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


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

Seminar on Venture CapitalKarnataka State
Chartered Accountants Association19 January 2008
  • Agenda
  • Rules, Regulations and Compliances for New
  • Vishnu Bagri

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

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

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
  • 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

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

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

  • Tax Laws A Perspective

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
  • 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

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
  • 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
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

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
  • Exception Case where the consideration is net of

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.

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)

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

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

Indirect Taxes
  • Technology Transfers
  • Research and Development Cess _at_ 5
  • Payable on transfer of technology from foreign

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.,
  • Locations specific
  • Special Economic Zones
  • Economically Backward/Developing regions e.g.
    Uttaranchal, North-east regions, etc
  • Provides for tax / duty exemptions and concessions

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            
  • Typical Decision Variables
  • a regulatory and tax perspective

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
  • These could open up further structuring prospects

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

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
  • FEMA in case of overseas funds Guidelines for
    foreign investment and external commercial
  • Income Tax and DTAA implications
  • Tax implications during operational phase
    (leverage on interest cost and withholding tax)
  • Tax cost upon repatriation

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
  • Exchange control implications in case of
    operations involving cross-border
  • Tax implications
  • Tax costs to be factored in building cost of
  • Use of incentive regimes for tax optimization
  • Supply chain design influences transaction tax
  • It helps to have a dashboard summary of the
    chosen structure design with articulation of dos
    and don'ts

Cross-Border Transactions
  • Indian exchange control regime considerably
  • 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
  • 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

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
  • Proactive considerations of legal, tax and
    regulatory factors will provide operational
    flexibility and tax efficiencies upfront
  • More importantly avoid pains of unwinding a wrong
  • Business flexibility should not mean being
  • The early stage behavior is a strong contributor
    to an organizational culture

Thank You
  • email
  • Tel 91.80.4153 8287

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.