Taxation Aspects

for

Doing Business in India

V S P V & Co Chartered Accountants

New Delhi & Bengaluru

India Tel. +91-11- 26 16 98 16

Web: www.vspv.in e mail: sudhir.gupta@vspv.in

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CONTENTS

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S.No Particulars Slide No

1 Doing Business in India –Advantages 3

2 Business Vehicles for Foreign Entities 4

3 Applicable Direct and Indirect Taxes 5-6

4 Direct Tax Implications 7-21

5 Double Taxation Avoidance

Agreement (DTAA) with Japan

22-23

6 Transfer Pricing Regulations 24-25

7 Indirect Tax Implications 26-33

8 Start up and Tax Incentives 34-35

9 Repatriation of Funds 36

Japan & India

• Largest & Fastest Growing Economy/Big Market in itself

• Global Business Process Outsourcing Hub

• Political Stability & Strategic Geographical Location

• Costs Competitive & Large Educated Youth Workforce

• Business Friendly Environment

3

Advantages of Doing Business in India

• Investing since 5 decades – India being a preferred

investment country

• Mitsubishi, Suzuki, Nippon-Insurance, Sony etc. are some

of the successful Japanese companies into India

• India being consumption driven economy, provides huge

market for Japanese products.

• Japan is Capital Intensive and India is Labour Intensive

Economy.

Business Vehicles for Foreign Entities

• Liaison Office (LO)

• Branch Office (BO)

• Project Office (PO)

• Wholly Owned Subsidiary (WOS)

Public or Private Limited Companies

Limited Liability Partnership (LLP)

• Joint Venture Company (JVC)

4

Applicable Direct and Indirect Taxes

Direct Taxes

Income Tax

Tax Deduction at Source (TDS, i.e. withholding tax)

Dividend Distribution Tax

Transfer Pricing Laws

Expat Taxation

5

Indirect Taxes

Central Excise Duty

Service Tax

Customs Duty

Central and State Level VAT

State Luxury Tax

Other Local Taxes

Goods and Services Tax (GST) – Expected to be implemented from July, 2017

6

Direct Tax – Income Tax

Scope of Taxation

Worldwide income from all sources of Domestic Companies

resident in India are taxed in India

Non-resident Companies are taxed on the income earned through

a Business Connection in India or any source in India or transfer

of a Capital Asset, being any share or interest in a Company

Incorporated outside India, deriving its value substantially from

assets located in India

A company is regarded as a resident in India if it is incorporated

in India or if its place of effective management (POEM) is in

India

India has Double Tax Avoidance Agreement with various

countries including Japan

7

Income Tax – Rates of Tax

• Domestic and foreign companies are taxed at a specified basic

tax rate, surcharge and cess based upon their total taxable income

• Provisions of Minimum Alternate Tax (MAT) are also applicable

on domestic and Foreign Companies

• LLP is taxable at the base rate of 30% further increased by

surcharge at the rate of 12% ( if total income exceeds 10 million)

and education cess at the rate 3%. However, profits distributed by

LLP are exempt in the hands of partners

• Foreign companies having Permanent Establishment (PE) in

India or Branch office or Project office are taxed at the basic rate

of 40%

• The tax rate for domestic and foreign corporations (including

surcharge and education cess) is summarized below:

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Sl

No

Description Tax

Rates

%

Surcharge

%

Education

Cess %

Effective

Rate %

A. Where the total income is up to INR 10 Million

Domestic Company 30 % NIL 3 % 30.9 %

Foreign Company 40 % NIL 3 %

41.2 %

B. Where the total income is more than INR 10 Million and up to INR 100 Million

Domestic

Company

30 % 7% 3 % 33.06 %

Foreign Company 40 % 2% 3 % 42.02 %

C. Where the total income is more than INR 100 Million

Domestic

Company

30 % 12% 3 % 34.61 %

Foreign Company 40 % 5% 3 % 43.26 % 9

Withholding Tax Rates

10

Particulars Individual/

HUF

Domestic

Company /

Firm

Limit of

Payment in

INR

Salary As per the prescribed rates

applicable to Individual /

Women & Senior Citizens

--

Interest other

than Interest on

Securities

10 % 10 % Banking INR

10,000/- p.a.

Others INR

5,000/- p.a.

Deemed

Dividend

-- 10% INR 2,500/-

Payment to

Contractors/

Advertisers

1 % 2 % INR 30,000/-

per contract or

INR 1,00,000/-

p.a.

