DOING BUSINESS IN INDIA - AVOIDING THE PITFALLS BREAKFAST BRIEFING 4 th November 2008

DOING BUSINESS IN INDIA

- AVOIDING THE PITFALLS

BREAKFAST BRIEFING

4th November 2008

November 4, 2008

■

PLANNING AN INDIA INVESTMENT…

10 common pitfalls to avoid

Ajay Sethi II Director & Managing Partner II

Corporate Catalyst India www.cci.in&

ASA & Associates chartered accountants www.asa.in

http://www.asa.in/

PRESENTATION OUTLINE

INDIA TOUR

KEY SET-UP ISSUES

KEY POST SET-UP ISSUES

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INDIA TOURINDIA TOUR


INDIA TOUR

The 2nd most attractive investment destination

(source UNCTAD World Investment Report 2007)

Advantage - low cost of production, large size domestic market

Growth rate expected around 8%

Besides the service industry, evolving into a manufacturing hub

Foreign Exchange reserves touched USD 310 bn in May 2008


FDI INFLOWTop Investing Countries

Ranks Country 2005-06 2006-07 2007-08 2008-09 Cumulative

1 MAURITIUS 2,570 6,363 11,096 4,122 29,757

2 U.S.A. 502) 856 1,089 867 5,400

3 SINGAPORE 275) 578 3,073 750 5,107

4 U.K. 266 1,878 1,176 415 4,778

5 NETHERLANDS 76 644 695 286 2,991

6 JAPAN 208 85 815 55 2,181

7 GERMANY 303 120 514 258 1,801

8 CYPRUS 70 58 834 272 1,258

9 FRANCE 18 117 145 251 1,011

10 U.A.E. 49 260 258 154 818

Total 5,546 15,726 24,579 10,073 72,582

US$ Million

6Source – Department of Industrial Policy & Promotion

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INDIA TOUR Understanding Regulatory Compliances

Most laws originate from British Laws

Procedure Driven

Failures to comply usually leads to penalty and sometimes prosecution

Stacked in favor of labour (blue collar staff)

Fine reading and interpretation is the norm


SETTING UP THE BUSINESSAvoiding Pitfalls


INDIA ENTRY Mode of Investment

INDIA

Head Office

Representation

Local

Subsidiary

Distribution

Channel

Liaison Office

Project Office

Branch Office Wholly Owned Subsidiary

Joint Venture

Importer

C&F

Franchise

9

S’pore Corporate


INDIA ENTRY Alternate Entity Comparison

Corporate[CO]

Liaison Office[LO]

Project Office[PO]

Branch Office[BO]

Characteristics Share capital owned by parent company

No commercial activities allowed

Temporary site office, specific projects

Commercial activities allowed

Status Shareholders Foreign Company Foreign Company

Foreign Company

Tax Rate 30% + Non Taxable 40% + 40% +

Control Board of Directors Parent Company Parent Company Parent Company

Set-up FIPB Approval / Automatic Route (4-6 weeks)

RBI approval(4 weeks)



Closure ROC (6-9 months)

RBI(3 months)

RBI(3 months)

RBI(3 months)

RBI – Reserve Bank of IndiaFIPB – Foreign Investment Promotion BoardROC – Registrar of Companies

10


■ How will the joint venture be financed?

■ Who will primarily run the joint venture?

■ How can I exit the joint venture?

■ What happens if there is a fall out with the other party involved?

INDIA ENTRY Planning your Joint Venture

Management control issues viz.

■ appointment to the board of directors and chairman of the board

■ appointment of CEO, MD, CFO

■ issues arising from future change of control, non-compete, etc.

■ implications of 26, 51 and 75 percent shareholding

Operational issues viz.

■ Labour handling

■ Government Liaisioning

■ Appointing head of sales, manufacturing, etc

INDIA ENTRY Joint Venture – Term Sheet and Shareholder’s Agreement

CORPORATE SET-UPFlawed Feasibility Study (#1)

Negative List - sectors where Foreign Direct Investment is not allowed e.g. betting, lottery business, atomic energy, retail trading (except ‘Single Brand’ product retailing)

Sectoral Caps – foreign investment in certain industries governed by equity cap e.g. Insurance (26 %)

A small list of activities is reserved for the Small Scale Industries (SSI)

13

Examine the Negative List, Sectoral caps and SSI

reservations while conceptualizing investment into

India


If yes, a ‘No Objection Certificate’ is mandatory from

the existing Indian Partner and prior approval is required from

the Foreign Investment Promotion Board of India

CORPORATE SET-UPExisting Collaboration(s) in India can restrict your entry plans (#2)

Do you have an existing joint venture with an Indian partner for the very field in which you now intend to set-up business in India?

