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Presentation on theme: "DOING BUSINESS IN INDIA - AVOIDING THE PITFALLS BREAKFAST BRIEFING 4 th November 2008."— Presentation transcript:


2 November 4, 2008 PLANNING AN INDIA INVESTMENT… 10 common pitfalls to avoid Ajay Sethi II Director & Managing Partner II Corporate Catalyst India & ASA & Associates chartered accountants


4 INDIA TOUR 4 ® Copyright Reserved

5 INDIA TOUR The 2 nd most attractive investment destination (source UNCTAD World Investment Report 2007) Advantage - low cost of production, large size domestic market Growth rate expected around 8% Besides the service industry, evolving into a manufacturing hub Foreign Exchange reserves touched USD 310 bn in May 2008 5 ® Copyright Reserved

6 FDI INFLOW Top Investing Countries RanksCountry2005-062006-072007-082008-09Cumulative 1 MAURITIUS2,5706,36311,0964,12229,757 2 U.S.A.502)8561,0898675,400 3 SINGAPORE275)5783,0737505,107 4 U.K.2661,8781,1764154,778 5 NETHERLANDS766446952862,991 6 JAPAN20885815552,181 7 GERMANY3031205142581,801 8 CYPRUS70588342721,258 9 FRANCE181171452511,011 10 U.A.E.49260258154818 Total 5,54615,72624,57910,07372,582 US$ Million 6 Source – Department of Industrial Policy & Promotion ® Copyright Reserved

7 INDIA TOUR Understanding Regulatory Compliances Most laws originate from British Laws Procedure Driven Failures to comply usually leads to penalty and sometimes prosecution Stacked in favor of labour (blue collar staff) Fine reading and interpretation is the norm 7 ® Copyright Reserved

8 SETTING UP THE BUSINESS Avoiding Pitfalls 8 ® Copyright Reserved

9 INDIA ENTRY Mode of Investment INDIA Head Office Representation Local Subsidiary Distribution Channel Liaison Office Project Office Branch Office Wholly Owned Subsidiary Joint Venture Importer C&F Franchise 9 Spore Corporate ® Copyright Reserved

10 INDIA ENTRY Alternate Entity Comparison Corporate [CO] Liaison Office [LO] Project Office [PO] Branch Office [BO] CharacteristicsShare capital owned by parent company No commercial activities allowed Temporary site office, specific projects Commercial activities allowed StatusShareholdersForeign Company Tax Rate30% +Non Taxable40% + ControlBoard of DirectorsParent Company Set-upFIPB Approval / Automatic Route (4-6 weeks) RBI approval (4 weeks) RBI approval (4 weeks) RBI approval (4 weeks) ClosureROC (6-9 months) RBI (3 months) RBI (3 months) RBI (3 months) RBI – Reserve Bank of India FIPB – Foreign Investment Promotion Board ROC – Registrar of Companies 10 ® Copyright Reserved

11 How will the joint venture be financed? Who will primarily run the joint venture? How can I exit the joint venture? What happens if there is a fall out with the other party involved? INDIA ENTRY Planning your Joint Venture

12 Management control issues viz. appointment to the board of directors and chairman of the board appointment of CEO, MD, CFO issues arising from future change of control, non-compete, etc. implications of 26, 51 and 75 percent shareholding Operational issues viz. Labour handling Government Liaisioning Appointing head of sales, manufacturing, etc INDIA ENTRY Joint Venture – Term Sheet and Shareholders Agreement

13 CORPORATE SET-UP Flawed Feasibility Study (#1) Negative List - sectors where Foreign Direct Investment is not allowed e.g. betting, lottery business, atomic energy, retail trading (except Single Brand product retailing) Sectoral Caps – foreign investment in certain industries governed by equity cap e.g. Insurance (26 %) A small list of activities is reserved for the Small Scale Industries (SSI) 13 Examine the Negative List, Sectoral caps and SSI reservations while conceptualizing investment into India ® Copyright Reserved

14 If yes, a No Objection Certificate is mandatory from the existing Indian Partner and prior approval is required from the Foreign Investment Promotion Board of India CORPORATE SET-UP Existing Collaboration(s) in India can restrict your entry plans (#2) Do you have an existing joint venture with an Indian partner for the very field in which you now intend to set-up business in India? Do you have an existing technology collaboration with an Indian partner for the same field in which you intend to do business in India? 14 Press Note 1 (2005 Series) ® Copyright Reserved

