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Doing Business in India

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Undertaking to manufacture in notified SEZ areas only ... Profits from manufacture of any article or thing in any notified zone in state ... – PowerPoint PPT presentation

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Title: Doing Business in India


1
  • Doing Business in India
  • An Overview of Direct Indirect Taxes

Narayan Mehta Partner, Sudit K. Parekh
Co. 25th May 2005
2
Road Map
  • Direct tax implications
  • Taxation of foreign companies in India
  • Taxation of domestic companies in India
  • Expatriate tax implication
  • Transfer pricing
  • Incentives available under the domestic tax laws
  • Indirect tax implications

3
Companies in India
  • Foreign companies
  • Domestic companies

4
Taxation of Foreign Companies
  • What is a Foreign Company?
  • A company which is not registered under the
    Indian domestic laws
  • i.e Branch, LO, Project offices, any other
    permanent establishment taxed as a foreign
    company
  • Tax exposure only if there is a permanent
    establishment

5
Permanent Establishment
Means a fixed place of business and includes
  • A place of management
  • A branch
  • An office
  • A factory
  • A workshop
  • A mine, an oil or gas well, a quarry or any other
    place of extraction of natural resources
  • A warehouse in relation to a person providing
    storage facilities for others
  • A farm, plantation or other place where
    agriculture, forestry, plantation or related
    activities are carried on
  • Premises used as a sales outlet or for soliciting
    and receiving orders
  • Building site or construction, installation or
    assembly project gt 183 days
  • Carrying on supervisory activities in connection
    with above gt 183 days
  • Provision services or facilities in connection
    with the exploration, exploitation or extraction
    of mineral oils gt 183 days
  • Provision of services, other than services
    referred above technical services through
    employees or other personnel gt 90 / 30 days.
  • Dependent Agent PE

6
Permanent Establishment
  • Exclusions Article 5(7)
  • A fixed place of business shall not be treated
    as PE if is used solely for the purpose of
  • Storage, display or occasional delivery of goods
    belonging to the enterprise
  • The maintenance of a stock of goods belonging to
    the enterprise for above purpose
  • The maintenance of a stock of goods belonging to
    the enterprise processing by another
    enterprise
  • Purchasing goods, or of collecting information,
    for the enterprise
  • Advertising, for the supply of information, for
    scientific research, or for similar activities
    which have a preparatory or auxiliary character,
    for the enterprise.

7
Taxation of Foreign Companies
  • Only profits that is directly or indirectly
    attributable to the permanent establishment would
    be taxable in India
  • Tax rate applicable to Foreign company
  • Higher of
  • Regular corporate tax rate- 41.82
  • Minimum Alternate Tax (MAT)- 8.415
  • No branch profit tax on repatriation of profits /
    surplus

8
WOS- Tax Factors
Singapore Parent
Tax sparing clause UTC clause
Cap gains exempt Dividends exempt

Singapore
Debt
Equity
India
Equipt. Royalties _at_10 Other Royalties _at_15 FTS /
Management fees _at_15 Interest _at_15
Dividends 14.025 Div Dist Tax
Finance Act 05 has reduced tax on Royalties / FTS
_at_ 11.22
33.66 Corp. Tax Or 8.415 MAT 22.44 LTCG 33.66
STCG
Indian WOS / JV
9
Tax Sparing
Singapore Parent
Tax sparring available- no further tax on
dividends
Dividend
exports
Equity debt
14.025 Div dist tax
Exports- Nil tax Domestic Sales 33.66
domestic sale
Indian Subsidiary
10
Advantage of using mix of Debt Equity
  • Only equity means that the investment is locked
    in India
  • Use of debt is useful to repatriate part of the
    initial capital from India to Singapore
  • Certain prohibition on utilization of debts
    towards working capital
  • Also interest is tax deductible in India
  • Use of redeemable preference shares in addition,
    in order to enable tax free repatriation of
    capital
  • No thin capitalization / debt-equity norms in
    India or in Singapore currently!
  • Use arms length interest rates for loans

11
Profit Extraction Techniques
  • Finance Act 05 has reduced tax on Royalties / FTS
    _at_ 11.22
  • Press News- India-Singapore Tax Treaty may be
    revised
  • and the w/tax may be reduced to 5!

12
Taxation of Expatriates
  • Taxation of expatriates (Art 15)
  • Taxable in India if
  • Stay in India exceeds 183 days
  • Remuneration borne by Indian PE
  • Employer is Indian resident
  • Credit for taxes paid in India available against
    tax liability in Singapore (Article 25)

13
Expatriates - Tax Rates in India
Surcharge Payable _at_ 10 of the Tax only if net
income exceeds INR 1,000,000 p.a. Education
Cess Payable _at_ 2 of the total tax and surcharge
14
Fringe Benefit Tax (FBT)
  • Applicable from April 1, 2005
  • Tax on fringe benefits provided directly or
    indirectly to employees or their family members,
    in the course of employment
  • Rate of tax - 33.66 (30 plus surcharge and
    education cess) on fringe benefits as valued
  • Valuation at specified percentages (20 or 50)
    of defined expenses (actuals in some cases)
  • Employees not liable to pay tax on fringe
    benefits
  • Industry specific relief on certain categories of
    expenses

15
Fringe Benefit Tax (FBT)
  • FBT is payable whether employer is liable to pay
    Income-tax or not
  • FBT- not a deductible expenditure
  • Separate procedural / compliance provisions for
  • Quarterly payment of advance tax
  • On or before 15th of July / Oct / Jan / March
  • Filling of return
  • Assessment Reassessment
  • Charging of interest penalty

16
Transfer Pricing
  • Prices charged by one related party to another
    for goods, services, etc.
  • Any related party transaction undertaken from 1st
    April 2001 onwards covered
  • Income arising to Associated Enterprises from
    International Transactions to be computed
    based onArms Length Price
  • Indian regulations based on OECD Guidelines
  • Methods used
  • Comparable Uncontrolled Price Method (CUP)
  • Cost Plus Method (CPM)
  • Resale Price Method (RPM)
  • Profit Split Method (PSM)
  • Transactional Net Margin Method (TNMM)

17
Transfer Pricing
  • Detailed documentation requirements
  • CPA certification
  • No exemption from compliance
  • Compulsory tax scrutiny for transactions
    exceeding INR 50 million
  • Onus of proof- tax payer primarily liable
  • Penalties are high!

