India’s State Secretary for Civil Aviation, Ashok Chawla provides his blue print for development and investment

Interview with Chris Devonshire-Ellis, Senior Partner, Dezan Shira & Associates in Delhi

The number of India’s total domestic passengers has doubled in just five years, and is set to expand even more rapidly. With more airports per square mile than any other Asian nation, a legacy of the British, much however needs to be done to upgrade, improve, and rebuild Indian airport capacity as anyone who has arrived at Mumbai or Delhi international airports well knows. But beyond the surface veneer of construction in progress, shabby terminals and dodgy washrooms, a revolution is occurring.

Ashok Chawla:
India has over 450 airports nationally, of which about 90 are currently operational. In conjunction with the Ministry of Urban Development (see other interview) we are highlighting a number of domestic airports for development which have a key strategic development role to play. However, firstly let me explain that all airports were previously managed by the Airports Authority of India, and that this has now changed. The AAI is now involved in two main models for airport infrastructure development. These are:

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Who knew that in 1991 ( economic policy), India would come this far and welcome investors with open arms. In the last few years the Nation has changed its policies towards a fruitful object and continues to do so.

I can recall when I was studying economic and business legislations of India that we used to talk about whether the FDI limits would eventually change to bring in more money and a better infrastructure or would Indians be driving on those bumpy roads and suffer in jams with its overgrowing population due to lack of adequate flyovers; will there be enough place at its airports to accommodate the immense increase in air traffic to India or for that matter will there be airlines other than Air India/Indian Airlines/a few more. Today the picture as changed and seems like we have the right people on board to gauge the needs of the hour.

Yesterday, 30th January 2008, the Government of India (GOI) showed how liberal it’s getting in its policies. The Cabinet Committee on Economic Affairs (CCEA) announced the following increases in the FDI limits in 7 sectors. Lets have a look below :

Sector/activity                                                           New Limit (max)        Old Lmit

oil refinery joint ventures with public-sector              49                                      26
oil firms  (1)

ventures involving the trading and marketing of        Deleted a rule
petroleum products. (2)

maintenance, repair and overhaul organisations        100                                   49
(MROs) and flying training institutes, helicopter
and sea-plane services

cargo and non-schedule airlines                                   74

ground handling services
(after requisite security clearances are obtained)`       74

Indian commodity exchanges     (3)                              49

mining and mineral separation of titanium
-bearing minerals and ores (4)                                      100

Credit information companies (5)                                 49

listed credit information companies                              24

Industrial Parks (6)                                                waviers (more…)

By Chris Devonshire-Ellis 

Our partner firm in Mumbai, Rahul Guatam Divan & Associates, has just alerted us to an improved decision in India that provides a more attractive platform for expatriates working in the country.

A Special Bench of the Income Tax Appellate Tribunal has held that taxes paid by an employer, on behalf of an employee, can be added only once in the taxable salary of an employee and thereafter, tax on such a perquisite does not need to be added again, since it is considered a non-monetary perquisite. The decision can be found here.

This new development goes against a recent decision of the Delhi Bench of the Tribunal.

Hence, for all of the expatriate clients working in India, this will have the impact of reducing their tax liability. Consequently in light of this new development, they will need to rework the tax liability for all of these expatriates to ascertain the remainder of the tax owed to the Indian Revenue Authorities.

If you require assistance with this matter please contact india@dezshira.com.

The International Fiscal Association (IFA) the Netherlands based global organisation who monitor and advice governments on tax protocols, international treaties and taxation strategies(www.ifa.nl) are holding their Indian chapter annual conference in Chennai, from 20th-21st July, at the Accord Metropolitan. Speakers include myself and other notable tax law illuminaries as follows:

Global Business Models: International Tax Challenges and Opportunities - Steve Towers, Deloitte

Making International Acquisitions Tax Effective - Abhishek Goenka, BMR Associates

Foreign Direct Investment Challenges in Real Estate Investment in India - Ganesh Raj, E&Y

Outbound investment tax considerations and structures for Indian companies investing abroad - Pieter L.de Ridder, Loyens & Loeff

Tax Residency and related issues - Radhakishan Rawal, PWC

Overseas tax planning - some basic concepts - Roy Rohatgi, Professor in International tax

China’s 2008 Tax Unification & VAT rebate reductions on export of goods from China - Chris Devonshire-Ellis, Dezan Shira & Associates

Transfer Pricing of Intangibles: Cost Sharing Arrangements - Arindam Mitra, Deloitte

Brain Trust Session - Mr.Ajay Vohra, Vaish Associates, Advocates, Delhi & Mr.K.R.Sekar, Partner, Deloitte Haskins & Sells, Bangalore.

