassessment, as was the position earlier under section 148.

Rectification of mistake

9.297 Section 154(8) needs to be amended to provide for the remedy /
      recourse to assessee in case of non disposal of application under section
      154 within the stipulated period.

Interest payable in case of default in furnishing return

9.298 Section 234A should be amended to give credit for the tax paid under
      section 140A while calculating the interest payable by the assessee.
      Presently, where the tax on self assessment is paid under section 140A
      before the due date for filing return on income, but return has been filed
      after due date, such tax on self assessment is not considered as item of
      deduction for the levy of interest under section 234A, which is neither
      fair nor warranted.



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Income from Duty Entitlement Passbook (DEPB) Sale

9.299 DEPB is not a subsidy but the reimbursement of excise and customs duty
      on the raw material. The Income Tax Department has been taking the view
      that as DEPB is not granted under import (control) Order 1955,
      proportionate deduction to it based on the percentage of export turnover to
      total turnover cannot be granted under the provisions of Section 80HHC(3).

Settlement Commission

9.300 Settlement Commission for Income-tax and Wealth-tax, was constituted on
      the recommendations of the Wanchoo Committee in 1976, which felt that
      “"a rigid attitude would not only inhibit a one time tax evader or an
      unintending defaulter from making a clean breast of his affairs, but would
      also unnecessarily strain the investigational resources of the Department in
      cases of doubtful benefit to revenue while needlessly proliferating litigation
      and holding up collection. Hence, the Committee felt that there should be a
      provision in law for settlement with the taxpayer at, any stage of the
      proceedings.” After two decades of functioning, the Commissions
      working was reviewed by a Committee headed by Ms Justice S Duggal to
      find out whether the Commission has served the purpose for which it was
      set up and whether there could be alternative arrangement for achieving the
      said objective. After considering all aspects of the functioning of the
      Commission, the Committee opined, “we are of the view that it has been
      very substantially successful in achieving the objects for which it was
      set up. To our mind, the main achievements have been building up a
      sense of confidence in the mind of the taxpayer that if he decides to
      turn over a new leaf, his affairs will be settled reasonably, quickly and
      fairly; collecting substantial amounts of tax, which would not have
      been otherwise recovered by the Department; reasonably quick
      disposal of cases; finality of proceedings, thereby reducing litigation;
      low cost of collection; and easing the demands on departmental
      resources."

9.301 The Committee further said "The question of looking for `alternative
      arrangements' can arise only if the existing mechanism has failed. It is
      our considered opinion that the existing organisation has substantially
      justified its creation. The figures of performance speak eloquently. In
      our judgement, it would be a retrograde step if the Commission is
      sought to be substituted by any alternative arrangement. We sincerely
      hope and trust that the Government will ensure that the Commission's
      powers are not restricted or diluted in any manner."


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9.302 In the above backdrop, FICCI fails to appreciate the rationale for the
      diminution of the status of the Commission. It needs a relook. At least,
      in cases where the matter is pending before the Commissioner appeals
      the assessee should be eligible to approach the Settlement Commission.
      It is not necessary that once the application is filed with the Settlement
      Commission, the same would be accepted. It would therefore be
      desirable to provide that the tax and interest would be payable by the
      applicant only when its application is allowed to be proceeded with,
      and only to the extent directed by the Settlement Commission. The
      applicant should not also be required to file the copy of the settlement
      application with the Assessing Officer.

Establishment of Tax Ombudsman

9.303 A Tax Ombudsman Scheme should be established and provided for in
      the Act on similar lines as that of a Banking Ombudsman Scheme for
      redressal of grievances and complaints of assessees against the Revenue
      and its officers. The object of such a Scheme will be to enable resolution
      of complaints relating to provision of revenue services and to facilitate the
      settlement of such complaints. In addition to this, the Scheme shall help to
      resolve disputes between the Revenue and its officers, as well as between
      the Revenue and taxpayers, through the process of conciliation, mediation
      and arbitration.

Limitation for Disposal of Appeal

9.304 The Act provides for a limitation period for disposal of appeals by the
      CIT (Appeals) within a period of one year from the end of the financial
      year in which the appeal was filed. However, this limitation period is
      subject to the caveat “where it is possible”. In other words, the limitation
      prescribed is rendered useless, if in the discretion of the CIT (A), it is not
      possible to dispose off the appeal. It has been observed in practice that such
      discretion has resulted in unnecessary delays in disposal of appeals. It is
      submitted that this discretion be done away with and the caveat be
      removed from the said provision.

