B S R and Associates

Investment in Modern Food Distribution and Investment in Modern Food Distribution and Cold Chain Infrastructure Cold Chain Infrastructure – – Tax and Regulatory perspectiveTax and Regulatory perspective

Jayesh KariyaJayesh Kariya

December 2010December 2010

B S R and Associates

© 2010 KPMG, an Indian Partnership 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.

ContentsBackdrop

Regulatory Framework

2

Tax Incentives and Issues Faced by the Industry

1.

2.

3.

4.

5.

Impact of DTC and GST6.

Key Considerations for Structuring and funding Avenues

Typical Structures and Exit Mechanisms


© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.

3

Backdrop



4

Backdrop

Trends

Strong macroeconomics fundamentals

Changing tax policy boosting warehousing outsourcing

Realty players foraying into the market

Investments from private equity firms

Government Incentives

Planned shift to GST tax regime

The Warehousing Act, 2007

Private investment in logistics parks and Free Trade Warehousing Zones

Infrastructure developments

Developments of the dedicated freight corridor



5

Regulatory Framework


© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved. 6

Investment under Schedule 1 to FEMA Notification No. 20 of May 2000

Investment under Automatic Route

Investment on repatriation basis

FDI RouteFDI Route FII RouteFII Route


Investment in accordance with SEBI (FII) Regulations


FVCI RouteFVCI Route


Investment in accordance with SEBI (FVCI) Regulations


NRI Route NRI Route

On repatriation basis under Schedule 1 and 3 to FEMA Notification No. 20 of May 2000; or

On non-repatriation basis under Schedule 4 to FEMA Notification N0. 20 of May 2000

Foreign Investment Windows

Regulatory framework



7


FDI Guidelines

Operating warehouse

– 100% FDI is freely permissible

Pure Construction of Warehouse

– Whether conditions of P No.2 of 2005 apply?

Modern Food Distribution

Foreign Direct Investments (FDI)

Warehouse

Food Distribution operators (not traders)


Quick Service Restaurants (‘QSR’)

Hotel Operators

- 100% FDI is freely permissible

- Term hotel includes restaurant, beach resorts and other tourism complexes providing accommodation and / or catering food facility to tourism

Cold Chain Industry

Operating Cold chain


Pure Construction of Cold Chain Storage

– Whether conditions of P No.2 of 2005 apply?



Automatic route – ECB up to USD 500 million (hotel – USD 100 million)

Permissible end-use – import of capital goods, financing of new projects, modernization or expansion of existing production units, for investment in the infrastructure sector in India, obtaining license/permit for 3G spectrum, specific service sectors viz, hotel, hospital and software

End-use restrictions – working capital, general corporate purposes and repayment of existing Indian rupee loan

Only specified lenders permitted – these include financial institutions and shareholders holding specified stake in borrower entity

Minimum maturity – 3 years

All in cost ceilings prescribed – if borrower wants to pay higher interest over the all-in cost ceiling, specific RBI approval required

Broad overview of ECB Guidelines

Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road

including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure

(water supply, sanitation and sewage projects) and (viii) mining, refining and exploration (ix) cold

storage or cold room facility, including for farm level pre-cooling, for preservation or storage of

agricultural and allied produce, marine products and meat.

In case the Offshore Co contemplates making investment through non-convertible debt instruments, such investment would be considered as foreign debt in nature and the ECB guidelines would become applicable

Eligibility of ECBs to the sectors in discussion??




9

Key Considerations for Structuring and Funding Avenues



10


Key considerations for structuring

Vanilla Debt

Regulatory Approvals

Managing Cash Trap

Valuation

Tax Influence

Key points Key points for for

consideratioconsiderationn

Business Plan

Constraints under Present ECB regime

Use of Structured products

Tax incentives under the Act Impact of DTC and GST Leveraging of debt cost vis-à-vis

profitability Transfer Pricing

Use of Share Premium

Exit Valuation Strategy

Promote Structure in case of Funds

Payback period and waterfalls

Put and call options including conversion options

Cold Chain and warehousing – freely permissible

QSR and Modern Food Distribution – freely permissible

Overseas Entity

Vehicle Use of FVCI vehicle Use of IHC vehicle



11


Key funding avenues

Domestic sources

Foreign sources

Funding avenues

Promoter’s contribution

Bank Loan

Initial Public Offering

Domestic Venture Capital

Foreign Direct Investment

Foreign Institutional Investors

Private Equity / Foreign Venture Capital

External Commercial Borrowings




Funding Instruments

DEBT

EQUITY

CCPs

CCDs

OptionallyConvertibles

RedeemablesECB

ECB, conditions

and restriction

s apply

Currently, Mezz FDI is permissible only in form of CCPS and

CCD

Equity/ADR/GDR

CCPS

CCD

Optionally Convertibles

Redeemables

Debt

Tax arbitrage may be

available on

interest payouts

No tax break on dividend

MEZZ

CapitalAuto Route



13

Typical structures and Exit mechanisms



Typical structures and Exit mechanisms

Direct Investment

Investment through holding company In India

Outside India

Investment strategy: Enterprise level

Project specific SPV (direct)

Project Specific SPV (through a holding company)

Project Specific SPV (through holding companies)

Co-ownership structure

Offshore Fund / FVCI structure

Enterprise level Exit through stake sale to domestic investor /

JV partner

Exit through an Initial Public Offer listing

Asset Sale Exit through sale to strategic investor

SPV level Exit through transfer of SPV shares by HC to

domestic investor / JV Partner

Exit through transfer of IHC shares overseas / overseas listing – Vodafone controversy

Typical Structure Exit Strategies

Other variations in the transaction model could be possible depending on the commercial objectives

Exit rights like put option and tag-along rights could also be considered



15




16


Tax Incentives under the Income-tax Act, 1961 (‘the Act’)

Modern Food Distribution / QSR:

− No special incentives under the Act.

