II. Letter to the Honourable Finance Minister

Rashmin Sanghvi & Associates

Partners :
Rashmin C. Sanghvi
Naresh A. Ajwani

Honourable Finance Minister,
Finance Ministry,
Government of India,
North Block, New Delhi,
INDIA.

Honourable Sir,

Subject : Budget 1997.

We sincerely thank you, all the secretaries and those persons in your team whose names are not even known - who have made this budget possible.

You have made an honest tax payer's life attractive. We can now dream of a time where a dishonest tax payer will be looked down upon and an honest tax payer will be a proud citizen.

There is a special reason for thanks. Where ever you have given relief, you have given it whole heartedly. A relief is not tied in with several conditions. This is a healthy spirit.

We present a few concepts for your kind consideration :

1. Voluntary Disclosure Scheme

1.1 VDS declared in Budget

As the Scheme is drafted, it will only help people with undisclosed assets to disclose their assets and bring them into open. Assets will remain where they are. By various methods, declarants will pay 10% or less of the current values of assets being disclosed.

Even at present, black money is being used in business and industry. It is not lying idle. This scheme is not going to shift the wealth to business.

2. VDS and PSU disinvestment

Following alternative Scheme may bring in more resources :

2.1 PSU

(i) Government will sell to the public, PSU shares;

(ii) Several PSUs will make public issues of their shares and debentures;

(iii) All the money will go for industrial/infrastructure development;

(iv) Any person subscribing these securities will get an immunity under Income-tax Act, Wealth-tax Act and FERA for his investment.

(v) No tax will be payable at all on this investment-disclosure. However, there will be a lock-in period of three years.

2.2 Private Infrastructure Projects

Where Private Sector comes in for approved infrastructure development projects of Rs.1,000 crore or more and makes public issue of shares and debentures, they also should be entitled to a similar relief.

Large industrialists having really large amounts of money in tax havens abroad, will bring in substantial funds in their own companies.

You can also provide that any NRIs, and OCBs can invest in these issues; they will not require any permission or even declaration before authorities. Big industrialists will not like to make public disclosures for several reasons. If after a lock-in period of three years, this investment can be made fully repatriable; then even larger flow of foreign exchange can be expected. Within three years, in any case, rupee may be fully convertible.

2.3 Keep this scheme on tap for two years as industrialists will need time to organise projects and make public issues.

3. Convertibility of Rupee - Road Map

3.1 You have continued-the healthy spirit of liberalisation in direct taxes - to the field of FERA also.

It is so nice to learn that for investing own money in EEFC account for joint venture investments abroad, people will not have to go to RBI. This is the real way of making a scheme work. If you put in some conditions or permissions, the lower level bureaucrats will immediately drown the scheme in conditions.

3.2 Convertibility is being viewed by everyone as an "end", a target, to be achieved after certain conditions have been fulfilled. RBI Governor has placed conditions that (i) inflation should be under control; (ii) interest rates should be comparable to international rates; and (iii) there should be comfortable foreign exchange reserves.

Probably, we can view convertibility as a "means" to achieve the target of comfortable foreign exchange reserves. More freedom on rupee convertibility will only cause larger flight of capital inwards.

3.3 We have a detailed plan on the road to convertibility which we will present to you after a few weeks.

One thing which can be done immediately is -

SCRAP all restrictions on the use of Non-repatriable (NRO account) funds by NRIs within India. In other words, use of these funds whether for giving loans to relatives, for buying and selling shares & securities or for doing business will require NO PERMISSIONS from RBI or any authorities. Even today for petty things like rights & bonus shares, we have to obtain permissions which take months. NRO funds should be available for use just like any Indian residents' funds.

(NRIs are not allowed investment in real estate dealing and agricultural activities. These two restrictions should be continued.)

3.4 Income-tax and Convertibility

Present Income-tax Act and the department are not equipped with full convertibility. One example.

Today an Indian resident cannot have a company abroad - due to FERA restrictions. Tomorrow, on full convertibility, any one will be able to form a company abroad. Thereafter, a majority of incomes can be transferred to this company. All this income will be tax free. The company will never declare dividend so shareholders will never pay tax to Indian Government. When they need funds, the Company will give loans to them. And they will pay interest to the company. This interest will be available as a deductible expenditure.

However, we should not slow down the liberalisation under FERA. Income-tax Act will have to be amended to cover these companies under tax ambit or to plug such loopholes. The U.S. Internal Revenue Code has provisions on "Controlled Foreign Companies". All profits earned by companies controlled by American citizens are liable to American tax irrespective of declaration of dividend.

This is only one example.

The road to convertibility will require some more changes under tax laws.

Hope, you will find these suggestions useful.

Wishing you all the best,

Mumbai
Dated : 10th March, 1997

Yours sincerely,
For RASHMIN SANGHVI & ASSOCIATES

RASHMIN SANGHVI.

NARESH AJWANI.

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