Doing Business in India An Overview of Direct & Indirect Taxes

1. Doing Business in India An Overview of Direct & Indirect Taxes Narayan Mehta Partner, Sudit K. Parekh & Co. 25th May 2005

2. Road Map • Direct tax implications • Taxation of foreign companies in India • Taxation of domestic companies in India • Expatriate tax implication • Transfer pricing • Incentives available under the domestic tax laws • Indirect tax implications

3. Companies in India • Foreign companies • Domestic companies

4. Taxation of Foreign Companies • What is a “Foreign Company”? • A company which is not registered under the Indian domestic laws • i.e Branch, LO, Project offices, any other permanent establishment taxed as a “foreign company” • Tax exposure only if there is a “permanent establishment”

5. Permanent Establishment Means a fixed place of business and includes: • A place of management; • A branch; • An office; • A factory; • A workshop; • A mine, an oil or gas well, a quarry or any other place of extraction of natural resources; • A warehouse in relation to a person providing storage facilities for others; • A farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on; Premises used as a sales outlet or for soliciting and receiving orders; Building site or construction, installation or assembly project > 183 days Carrying on supervisory activities in connection with above > 183 days Provision services or facilities in connection with the exploration, exploitation or extraction of mineral oils > 183 days Provision of services, other than services referred above & technical services through employees or other personnel > 90 / 30 days. Dependent Agent PE

6. Permanent Establishment • Exclusions: Article 5(7) A fixed place of business shall not be treated as PE if is used solely for the purpose of: • Storage, display or occasional delivery of goods belonging to the enterprise; • The maintenance of a stock of goods belonging to the enterprise for above purpose • The maintenance of a stock of goods belonging to the enterprise & processing by another enterprise; • Purchasing goods, or of collecting information, for the enterprise; • Advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.

7. Taxation of Foreign Companies • Only profits that is directly or indirectly attributable to the permanent establishment would be taxable in India • Tax rate applicable to Foreign company: • Higher of: • Regular corporate tax rate- 41.82% • Minimum Alternate Tax (MAT)- 8.415% • No branch profit tax on repatriation of profits / surplus

8. WOS- Tax Factors Singapore Parent Tax sparing clause UTC clause • Cap gains exempt • Dividends exempt ………………………………………………………… Singapore Debt Equity India Equipt. Royalties @10% Other Royalties @15% FTS / Management fees @15% Interest @15% Dividends 14.025% Div Dist Tax Finance Act 05 has reduced tax on Royalties / FTS @ 11.22% 33.66% Corp. Tax Or 8.415% MAT 22.44% LTCG 33.66% STCG Indian WOS / JV

9. Tax Sparing Singapore Parent Tax sparring available- no further tax on dividends Dividend exports 14.025% Div dist tax Equity & debt Exports- Nil tax Domestic Sales = 33.66% domesticsale Indian Subsidiary

10. Advantage of using mix of Debt & Equity • Only equity means that the investment is locked in India • Use of debt is useful to repatriate part of the initial capital from India to Singapore • Certain prohibition on utilization of debts towards working capital • Also interest is tax deductible in India • Use of redeemable preference shares in addition, in order to enable tax free repatriation of capital • No thin capitalization / debt-equity norms in India or in Singapore currently! • Use arm’s length interest rates for loans

11. Equip Roy - 10% Roy / FTS / Mgt fees - 15% Interest - 10% / 15% Dividends – 14.025% Comm. - 0% Director fees - 30% Profit Extraction Techniques • Finance Act 05 has reduced tax on Royalties / FTS @ 11.22% • Press News- India-Singapore Tax Treaty may be revised and the w/tax may be reduced to 5%!

12. Taxation of Expatriates • Taxation of expatriates (Art 15) • Taxable in India if: • Stay in India exceeds 183 days • Remuneration borne by Indian PE • Employer is Indian resident • Credit for taxes paid in India available against tax liability in Singapore (Article 25)

13. Net Income (INR) Rate of Income Tax 0 – 100,000 NIL 100,000 – 150,000 10% of the amount on which the total income exceeds INR 100,000 150,000 – 250,000 INR 5,000 plus 20% of the amount on which the total income exceeds INR 150,000 Above 250,000 INR 25,000 plus 30% of the amount on which the total income exceeds INR 250,000 Expatriates - Tax Rates in India Surcharge: Payable @ 10% of the Tax only if net income exceeds INR 1,000,000 p.a. Education Cess:Payable @ 2% of the total tax and surcharge

14. Fringe Benefit Tax (FBT) • Applicable from April 1, 2005 • Tax on fringe benefits provided directly or indirectly to employees or their family members, in the course of employment • Rate of tax - 33.66% (30% plus surcharge and education cess) on fringe benefits as valued • Valuation at specified percentages (20% or 50%) of defined expenses (actuals in some cases) • Employees not liable to pay tax on fringe benefits • Industry specific relief on certain categories of expenses

15. Fringe Benefit Tax (FBT) • FBT is payable whether employer is liable to pay Income-tax or not • FBT- not a deductible expenditure • Separate procedural / compliance provisions for – • Quarterly payment of advance tax • On or before 15th of July / Oct / Jan / March • Filling of return • Assessment & Reassessment • Charging of interest & penalty

16. Transfer Pricing • Prices charged by one related party to another for goods, services, etc. • Any related party transaction undertaken from 1st April 2001 onwards covered • Income arising to “Associated Enterprises” from “International Transactions” to be computed based on“Arm’s Length Price” • Indian regulations based on OECD Guidelines • Methods used: • Comparable Uncontrolled Price Method (CUP) • Cost Plus Method (CPM) • Resale Price Method (RPM) • Profit Split Method (PSM) • Transactional Net Margin Method (TNMM)

17. Transfer Pricing • Detailed documentation requirements • CPA certification • No exemption from compliance • Compulsory tax scrutiny for transactions exceeding INR 50 million • Onus of proof- tax payer primarily liable • Penalties are high!