Powers of CIT (Appeals)

9.305 The power of the CIT(A) to set aside the assessment and refer the case back
      to the Assessing Officer for making a fresh assessment was omitted by the
      Finance Act, 2001, with effect from 1-6-2001. However, the legislature has


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      retained the power of annulment of the assessment in section 251.
      Annulment of an assessment would only mean that the entire
      assessment proceedings would become void ab intio. It would have
      certain consequences which are different from merely setting aside the
      order of assessment. In a case where the order of assessment is set aside, it
      is open to the Assessing Officer to make a fresh assessment in accordance
      with law. In the case of annulment, the order becomes non est. There are no
      guidelines prescribed in section 251 or any other provision of the Act as to
      when an order is to be set aside and when it is to be annulled. If there is an
      irregularity in making an assessment order say for example violation of
      principles of natural justice, it may be set aside by the appellate authority
      with a direction to the assessing authority to make a fresh assessment in
      accordance with law. In the absence of such a power, the first appellate
      authority has no other option but to annul the assessment which is
      detrimental to the interest of the revenue. But if the order happens to be
      without jurisdiction, it has to be annulled.

9.306 An assessment under section 144 should not, ordinarily be annulled but
      should be only set aside even where the appellate authority holds the
      view that the ex-parte assessment order under section 144 was not
      warranted on the facts of the case. Similarly, an assessment completed on
      the basis of the original return ignoring the revised return cannot be said to
      be a nullity even if it may be erroneous and such an assessment is liable to
      be set aside but not to be annulled.


Tax Administration

9.307 The sine qua non for an effective and efficient tax laws is its
      implementation through a motivated, energetic and vigilant tax
      administration. A thorough study of the working conditions in the
      Department through an independent body and implementation of its
      constructive recommendations to improve the tax administration is
      absolutely necessary.

9.308 The prudent suggestions made by various Committees such as Chelliah
      Committee, Parathasarthi Shome Committee, Kelkar Committee, etc. to
      improve the tax administration, should be implemented in its letter and
      spirit.




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9.309 What is important is that there should be proper consultation between
      the field formations and the Department of Revenue before any target
      of revenue collections is fixed.

9.310 The parameters so fixed should be transparent and perceptible to trade and
      industry so that there is proper understanding and cooperation. This will
      help in avoiding last minute pressure on corporates to deposit huge amounts
      of tax in the exchequer at the end of the year and subsequently apply for
      refund. Such tax collections do not give a true picture of the revenue
      collections of the Government.

9.311 The problem of huge backlog of cases and the denial of quick Justice
      cannot be effectively addressed unless the problem of ever increasing
      appeals is resolved. The Department should not prefer the appeal in routine
      manner. Commissioners of Income Tax should be accountable for
      unsuccessful appeals to deter making frivolous and unwarranted appeals.
      Appeals should be disposed off within a time-frame.

9.312 It is equally imperative that the administration cost and the compliance
      cost, as also transaction cost are significantly reduced and law made
      simple and transparent to generate higher tax collection and better
      compliance.




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                                       X

                                WEALTH TAX

10.1   The amount of revenue collected on account of wealth tax is quite
       insignificant. As per last year‟s budget papers, the projected revenue for
       2007-08 is merely Rs.315 crores. In this context, it is for consideration
       whether we should at all continue with this tax especially, when one
       considers the direct and indirect costs incurred in its collections,
       assessments and appeals by the Income Tax Authorities as well as the
       large number of litigations involved. FICCI is for its abolition.

10.2   In case, however, the Government thinks otherwise, at least the
       exemption limit should be significantly raised to at least Rs one crore in
       view of the considerable erosion in the value of rupee.

10.3   Besides, motorcars, which have become now a necessity, should be
       excluded from the „specified assets‟ termed as unproductive items.

10.4   It is equally important that residential accommodation provided by a
       company to its employees drawing salary exceeding Rs. 5 lakhs should
       not be brought within its tax net. Companies in most of the cases are
       under compulsion to provide the accommodation to its employees
       considering the remote location of its factory/offices and other reasons
       like attracting talented persons. Such residential accommodations, it
       has to be appreciated, should not be construed as non productive
       assets.

10.5   Vacant industrial land which are earmarked for future expansion
       should also be outside the preview of Wealth Tax.

10.6   Also, Government companies be exempted and made at par with
       statutory bodies which are exempted from wealth tax.

                                      ***




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