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Seminar on Venture Capital Karnataka State Chartered Accountants Association 19 January 2008 Agenda Rules, Regulations and Compliances for New Entrepreneurs.

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Presentation on theme: "Seminar on Venture Capital Karnataka State Chartered Accountants Association 19 January 2008 Agenda Rules, Regulations and Compliances for New Entrepreneurs."— Presentation transcript:

1 Seminar on Venture Capital Karnataka State Chartered Accountants Association 19 January 2008 Agenda Rules, Regulations and Compliances for New Entrepreneurs Vishnu Bagri

2 Managing the Regulatory Function Common decision points Applicable laws, compliances and registrations Choice of entity structure Choice of funding structure Choice of operating structure

3 Applicable Laws Broadly the objectives which the Central or State Governments propose to achieve through implementation of various Rules and Regulations could be categorized as: Governance Revenue Social

4 Governance (Select Laws) The Companies Act,1956 The Indian Partnership Act, 1932 The Indian Contract Act, 1872 Foreign Exchange Management Act, 1999 Foreign Trade Policy Securities and Exchange Board of India Act, 1992 (SEBI) Reserve Bank of India Act, 1934 (Banking companies and NBFCs) Industry specific regulations Incentive regulations (such as The Special Economic Zones Act, 2005 etc) State specific regulations

5 Revenue (Select Laws) Income Tax Act, 1961 Double Tax Avoidance Agreements entered into by India with select jurisdiction Wealth Tax Act, 1957 Service Tax (Finance Act 1994) Central Excise Act, 1944 The Central Sales Tax Act 1956 Research and Development Cess Act, 1986 State Laws Commodity taxes Property taxes Professions Tax

6 Social (Select Laws) Labour Laws, such as The Employees Provident Fund And Miscellaneous Provisions Act,1952 The Factories Act,1948 Employee State Insurance, 1948 Intellectual Property Laws State laws such as Karnataka Shops & Commercial Establishments Act Prevention and Control of Pollution Acts, etc Micro, Small and Medium Enterprises Act Others

7 Tax Laws… A Perspective

8 Direct taxes (Income tax, Wealth tax) Central Levy On the profits earned or wealth accumulated (e.g. property and vehicles) Is a direct cost of operations Transaction Taxes or Indirect Taxes Central and State levies on the value of goods or services An indirect cost of operation ! Affects the procurement costs Increases the transaction price for customer Generally each of the laws have registration, periodic remittance and reporting requirements

9 Income Tax Business StageCompany Operational business income30.90%/33.99% Profit declaration - In the hands of the entity - In the hands of the entrepreneur - 17% dividend distribution tax - Nil Any person earning income would generally be liable to tax Tax incidence dependent upon Residency of the person and source of income during a previous year Indian resident person liable to tax on the global income with credit for foreign taxes (if any) Tax Rates

10 Income Tax Fringe benefit tax Tax on the fringe benefits provided to employees (travel, staff welfare, entertainment expenses, telephone charges, sales promotion and publicity expenses, gifts, club facility provided, etc) Valuation principles provided Effective tax on these expenses could be in the range of 1.70% to 6.80% of the expenditure. Few expenses such as gifts attract 17%. ESOP and superannuation benefits also liable to 33.99%

11 Income Tax Withholding taxes (TDS) Rates of tax dependent upon the nature of payments and interplay of double tax avoidance agreements in case of cross-border transactions Usually not an incremental cost of operations. The deductee to get a credit of such amounts withheld Exception: Case where the consideration is net of tax

12 Indirect Taxes Commonly referred to as transaction taxation or the commodity tax. The tax incidence arises on: Import of goods into India (customs duty) Manufacture of goods (central excise duty) Sale of goods (sales tax / VAT) Provision of services (service tax) A single transaction can include more than 1 tax. They can co-exist.

13 Indirect Taxes Customs duty Levy on import of goods into India Concessions provided under various export promotion schemes Average duty at 34.09% Manufacturers eligible for credit of 23.25% (effective incidence 10.84%) Service providers eligible for credit of 18.12% (effective incidence 15.97%) Central excise Levy on manufacture or processing of goods Tax on value addition Exports exempt Typical rate of duty at 16.48% (including education cess)

14 Indirect Taxes Sale of goods Levy of tax on sale of goods (within and between States administered separately) Archaic systems of Sales tax replaced with VAT Multiple rate/s of tax replaced with 4 rates across India with broad uniformity on classification of goods Provides for benefit of input tax credits CST to currently continue To be phased out by April 2010 Exports kept out of the tax net with a benefit of input tax refunds

