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Seminar on Venture Capital Karnataka State Chartered Accountants Association 19 January 2008

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

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Title: Seminar on Venture Capital Karnataka State Chartered Accountants Association 19 January 2008


1
Seminar on Venture CapitalKarnataka State
Chartered Accountants Association19 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
Tax LawsA Perspective
  • 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
  • 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

Business Stage Company
Operational business income 30.90/33.99
Profit declaration In the hands of the entity In the hands of the entrepreneur 17 dividend distribution tax Nil
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
    FBT _at_ 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
  • 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)
  • 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)

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 services _at_ 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 Cess _at_ 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 In Weeks In Weeks In Weeks In Weeks In Weeks In Weeks
Registration   Business critical event   1 2 3 4 5 6 7
Company Incorporation To 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 registration Raising the invoice or claiming input credits            
VAT / CST registration Raising the invoice or claiming input credits            
Import/Export Code (IEC) Any cross-border movement of goods/services            
Shop Establishment Functioning 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
  • email vishnu_at_accretiveglobal.com
  • Tel 91.80.4153 8287

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