15 CORPORATE SET-UP Pay attention to your Capital Structuring (#3) At least two Shareholders are required; and Capital structure will determine private or deemed as public company in India viz. 15 CaseShareholding of the Indian CompanyStatus in India 1Indian Individual Shareholder + Foreign Company (Public)Public Company 2Indian Company + Foreign Company (Public)Public Company 3Foreign Company (Public) + Foreign Individual ShareholderPublic Company 4Foreign Company (Public) + Foreign Company (Public)Private Company 5Two or more Foreign Individual ShareholdersPrivate Company 6Foreign Company (Private) + Foreign Company (Private)Private Company 7Foreign Company (Private) + Foreign Individual ShareholderPrivate Company section 4(7), Indian Companies Act, 1956 If a company is deemed a public company (listed or non-listed), it will attract higher compliance requirements ® Copyright Reserved

16 Though retailing is not allowed, Single Brand retail can be done through a 51:49 joint venture with an Indian Partner Single Brand Retailing means You retail goods under one single brand, and The brand is well recognised, and It covers only products branded during manufacturing 16 Applications for single brand retailing are processed by the Department of Industrial Policy & Promotion (DIPP) and is presently somewhat restrictive CORPORATE SET-UP The confusion of Single Brand Retailing (#4) Press Note 3 (2006 Series) ® Copyright Reserved

17 Pre-incorporation expenses are tax deductible, viz. preparation of feasibility report, engineering services relating to the business, legal charges for drafting any agreement etc. Pre-incorporation contracts are recognised if, the company had adopted the same post incorporation; and Contracts which are warranted by the terms of incorporation, or those entered before incorporation and adopted by the company, are legally valid e.g. office lease agreement ratified in the first board meeting, employment agreements etc 17 CORPORATE SET-UP Can we recognise contracts & expenses prior to incorporation? (#5) Unless the company adopts the contract, the other party cannot enforce the same against the company. However, promoters can become personally liable. ® Copyright Reserved

18 Have you considered various Municipal Level Taxes? Have you considered effect of Fringe Benefit Tax, Pension Schemes etc? If land is required, have you considered future expansion plans? Logistics and easy access to resources taken into consideration? Does the paid-up capital of the Indian Company exceeding INR 20 million? if yes, Company Secretary required 18 SOME USEFUL TIPS Value Addition to the Feasibility Study ® Copyright Reserved


20 COMPLIANCES Overview Custom s Duty Excise Duty Corporate Tax CST / VAT Special Audit Accounting Service Tax Transfer Pricing Withholdin g Tax Expatriat e Tax Statutory Audit Internal Audit Tax Audit Recurring Regulatory Compliance Secretarial Compliance s Labour Laws Employe e Payroll 20 ® Copyright Reserved

21 REGULATORY MATTERS Key Authorities Reserve Bank of India (RBI) Registrar of Companies (ROC) Income Tax Authorities Central Board of Excise and Customs (CBEC) Labour Commissioner 21 ® Copyright Reserved

22 ACCOUNTING Key Laws in Focus Company Law Tax Laws (Income tax including tax treaties, Customs, Excise, VAT/Service Tax) Indian Generally Accepted Accounting Policies (Indian GAAP) Labour Laws (Factories Act, Industrial Dispute Act, etc.) Employment Regulation (Social Security Regulations ) 22 ® Copyright Reserved

23 ACCOUNTING Key Issues Financial Year - April 1 st to March 31 st Recording of transactions - per Indian GAAP Adequate provisioning and appropriate disclosure Compliances - Daily, Monthly, Quarterly, Annual CO LO BOPO 23 ® Copyright Reserved

24 PAYROLL MANAGEMENT Key Issues Employment Contracts Regulated under labour laws Income Tax Issues Corporate Laws COBOPOLO 24 ® Copyright Reserved

25 AUDITS Overview Statutory Audits Annual Review and Reporting by an Indian firm of Chartered Accountants Indian Generally Accepted Accounting Policies (Indian GAAP) Annual Reporting to Government Authorities Tax Audits Applicability – Annual Turnover INR 4 Million (USD 90,000 approx) Certification by an Indian firm of Chartered Accountants Internal Audits Applicability – Turnover INR 50 Million or Paid-up Capital INR 5 Million In-house Team or Outsource to Indian firm of Chartered Accountants COBOPOLO COPOBO CO 25 ® Copyright Reserved

