Pr policies & Regulations in India For Praying Freign Investments

Transcription

1 India is the 7 th largest cuntry in the Wrld by area. It is a Federal Demcratic Republic cmprising f 28 States and 7 Unin Territries. India nt nly supprts ne f the largest ppulatins in the wrld, but is als ne f the yungest ppulatins. India is the 3 rd largest ecnmy in the Wrld (by purchasing pwer parity) with an average grwth rate f 7% ver the last decade. Being ne f the fastest grwing ecnmies in the Wrld, India has emerged as a key destinatin fr freign investrs in recent years. India strives t prmte freign investment in a fcused, cmprehensive and structured manner while acting as a first reference pint t prvide quality input and supprt services t its prspective freign investrs. Presently, frm April, 2013 t June, 2013, India has received FDI amunting t US$ 9.14 Billin and cumulative FDI inflws frm April 2000 t June 2013 stands at US$ Billin. Hwever, there are a number f factrs which are t be cnsidered befre setting up a business in India. This dcument takes yu thrugh sme f the cmmn questins that nrmally prp up and gives yu practical infrmatin abut the issues invlved. What type f Business Structure shuld we use? There are advantages and disadvantages in all structures. It all depends n the specific cmmercial needs and business expediencies. A brief verview f the main structures is given belw: Private Cmpany Minimum paid up capital f INR 100,000 (USD 1,600 apprx.) Minimum 2 Directrs (at least ne shuld be resident) Minimum 2 sharehlders; Maximum 200 sharehlders 1 sharehlder fr One Persn Cmpany Restrictins n transfer f shares Restrictins n invitatin t public fr subscriptin f share Restrictins n Listing f shares FDI permissible under Autmatic Rute, subject t sectral caps Public Cmpany Minimum paid up capital f INR 500,000 (USD 8,000 apprx.) Minimum 3 Directrs (at least ne shuld be resident) Minimum 7 sharehlders; Maximum n restrictins Authrized t List its shares n recgnized stck exchanges thrugh Initial Public Offer (IPO) FDI permissible under Autmatic Rute, subject t sectral caps Limited Liability Partnership (LLP) Minimum 2 Partners wh are individuals At least 1 f them shall be resident in India. N limit n maximum numbers f Partners At least 2 Designated Partners

2 100% freign investment allwed with prir Gvernment apprval in certain sectrs (fr eg. NBFCs, cnstructin and develpment f twnships and thers), where FDI is allwed, withut any perfrmance linked cnditins Branch Office Freign cmpanies can cnduct their business in India by pening a branch ffice with prir apprval f Reserve Bank f India (RBI). A branch ffice can undertake fllwing activities: Imprt & Exprt f gds. Rendering prfessinal r cnsultancy services. Carrying ut research wrk in area which its parent cmpany is engaged. Prmting technical/financial cllabratins n behalf f parent cmpany/ verseas grup cmpany. Representing parent/grup cmpanies in India and acting as buying/selling agent in India. Prviding IT services and develping sftware in India. Prviding technical supprt fr prducts supplied by parent cmpany/grup. Freign Airline/ Shipping Cmpany. Apprval f Department f Banking Operatins and Develpment f Reserve Bank f Indian (RBI) is required fr pening branch f a freign bank. Liaisn Office A liaisn ffice (LO) r a representative ffice can be pened in India subject t apprval by RBI. Such an ffice can undertake liaisn activities n behalf f its cmpany like: Representing parent/grup cmpanies in India Prmting imprt/exprt in India Prmting technical/financial cllabratins n parent cmpany/grup s behalf Crdinating cmmunicatins between parent/grup cmpanies and Indian entity. A LO cannt undertake any business activity in India and cannt earn any incme in India. Further, permissin t set up a LO is initially granted fr a perid f 3 years and can be extended frm time-t-time. Upn expiry f the validity perid, LO may either clse dwn r be cnverted int a Jint Venture/ Whlly wned Subsidiary in cnfrmity with the FDI plicies. Prject Office A freign Crpratin that has secured a cntract frm an Indian cmpany t execute a prject in India can set up a prject ffice in India withut btaining prir permissin f the RBI, prvided: The prject is funded directly by inward remittance frm abrad; r The prject is funded directly by a bilateral r multilateral Internatinal Financing Agency; r The Prject has been cleared by an apprpriate authrity; r The cmpany r entity in India awarding the cntract has been granted a term lan by a public financial institutin r a bank in India fr the prject. Hwever, if the abve cnditins are nt met, the freign entity has t apprach the RBI,

