Doing Business in India - Tax and Regulatory Update

Business opportunities and developments

February 18, 2015Ed WeaverInternational Tax ManagerGrant Thornton US

© Grant Thornton India LLP. All rights reserved.

Agenda

Introduction

Modes of Investment in India

Tax Landscape in India

Introduction

Political Development

"This has been an election of Hope. It marks a turning point in the evolution of our democratic polity.

The surge in aspirations and the belief that these could be realized through democratic processes, has been amply reflected in the record 66.4% participation by voters, and a clear verdict in favour of a single political party after a gap of nearly 30 years.

The electorate transcended the boundaries of caste, creed, region and religion to come together and vote decisively in favour of Development through Good Governance."

*President of India in his address to Parliament on 06 June 2014

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• the newly elected NDA government has assured

"to provide a non-adversarial and conducive tax environment, rationalise and simplify the tax regime and overhaul dispute resolution mechanisms"***

• legislative layers in decision-making to be reduced .

• perception of 'tax terrorism' and 'uncertainty' are to be tackled by the new Govt.

• merger of some departments and ministers to create focused outfits.

“less government and more governance"*

* Economic Times** Business Standard - Modi pleases India Inc. with tax talk*** Business Standard - Tax department to lose 'terrorism' tag

“This tax terrorism in the country is terrifying. One can’t run the government by thinking that

everybody is a thief"**

Tax Regime – Promised Under NDA Led Government

• The government is likely to modify the controversial retrospective amendments to the Income-tax Act and make them prospective, justifying the move as a necessary measure to improve investment sentiment. (Source: Economic Times June 05, 2014)

"We will embark on rationalisation and simplification of the tax regime to make it non-adversarial and conducive to investment, enterprise and growth"

President of India in his address to Parliament on 06 June 2014

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Tax regime- Promised under NDA led Government

Existing Airports

100%

Titanium Minerals

100%

Asset Reconstruction Companies

100%

Single brand retailing

100%(49% automatic)

Multi brand retailing (a)

51%

Telecom - Carriers(a)

100%

Defence

49%

Print Media (a)

49%

Broadcasting (a)

Agriculture (b)

Atomic energy

Lottery, betting and gambling

Chit fund

Negative List

(Illustrative)

Prior Approval

(Illustrative)

Agri-sector services IT / ITeS Special Economic Zones

Manufacturing sector

Hotels and tourism Infrastructure Courier

Shipping

Real Estate(a)

Insurance (49 % cap)(a)

Telecom – IP Category 1

Financial services(a)

NBFC (minimum capitalization norms)

Automatic Route

(Illustrative)

Note: (a) Sector specific guidelines (b) Subject to certain exceptions

Efforts by Indian Government to ease restrictions and enhance sectoral caps

Investing in India – Foreign Direct Investment Limits

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• Exports• Most goods can be exported from India except for a couple prohibited

items• India exports in prior year were about $300 billion• Keys exports are gems/jewelry, petroleum, textiles• Keys destinations are UAE, U.S., China, Singapore, Hong Kong

• Imports• Most goods can be imported into India except for a couple prohibited

items• India imports in prior year were about $490 billion• Keys imports are petroleum, electronics, machinery, gold• Keys sources are China, UAE, Saudi Arabia, Switzerland, U.S.

Imports/Exports

Tax Landscape in India

10Operational needs, tax efficiencies, regulatory compliances and funding flexibility to determine mode

A wide gamut of taxing legislations covering direct, indirect, transaction and other taxes is as under:

An Indian tax year runs from 01 April to 31 March of the next year. Tax laws undergo amendments / revisions annually as a part of the budget exercise of the Government.

Tax Landscape in India

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• Direct Taxes comprising of income-tax, wealth tax, MAT and DDT etc., have a Federal Level tax structure in India – governed by the Income Tax Act, 1961

• A Indian Company is taxed on its worldwide income

• Foreign company is taxed on receipts/deemed/receipts/accrual/deemed accrual of income in India

Company Total Income (INR)

≤ 10 Million 10 Million -100 Million

≥ 100 Million

Domestic 30.90% 32.45% 33.99%

Foreign 41.20% 42.02% 43.26%

The above rates are inclusive of applicable surcharge, education cess and secondary and higher education cess.

Tax Landscape in India - Overview of Direct Taxes

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• Taxation of Dividends on shares of an Indian company

Particular Rate of tax % Basis for levy

Indian Company Paying Dividend

16.995% as DDT Dividends declared, distributed or paid after specified adjustments

Shareholder Exempt

The above rate is inclusive of applicable surcharge @ 10%, education cess and secondary and higher education cess @ 2% and1% respectively.

Tax Landscape in India -Overview of Direct Taxes

Dividends

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• Capital Gains Tax

Nature of Capital asset transferred

Long Term Capital Gain Short Term Capital Gain

Listed Securities Exempt 15%

Unlisted Securities (Non-Resident)

10% 40%

Other (Resident) 20% 30%

Other (Non-Resident) 20% 40%

The above rates are exclusive of applicable surcharge, education cess and secondary and higher education cess. See ‗Rate of surcharge, education cess and secondary and higher education cess‘ for details..

