Interest on debentures paid to an investor, who is a resident of Mauritius, is subject to withholding tax in India, unless it is specifically exempted. In a recent ruling by the Authority for Advance Rulings (AAR), it was held that mere approval from the Reserve Bank of India (RBI) for the issue of such securities to a non-resident does not imply approval for tax exemption. In this case, a Chennai-based Private Company had allotted partly-convertible debentures to Weststar Investment Holdings, an Overseas Corporate Body (OCB) incorporated in Mauritius. The Indian Company had obtained RBI approval for payment of interest on debentures at a rate not exceeding 14% and only to the extent of the profits. During the year ended March 31, ’02, as the interest liability was more than the profits, the entire profits were payable as interest to the Mauritius-based investor.

The Indian company had approached the AAR to ascertain whether it would be liable to deduct tax at source for this particular year.

It admitted that under Indian tax laws, payment of interest to a non-resident on borrowings utilised in India is taxable in India and the payer is required to deduct tax at source.

However, the company contended that such interest income is exempt from tax in India owing to Article 11(4) of the Indo-Mauritius tax treaty. According to the applicant, all conditions laid down under the Article had been met. The recipient of interest was a resident of Mauritius and beneficial owner of the debentures. Further, it stated that the RBI’s approval amounted to approval by the government.

The AAR however, held that the approval accorded by the RBI was only under the Foreign Exchange Regulation Act. Tax exemption under Article 11(4) can be granted only by the finance ministry. In the absence of any tax exemption accorded either under Indian tax laws or the tax treaty, the Indian company was obliged to deduct tax at source at the prevailing rates in force.

The context has changed. Today, industry in India is competitive and confident, not complacent, because it has restructured itself through enormous pain over 1997-2002. This change necessarily impacts the interface between industry and government. The focus is on getting on with work and business, taking disadvantages to companies, imposed by the external environment, as a given.

So, the first real change that has happened is to stop crying, recognising that industry is an adult (not a spoilt child) and has to largely fend for itself. The industry-government interface is, therefore, focused on issues which cause additional difficulty for industry, such as procedures and delays, tax anomalies, infrastructure and international trade negotiations which impact on competitiveness. And, evidence of this is in the quality and range of the dialogue between policy-makers and industry. And, it comes from a new comfort with dealing with a huge new phenomenon called competition.

Certainly, each and every industry has not evolved to the same extent. But many have. And those that have not, are getting left behind in the high-pressure race for survival, profitability and prosperity. But what is exciting is that many SSI/SME units which had lived behind the fragile curtain of reservation and protection, are also changing. In several 'clusters' where SSI/SMEs exist, sustained work is going on, through a collaborative process, to be competitive.

The second facet of the interface is the new outward orientation of Indian industry and how government policy and procedures can be eased to speed up decision-making and implementation. Thanks to the $100 billion plus reserves, this process is very much on and the building of Indian corporates as global companies or MNCs is in the works. Indian companies are investing abroad both in services and in manufacturing depending on their competitive advantage.

The third interface is the new framework of regulators and their role in the process of business operations and growth. Everyone is generally agreed that the RBI, the oldest regulator, is some kind of a role model. The telecom, power and insurance regulators are other examples of this new phenomenon on the economic horizon. Clearly, this is a major element in the interface and is in the process of evolution through a learning process of actual experience on issues. There are role models overseas but India has to learn, adapt and evolve its own regulatory structure. Apart from the rules which govern regulators, there is the issue of establishing conventions and training people to perform this role with efficiency, transparency and integrity.

The most significant focus of interface is on new opportunities - in food and agriculture, manufacturing, services, infrastructure and so on. Suddenly, the scope for India, and Indians, seems limitless and a great deal of industry institution time, in CII for example, is spent on the new opportunities, not just in India but globally. It's not Fortress India, it's India unleashed. One sector after another presents new opportunities and CII has been working in partnership with consultancy, research and academic organisations to highlight the avenues for investment and growth. This is an exciting part of industry-government interface because there is always the key role of enabler which the government has to play to help realise the potential. New areas call for new frameworks, new rules, new laws, and all of this has to happen soon.

Another exciting new development, just beginning, is the delegation of responsibility to an industry institution to take charge of a specific programme or scheme with a joint government-industry supervisory board to lay down strategy, policy and direction. This has enormous scope for the future. A small, successful beginning is there to see, based on competitive bidding and decision-making done by government through a fairly lengthy process. This type of partnership can be extended to numerous areas.

All this reflects a new level of trust and mutual confidence not only in industry but also in government. A sense of security which is enabling industry and government to work in partnership never before seen - in India or elsewhere. And, in CII, the belief is that its role is not to seek sops and incentives but to constantly introspect and ensure that it is working as a development institution with a higher order of vision.

This new environment for government-industry interface has an important corollary. Industry has to change itself and its institutions from a mindset of being a trade union of employers to an organisation dedicated to development. This, again, is both a challenge and a new phenomenon. But, it is happening because the realisation has come that India has to find solutions and systems appropriate to India, learning from the best- and the worst-practices elsewhere.