Do you have an existing technology collaboration with an Indian partner for the same field in which you intend to do business in India?

14

Press Note 1 (2005 Series)


CORPORATE SET-UPPay attention to your Capital Structuring (#3)

At least two Shareholders are required; and

Capital structure will determine ‘private’ or ‘deemed as public’ company in India viz.

15

Case Shareholding of the Indian Company Status in India

1 Indian Individual Shareholder + Foreign Company (Public) Public Company

2 Indian Company + Foreign Company (Public) Public Company

3 Foreign Company (Public) + Foreign Individual Shareholder Public Company

4 Foreign Company (Public) + Foreign Company (Public) Private Company

5 Two or more Foreign Individual Shareholders Private Company

6 Foreign Company (Private) + Foreign Company (Private) Private Company

7 Foreign Company (Private) + Foreign Individual Shareholder Private Company

section 4(7), Indian Companies Act, 1956

If a company is deemed a public company (listed or non-listed), it will attract

higher compliance requirements


Though retailing is not allowed, ‘Single Brand’ retail can be done

through a 51:49 joint venture with an Indian Partner

Single Brand Retailing means

You retail goods under one single brand, and

The brand is well recognised, and

It covers only products branded during manufacturing

16

Applications for single brand retailing are processed by

the Department of Industrial Policy & Promotion (DIPP) and is presently somewhat

restrictive

CORPORATE SET-UPThe confusion of ‘Single Brand’ Retailing (#4)

Press Note 3 (2006 Series)


Pre-incorporation expenses are tax deductible, viz. preparation of feasibility report, engineering services relating to the business, legal charges for drafting any agreement etc.

Pre-incorporation contracts are recognised if, the company had adopted the same post incorporation; and

Contracts which are warranted by the terms of incorporation, or those entered before incorporation and adopted by the company, are legally valid e.g. office lease agreement ratified in the first board meeting, employment agreements etc

17

CORPORATE SET-UPCan we recognise contracts & expenses prior to incorporation? (#5)

Unless the company adopts the contract, the other party

cannot enforce the same against the company.

However, promoters can become personally liable.


Have you considered various Municipal Level Taxes?

Have you considered effect of Fringe Benefit Tax, Pension

Schemes etc?

If land is required, have you considered future expansion plans?

Logistics and easy access to resources taken into consideration?

Does the paid-up capital of the Indian Company exceeding INR

20 million? if yes, Company Secretary required

18

SOME USEFUL TIPSValue Addition to the Feasibility Study


RECURRING REGULATORY COMPLIANCES


COMPLIANCESOverview

Customs Duty

Excise Duty

Corporate Tax

CST / VAT

Special Audit

Accounting

Service Tax

Transfer Pricing

Withholding Tax

Expatriate Tax

Statutory Audit

Internal Audit

Tax Audit

RecurringRegulatory Compliance

Secretarial Compliance

sLabour Laws

Employee Payroll


REGULATORY MATTERS Key Authorities

Reserve Bank of India (‘RBI’)

Registrar of Companies (‘ROC’)

Income Tax Authorities

Central Board of Excise and Customs (‘CBEC’)

Labour Commissioner


ACCOUNTING Key Laws in Focus

Company Law

Tax Laws (Income tax including tax treaties, Customs,

Excise, VAT/Service Tax)

Indian Generally Accepted Accounting Policies (‘Indian GAAP’)

Labour Laws (Factories Act, Industrial Dispute Act, etc.)