3 Central Office fr apprval. Hw much Crpratin Tax will the business pay? Crpratins resident in India are taxed n their wrldwide incme arising frm all surces earned in a Tax Year. Tax Year is the12 mnths perid beginning n April 1 st and ending n March 31 st. Nn-resident Crpratins are taxed n the incme earned frm a business cnnectin in India r frm ther Indian surces. A Crpratin is deemed t be resident in India if it is incrprated in India r its cntrl r management is whlly situated in India. The rates f varius crprate taxes are as fllws: Particulars Dmestic Cmpanies Freign Cmpanies Crprate Tax Rate 30% 40% Minimum Alternate Tax (MAT) % 18.5% Dividend Distributin Tax 15% - Capital Gains Tax 20% 20% Lng Term Listed Securities transferred thrugh Stck NIL NIL Exchange (hlding perid mre than 1 year) Lng Term Unlisted Securities (hlding perid mre than 1 year) 20% 2 10% Lng Term Others (hlding perid mre than 3 years) 20% 2 20% 2 Shrt Term Listed Securities (hlding perid less than 1 year) 15% 15% Shrt Term Unlisted Securities (hlding perid less than 1 year) 30% 40% Shrt Term Others (hlding perid mre than 3 years) 30% 40% Withhlding Tax Rates Interest n freign currency lans 10% 20% Ryalty & Fees fr Technical Services (included services) 10% 25% Any ther incme 10% 40% (NB: rates are fr the tax year starting frm 1 st April, 2013 t 31 st March, 2014 excluding applicable Surcharge 3 and Educatin Cess 4.) 1 MAT is levied n Bk Prfit calculated as per Indian GAAP nly if Crprate Tax is less than MAT in a particular year due t allwances and deductins as per Indian Incme Tax Act. Credit f excess tax paid is available against nrmal tax in subsequent years. 2 Cst Inflatin Indexatin benefit is available. 3 Rates f surcharge: In case f Dmestic Cmpany - 5% (if taxable incme between Rs. 10 millin t Rs. 100 millin) r 10% (if taxable incme exceeds Rs. 100 millin). In case f Freign Cmpany - 2% (if taxable incme between Rs. 10 millin t Rs. 100 millin) r 5% (if taxable incme exceeds Rs. 100 millin). 4 Educatin 3% n incme tax and surcharge (if applicable). Tax Treaties: India has Duble Taxatin Avidance Agreements (DTAA) with ver 85 cuntries in the wrld. Sme f the cuntries are as fllws:

4 Nrth and Latin America Eurpe Middle East & Africa Asia Pacific USA United Kingdm UAE Singapre Canada France Suth Africa China Brazil Germany Mauritius Russia Mexic Cyprus Saudi Arabia Japan Trinidad and Tbag Netherlands Turkey Australia Where a taxpayer is a resident f a cuntry with which India has a tax treaty then the prvisins f the Indian Incme Tax Act r the tax treaty, whichever is beneficial shall apply. Accrdingly, the taxability f nn-resident in India is likely t be restricted r mdified and lwer rates are expected t be applied as per the tax treaty. If there is n such agreement, resident crpratins can claim a freign tax credit fr the tax paid by them in ther cuntries. The credit amunt granted t such crpratins is the lwer f the tax payable in India n incme that is subject t duble taxatin r the freign tax paid. What if we use India t set up ur hlding cmpany? Due t taxatin structure namely Crprate Tax/ MAT, Dividend Distributin Tax, Tax n Freign Dividend etc. and ther statutry cmpliances, India is nt a preferred destinatin fr setting up a hlding cmpany. Hwever, the chice wuld nrmally depend n business needs and ther cmmercial expediencies. What if we make crss-brder transactins between grup cmpanies? India fllws internatinally recgnized Transfer Pricing (TP) Rules where crss-brder trading and financial transactins between assciated entities have t be cnducted n an arm s length basis. The price and terms need t be benchmarked in the same manner as tw independent unrelated parties wuld nrmally carry ut such transactins. Indian transfer pricing prvisins are generally in line with transfer pricing guidelines issued by the Organizatin fr Ecnmic C-peratin and Develpment (OECD). Under TP Rules, any Internatinal Transactin (ITN) between tw r mre Assciated Enterprises (including permanent establishments) must be at arm s length price (ALP). These regulatins als apply t cst sharing arrangements. Fr cmputatin f ALP, TP Rules require the applicatin f the mst apprpriate amngst all prescribed methds as fllws: Cmparable Uncntrlled Price Methd (CUP) Resale Price Methd (RPM) Cst Plus Methd (CPM) Prfit Split Methd (PSM) Transactinal Net Margin Methd (TNMM) Any methd, which takes int accunt the price fr the same r similar uncntrlled transactin between nn-assciated enterprises, under similar circumstances, cnsidering all the relevant facts. Internatinal Transactins means a transactin between tw r mre Assciated

