Indian Tax Regime and Recent Developments/media/IE Singapore/Files/Events... · Indian Tax Regime...

Indian Tax Regime and Recent Developments

22 August 2012

2 © 2012 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.

FORM PURPOSE RESTRICTIONS APPROVALS REQUIRED

ESTIMATED TIME-FRAME FOR APPROVAL

INCOME TAX / PEAK RATES

LIAISON OFFICE

Representation / Communication Channel

Commercial/Any Income Earning Activity

Pre-approval from the RBI 4 – 6 weeks • Non Taxable presence

subject to safeguards

PROJECT OFFICE

Project execution – Turnkey projects for limited duration

Activities not connected to the Project

Only Post-facto filing (RBI) N. A.

• 42.02%

• Liable to MAT on Book Profits – 19.44% BRANCH

OFFICE

Import –Export /Technical Services / Other permissible activities

Manufacturing (except when set-up in SEZ) / Retail trading

Pre-approval from the RBI (for Branch Office in SEZ, approval from SEZ authorities)

4 – 6 weeks

INDIAN COMPANY

Most sectors / activities / operations fall under Automatic Route (no prior approval)

Small negative list and few sectors attract sectoral caps / prior Government approval

If Regulated, Pre-approval (FIPB) is required else only post facto –filings with the RBI

6 – 8 weeks (FIPB – only if approval is required)

• 32.45%

• Liable to MAT on Book Profits - 20.01%

• DDT – 16.22%

INDIAN LIMITED LIABILITY PARTNERSHIP

Permisssble for sectors falling under the Automatic Route with no performance-linked conditions

Pre-approval (FIPB)/ RBI guidelines awaited

12 – 16 weeks (FIPB)

4 – 8 weeks (RBI?)

• 30.90%

• Liable to Alternate Minimum Tax -19.06%

Forms of Business Presence in India for Non-Resident Entrepreneurs


FINANCIAL YEAR • Uniform Financial Year from April to March for all taxpayers irrespective of accounting / statutory year

ADVANCE RULING

• Available for taxation issues of Non-Residents and binding on Taxpayer as well as the Department

TAX INCENTIVES • Location specific – North Eastern States • SEZ – Developers & Units (Exports) • Industry specific – Infrastructure, Hotels, etc • Activity based – Deductions for in-house R&D, etc

WITHHOLDING TAX

• Onerous withholding tax obligations exists on Payers • Default impacts deductibility and attracts interest and

penalties • Special withholding tax rate of 5% on payments made to

Non-residents for External Commercial Borrowings

WEALTH TAX • 1 % on aggregate taxable value exceeding INR 3 Million

TRANSFER PRICING

• In line with International Standards • Transaction between domestic related parties covered • Advance Pricing Agreement Rules to be notified • Safe Harbour Rules to be notified

Overview of Income Tax Laws in India


Overview of Income Tax Laws in India

DEEMED BASIS TAXATION FOR NON-RESIDENTS

• Business relating to operation of ship or aircraft, extraction of mineral oils, turnkey power projects, etc has deemed basis of taxation – 5% to 10% of gross receipts treated as deemed income

REPATRIATION OPTIONS

• Dividend – Attracts DDT at 16.22% • Payment for services – Taxable in India (subject to Tax

Treaty relief) • Buy Back of shares – Capital Gains Tax (subject to Tax

Treaty relief), Ceilings applicable • Capital reduction – Capital Gains Tax (subject to Tax

Treaty relief) and DDT implications, High Court approval required

EXIT STRATEGY • Amalgamation – Tax Neutral, High Court approval – suitable for consolidation of business

• Demerger – Tax Neutral, High Court approval – suitable for spin off of part of business, division, undertaking, etc

• Sale of business – Slump Sale / Itemised Sale – Capital Gains

OTHER KEY FEATURES

• No Consolidation Rules, • No Thin Capitalization Rules • No Controlled Foreign Company Rules


ELIGIBLE ACTIVITIES TAX HOLIDAY / INCENTIVE

Infrastructure projects - Roads, rail systems, highway projects, water supply projects, ports, airports, etc

100% of the profits are tax deductible for ten years (MAT Payable)

Power generation and distribution (on or before 31 March 2013) 100% of the profits are tax deductible for 10 years (MAT Payable)