18. Certain Tax Compliances • Fiscal year – 1st April to 31st March • Registration & obtaining PAN / TAN • Payments of advance tax in 4 installments • Compliance with tax deduction requirements • Compliance with FBT provisions • Maintenance of accounts • Tax audit if gross receipts / sales > INR 4 Mill. • Return of income – due date 31st October • Transfer pricing compliances

19. Presumptive Taxation • Civil Construction, etc. business : Sec 44AD (8%) • Business of Plying, Hiring or Leasing Goods Carriages : Sec 44AE (for Heavy goods vehicles Rs 3500 per month, Others Rs 3150 per month) • Retail Business : Sec 44AF (5%) • Shipping Business : Sec 44B (7.5%) • Exploration, etc. of Mineral Oils : Sec 44BB (10%) • Operation of Aircraft : Sec 44BBA (5%) • Civil Construction, etc. in turnkey power projects : Sec 44BBB (10%)

20. Software/ hardware/ merchandise exports by STP / EOU units: 10A & 10B

21. Units set up in SEZ–10A

22. ‘Infrastructure facilities’ ‘Industrial park’

23. Housing

24. Handling storage & transportation of food grain and processing, preserving & packaging of fruits & vegetables- 80IB (11A)

25. Specified States – 80 IC

26. Shipping Industry – 33AC

27. Mineral Prospecting & Production Industry – 35E

28. Mineral Oil Industry – 42

29. Power Generation & Distribution 80-IA

30. Telecommunications – 35ABB

31. Defence / Security Services

32. Sales tax / VAT CST (Central / State Govt) Overview of Indirect Taxes

33. Indirect Taxes • Customs Duty • Excise Duty • Service Tax • Sales Tax / VAT • Octroi duty / Entry Tax • Stamp duty

34. Customs Duty • Paid on Importation of goods • Types of duties • Basic Customs Duty – At the Rates Specified • Counter Veiling Duty (CVD) – At Excise Duty Rates on Basic Customs Duty • In general- peak customs duty rate – 15% • Items supplied free of cost subject to custom duty on fair market / assessable value • 1% Duty Deposit (DD) on assessable value payable for transactions between Related Parties

35. Customs Duty – Illustration

36. Custom Duty - Rates & Procedure • Duty rates • Information Technology Software – 0% for most software – 4% for others • Computer Hardware – 4% • Proper procedure to be followed for importation of all goods including software

37. Excise Duty • Excise duty – leviable on ‘manufacture’ • ‘Assembling’ in India – amounts to manufacture • General Rate – 16% plus Education Cess @ 2%, effective rate 16.32%

38. Excise Duty • Excise Duty\ service tax paid on goods\ services procured available as CENVAT Credit against Excise Duty payable on final goods manufactured • CVD paid on imported goods can also be set off against Excise Duty payable on final goods manufactured

39. Excise Duty - Illustration

40. Excise Duty - CENVAT Credit

41. Service Tax • Software development and design services exempted • Export Rules 2005 for export of services are in place • Import of services are under service tax net • Cenvat Credit across goods and services • Service tax – 10.2% ( inclusive of education cess) • Service Tax levied based on Categories • 71 Categories are notified till date

42. Sales Tax / VAT #.

43. Sales Tax / VAT cont • Refund of CST to EOU/ STP units • VAT has replaced local sales tax w.e.f 1st April 05 in almost all the • states • Remaining states continue to follow the old Sales Tax regime • Credit of VAT paid on input goods – available • VAT slabs are mostly similar in each state • Intangible goods ( e.g. Technical know how, royalty) are subject to VAT/ CST • No VAT on sales in course of import/ export

44. Octroi duty / Entry tax • Levied on entry and use of goods within state / municipal limit • The rate varies in state / municipal limit / local authority depending on relevant local legislation • Many states provide exemption for EOU/STP • Ranges from 4% to 5%

45. Stamp Duty • State Govt levy on certain instruments e.g. agreement, deed, etc. • Rate varies from state to state • Maharashtra provides abatement in stamp duty to EOU/ STP units up to 75%

46. Our role • Acting as tax counsel in structuring the investments into/out of India • Procuring regulatory approvals for investments into/out of India • Co-ordinating and synchronizing with our overseas associates and implementing the business plan • Provide recurring services once the business is up and running

47. Thank You • Contact Narayan Mehta • Tel: +91 22 22821141 • Fax: +91 22 22024193 • Mobile: +91 9820544495 • E-Mail: narayan.mehta@skparekh.com • Queries ?