Employment Regulation (Social Security Regulations )


ACCOUNTING Key Issues

Financial Year - April 1st to March 31st

Recording of transactions - per Indian GAAP

Adequate provisioning and appropriate disclosure

Compliances - Daily, Monthly, Quarterly, Annual

CO LO BO PO


PAYROLL MANAGEMENTKey Issues

Employment Contracts

Regulated under labour laws

Income Tax Issues

Corporate Laws

CO BOPOLO


AUDITSOverview

Statutory Audits Annual Review and Reporting by an Indian firm of

Chartered Accountants Indian Generally Accepted Accounting Policies (‘Indian GAAP’) Annual Reporting to Government Authorities

Tax Audits Applicability – Annual Turnover INR 4 Million (USD 90,000 approx) Certification by an Indian firm of Chartered Accountants

Internal Audits Applicability – Turnover INR 50 Million or Paid-up Capital INR 5 Million In-house Team or Outsource to Indian firm of Chartered Accountants

CO BOPOLO

CO PO BO

CO


DIRECT TAXESOverview

Corporate Tax

Transfer Pricing

Withholding Tax

Fringe Benefit Taxation

Expatriate Taxation

CO PO BO

CO

CO

CO

CO

LO

LO

LO

PO

PO

PO

PO

BO

BO

BO

BO


DIRECT TAXESTax Withholding

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PAYEE WHEN TAX WITHHOLIDNG

(%) *

DATE OF DEPOSIT

REPORTING

Employee If salary is taxable

Per prescribed slabs

Within 7 days of payment

Quarterly to Indian tax authorities

Contractor Annual payment exceeds INR 20,000 (USD 500 approx)

27th of the month

succeeding payments

Landlord Annual rental exceeds INR 120,000 (USD 2,500 approx)

15/20

Profession Annual payment exceeds INR 20,000 (USD 500 approx)

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*Further enhanced by surcharge and education cess®Copyright Reserved

INDIRECT TAXESOverview

Excise Duty

Customs Duty

Service Tax

Central Sales Tax

Value Added Tax

CO PO BO

CO

CO

CO

CO

PO

PO

PO

PO

BO

BO

BO

BO

LO


INDIRECT TAXESExcise Duty

Applicability

Definition of Goods

Concept of Manufacture

Proper Recoding of transactions

Inspection by Excise Inspectors

Complex Duty Structure and Calculation Mechanism

Developed Case Laws

CO


INDIRECT TAXESCustoms Duty

Applicability

To regulate imports of foreign goods into India

Regulate supply of goods into domestic market

Additional Duty of Customs – protective shield to domestic industry

Methods of Valuation

Classification of Goods – 99 Chapters

CO PO BOLO


INDIRECT TAXESService Tax

Applicability

Voluntary compliance

Services defined – Over 100 categories

Services provided from outside of India and received in India

Proper Recording of transactions

Developed Case Laws

CO PO BO


INDIRECT TAXES Central Sales Tax/ VAT

Central Sales Tax Non VATABLE Under phase out by 2010

Value Added Tax Includes goods sold within a particular Indian state Goods sold from outside of India and title transferred in India Proper Recording of transactions Developed Case Laws

CO PO BO

CO PO BO


INDIRECT TAXES VAT Case Study

Purchase Price Rs 100

Tax paid on purchase Rs 10 (input tax)

Sale price Rs 120

Tax payable on sale price Rs 12 (output tax)

Input tax credit Rs 10

VAT payable Rs 2


INDIRECT TAXES Flag This

Central Sales Tax/ VAT & Service Tax – to be merged into a

single Goods & Service Tax (‘GST’) by 2010


SECRETARIAL COMPLIANCE Overview

EVENT Applicability

Office shifting CO LO PO BO

Change in Director / Authorised Representative

CO LO PO BO

Board Meetings & Annual Shareholders Meeting

CO

Maintain Statutory Records CO

Annual Return to ROC CO LO PO BO

Annual Return to RBILO PO BO


POST SET-UPAvoidable Pitfalls


POST SET-UP – Recurring Compliance Key Dates

REGULATORY MATTER DUE DATE

CORPORATE LAW

Board Meeting Quarterly (calendar year basis)

Annual General Meeting Within 180 days of closing the accounts

INCOME TAX

Corporate Tax Return September 30th

Tax Audit Report September 30th

Fringe Benefit Tax Return September 30th

Transfer Pricing Report September 30th

TDS Returns (Tax Withholding) Quarterly

Employee Tax Return July 31st

SERVICE TAX October 25th & April 25th


Arm’s Length price (‘ALP’)

Any income arising from an international transaction between associated parties to be computed having regard to ALP

ALP means a price which is applied in a transaction between persons other than associated enterprises

Associated Enterprise (‘AE’)

Participation in management or control or capital of other enterpriseDirectly through intermediaries

TRANSFER PRICINGEnsuring that transactions between group companies are at market price? (#6)


Holding Company

Wholly Owned Subsidiary

Singapore

India

Transfer Pricing Issue – what should be the profit

margin of the Wholly Owned Subsidiary?

