FICCI U.S. – India Business Summit November 29-30, 2006

1. Global Tax Advisory Services FICCIU.S. – India Business SummitNovember 29-30, 2006 Doing Business with India – Tax & Accounting Aspects Gaurav Taneja Ernst & Young India

2. Overview of Tax Regime • Worldwide system of taxation for resident companies • Non-resident companies taxed on India source income, subject to tax treaty provisions • Corporate tax rate of 33.6% for domestic companies and 41.82% for foreign companies • Minimum Alternative Tax levied at 11.22% • Fringe Benefit Tax (FBT) levied on certain expenses • “Split rate” system of taxing dividends paid by domestic companies • Dividend distribution tax (DDT) of 14.043% levied on corporation distributing dividends • Shareholder not liable for tax on dividends

3. Overview of Tax Regime • Tax Treaties • Wide network of tax treaties (nearly 65 countries) • Higher emphasis on source country taxation • Transfer Pricing • Mandatory contemporaneous documentation requirements • Stringent penalties for non-compliances or for TP adjustments

4. Overview of Indirect Taxes • Custom duty applicable on import of goods • Made up of various duties and cess • Effective rate approx 36.74% • Information Technology Agreement products exempt from Basic Duty • Manufacture/ production of goods subject to excise duty • Peak rate of duty at 16.32% • VAT implemented in most States • Multipoint taxation system • Common rate of 12.5% and concessional rate of 4% • Inter-state sale liable for Central Sales Tax

5. Overview of Indirect Taxes • Service tax applicable on identified services provided or received in India • Current scope of taxable services is very wide and covers a vast majority of service categories • Applicable at 12.24% • Export of services exempt from service tax • Export determined as per prescribed rules • Rebate of input service tax available to exporter of taxable services • Import of services liable to service tax under a reverse charge mechanism

6. Tax Incentives • Developers of SEZs and Units located in SEZs • Units engaged in export of goods & IT Services (upto 2009) • Geographic location based & State specific incentives • Companies engaged in generation & distribution of power • Companies engaged in “infrastructure projects” such as roads, ports, urban infrastructure etc • Incentives under Foreign Trade Policy, Free Trade Agreements

7. Tax Issues faced by U.S. MNCs • Problems of Interpretation • Aggressive interpretation of tax laws/ treaties by Indian Tax Authorities • Problems of Procedure • Time consuming procedure for resolving tax disputes, absence of Advance Pricing Agreements • Problems of Regulations • Some regulations are outdated and contrary to “international best practices”

8. Key Tax Challenges • Repatriation & Exit tax costs • Availability of DDT as a tax credit in the U.S? • Cascading impact in case of “two-tier” in-country holding structures • Capital gains tax on exit/ internal re-organization • Need to consider using favorable holding structure during set-up stage • PE risk • Lower threshold for PE exposure under India’s tax treaties • Need to regularly monitor activities in India to assess PE exposure

9. Key Tax Challenges • Withholding tax • Withholding tax applicable on service fee, royalty and cost allocations • Planning possible through use of favorable tax treaties • Aggressive enforcement by Revenue Authorities • Need to review cross-border payments to assess WHT exposure

10. Key Tax Challenges • Service Tax • Emerging as a controversial area • Ambiguity on several issues relating to cross-border services • Assessments & Appeals • Time consuming process of appealing assessments and resolving tax disputes

11. Accounting Aspects • ICAI, National Advisory Committee on Accounting Standards, Company’s Act & SEBI govern financial reporting requirements • Indian GAAP based on Accounting Standards (AS) pronounced by ICAI • ICAI AS mandatory for Indian companies • Broad convergence between ICAI AS and IFRS on most practices • Disclosure Requirements • Balance Sheet, Profit & Loss Account, Notes to Financial Statements, Auditors Report, Cash-flow Statement • Interim financial reporting for listed companies

12. Accounting Aspects • Clause 49 of listing agreement revised by Securities & Exchange Board of India (SEBI) • Enhancing corporate governance through Board & Audit Committee responsibility and disclosure requirements • Disclosures to be made in Annual Report • Financial statements related • Compliance with Accounting Standards • Business related information • Information on key employees • Composition of Audit Committee • Relationship with Directors

13. Moving Forward • Careful planning of ownership structure & business model during set-up stage • Optimizing benefits under tax incentive schemes, especially negotiation of State incentives • Be prepared for protracted litigation – a way of life in India! • Well developed judicial system, but process can be time consuming • Dynamic environment resulting in continuous tax, regulatory & accounting developments

14. Thank You