5 Enterprises either r bth f whm are nn-residents and have a bearing n the prfits, incme, lsses r assets f such enterprises. Typically, internatinal transactin cvers the fllwing: Transactins f business restructuring r rerganizatin Financial transactins such as capital financing including and type f lng-term r shrt brrwings r lendings r prvisin f guarantee etc. Services related t market research, scientific research, market develpment, legal r accunting services Purchase, sale, transfer, lease r use f tangible prperty including building, plant and machinery, vehicles r any ther article, prduct r thing Purchase, sale, transfer, lease r use f any intangible prperty Certain Specified Dmestic Transactins (SDT) are als cvered within the ambit f Transfer Pricing Rules where the aggregate f such transactins exceeds INR 50 millin. The SDTs are as fllws: Any expenditure incurred in favur f any dmestic related party Any deductins r benefits claimed while cmputing taxable incme, which invlve transactins with related parties. Transactins with related dmestic cmpanies r units eligible fr tax hliday benefit What Emplyment Taxes and Scial Security will need t be paid? Liability fr Incme Tax is gverned by the residential status f the individual during the fiscal year. Individuals are cnsidered t be residents if they meet either f the fllwing criteria: He/ She were present in India fr 182 days r mre during the tax year, which extends frm 1 April t 31 March. He/ She were present in India fr 60 days r mre during the tax year and fr at least 365 days in ttal during the preceding fur tax years (The perid f 60 days can be extended t 182 days in certain cases). Individuals wh d nt meet either f the criteria mentined abve are cnsidered t be nn-residents. Individuals are cnsidered t be nt rdinarily resident if, in additin t meeting ne f the criteria mentined abve, they satisfy either f the fllwing cnditins: Nn-resident in India fr 9 f the preceding 10 tax years Present in India fr 729 days r less during the preceding 7 tax years. Scpe f ttal incme is as fllws: Residential Status Taxability Resident and rdinarily resident Wrldwide incme Resident and nt rdinarily resident Incme received in India r deemed t be received in India Incme accruing r arising in India r deemed t accrue r arise in India

6 Nn Resident Incme accruing r arising utside India, either frm a business cntrlled frm India r a prfessinal set-up in India Incme received in India r deemed t be received in India. Incme accruing r arising in India r deemed t accrue r arise in India. Current Persnal Incme Tax rates in India are: Incme slabs (INR) Incme Tax 0 200,000 Nil 200, ,000 10% 500, ,000 20% 1000,001 upwards 30% (NB: rates are fr the tax year 1 st April, 2013 t 31 st March, 2014 excluding applicable Surcharge 1 and Educatin Cess 2.) 1 10% if taxable incme exceeds Rs. 100 millin. 2 Educatin 3% n incme tax and surcharge (if applicable). It is advised that any new entrant t India r persn wh spends time wrking in India t seek prfessinal advice t determine whether they are Indian tax resident r nt. Scial Security in India is gverned by the Emplyees Prvident Funds and Miscellaneus Prvisins Act, 1952 (EPF Act). The EPF Act cntains the fllwing tw principal schemes: Emplyees Prvident Funds Scheme, 1952 Emplyees Pensin Scheme, 1995 Every cvered emplyer is required t cntribute 24% (including 12% emplyee s share) f the emplyee s mnthly pay as defined twards the Prvident Fund and Pensin Fund. India has entered scial security agreements with Belgium, Germany, Switzerland, Luxemburg, France, Netherlands, Denmark, Hungary, Czech Republic, Suth Krea, Nrway and Finland. Agreements with Hungary, Czech Republic, Nrway and Finland have nt yet been brught int frce. VAT/ CST: VAT is an intra-state multi-pint tax system administered at the State level and is levied n sale f gds at each stage f sale. The basic rate slabs under VAT are as fllws: 0% fr natural and unprcessed prducts and ther essential gds.