TRANSFER PRICINGDetermining the appropriate pricing for group companies transactions (#6)

payment?

servicing

warranty etc.

supply of goods

Customer


PERMANENT ESTABLISHMENT (PE)Risk of exposure (#7)

Foreign company operating through an agent, branch etc regarded as having a PE in India

In certain cases, an Indian subsidiary can be classified as a PE

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Where work linked to India, India tax office can prove

existence of PE, part or entire portion of India linked

transactions can be brought to tax in India

LIAISON OFFICEThe PE Trap (#7)

Does the India Liaison Office (‘LO’) sign direct contracts in India ?

Is the LO deeply involved in price negotiations?

Are the employees of the LO paid incentives on sales ?

Does the LO raise Purchase Orders on the Head Office ?

An affirmation to any of the above – LO regarded as a

Permanent Establishment of the parent company in India.

This is a high risk of exposure to taxation


Involved in negotiation

X-Company

X - LO

Singapore

India

Supplies S$ 100

Customer

Effect: Part or whole of S$ 100 can be taxed to India

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LIAISON OFFICEThe PE Trap (#7)

TAX COMPLIANCESCharging the Head Office Expenses (#8)

The lower of the following are tax deductible expenses by the HO

An amount equal to 5 per cent of the total income of Indian entity, or

Actual expenses

Plan your future Head Office (HO) expenses allocations

carefully to avoid disallowance by the Indian

Tax Officer


REPATRIATING PROFITSThe menace of Dividend Distribution Tax (#9)

Whether the credit in respect of Dividend Distribution Tax (DDT)

of INR 17 is available in the Parent Country?

X-India

Parent CompanyX - Singapore

India

Singapore

Net Profit 133

Tax on Profit 33

Distributable Profit 100INR 83

Amount in INRGovernment

Treasury

INR 17


EXPATRIATE TAX MATTERSSocial Security Payment (#10)

Social security payments made outside India, are

taxable in India where a right immediately vests to the

expatriate

Does the parent company pay for the pension funds maintained outside

India by the expatriate?

Does he/she have an internationally valid medical insurance?


THANK YOU


The Iyer PracticeAccountants & Business Consultants

Tax Aspects of Singapore Tax Aspects of Singapore Companies Investing in IndiaCompanies Investing in India

Shanker Iyer, FCAShanker Iyer & Co

Certified Public AccountantsSingapore


Investing via Mauritius


AdvantageCapital Gain in India – 0% by virtue of India-Mauritius tax treaty.

Pitfalls Dividends Income is

taxed in Mauritius at effective rate of 3%.

Interest payment is subject to 20% withholding tax – No treaty benefits

Investing via MauritiusInvesting via Mauritius

100% Share ownership

Indian Co.

Cap

ital

Gai

nC

apit

al G

ain

100% Share

ownership

Singapore Co.

Mauritius Co.


Pre 2005 - Capital gain in India was subject to tax as per domestic law of India – No treaty protection

Pre 2003 – All foreign sourced income (including dividend) was subject to taxed on receipt basis in Singapore.

Earlier disadvantage of using Earlier disadvantage of using Singapore Holding StructureSingapore Holding Structure

Indian Co.

Cap

ital

Gai

n

100% Share

ownership

Singapore Co.


Investing via Singapore


India-Singapore CECA

Foreign-sourced income exemption.

Extensive tax treaty network.

Investing via SingaporeInvesting via Singapore


Investing via SingaporeIndia – Singapore CECA

Capital gains provisions replaced - gains to be taxed on

basis of residence, subject to shell/conduit conditions

Amended provisions to be in force till included in India-

Mauritius tax treaty

Reduction in withholding tax on royalties & Fees for

Technical services to 10%

Highlights of the Protocol amending the treaty


First condition Singapore company is not used for the primary purpose of taking advantage

of the capital gains tax exemption. Protocol clarifies that any legal entity without any bona fide business activity

would be considered as having a primary purpose of taking advantage of the benefit.