Tax Effective Supply Chain Management Systems - Sudhir Kapadia, KPMG

Cross Border Services and Supply - T P Ostwal, Ostwal, Desei & Kothari

That is quite a line up of tax experts there and Dezan Shira & Associates are honored to be speaking for the second year in succession. From personal experience, I can advise it is an excellent event and covers a lot of important cross-border issues. Registration can be obtained at the IFA India chapter website at :www.ifasrc.org
If you are attending - please come up and say hello, I’d be very happy to see you there.

One of the important proposals in the 2007 Indian Union Budget was to allow the institutional investors to short sell their securities. Earlier this was possible only by retail investors due to regulatory restrictions. Securities and Exchange Board of India (SEBI) last week has announced that its soon going to implement short selling norms for the institutional investors as well. These rules would apply to both foreign and domestic institutions but only in derivative products to start with.

Increased short selling activity would make the stock market more liquid and increase its efficiency considerably. Once the proposed short selling norms for the prohibited investor class becomes effective, there will be a level playing field in the market. Its quite surprising in this sense that only derivative products are going to be covered in the proposal. There’s one more consideration here as to whether SEBI will stick to these norms or will it withhold them at later period of time against the interest of investors is yet to be seen.

China picture: The old laws passed in 1998 had specific restrictions on the short-selling mechanisms due to fears of rampant speculation, which were removed in 2006. It was only with establishment of China Financial Futures Exchange (CFFEX) in Shanghai in 2006, the mainland’s first exchange specializing in derivatives trading, which entailed a mechanism for short selling stocks, that this much needed concept took hold and allowed investors to benefit from both rising and falling markets.

The 3rd of our Opinion articles in the Shanghai Daily:

Source: Shanghai Daily, Opinion Section, May 30th, 2007 http://www.shanghaidaily.com/sp/article/2007/200705/20070530/article_317673.htm

Chris Devonshire-Ellis, Senior Partner of Dezan Shira & Associates, China’s largest independent consulting practice, holds his annual meetings with senior Chinese Ministers and Government Officials during the last week of March (26th - 30th). He will be able to ask questions posed directly by our 2point6billion readership to them and will be able to communicate a reply to you.

This year, over a three day period, he is meeting with officials from:

The Ministry of Commerce
The General Administration of Customs
The Office of the Government of Hong Kong
The China Banking Regulatory Commission
The China Security Regulatory Commission
The State Administration of Tax
The Office of the Central Financial Work Leading Group
The Beijing Olympic Committee
The National Reform & Development Commission
The Ministry of Finance
The Financial Work Committee of the Chinese Communist Party Central Committee

If you have questions you would like to put to any of these bodies, please email to: MinisterialMeetings@china-briefing.com

A condensed report about these meetings will follow in the May issue of China Briefing www.china-briefing.com.

Ha ! What a politically involved series of meetings 2.6billion has had - we meet with the Chinese equivilent Ministers in two weeks time courtesey of Dezan Shira & Associates long term contacts in China law & tax so look out for that. Meanwhile, in Delhi, here is our debate with India’s Minister of Commerce, Kamal Nath. Chris Devonshire-Ellis, senior partner of Dezan Shira & Associates international practice, and asks the questions:

Mr. Minister, how do you perceive India’s reforms ?

I believe we are in the secondary stage. First, we have ensured that the regulatory reforms are largely in place and enshrined in law by an act of Parliament. These cannot be changed without debates and an amendment to the acts in question. The secondary stage we face is implementation. This is a big challenge. China is much better than implementing reforms than we are, they are a one party state. But sometimes they rush. We have other issues, including democratic debate, to consider. The second phase is governance. We have to ensure that acts of parliament are implemented. This is the Indian governments huge task.

How does democracy drive India ?

We are all elected. We all have to go home and face our constituents and answer their questions. Usually there are five:

1) How can I protect my land ?

2) How can I get clean drinking water ?

3) How can I get basic sanitation ?
4) How can I get basic health care beyond the local herbal traditional recipes ?

5) How can we get access to education for our children ? (80% of rural Indians drop out of education at age eight)

These are not unreasonable requests. Our goal is to spread increased wealth, and empower our rural areas. It is a moral issue. 65% of Indians live in rural areas, and as a democracy we must listen to them. Our challenge is to spread growth amongst the nation. If we can accomplish this, with such a workforce, India will greatly affect global trade and properly contribute to it.

What about the economic gap between manufacturing and agriculture ?

Agriculture is a problem. We need to create more jobs in manufacturing. This is intended to take some of the stress off un-sustainable agriculture, such as a family of 15 trying to live off 1 hectare, but we need help with this.

So how are the Doha (India’s entry into WTO amongst others) talks going ?