7 1% t 2% fr special gds such as gld, bullin, silver, etc. 4%/5% fr agricultural and industrial input, IT prducts, capital gds and intangible gds, i.e., patents and thers, as well as items f basic necessity. 12.5% t 15% fr all ther gds that d nt fall under any f the categries mentined abve. Interstate sales are liable t Central Sales Tax (CST), which is impsed by the Indian Gvernment and administered by State Gvernments. The rate f CST is 2%, subject t fulfillment f certain cnditins. Further, a sale invlving imprt f gds frm utside India is nt liable t VAT/CST, subject t the prescribed cnditins. Mrever, sale f gds (including penultimate sale) invlving exprt f gds frm India is als nt liable t VAT/CST. Input tax credit is available with respect t VAT paid n lcally prcured gds, including capital gds (ther than the negative list f gds prvided under respective state VAT laws) subject t certain cnditins. The credit can be set ff against utput VAT liability, including utput CST. Hwever, n input credit is available in respect f CST paid n prcurements and hence, it is a cst t the purchaser. Custms Duty: Custm duty is levied by the Indian Gvernment n imprt f gds int India and is typically payable by the imprter f gds. It is als levied n exprt f certain gds. Custm duty rates depend n the classificatin under the Custms Tariff, which is aligned with the Internatinal Harmnized System f Nmenclature generic rate being 28.85%. Excise Duty: Excise Duty is applicable n the manufacture f gds within India and is payable by the manufacturer. Mst prducts attract a unifrm rate f 12.36% i.e., Excise 12% and Educatin Cess f 0.36% (3% n Excise Duty). Excise duty is generally levied n an ad valrem basis, either expressed as a percentage f the transactin value r maximum retail price (fr certain specified gds). Credit f Excise Duty paid is available in certain situatins. Service Tax: Service Tax is a tax n services. It is a tax levied n the transactin f certain services specified by the Central Gvernment. It is als applicable n imprt f services in India where service recipient is required t discharge Service Tax liability in cash (under reverse charge mechanism). The present rate f Service Tax is 12.36% i.e. 12% Service Tax and Educatin Cess f 0.36% (3% n Service Tax). The Indian Gvernment has intrduced a negative list-based taxatin f services with effect frm 1 July In view f this, except 17 negative services (mainly prvided by r t Indian Gvernment r State Gvernments, health care services, agriculture, trading, etc.) and 39 specifically exempted services, all ther services are taxable subject t exceptins. Service prvided utside India will nt be liable t Service Tax. Credit f Service Tax paid is available in certain situatins. Can we prvide Share ptin plans t ur staff? Many cmpanies see Share Optin plans as being an imprtant way f attracting, mtivating and retaining key staff.

8 Emplyee Stck Optin Plans (ESOPs) alltted/transferred by an emplyer, free f cst r at a cncessinal rate, are taxable in the hands f the emplyee. ESOPs are taxed at the fair market rate n the date they are exercised by an emplyee, reduced by the amunt actually paid by r recvered frm the emplyee. Hwever this is a technical area and careful planning needs t be undertaken as sn as share ptin plans are being cnsidered fr implementatin in India. Hw else can we cmpensate ur emplyees? India has a very cmprehensive range f cmpensatin and benefit ptins available fr cmpanies t ffer their emplyees. In general, mst elements f cmpensatin are taxable in India. Hwever, certain benefits are likely t receive preferential tax treatment, subject t certain requirements. Free/ Cncessinal Accmmdatin, interest free/ lw interest lans, reimbursement f medical expenses, cntributin t retirement benefit funds, leave/ travel/ educatin allwance, pensins etc. are nw cmmn benefits prvided by many Indian businesses t their wrkfrce. T discuss yur requirements please cntact the Internatinal Office n +44 (0) r us directly. Krestn Internatinal Krestn Internatinal Limited is a glbal netwrk f independent accunting firms. Offering reliable and cnvenient access t efficient and seamless advisry and assurance services thrugh member firms lcated arund the glbe, Krestn: Is ranked the 13th largest accunting netwrk in the wrld Cvers 104 cuntries Has 700 ffices Has a resurce f 21,000 prfessinal and supprt staff. Our members are accustmed t wrking tgether t deliver chesive internatinal slutins t ensure clients receive the highest quality f expertise available in their respective cuntries. Beynd assurance, quality and experience, clients will enjy the unique synergy that stems frm the trusted relatinships that Krestn members have created glbally and which supprt the cnsistent delivery f exceptinal internatinal service. This infrmatin is prvided fr guidance nly and is nt a substitute fr prfessinal advice. Neither Krestn Internatinal Limited nr its member firms accept any liability fr any lss arising as a result f actins taken r nt taken based n the infrmatin cntained in this dcument. The infrmatin in this dcument was prepared as at 30 Nvember 2013.