26 DIRECT TAXES Overview Corporate Tax Transfer Pricing Withholding Tax Fringe Benefit Taxation Expatriate Taxation COPOBO CO LO PO BO 26 ® Copyright Reserved

27 DIRECT TAXES Tax Withholding 27 PAYEEWHENTAX WITHHOLIDNG (%) * DATE OF DEPOSIT REPORTING EmployeeIf salary is taxable Per prescribed slabs Within 7 days of payment Quarterly to Indian tax authorities ContractorAnnual payment exceeds INR 20,000 (USD 500 approx) 2 7 th of the month succeeding payments LandlordAnnual rental exceeds INR 120,000 (USD 2,500 approx) 15/20 ProfessionAnnual payment exceeds INR 20,000 (USD 500 approx) 10 * Further enhanced by surcharge and education cess ® Copyright Reserved

28 INDIRECT TAXES Overview Excise Duty Customs Duty Service Tax Central Sales Tax Value Added Tax COPOBO CO PO BO LO 28 ® Copyright Reserved

29 INDIRECT TAXES Excise Duty Applicability Definition of Goods Concept of Manufacture Proper Recoding of transactions Inspection by Excise Inspectors Complex Duty Structure and Calculation Mechanism Developed Case Laws CO 29 ® Copyright Reserved

30 INDIRECT TAXES Customs Duty Applicability To regulate imports of foreign goods into India Regulate supply of goods into domestic market Additional Duty of Customs – protective shield to domestic industry Methods of Valuation Classification of Goods – 99 Chapters COPOBOLO 30 ® Copyright Reserved

31 INDIRECT TAXES Service Tax Applicability Voluntary compliance Services defined – Over 100 categories Services provided from outside of India and received in India Proper Recording of transactions Developed Case Laws COPOBO 31 ® Copyright Reserved

32 INDIRECT TAXES Central Sales Tax/ VAT Central Sales Tax Non VATABLE Under phase out by 2010 Value Added Tax Includes goods sold within a particular Indian state Goods sold from outside of India and title transferred in India Proper Recording of transactions Developed Case Laws COPOBO COPOBO 32 ® Copyright Reserved

33 INDIRECT TAXES VAT Case Study Purchase PriceRs 100 Tax paid on purchaseRs 10 (input tax) Sale priceRs 120 Tax payable on sale priceRs 12 (output tax) Input tax creditRs 10 VAT payableRs 2 33 ® Copyright Reserved

34 INDIRECT TAXES Flag This Central Sales Tax/ VAT & Service Tax – to be merged into a single Goods & Service Tax (GST) by 2010 34 ® Copyright Reserved

35 SECRETARIAL COMPLIANCE Overview EVENTApplicability Office shiftingCOLOPOBO Change in Director / Authorised Representative COLOPOBO Board Meetings & Annual Shareholders Meeting CO Maintain Statutory RecordsCO Annual Return to ROCCOLOPOBO Annual Return to RBI LOPOBO 35 ® Copyright Reserved

36 POST SET-UP Avoidable Pitfalls 36 ® Copyright Reserved

37 POST SET-UP – Recurring Compliance Key Dates REGULATORY MATTERDUE DATE CORPORATE LAW Board MeetingQuarterly (calendar year basis) Annual General MeetingWithin 180 days of closing the accounts INCOME TAX Corporate Tax ReturnSeptember 30 th Tax Audit ReportSeptember 30 th Fringe Benefit Tax ReturnSeptember 30 th Transfer Pricing ReportSeptember 30 th TDS Returns (Tax Withholding)Quarterly Employee Tax ReturnJuly 31 st SERVICE TAX October 25 th & April 25 th 37 ® Copyright Reserved

38 Arms Length price (ALP) Any income arising from an international transaction between associated parties to be computed having regard to ALP ALP means a price which is applied in a transaction between persons other than associated enterprises Associated Enterprise (AE) Participation in management or control or capital of other enterprise Directly through intermediaries TRANSFER PRICING Ensuring that transactions between group companies are at market price? (#6) 38 ® Copyright Reserved