Healthcare: Operating and maintaining hospitals (other than excluded area) - Hospital should start functioning between 1 April 2008 and 31 March 2013

100% of the profits are tax deductible for 5 years (MAT Payable)

Special Economic Zones - undertaking developing, operating and maintaining a SEZ

100% of the profits are tax deductible for 10 years (MAT Payable)

Undertaking set-up in North Eastern States • manufacturing and production of any eligible article or thing • carrying on any specified eligible business – hotel, healthcare, bio-technology,

etc

100% of the profits are tax deductible for ten years (MAT Payable)

Unit in SEZ – export of goods and services

Phased income-tax holiday for 15 years (MAT Payable) • 100% for first 5 years (unconditional) • 50% for next 5 years (unconditional) • 50% (max) for next 5 years (conditional)

Infrastructure Debt Fund Income earned not taxable (MAT not payable)

Education (Not for Profit Institutes) Income earned not taxable (MAT not payable)

Paradigm shift in proposed DTC – Investment based deduction as against profit linked incentive

Tax Incentives / exemptions


Weighted / Accelerated Deductions

ELIGIBLE ACTIVITIES DEDUCTIONS

Business such as cold chain facility, warehousing facility for storage of agricultural produce, natural gas pipeline network, Hotels (Two star and above), hospitals (100 beds and above), etc

• Any capital expenditure excluding cost of acquisition on any land, goodwill or financial instrument

In house R&D - bio technology, manufacturing and production of articles and things (except certain specified article)

• 200% of expenditure incurred except on land or building

• 100% for expenditure incurred towards land or building

Payments to an eligible approved scientific research company for in-house R&D facility

125% of the amount paid

Payments made to approved agencies for scientific research, research in social science or statistical research (not in house R&D)

125% / 175% of the sum paid


Key Challenges / Aspects to be considered

NATURE OF PROJECTS KEY CHALLENGES / ASPECTS

EPC Projects • Split of onshore and offshore contracts • Taxability of offshore services and goods • Exposure of AOP (loose consortium) • Permanent establishment in India

Real Estate • Exposure of AOP under JDA • ‘Point of taxability’ in relation to transfer of development

rights under JDA • Business income v Income from house property

Infrastructure and Other Eligible Business for Tax Incentives

• Not formed through restructuring of existing business • Transfer pricing between related parties • Continuity of incentive on transfer of ownership

Education Services Collaboration of foreign institutes with Indian institutes

• Structuring for repatriation of profits • Arms length payments to related person • Withholding tax on payments under collaboration

agreements e.g. sharing of brand name, curriculum, dual degree courses, etc

• Permanent Establishment in India


Overview of framework for Expatriate Secondment / Deputation to India

• Deputation / secondment planning − Economic v Legal Employer − Transfer to Indian payroll v lien on employment − Continuing social security contributions overseas − Reimbursement of salary / SS contributions

• Service Permanent Establishment − FTS / FIS v. Service PE − Conflicting Rulings

• Contribution under Indian Provident Fund Rules (Social Security type contributions)

– Stringent contribution norms – Withdrawal only after 58 years of age – Few social security agreements

• France, Belgium, Germany, Luxemburg and Switzerland effective

• Certificate of Coverage to be obtained • Equalisation adds to tax costs


PARTICULARS INDIA- SINGAPORE TREATY INDIA-MAURITIUS TREATY

DIVIDEND • NIL as Tax free for all Shareholders but DDT levied on the Indian Company at 16.22% on the Dividends declared / distributed

INTEREST • 10% on gross basis for loans by Banks

• 15% on gross basis for others

• Nil for loans by Banks • For others - as per domestic

tax laws i.e. 20.60%/ 21.01% on gross basis (for rupee loans: 41.20% - 42.02% )

ROYALTIES • 10% on gross basis • 10.30% / 10.501% on gross basis under domestic tax law (Treaty Rate is higher at 15% and recourse not warranted)

FEES FOR TECHNICAL SERVICES

• 10% on gross basis (‘Make available’ concept)

• Nil as no FTS Article

Foreign Co.

Ind Co.