Tax Landscape in India– Capital Gains Tax

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• Both Central Government and State Government(s) are empowered to levy indirect taxes. • There are different tax legislation for taxation of goods and services• Government has introduced concept of Negative list under Service tax. Service tax is paid on a

range of services except for a negative list of services that are not liable to tax.

Indirect Tax Nature of Levy General Effective Rate

Service Tax Tax on provision of Services 12.36%

Customs Duty Duty of import/export of goods into/from India

Current peak effective customs duty on import of goods is 28.85%

Excise Duty Tax on manufacture/production of goods in India

12.36%

CST Tax on inter-state sale of Goods The local VAT rate applicable on the goods in the state from where

movement of goods commence. 2% in case prescribed form is available

VAT Tax on local Sale or purchase of goods within State

Varies from state to state;generally ranges between4% to 20%

Entry Tax/ Octroi Tax on entry of goods into a state/ local area for consumption,

use or sale

Varies from state to state

Tax Landscape in India -Overview of Indirect Taxes

© Grant Thornton India LLP. All rights reserved.

Modes of Investment in India

© Grant Thornton India LLP. All rights reserved.16

Unincorporated entities

Incorporated entities

Partnerships

Foreign investor

Liaison office

Project office

Branch office

Joint venture

Wholly owned subsidiary

Unlimited partnership

Limited Liability Partnership

Generally permitted except

for certain sectors

Generally requires approval (except

for Project Office); subject to conditions

Government approval required

Foreign investment

recently allowed

Operational needs, tax efficiencies, regulatory compliances and funding flexibility to determine mode

Modes of Investment In India

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Liaison Office(‘LO’)

Promotion/ Marketing of components

Identification of customers

Functions performed

Investing in India - Liaison Office

US Corporation(‘HO’)

• Setting up LO – procedural requirements like RBI and RoC approval

• Regulatory Requirements – only specific activities can be performed by LO

• Taxation of LO – No taxable income, however annual compliance need to be undertaken

• All LO's under the radar of the tax authorities for the activity carried out by them in India

• Pros / Cons• No commercial activity is allowed;

• Thin line of difference between creating a taxable PE because of nature of work involved;

• Good model for testing the market and only for sourcing of goods from India

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Branch Office(‘BO’)

Investing in India - Branch Office

US Corporation(‘HO’)

• Setting up BO – requires approval from RBI and registration with RoC

• Regulatory Requirements – is permitted for only certain commercial activities; manufacturing not allowed;

• Taxation of BO – taxable as foreign entity for the profits earned by the Branch;

• Need to undertake tax compliances like tax audits if applicable, file returns, undergo assessments etc

• Pros / Cons:

• Good model for limited businesses like setting up ITES service;

• subject to higher rate of taxes, however entire access can be repatriated without paying DDT

• Branch to be very careful of its operations so as to ensure that head office company is not impacted

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Project Office(‘PO’)

Investing in India - Project Office

US Corporation(‘HO’)

• Setting up PO – required approvals from regulators,

• Regulatory Requirements – only set-up for a particular project and needs to be wound up post completion of the project, need to undertake annual compliances;

• Taxation of PO – taxable as foreign company just like Branch,

• Pros / Cons:

• Is only for a specific project and cannot undertake any other activity;

• For more than one project, may need to set-up another project office and maintain separate accounts and undertake separate compliances

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Joint Venture(‘JV')

• Forms of JV

• Company JV

• Un-Incorporated JV's - Co-operation Agreements / Strategic Alliance

• Regulatory Requirements

• Taxation of Joint Ventures

• Pros / Cons:

• JV are legal entities separate from their shareholders;

• Ring fences the risks and liabilities of the JV partners in case of incorporated JV's;

• Unincorporated JV's are generally taxed as AoPs or in the hands of the their respective partners;

• Good starting point to enter into the Indian market, if you find a suitable partner as all local compliances can be managed by such partner, plus they would have knowledge of diverse Indian market;

• Investment requirements can also be low;

Investing in India - Joint Venture

US Corporation

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Wholly owned Subsidiary

(WoS)

• Setting up a Subsidiary – Approval Required

• Regulatory Requirements – is allowed only in sectors where 100% FDI is allowed either under automatic route or approval route

• Taxation of WoS – taxable as a normal Indian company;

• any distribution of profits liable for DDT

• Pros / Cons

• separate legal entity;

• is treated like an Indian company for all legal and practical purposes;

• no restrictions on activity to be undertaken so long the same is allowed under FDI policy

Investing in India - Wholly Owned Subsidiary

US Corporation(Parent Co)

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Indian LLP

• Regulatory Requirements • foreign Investment (FDI) in LLP is now allowed but

only for those sectors which are under the automatic investment route

• FDI is allowed only after prior Government approval

• minimum 2 partners are required to form a LLP (Indian LLP with foreign partners require at least 1 resident Indian designated partner)

• LLP is registered with Registrar of Companies, in the state of incorporation

• LLPs not permitted to avail External Commercial Borrowings (ECBs)

• Pros / Cons• flexibility of operations without imposing detailed

legal and procedural requirements.

• no DDT on the profits distributed to the partners

• non-applicability of buy-back tax and deemed dividend provisions, as applicable in case of a company

Investing in India -LLP

Foreign Partners