Doing Business in India - Tax and Regulatory
Update
Business opportunities and developments
February 18, 2015
Ed Weaver
International Tax Manager
Grant Thornton US
Agenda
Introduction
Tax Landscape in India
Modes of Investment in India
© Grant Thornton India LLP. All rights reserved.
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
4
Tax Regime – Promised Under NDA Led Government
“less government and
more governance"*
“This tax terrorism in the country is
terrifying. One can’t run the
government by thinking that
everybody is a thief"**
•
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.
* Economic Times
** Business Standard - Modi pleases India Inc. with tax talk
*** Business Standard - Tax department to lose 'terrorism' tag
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 nonadversarial and conducive to investment, enterprise and growth"
President of India in his address to Parliament on 06 June 2014
6
Investing in India – Foreign Direct Investment Limits
Automatic Route
(Illustrative)













Note:
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
Negative List
(Illustrative)
Existing Airports
100%
Titanium Minerals
100%
Asset Reconstruction
Companies
100%

Single brand retailing
(49% automatic)
100%





Multi brand retailing (a)
51%
Telecom - Carriers(a)




Agriculture
(b)
Atomic energy
Lottery, betting and gambling
Chit fund
100%
Defence
49%
Print Media (a)
49%
Broadcasting (a)
Financial services(a)
NBFC (minimum
capitalization norms)



(a) Sector specific guidelines
(b) Subject to certain exceptions
Efforts by Indian Government to ease restrictions and enhance sectoral caps
8
Imports/Exports
• 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.
Tax Landscape in India
Tax Landscape in India
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.
Operational needs, tax efficiencies, regulatory compliances
and funding flexibility to determine mode
10
Tax Landscape in India - Overview of Direct Taxes
•
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
Domestic
30.90%
10 Million -100
Million
32.45%
≥ 100 Million
33.99%
•
text
here
43.26%
•
text here
•
text here
•
text here
• and
textsecondary
here
The above rates are inclusive of applicable surcharge, education cess
and
•
text
here
higher education cess.
Foreign
41.20%
42.02%
Tax Landscape in India -Overview of Direct Taxes
Dividends
•
Taxation of Dividends on shares of an Indian company
Particular
Rate of tax %
Indian Company Paying
Dividend
16.995% as DDT
Shareholder
Exempt
Basis for levy
Dividends declared,
distributed or paid after
specified adjustments
• education
text herecess and secondary
The above rate is inclusive of applicable surcharge @ 10%,
•
text here
and higher education cess @ 2% and1% respectively.
•
•
•
•
text here
text here
text here
text here
Tax Landscape in India– Capital Gains Tax
• Capital Gains Tax
Nature of Capital asset
transferred
Long Term Capital Gain
Short Term Capital Gain
Listed Securities
Exempt
15%
Unlisted Securities (NonResident)
10%
40%
Other (Resident)
20%
30%
Other (Non-Resident)
20%
40%
•
text here
•
text here
•
text here
•
text
here
The above rates are exclusive of applicable surcharge, education
cess
and secondary and
•
text here
higher education cess. See ‗Rate of surcharge, education cess and secondary and higher
•
text here
education cess‘ for details.
.
Tax Landscape in India -Overview of Indirect Taxes
•
•
•
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
•
text
here
movement
of goods
commence. 2% in
case
prescribed
form
•
text hereis available
VAT
Tax on local Sale or purchase of
goods within State
Entry Tax/ Octroi
Tax on entry of goods into a state/
local area for consumption, use or
sale
•
text here
•
text here
Varies from state to state;
•
text here
generally ranges between
text here
4%• to 20%
Varies from state to state
Modes of Investment in India
© Grant Thornton India LLP. All rights reserved.
Modes of Investment In India
Foreign investor
Unincorporated
entities
Generally requires
approval (except
for Project Office);
subject to
conditions
Liaison office
Incorporated
entities
Generally
permitted except
for certain
sectors
Partnerships
Government
approval
required
Unlimited
partnership
Joint venture
Foreign
investment
recently
allowed
Project office
Limited Liability
Partnership
Wholly owned
subsidiary
Branch office
Operational needs, tax efficiencies, regulatory compliances and funding flexibility to determine mode
© Grant Thornton India LLP. All rights reserved.
16
17
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
•
Liaison Office
(‘LO’)
Functions performed
Promotion/ Marketing
of components
Identification
of customers
•
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
18
Investing in India - Branch Office
US Corporation
(‘HO’)
Branch Office
(‘BO’)
•
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
19
Investing in India - Project Office
US Corporation
(‘HO’)
Project Office
(‘PO’)
•
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
20
Investing in India - Joint Venture
US Corporation
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;
21
Investing in India - Wholly Owned Subsidiary
US Corporation
(Parent Co)
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
22
Investing in India -LLP
Foreign Partners
• 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
Indian LLP
• 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