Intermediate Holding Company

India

Favorable Tax

Jurisdiction

Investor Tax Jurisdiction

• Indian Tax Authorities have been aggressive against such tax planning – careful implementation is critical

• Apart from Singapore / Mauritius - Netherlands, Cyprus, etc popular

Investing in India –Tax Friendly Jurisdictions (1/2)


Investing in India – Tax Friendly Jurisdictions (2/2)

PARTICULARS INDIA- SINGAPORE TREATY INDIA-MAURITIUS TREATY

Capital Gains on transfer of shares in Indian Company for Non-Residents

Note: Taxable in India as per Domestic Tax laws: Short Term Capital Gains of Foreign Company: 15.76% *- 42.02% / Long Term Capital Gains: 0% *– 10.51% (others)

* For listed shares subject to Securities Transaction Tax on stock exchange

• Not taxable in India subject to LOB provisions and similar benefits continuing under India-Mauritius Tax Treaty − LOB – Treaty benefit denied if primary

purpose is to take advantage of Treaty or if shell / conduit company claims Treaty benefit

− LOB – Singapore Investor not a shell / conduit if it incurs Annual Expenditure in Singapore of atleast SGD 200,000 in the immediate preceding 24 months from the date the gains arise

• LOB clause should provide more certainty in availing Tax Treaty Benefits

• Not taxable in India under India-Mauritius Tax Treaty

• No LOB clause in India-Mauritius Tax Treaty


Several retrospective amendments w.e.f. 1.4.1962 • Clarificatory amendment to state that asset or a capital asset

being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India

• Potential tax impact on income earned (especially capital gains) through multi layered structures with India investment being the substantial investment

• What is ‘substantial’ in this context – clarification awaited

• Clarification issued that there will be no reopening of completed assessments (audits) on account of retrospective amendment

• S. 195: WHT obligation even on non-residents who have no place of business / business connection / other presence in India

Foreign Company

SPV

Sale of shares of SPV

Indian Company

Buyer

Overseas

India

Sale of shares of Indian company

Finance Bill 2012 - Taxing Indirect transfer - Vodafone overturned


GAAR to be applicable from 1 April 2013

“Main purpose” or one of the “main purposes” is to obtain a “tax benefit”

Not at “arm’s-length”

“Misuse/abuse" of tax provisions

Lacks “commercial substance”

Not for bona-fide purposes OR OR

AND

Impermissible Avoidance Arrangement

Consequences

Disregard / combine / re-characterize whole /

part of the arrangement

Disregard corporate structure

Deny treaty benefit

Re-assign place of residence / situs of assets or transaction

Re-allocate income,

expenses, relief, etc.

Re- characterize Equity- Debt, Income, Expenses, relief, etc.

OR

GAAR to override Treaties

Finance Bill 2012 – GAAR proposed


• “Draft” guidelines

− Issued on 28 June 2012 with 21 illustration:

− Review pending…. Will GAARs be….deferred....diluted…. or deleted?

• Positives − Clarity in meaning of “connected person”

− “Tax Mitigation” permissible

− Thin Capitalisation applicable only qua “connected persons”

− Overseas investments: Non-applicability of GAARs to parking of dividends

− No provision for grandfathering of existing structure

− Income earned post 1 April 2013 would be subjected to GAAR

• Things to look-out for

− Is Singapore an effective alternative jurisdiction for India holdings - Most of the MNC’s / Singapore Companies are likely to have substance in Singapore

− Will GAAR not apply if one satisfies the LOB provision in the India-Singapore Tax Treaty?

− Likely to impact the India holding structures without substance especially via Mauritius

− Need for an effective restructuring of the India investment structure / substance in the entity owning India investments

GAAR Guidelines and key takeaways


Some of the above provisions have already been introduced in the Act

Direct Taxes Code Bill 2010 - Earlier proposed to be enacted from 1 April 2012

• Substantial new law / enactment to replace the existing Income-tax Act 1961 and other direct tax statutes

• Key international tax aspects − General Anti Avoidance Rules (GAAR) (already

introduced) − Thin Capitalization Rules − Controlled Foreign Company (CFC) Rules − Branch Profit Tax (BPT) at 15% on for Foreign

Companies − Widening the Definition of Permanent Establishment − Place of Effective Management in India – any time

during the year results in Tax Residency − Tax Treaty Override – GAAR / CFC / BPT (Already

introduced for GAAR) − Wide ambit of provisions taxing Transfer of Assets

situated in India (already introduced)