Globally we missed the 2005 deadline. At that time not many nations understood the small print over agricultural reforms. Now we do. Agriculture is the sticking point, that is really all, and it is not confined to India. The developed world subsidises it’s agriculture. This is for different reasons. The EU for example, subsidizes, but has no real intention to sell to India, it is more an EU internal issue. But take cotton. The US is an export aggressive nation and wants to export cotton to India. The US government subsidises US cotton production by 45%. I am happy to import US fruit and vegetables. But I am not happy to import their subsidies. All that said - we are confident of a breakthrough mid-summer this year. Bush has a legacy to leave. To our European cousins I can say we have agreed a reduction in tariffs in imported wine and spirits. (Loud cheers from various sections of 2.6billion journos who heard that).

How is the deregulation of legal services in India coming along ?

We’ve always felt that lawyers can debate issues better than government, so we’ve passed this over to them to deal with in their own industry. There are some domestic regulations that need change. For example, you can only have a maximum of 20 partners in India, and in London it’s 1,000. Consequently the size of Indian practices is diminished. We are looking at ways to both liberalise the Indian domestic market, and when that is sorted, we’ll look at how we can introduce foreign expertise intio the mix.

The retail industry in India is still restricted to foreign investors. Any comments ?

We face a number of challenges here. The main two is a domestic fear that by opening up this market we will loose our Mom & Pop stores, and that only 3% of retail in India is collectively organised. The industry as you describe does not exist on that scale here. Retail in India needs calibration and defination, and we need to ensure that the family store is continued to be passed down the generations from Fathers to sons, from Mothers to daughters. We need investments at the back end for sure but we also need to secure the legacy of the local traders. THis evolution will take time.

Can India’s Judiciary uphold and enforce the Law ?

We have problems here, but not in the essential structure of the courts. You never hear of Indian courts being biased. We have a well proven rule of law. We do have problems in backlogs of work and the courts are jammed up, and that is a problem. We have rule of law here in India and lawyers themselves can be clever and constently delay hearings on technicalities. There is a legal backlog and we are aware of this. But our courts are independent and impartial. We are looking at ways of reforming legal administration with the help of the UK, US and EU. But this will take time. The good news is the process is there !

Minister Nath, thank you for talking to us

Chris Devonshire-Ellis

Senior Partner, International Practice, Dezan Shira & Associates

We met today with India’s Finance Minister, P. Chidambaram. In a frank and pragmatic address he made the following points and observations relating to the sustainability of India’s growth:

How do you see India’s FDI evolving ?

India had FDI of USD10billion in 2006, this is expected to rise to USD12.5billion for 2007. We believe this will rise to about USD25 billion in the next five-ten years. Another income source for the country that differentiates us from say, China, is that of the Indian diaspora, which is the largest in the world. Indians overseas remit annually about USD24 billion back to India. But regular FDI is expected to grow at about 9% annually.
What measures are in place to sustain this ?

We are well down the road of reforming as a nation. For example, our Government is now made up of academics and professionals, our Prime Minister is a world renowned economist and was educated at Cambridge (1st class honours degree) and Oxford (D. Phil. degree). As finance Minister I am a qualified lawyer and a Harvard graduate. Our Planning Commission is headed up by a Professor of economics, while our Minister of Science & Technology is also a lawyer and has been President of the Supreme Bar. Our Minister for Commerce has a degree in commerce. So government now has the right academic talent, we are more academics than politicians, and this helps in getting the intellect required to understand what needs to be done, where the problems are, and how to fix them. We have liberalised most industries in India, and most are available for foreigners to particpate in 100%. Other sectors, such as banking and insurance, will be liberalised by 2009, and our effective tax rate is 20%. So we have a lot to offer. Sustained growth is out key. We also enjoy high savings rates in excess of 30% of GDP and as long as this is maintained our fundamental growth will be sustainable. India is already the worlds 3rd largest economy having overtaken Japan recently.
Which areas of India are seeing the highest growth rates ?

Delhi and the Punjab lead, followed by Mumbai and the Western coast, and South East Indian around Chennai. The coastal cities are doing well. Our challenge is to get that growth into the rural areas. 65% of Indians live in rural villages and we need to empower them. We need to balance our increased economy and infrastructure development with the moral issue of providing basic services, such as fresh drinking water, sanitation, education, and medical care to the rural areas. If we can accomplish this we will overtake China by 2030 as the demographics of India’s young population, our huge labour force affect global development, and as China’s one child policy starts to bite into their aging population.

What about the disparity between the service industry and the manufacturing industry in India’s economy ?

Much is made of this, and we have had problems with the development and implementation of large manufacturing industries. But this is changing. Manufacturing will have grown by 11% in this quarter and a percentage of GDP. So we don’t see this as an issue actually. At present services account for 55% of GDP, Manufacturing 28% and Agriculture 17%. Agriculture is where the problems lie, not manufacturing, and we are pushing through reforms to assist this sector also.