15 Indirect Taxes Service Tax Levy of tax on provision of 12.36% Follows selective principle of taxation wherein only specified services are taxable Currently 100 in number Normally, the provider of services liable to pay tax, however, in certain instances the recipient of services obligated to, E.g. goods transport and services received from the overseas Exports entitled for tax exemption with a benefit of input tax refunds Cross-sectoral credit of service tax vis-à-vis central excise provided

16 Indirect Taxes Technology Transfers Research and Development 5% Payable on transfer of technology from foreign country

17 Incentive Regimes Exporters Software Technology Park (STP) Scheme or 100% Export Oriented Scheme (EOU) Scheme provides a host of direct and indirect tax incentives. Income tax holiday to expire in March 2009 Other schemes such as export promotion capital goods, advance authorisation schemes etc., provided Locations specific Special Economic Zones Economically Backward/Developing regions e.g. Uttaranchal, North-east regions, etc Provides for tax / duty exemptions and concessions

18 Key Business Registrations Registration Business critical event In Weeks Company IncorporationTo establish the entity Permanent Account Number Mandatory for a business and also an essential document for other registrations Tax Deduction Account Number Withholding tax on vendor payments Service Tax registrationRaising the invoice or claiming input credits VAT / CST registrationRaising the invoice or claiming input credits Import/Export Code (IEC)Any cross-border movement of goods/services Shop & EstablishmentFunctioning in an office premise Professions Tax (Establishment and Employer) Upon commencement of operations and Prior to first salary pay-out

19 Typical Decision Variables… a regulatory and tax perspective

20 Choice of Entity Structure Unincorporated (sole proprietor/partnership firm) vis-à-vis incorporated (company) Company a preferred format from an investor, employee and customer perspective Incorporation is the process of forming or uniting into a corporation either by a charter or by a statute, so as to form a single body Immediately after incorporation, the business concern shall be constituted as a corporate body, legally authorized to act as an entity [An artificial person] Regulations expected on Limited Liability Partnerships These could open up further structuring prospects

21 Choice of Investment Structure Investment or holding company structure needs consideration, particularly in case of cross-border investments strategic objective entails listing in an overseas stock exchange e.g. Mauritius/Singapore holding company structure

22 Choice of Funding Structure Alternative instruments Equity & Preference share capital Debt External commercial borrowing Hybrid instruments Review under following laws imperative; illustrative comments Companies Act - governs the minimum capital requirements, characteristics of the instrument and reporting/documentation SEBI for sweat equity and employee stock option guidelines FEMA in case of overseas funds – Guidelines for foreign investment and external commercial borrowings Income Tax and DTAA implications Tax implications during operational phase (leverage on interest cost and withholding tax) Tax cost upon repatriation

23 Choice of Operating Structure Understanding of alternative contracting structure essential prior to implementation Key considerations Identify registration/approval requirements and time required; examples Review the companys charter documents to ensure it is an approved activity Registration under incentive regimes Industry specific approvals in case of certain operations Exchange control implications in case of operations involving cross- border investment/trade Tax implications Tax costs to be factored in building cost of operations Use of incentive regimes for tax optimization Supply chain design influences transaction tax costs It helps to have a dashboard summary of the chosen structure design with articulation of dos and don'ts

24 Cross-Border Transactions Indian exchange control regime considerably liberalized Foreign direct investments in most sectors (IT/ITES/Automotive parts manufacturing) possible under automatic route Indian companies can invest abroad upto 400% of their net worth Investment, entity and operational structures can provide tax optimization opportunities Typical cross-border tax pressure-points Structuring aspects Employee secondment and his tax equalization issues Taxes in foreign country Employee presence for more than six months Passive income streams such as interest, dividend, royalty and fee for technical services Transfer pricing a critical tax planning and compliance requirement

25 Concluding Remarks A common approach: Lets get started and business reach some maturity before investing on regulatory reviews An objective approach: Lets understand and face it Proactive considerations of legal, tax and regulatory factors will provide operational flexibility and tax efficiencies upfront More importantly avoid pains of unwinding a wrong decision Business flexibility should not mean being non-compliant….. The early stage behavior is a strong contributor to an organizational culture

26 Thank You Tel: The views expressed and the information provided in this presentation are of general nature and is not intended to address the circumstances of any particular individual or entity. The above content should neither be regarded as comprehensive nor sufficient for making decisions. No one should act on the information or views provided in this publication without appropriate professional advise. It should be noted that no assurance is given for any loss arising from any actions taken or to be taken or not taken by anyone based on this publication.


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