India tax overview. February 2011

Transcription

1 February 2011

2 Agenda Setting up of operations Investment planning Page 2

3 Setting up of operations

4 Doing business in India 7 Potential areas of concern for MNC s 1 Foreign investment policy 6 International arrangements Doing business in India Regulatory Environment 2 Tax Multinationals Environment Doing business in India 5 Regulatory overview 3 Technology 4 Page 4

5 Foreign investment policy Historically,foreign investment was restrictedin India The economic reforms initiated in 1991, stimulated FDI into India when the new industrial policy provided, inter alia, automatic approval for projects with foreignequity participationup to 51 per cent in high priority areas The policy of liberalization continued and today India welcomes FDI under an AutomaticRoute into most sectors FDI caps apply for certain sectors telecom services (49%), banking (74%), airline(49% to 74%), insurance(26%), single brand retail ( 51%), etc FDI is not permitted in certain sector such as lottery, gambling, atomic energyetc Page 5

6 Regulatory Environment Exchangecontrol The Indian exchange control regulations contained in the Foreign Exchange Management Act, 1999 govern cross-border transactions involving movement of foreignexchange into and out of India While current account transactions are freely permitted unless restricted, capital accounttransactionsare generally restrictedin India unless specified Some restricted Current A/c transactions Payment of consultancy fees in excess of specified limits Some permitted Capital A/c transactions Purchase and sale of equity shares of Indian Companies subject to pricing guidelines Remittance by residents outside India subject to a US$ 200,000 limit Acquisition of land for the purpose of business of a branch/ office of a foreign company in India Key regulators Foreign Investment Promotion Board Securities & Exchange Board Department of Industrial Policy& Promotion Registrar of Companies Reserve Bank of India Page 6

7 Multinationals Doing business in India Foreign Company Operates as a foreign company Establishes an Indian company Liaison Office Project Office Branch Office Joint Ventures Wholly Owned Subsidiary Other forms of business Franchisee and distributor arrangements (no direct presence) Foreign technology collaborations (no direct presence) Limited liability partnerships introduced in India, however, guidelines on foreign investment awaited Page 7

8 Regulatory overview Technology Software Technology Park (STP) scheme provided large number of fiscal benefits contributed to the growth of software industry in India Direct tax holiday to STP units fading out in March 2011 Special economic zones are the new hubs for technology sector and provide large number of direct and indirect tax benefits Page 8

9 Tax Environment Constitutional provisions The Constitution of India establishes a partly federal and partly unitary form of governance in the country The right to tax subjects are distributed between the Union and the State Government Tax legislations India has a wide gamut of taxing legislations that cover direct, indirect, transaction and other taxes While taxes on income, corporations, services, manufacturing, import, wealth etc are levied by the Central Government, taxes on sale of goods, stamp duties etc are levied by the state governments Multiple laws Given the multiplicity of tax legislations and associated Authorities, there sometimes are conflicts and overlaps [Eg; Taxation of software, real estate transactions etc] Moving towards simplification There are recent initiatives on the part of the Government to move towards a simplified tax regime. The Direct Taxes Code Bill, 2010 will be tabled in the Indian Parliament and a Unified Goods and Services Tax is in the anvil Page 9

10 Wide gamut of taxes (illustrative) Gamut of Taxes in India Direct tax Income tax Wealth tax Dividend Distribution tax Minimum Alternate Tax Indirect tax Customs duty Sales tax/ Value added tax Service tax Excise duty Levies on transactions Securities transaction tax Stamp duty Octroi/ Entry tax R&D Cess Page 10

11 International arrangements Double taxation avoidance agreements: India has a Tax Treaty network with over 70 countries, which include USA, UK, European Union nations, Japan, Singapore, Australia, etc In general, provisions of the domestic income-tax law or Tax Treaty, to the extent more beneficial may be applied by non-residents Treaty shopping being heavily debated Regional Trade Agreements: India has entered into many agreements with Regional Countries, to facilitate greater trade between Countries The Agreements principally provide for lower duties on imports upon satisfying the test of origin of goods Significant among the Agreements are the SAFTA [between Pakistan, Sri Lanka, Maldives, Nepal, Bhutan and Bangladesh in operation since 1995] and India Singapore (Comprehensive Economic Cooperation Agreement CECA) implemented and effective from August 2005 Free Trade Agreements also exist with Sri- Lanka, Nepal and Thailand Page 11

12 Potential areas of concern for MNC s Transfer pricing Comprehensive TP regulations, increasing number of TP audits and stringent penal consequences for non-compliances with regulations result in uncertainty Taxation of overseas M&A deals The Indian Tax Authorities have in recent past questioned the Indian tax impact of overseas M&A deals involving transfer of shares of an Indian company. The matters are being fiercely litigated Withholding tax Stringent enforcement of withholding tax rules by Indian Tax Authorities Secondment of employees Secondment arrangements by MNC s to India poses potential PE consequences Tax withholding mandated on overseas salary payments to expatriates working in India Indian Government has mandated contribution towards social security for International Workers Page 12

13 Investment planning

14 Funding strategies Instrument Characterization Equity shares Compulsorily Convertible Preference shares Optionally Convertible Preference shares Compulsorily Convertible Debentures Optionally Convertible Debentures Debt Equity Tax 16.61% Not tax deductible Tax-efficient profit repatriation strategies (like buyback) to be explored Debt Interest is tax deductible Needs to be compliant with transfer pricing provisions Exchange control Equity Need to comply with FDI policy Same as above Cap on dividend SBI PLR plus 300 bps Debt Need to comply with ECB guidelines Equity Need to comply with FDI policy Cap on interest Debt Need to comply with ECB guidelines Crucial to have an appropriate mix of equity and debt from a tax, exchange control and valuation perspective considering the funds requirement schedule and other commercial considerations (such as preferential distributions, shareholding ratio etc) Some tax efficient options of financing have been discussed in the following slides Page 14

15 Comparative illustration Debt Capital 10,000 (D/E: 3:2) Equity 10,000 Return on capital invested 10% 10% Net profit before interest and tax Interest (10% of debt of Rs 6,000) 600 Nil Net profit before tax Income-tax 33.22%) (132.88) (332.2) Profit after tax Transfer to Reserves (10%) (66.78) Balance Surplus Dividend distribution tax (16.61%) (34.25) (85.61) Surplus distributed Total tax for Indian company Withholding tax on interest 10%) Nil Total India tax Page 15

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