Is Micro-credit a big tool for the rural population ?

Very much so and it is an untold tale of success actually. India has 2.5 million self-help schemes, largely run by women, and supported by NGO’s and banks. They have a recovery rate of between 97-99%, which is a fantastic achievement. This is also helping lift the rural population out of poverty and later, into productivity. It will take awhile but the rural population will be the continuing engine of India’s growth in 20 years time.

How important are developing countries in global growth ?

Actually 2006 was a watershed year. For the first time, 50% of gobal growth came from the developing nations. The US is still immensely powerful, but Asia is now the primary growth driver, lead by China and with India behind. This will not change. To succeed globally, international businesses must have China and India in their plans.
How does India compare with China in it’s economy ?

Apart from some similarites in demographics, there is a huge difference in the type of economies we have. India is actually far closer to the US model than the Chinese. China’s economy is dependent upon exports, whereas India is a consumer led economy. We have a massive middle class that can and does buy. We use exports to fund our imports, and have a healthy domestic market for product that is far stronger than China’s.

Minister, thank you for your time.

Note: IBM have just announced plans to invest USD6 billion in India by 2009, effectively tripling their existing investment of USD2 billion. Growth for IBM in India during 2006 was 38%, with a workforce of some 50,000 employees in India. 90% of that workforce is engaged in providing services external from India.

We’ve been lucky enough to hear the Indian Prime Ministers comments as regards India’s development today (13th March 2007) in comments to 2.6billion.com. Chris Devonshire-Ellis, of Dezan Shira & Associates, summarises:

“Dr. Singh made a provocative yet illustrating presentation over the current and future development of India in the global community. I summarise these as follows”:

1) It’s March 2007. Where is India today ? And what is the sustainability of India’s Economic Growth?

India’s economy has grown at 8% the past three years and touched 9% in 2006. In terms of domestic savings and deposits, India has also recorded rates of 32% & 34% of GDP being realised in this fashion. Accordingly we see that if India can sustain this growth - and we are taking steps to ensure this will be the case, a sustained growth rate of this magnitude will transform India and smooth it’s passage as a global player.

2) How will this be accomplished?

Those savings rates will enable us to re-invest. However we do need to reconcile current public spending with fiscal policies. Our macro-economic policies dictate that such rates will continue. Additionally, we expect a three fold increase in FDI over the next two years and this will also assist. There are weaknesses, and we recognise these. India needs to develop a long term debt market also to carry some of this, and we need to better co-ordinate public and private investment.

3) India’s democracy and it’s multi-faceted images has often meant stagnation for the country. Is this a problem?

India is the world’s largest democracy. we are proud of this, and we are a large nation. Although oppostion parties may be voiciferous in opposition, actually there is a lot of
common ground and fiscal unity on what needs to be done. There is more unity over the countries direction towards openess, transparency and welcoming of foreign investment than meets the media eye at this moment in time.

4) How about WTO entry?

We are hopeful that the current round in Doha will reach a conclusion for Indian entrance in July. These are complicated talks, and we need to be sure that developed nations do not impose unreasonable quotas upon us, especailly in agriculture. Between 35 and 50% of all rural Indians are illiterate. We truly are a developing country and we need assistance to educate. India as part of the global community is better off and the global community with that labor force is better off also if we are permitted to join. The future of low-cost manufacturing as we have seen with the rise of China, lies in Asia, not in the West.

5) India’s service industry and it’s manufacturing industries are imbalanced. How do you see this changing to a more sustainable economic model?

India has a historic reason for this, yet we must balance our economic output to protect sustainability. We must develop more manufacturing. Actually, our policies are in favour of this; we export in order to purchase imports that we need. We don’t need to create huge trade imbalances. But we do need to boost exports to buy the materials we require nto redevelop the countries infrastructure.

6) How much do you think is required in terms of infrastructure development?

We have budgetted for USD300 billion over the next few years. Funded by the increase in FDI, the increasing levels of savings I mentioned, the growth in export earnings and other domestic factors as follows:

* More favorable investment and labor policies, we are constantly evaluating these;

* India’s natural demographics, which see us with a young labour force over the next 30 years as opposed to China’s, which is aging;

* Education in workforce: We are increasing investment in education from 3.6% today to 6% in the next three years.

* As I mentioned earlier, the creation of long-term debt markets. International FDI into India just this year has been more than Institutional income for the first time ever.

7) How about security with Pakistan and China ?

The media loves to sell newsprint. Relations with Pakistan are cordial, although we have our well known differences, these are being worked on. With China we have border disputes but again, these are being discussed. It is not in anybodies interest to fall out of the global community, and although we have differences with these, and other nations from time to time these can be worked out as global solutions. India, with over 1 billion people, is part of the global community and we are working towards our integration into this world.

Prime Minister, we thank you for your time.