18
Certain Tax Compliances
  • Fiscal year 1st April to 31st March
  • Registration obtaining PAN / TAN
  • Payments of advance tax in 4 installments
  • Compliance with tax deduction requirements
  • Compliance with FBT provisions
  • Maintenance of accounts
  • Tax audit if gross receipts / sales gt INR 4 Mill.
  • Return of income due date 31st October
  • Transfer pricing compliances

19
Presumptive Taxation
  • Civil Construction, etc. business Sec 44AD (8)
  • Business of Plying, Hiring or Leasing Goods
    Carriages Sec 44AE (for Heavy goods vehicles Rs
    3500 per month, Others Rs 3150 per month)
  • Retail Business Sec 44AF (5)
  • Shipping Business Sec 44B (7.5)
  • Exploration, etc. of Mineral Oils Sec 44BB
    (10)
  • Operation of Aircraft Sec 44BBA (5)
  • Civil Construction, etc. in turnkey power
    projects Sec 44BBB (10)

20
Software/ hardware/ merchandise exports by STP /
EOU units 10A 10B
21
Units set up in SEZ10A
22
Infrastructure facilities
Industrial park
23
Housing
24
Handling storage transportation of food grain
and processing, preserving packaging of fruits
vegetables- 80IB (11A)
25
Specified States 80 IC
26
Shipping Industry 33AC
27
Mineral Prospecting Production Industry 35E
28
Mineral Oil Industry 42
29
Power Generation Distribution 80-IA
30
Telecommunications 35ABB
31
Defence / Security Services
32
Overview of Indirect Taxes
33
Indirect Taxes
  • Customs Duty
  • Excise Duty
  • Service Tax
  • Sales Tax / VAT
  • Octroi duty / Entry Tax
  • Stamp duty

34
Customs Duty
  • Paid on Importation of goods
  • Types of duties
  • Basic Customs Duty At the Rates Specified
  • Counter Veiling Duty (CVD) At Excise Duty Rates
    on Basic Customs Duty
  • In general- peak customs duty rate 15
  • Items supplied free of cost subject to custom
    duty on fair market / assessable value
  • 1 Duty Deposit (DD) on assessable value payable
    for transactions between Related Parties

35
Customs Duty Illustration
36
Custom Duty - Rates Procedure
  • Duty rates
  • Information Technology Software 0 for most
    software 4 for others
  • Computer Hardware 4
  • Proper procedure to be followed for importation
    of all goods including software

37
Excise Duty
  • Excise duty leviable on manufacture
  • Assembling in India amounts to manufacture
  • General Rate 16 plus Education Cess _at_ 2,
    effective rate 16.32

38
Excise Duty
  • Excise Duty\ service tax paid on goods\ services
    procured available as CENVAT Credit against
    Excise Duty payable on final goods manufactured
  • CVD paid on imported goods can also be set off
    against Excise Duty payable on final goods
    manufactured

39
Excise Duty - Illustration
40
Excise Duty - CENVAT Credit
41
Service Tax
  • Software development and design services exempted
  • Export Rules 2005 for export of services are in
    place
  • Import of services are under service tax net
  • Cenvat Credit across goods and services
  • Service tax 10.2 ( inclusive of education
    cess)
  • Service Tax levied based on Categories
  • 71 Categories are notified till date

42
Sales Tax / VAT
.
43
Sales Tax / VAT cont
  • Refund of CST to EOU/ STP units
  • VAT has replaced local sales tax w.e.f 1st April
    05 in almost all the
  • states
  • Remaining states continue to follow the old Sales
    Tax regime
  • Credit of VAT paid on input goods available
  • VAT slabs are mostly similar in each state
  • Intangible goods ( e.g. Technical know how,
    royalty) are subject to VAT/ CST
  • No VAT on sales in course of import/ export

44
Octroi duty / Entry tax
  • Levied on entry and use of goods within state /
    municipal limit
  • The rate varies in state / municipal limit /
    local authority depending on relevant local
    legislation
  • Many states provide exemption for EOU/STP
  • Ranges from 4 to 5

45
Stamp Duty
  • State Govt levy on certain instruments e.g.
    agreement, deed, etc.
  • Rate varies from state to state
  • Maharashtra provides abatement in stamp duty to
    EOU/ STP units up to 75

46
Our role
  • Acting as tax counsel in structuring the
    investments into/out of India
  • Procuring regulatory approvals for investments
    into/out of India
  • Co-ordinating and synchronizing with our overseas
    associates and implementing the business plan
  • Provide recurring services once the business is
    up and running

47
Thank You
Contact Narayan Mehta Tel 91 22
22821141 Fax 91 22 22024193 Mobile 91
9820544495 E-Mail narayan.mehta_at_skparekh.com
  • Queries

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