39 Holding Company Wholly Owned Subsidiary Singapore India Transfer Pricing Issue – what should be the profit margin of the Wholly Owned Subsidiary? TRANSFER PRICING Determining the appropriate pricing for group companies transactions (#6) payment? servicing warranty etc. supply of goods Customer 39 ® Copyright Reserved

40 PERMANENT ESTABLISHMENT (PE) Risk of exposure (#7) Foreign company operating through an agent, branch etc regarded as having a PE in India In certain cases, an Indian subsidiary can be classified as a PE 40 Copyright Reserved Where work linked to India, India tax office can prove existence of PE, part or entire portion of India linked transactions can be brought to tax in India

41 LIAISON OFFICE The PE Trap (#7) Does the India Liaison Office (LO) sign direct contracts in India ? Is the LO deeply involved in price negotiations? Are the employees of the LO paid incentives on sales ? Does the LO raise Purchase Orders on the Head Office ? An affirmation to any of the above – LO regarded as a Permanent Establishment of the parent company in India. This is a high risk of exposure to taxation 41 ® Copyright Reserved

42 Involved in negotiation X-Company X - LO Singapore India Supplies S$ 100 Customer Effect: Part or whole of S$ 100 can be taxed to India 42 Copyright Reserved LIAISON OFFICE The PE Trap (#7)

43 TAX COMPLIANCES Charging the Head Office Expenses (#8) The lower of the following are tax deductible expenses by the HO An amount equal to 5 per cent of the total income of Indian entity, or Actual expenses Plan your future Head Office (HO) expenses allocations carefully to avoid disallowance by the Indian Tax Officer 43 ® Copyright Reserved

44 REPATRIATING PROFITS The menace of Dividend Distribution Tax (#9) Whether the credit in respect of Dividend Distribution Tax (DDT) of INR 17 is available in the Parent Country? X-India Parent Company X - Singapore India Singapore Net Profit133 Tax on Profit33 Distributable Profit100 INR 83 Amount in INR Government Treasury INR 17 44 ® Copyright Reserved

45 EXPATRIATE TAX MATTERS Social Security Payment (#10) Social security payments made outside India, are taxable in India where a right immediately vests to the expatriate Does the parent company pay for the pension funds maintained outside India by the expatriate? Does he/she have an internationally valid medical insurance? 45 ® Copyright Reserved

46 THANK YOU 46 ® Copyright Reserved

47 The Iyer Practice Accountants & Business Consultants Tax Aspects of Singapore Companies Investing in India Shanker Iyer, FCA Shanker Iyer & Co Certified Public Accountants Singapore

48 The Iyer Practice Accountants & Business Consultants Investing via Mauritius

49 The Iyer Practice Accountants & Business Consultants Advantage Capital Gain in India – 0% by virtue of India-Mauritius tax treaty. Pitfalls Dividends Income is taxed in Mauritius at effective rate of 3%. Interest payment is subject to 20% withholding tax – No treaty benefits Investing via Mauritius 100% Share ownership Indian Co. Capital Gain 100% Share ownership Singapore Co. Mauritius Co.

50 The Iyer Practice Accountants & Business Consultants Pre 2005 - Capital gain in India was subject to tax as per domestic law of India – No treaty protection Pre 2003 – All foreign sourced income (including dividend) was subject to taxed on receipt basis in Singapore. Earlier disadvantage of using Singapore Holding Structure Indian Co. Capital Gain 100% Share ownership Singapore Co.

51 The Iyer Practice Accountants & Business Consultants Investing via Singapore

52 The Iyer Practice Accountants & Business Consultants India-Singapore CECA Foreign-sourced income exemption. Extensive tax treaty network. Investing via Singapore

53 The Iyer Practice Accountants & Business Consultants Investing via Singapore India – Singapore CECA Capital gains provisions replaced - gains to be taxed on basis of residence, subject to shell/conduit conditions Amended provisions to be in force till included in India- Mauritius tax treaty Reduction in withholding tax on royalties & Fees for Technical services to 10% Highlights of the Protocol amending the treaty