− Normal provisions governing taxability of ‘Income from business / profession’ would apply.

Cold Chain Industry and Warehousing:

− Investment linked incentives to the operator of cold chain facility and warehousing facility for storage

of agricultural produce (subject to certain conditions):

Accelerated deduction of capital expenditure

Expenses incurred before commencement of operations – 100% in the 1st year of operation

– Incentives to Developers of Free Trade Warehousing Zones (‘FTWZ’) in the Special Economic Zone

(‘SEZ’):

100% deduction for ten consecutive assessment years out of fifteen years

Exemption from Minimum Alternate Tax (‘MAT’) and

Exemption from Dividend Distribution Tax (‘DDT’)



17


Tax Issues Faced by the Industry

Cold Chain Industry and Warehousing:

– Meaning of Agriculture produce

– MAT liability

– Rent payment to Cold Chain Storage Operator – withholding tax implications

Taxability of Subsidy from Government – capital vs. revenue receipt

Characterization of the income

Tax depreciation – as plant or as building

Deduction to ICDs / CFCs



18

Impact of DTC and GST



19

Impact of DTC

Impact of DTC

Incentives to operator of cold chain facility and warehousing facility for storage of

agricultural produce (subject to certain conditions):

– Investment linked incentives continued

Incentives to Developer of FTWZ in the SEZ:

– Grandfathering of profit linked incentives – SEZs notified upto 31 March 2012

– Investment linked incentives – SEZs notified on or after 1 April 2012

– No MAT and DDT exemption

Corporate tax rate – flat tax rate of 30% irrespective of residential status of the assesses

MAT rate 20% – additional burden

Additional tax liability for non-resident companies – branch profit tax @ 15%

Relaxation in DDT credit provisions

Ordinary Source vs. Special Source

– Rental Income – whether taxed as business income?



20

Impact of DTC

Impact of DTC

Other aspects:

– GAAR

– CFC regulations

– Place of effective management

– Branch profit tax

– Treaty overrides



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

VAT/ Entertainment tax/ Luxury tax/ Entry tax (except in lieu of Octroi)

Cesses and surcharges on goods and services supply

Certain petroleum/other products likely to be outside the purview of GST

LIKELY RATE and CREDITS

C

GST

FRAMEWORK

Dual GST for Centre and States

IGST on inter-state transactions incl. stock transfers

Separate legislation, levy and administration

Place of supply rules for determining “situs” of services

Peak rate of 20 percent (with

gradual reduction)

Concessional rate for select goods

(not for services) at 12 percent

Tax on services at 16 percent

COVERAGE B

TIMELINED

1 April 2011?

A

Impact of GST - Proposed Structure



Impact of GST

22

The impact of GST on the subject business needs to be established from the following two perspectives:

Internal impact Impact on revenue, Tax cost on sourcing/ distribution/ logistics, cash

flows, pricing, Invoicing, returns etc

External Impact

Impact on the business decisions and operations of 3PL service

provider, arising out of the supply chain decisions taken by their

customers in the proposed GST regime



Impact of GST - Supply Chain

23

Existing scenario

GST scenario

Points for consideration – supply chain

Interstate sale attracts CST – non creditable

Stock transfers not liable to CST/ VAT

Need for depots to stock transfer and make onward sales

Interstate sale to attract IGST – creditable

Stock transfers to attract IGST – creditable. However, such IGST to result in blockage of working capital till inventory disposed

Shift of trend in movement of goods:

– interstate freight likely to increase

– reduction in number of depots

– reduction in stock transfers

– more stocking at mother warehouses

Identifying the correct number and appropriate location of depots

Developing efficient distribution plans – movement points, quantity for distribution

Optimize the tax implications

Cost for opening and operating of depot

GST to force industry to re-visit existing logistics and warehousing set up

– Opportunity for 3 PL service providers

Jayesh KariyaPartner

Tax and Regulatory Services


Phone: +91 (22) 30902080

Email: [email protected]

Delhi

Building No.10, Tower B, 8th Floor, DLF Cyber City, Phase – IIGurgaon 122002 HaryanaTel +91 124 3074000Fax +91 124 2549101

Mumbai

Lodha Excelus, Apollo Mills CompoundNM Joshi MargMahalaxmiMumbai 400 011Tel +91 22 3983 6000Fax +91 22 24913132

Bangalore

Solitaire139/26, 3rd Floor, Inner Ring Road, KoramangalaBangalore 560 071Telephone: +91 80 4176 6000Fax: +91 80 4176 6999

Hyderabad

8-2-618/2Reliance Humsafar, 4th FloorRoad No. 11, Banjara HillsHyderabad 500 034Tel +91 40 6630 5000Fax +91 40 6630 5299

Chennai

No. 10 Mahatma Gandhi Road, Nungambakam, Chennai 600 034Tel +91 40 3914 5000Fax +91 40 3914 5999

Kolkata

Infinity Benchmark, Plot No.G-1, 10th floor, Block - EP and GP, Sector - V, Salt Lake CityKolkata 700091Tel: +91 33 44034066Fax: +91 33 4403 4199

Pune

703, Godrej Castlemaine Bund Garden Pune 411 001Tel: +91 20 3058 5764/ 65Fax: +91 20 30585775

Kochi

4.F, Palal Towers,M.G. Road,Ravipuram, Kochi, Kerala 682016

Chandigarh

First Floor, SCO 22-23Sector 8C, Madhya MargChandigarh - 160019Tel: +91 172 3935777/78/79/81Fax: +91 172 3935781

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or

entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of

the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate

professional advice after a thorough examination of the particular situation.


Thank you

B S R and Associates

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