Second condition Singapore company is not a shell and conduit company with negligible or nil

business operations, or with no real and continuous business activities in Singapore

Not a shell and conduit company if:– it is listed on the Singapore stock exchange; or – its total annual expenditure is equal to or more than Indian Rs 50,00,000 or

S$200,000 over 24 months

Investing via SingaporeIndia – Singapore CECAConditions for Indian capital gains tax exemption


Taxable only if remitted.

Exemption of certain remitted foreign-sourced income dividends; service income; branch profits; provided certain conditions are met.

If conditions not met but if income remitted, then exemption under specific scenarios or circumstances.

Investing via SingaporeTax Treatment of Foreign-Sourced Income Exemption


15% ‘headline’ rate of tax

Exemption should be beneficial

Subject to tax

Resident

Conditions

Investing via SingaporeTax Treatment of Foreign-Sourced Income Exemption

Conditions


Europe Austria Belgium Bulgaria Cyprus Czech Republic Denmark Estonia Finland France Germany Hungary Kazakhstan Italy Latvia Lithuania Luxembourg Malta Netherlands Norway

Poland Portugal Romania Slovak republic Sweden Switzerland United Kingdom

America Canada Mexico

Africa Egypt South Africa Mauritius

Middle EastBahrainIsraelKuwaitTurkeyUAEOmanQatar

Asia-Pacific Australia Bangladesh Brunei China India Indonesia Japan Malaysia Mongolia Myanmar New Zealand Pakistan Papua New

Guinea Philippines

South Korea Sri Lanka Taiwan Thailand Vietnam Fiji

New Treaties : Estonia, Malta, QatarPending Retification : Belgium,Morocco,Russian Federation,Ukraine, UzbekistanTotal Comprehensive treaties : 63 of which 5 are pending ratification

Investing via SingaproeTax Treaty network


Pitfalls of using Singapore Holding Company (SHC)


‘Capital’ gains - may be taxed if not an Approved Holding Company.

Interest and royalties – taxed on remittance.

Limitation of relief article in tax treaty.

Pitfalls of using SHCPitfalls of using SHC


Issues pertaining to capital gains

Revenue v/s. Capital.

Even isolated transaction profits may be treated as transaction in nature of adventure.

No safe harbor holding period.

No certainty.

Tax treatment depends on facts and onus of proof.

Pitfalls of using SHC Capital gain issues


Indian withholding taxes


(1) Under Indian domestic law, Dividend Distribution Tax (DDT) @ 16.995%.(2) Under Indian domestic law, including surcharge of 2.5% plus education cess of 3%.(3) No article on technical or management services in India- Mauritius treaty. Thus conservative

approach is to taxed as per domestic law of India. However many take the other approach that such payment is subject to tax only if PE exist in other state.

(4) Taxable under domestic law of Netherlands in case of transfer of shares by a Netherland resident to another non-resident. If transfer is to resident of India it shall be taxable as per Indian domestic tax law.

(5) If no make available

Indian withholding taxesJurisdiction

Mauritius

Dividends Nil(1)

Capital gains on disposal of shares

Nil Nil Note(4)

Interest 21.12% 10% 10%

Royalty 10.55%(2) 10.55%(2) 10%

Cyprus NetherlandsNature of Income

Nil*

Nil

10/15%

10%

Singapore

Nil(1) Nil(1)

Technical/Management fees

0(3)/ 10.55%(2) 0(5)/10/ 10.55%(2) 0(5)/10%0(5)/10%


Any Questions


For a further discussion on any of the topics covered, please contact:

Shanker Iyer [email protected]

Phone: +65 6532 5746Fax : +65 6532 7680Website: www.iyerpractice.com

To keep yourself updated on new developments in Singapore, please subscribe online to our free quarterly newsletter via our website: www.iyerpractice.com/News.htm

Disclaimer : This presentation of slides is intended as a general guide only, and the application of its contents to specific situations will depend on the particular circumstances involved. Accordingly, readers should seek appropriate professional advice regarding any particular problems that they encounter, and this presentation should not be relied on as a substitute for this advice. While all reasonable attempts have been made to ensure that the information contained in this presentation is accurate, Shanker Iyer & Co accepts no responsibility for any errors or omissions it may contain, whether caused by negligence or otherwise, or for any losses, however caused, sustained by any person that relies on it.

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DOING BUSINESS IN INDIA - AVOIDING THE PITFALLS BREAKFAST BRIEFING 4 th November 2008