54 The Iyer Practice Accountants & Business Consultants First condition Singapore company is not used for the primary purpose of taking advantage of the capital gains tax exemption. Protocol clarifies that any legal entity without any bona fide business activity would be considered as having a primary purpose of taking advantage of the benefit. Second condition Singapore company is not a shell and conduit company with negligible or nil business operations, or with no real and continuous business activities in Singapore Not a shell and conduit company if: – it is listed on the Singapore stock exchange; or – its total annual expenditure is equal to or more than Indian Rs 50,00,000 or S$200,000 over 24 months Investing via Singapore India – Singapore CECA Conditions for Indian capital gains tax exemption

55 The Iyer Practice Accountants & Business Consultants Taxable only if remitted. Exemption of certain remitted foreign-sourced income dividends; service income; branch profits; provided certain conditions are met. If conditions not met but if income remitted, then exemption under specific scenarios or circumstances. Investing via Singapore Tax Treatment of Foreign-Sourced Income Exemption

56 The Iyer Practice Accountants & Business Consultants 15% headline rate of tax Exemption should be beneficial Subject to tax Resident Conditions Investing via Singapore Tax Treatment of Foreign-Sourced Income Exemption Conditions

57 The Iyer Practice Accountants & Business Consultants Europe Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Hungary Kazakhstan Italy Latvia Lithuania Luxembourg Malta Netherlands Norway Poland Portugal Romania Slovak republic Sweden Switzerland United Kingdom America Canada Mexico Africa Egypt South Africa Mauritius Middle East Bahrain Israel Kuwait Turkey UAE Oman Qatar Asia-Pacific Australia Bangladesh Brunei China India Indonesia Japan Malaysia Mongolia Myanmar New Zealand Pakistan Papua New Guinea Philippines South Korea Sri Lanka Taiwan Thailand Vietnam Fiji New Treaties : Estonia, Malta, Qatar Pending Retification : Belgium,Morocco,Russian Federation,Ukraine, Uzbekistan Total Comprehensive treaties : 63 of which 5 are pending ratification Investing via Singaproe Tax Treaty network

58 The Iyer Practice Accountants & Business Consultants Pitfalls of using Singapore Holding Company (SHC)

59 The Iyer Practice Accountants & Business Consultants Capital gains - may be taxed if not an Approved Holding Company. Interest and royalties – taxed on remittance. Limitation of relief article in tax treaty. Pitfalls of using SHC

60 The Iyer Practice Accountants & Business Consultants Issues pertaining to capital gains Revenue v/s. Capital. Even isolated transaction profits may be treated as transaction in nature of adventure. No safe harbor holding period. No certainty. Tax treatment depends on facts and onus of proof. Pitfalls of using SHC Capital gain issues

61 The Iyer Practice Accountants & Business Consultants Indian withholding taxes

62 The Iyer Practice Accountants & Business Consultants (1) Under Indian domestic law, Dividend Distribution Tax (DDT) @ 16.995%. (2) Under Indian domestic law, including surcharge of 2.5% plus education cess of 3%. (3) No article on technical or management services in India- Mauritius treaty. Thus conservative approach is to taxed as per domestic law of India. However many take the other approach that such payment is subject to tax only if PE exist in other state. (4) Taxable under domestic law of Netherlands in case of transfer of shares by a Netherland resident to another non-resident. If transfer is to resident of India it shall be taxable as per Indian domestic tax law. (5) If no make available Indian withholding taxes Jurisdiction Mauritius Dividends Nil (1) Capital gains on disposal of shares Nil Note (4) Interest21.12% 10% Royalty10.55% (2) 10% CyprusNetherlands Nature of Income Nil* Nil 10/15% 10% Singapore Nil (1) Technical/Manage ment fees 0 (3) / 10.55% (2) 0 (5) /10/ 10.55% (2) 0 (5) /10%

63 The Iyer Practice Accountants & Business Consultants Any Questions

64 The Iyer Practice Accountants & Business Consultants For a further discussion on any of the topics covered, please contact: Shanker Phone: +65 6532 5746 Fax : +65 6532 7680 Website: To keep yourself updated on new developments in Singapore, please subscribe online to our free quarterly newsletter via our website: Disclaimer : This presentation of slides is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, readers should seek appropriate professional advice regarding any particular problems that they encounter, and this presentation should not be relied on as a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this presentation is accurate, Shanker Iyer & Co accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it. Contact Us


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