• Transfer Pricing − Widening of the definition of ‘Associated Enterprise’

(widened gradually) − Introduction of provisions for Advanced Pricing

Agreements (valid generally for 5 years unless change of facts / law) (already introduced)

− Audit process tightened • Tax Holidays

− Grandfathering of existing tax holidays • SEZ Units commencing upto 31 March 2014

− Move towards granting investment-linked incentives as compared to profit-linked incentives


Overview of Indirect Tax Regime in India

INDIRECT TAX TAXING AUTHORITY APPLICABLE ON GENERAL EFFECTIVE RATE*

Customs duty Central Government Import of goods from outside India

22.85% / 25.85% / 28.85%

Excise duty Central Government Manufacture of goods in India 12.36%

VAT State Governments Sale of goods within the state 4% to 5.5% / 12.5% to 15%

CST Central Government Inter-state sale of goods 2% / 4% to 5.5% / 12.5% to 15%

Service tax Central Government Provision of specified categories of services

12.36%

Entry tax/ Octroi State Governments/ Local Authorities

Entry of goods into a state/ local area for sale, consumption or use

Nil to 12.5%

Research & Development Cess

Central Government Import of technology into India under foreign collaboration

5%


• Excise duties/ Service tax/ CVD/ SAD/ Surcharges/ Cesses

• VAT/ Entertainment tax/ Luxury tax/ Entry tax/ Purchase tax (other than Octroi)

• Cesses & Surcharges on goods & services supply

LIKELY RATE & CREDITS

FRAMEWORK

• Dual GST for Centre and States, IGST on inter-state transactions

• Separate legislation, levy & administration

• Place of Supply Rules for determining ‘situs’ of goods & services

• For goods - Between 12% to 20% in 1st year, 12% to 18% in 2nd year, 16% in 3rd year

• For services – 16%

• Utilisation of credit in specific order

COVERAGE TIMELINE

• 1 April 2013?

GST - Proposed Structure

GST


The above developments are being undertaken keeping in mind International Best Practices from a tax and regulatory perspective

Foreign Exchange Regulations

Securities Law

Companies Act

Stamp Duty

Expatriate and Social Security

Income Tax Act

Indirect Taxes Laws

Key amendments expected in FDI guidelines (Aviation/Retail)

Introduction of the new Takeover Code

New Companies Bill expected to be introduced

Stamp Duty law proposed to be revised

Introduction of new Visa Regulations and Social Security measures

New Code –DTC to be introduced in 2013?? - International concepts such as GAAR / APA proposed

New GST regime expected

Reporting Standards Adoption of International Financial Reporting Standards

Key Changes in Tax and Regulatory Laws


18

Glossary of terms

ABBREVIATION PARTICULARS ABBREVIATION PARTICULARS

DDT Dividend Distribution Tax TDS Tax Deducted at Source

MAT Minimum Alternate Tax WHT Withholding Tax

SEZ Special Economic Zone CVD Counter veiling Duty

FTS / FIS Fees for Technical Services / Fees for Included Services

SAD Special Additional Duty

R&D Research & Development INR Indian Rupees

FIPB Foreign Investment Promotion Board

AOP Association of persons

RBI Reserve Bank of India JDA Joint Development Agreement

GAAR General Anti Avoidance Rules MNC Multi National Companies

CFC Controlled Foreign Company BPT Branch Profits Tax

LOB Limitation of Benefits EPC Erection, Procurement and Construction

Act The Income-tax Act, 1961 DTC Direct Taxes Code 2010

GST Goods and Services Tax FDI Foreign Direct Investment

VAT Value Added Tax CST Central Sales Tax

THANK YOU PRESENTED BY:

NARENDRA SONI Senior Manager – India Tax Desk Tel: + 65 6213 2688 [email protected]

© 2012 KPMG Services Pte. Ltd. (Registration No: 200003956G), a Singapore incorporated company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved. Printed in Singapore.

Date post:	31-Jan-2018
Category:	Documents
Upload:	truongduong
View:	226 times
Download:	0 times

Indian Tax Regime and Recent Developments/media/IE Singapore/Files/Events... · Indian Tax Regime...

Documents