Commission &

Brokerage

5 % 5 % INR 15,000/-

Rent - Land &

Building

10 % 10 %

INR 1,80,000/- Rent - Plant &

Machinery

2 % 2 %

Professional

Fees &

Technical

Services /

Royalty

10 % 10 % INR 30,000/-

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Particulars Individual/

HUF

Domestic

Company /

Firm

Payment in

Excess of

Withholding Tax Rates for Payments

to Foreign Companies

Nature of Payment Basic Rate

Interest on Foreign Currency Loan 20%

Royalties & Fees for Technical Services 10 %

Dividends received by Foreign Company 20 %

Short Term Capital Gains 15 %

Long Term Capital Gains 20 %

Other Income 40 %

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Other Provisions related to Income Tax

• At present, basic Corporate tax rate for an Indian company is 30

percent which for the purpose of promoting easiness of doing

business in India is proposed to be reduced from 30 percent to 25

percent over the next four years, starting from the financial year

2016-17

• Basic Minimum Alternate Tax (MAT) rate for domestic and

foreign companies is 18.5 %, which is calculated on the book

profit under prescribed rules

• A presumptive taxation regime exists under the Act under which

specified business activities like exploration, etc. of mineral oils,

execution of certain turnkey contracts, and air and shipping

operations in the hands of non-residents are taxed on presumptive

basis

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• Dividend Distribution Tax @ basic rate of 15 % (effective rate

being 20.36 % ) is payable by domestic companies on the amount

of dividends declared by them

• Rates of depreciation on fixed assets prescribed on written down

value basis

• Unabsorbed business losses can be carried forward and set off

against the business profits of any business for a maximum of

eight years

• Unlisted companies could lose the right to carry forward the

business loss if there is a substantial change in the shareholding.

• Capital losses may also be carried forward for eight years

• Unabsorbed depreciation can be carried forward for an indefinite

period and can be offset against any head of income

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• Broadly, the assessment system consists of

– a) Self Assessment;

– b) Regular/Scrutiny Assessment;

– c) Best Judgment Assessment;

– d) Income Escaping Assessment.

• Filing due dates (unless otherwise extended under certain

circumstances):

i) 30th November – If the company has international transactions

ii)30th September– Any other company

• Carry back of losses in not permitted in India

• Authority for Advance Rulings for non-residents

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Advance Ruling

• Authority For Advance Ruling Set up by Government of India

(GOI) under Income Tax Act

• Non-Residents can know its liability towards income tax before

start of investment in India

• Best suited to sought complex issues of income tax including

those concerning DTAA’s

• Rulings of AAR binding upon Income Tax Department

• Time bound disposal of applications

• Non-resident himself or resident entering into business with

Non-Resident or public limited company can obtain advance

Ruling

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Income Tax Procedures

• Obtaining Permanent Account Number (PAN)

• Payment of advance tax

• Filing of tax returns

• Assessment by Assessing Officer

• Appeals to Commissioner (Appeals)

• Appeals to Income Tax Appellate Tribunal

• Appeals to High Court

• Reference to Supreme Court

• Website www.incometaxindia.gov.in

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Dispute Resolution Mechanism in India

• Laws and compliances in India are being simplified to avoid

arising of disputes

• Even if dispute arises, alternate judicial mechanisms like

Authority for Advance Ruling, Dispute Resolution Panel, Income

Tax Appellate Tribunal, etc. are setup to resolve dispute in time

bound manner

• Judicial system of High Courts and Supreme Courts have been

asked to make faster disposal of cases – commercial courts setup

• Different Tribunals under various laws like National Company

Law Tribunal, Securities Appellate Tribunal, etc. have been made

functional for faster disposal of disputes

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Income Tax on Employees Deputed by

Parent Companies

Basic Tax structure for resident individuals and non-resident individuals:

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Net Income

Range

Income Tax

Rates

Surcharge Education Cess

Up to INR 2,50,000/- Nil Nil Nil

INR2,50,000/- to

INR5,00,000/-

10% (of total income

minus INR2,50,000)

Nil

3 %

INR5,00,000/- to

INR10,00,000/-

INR25,000/- + 20% (of

total income minus

INR5,00,000)

Nil

3 %

INR10,00,000/- to

INR99,99,999/-

INR1,25,000/- + 30%

(of total income minus

INR10,00,000)

Nil

3 %

Above

INR1,00,00,000/-

INR28,25,000/- + 30%

(of total income minus

INR10,00,000)

12 % 3 %

Specified Business Deductions

• Any capital expenditure (excluding land, goodwill, financial instrument) incurred wholly for specified business prior to the commencement of operations and capitalized as on the date of commencement of operations allowed as deduction

Quantum of Deduction :

– 150% of deduction of capital expenditure on:

Cold-chain facility and warehouse facility for the storage of agricultural produce

Building and operating a hospital (specified parameters)

Developing and building a housing project (affordable housing)

Production of fertilizers in India

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- 100% of deduction of capital expenditure on:

Building and operating a two-star and above hotel

Developing and building a slum re-development housing

project Setting up and operating an inland container depot or a

container freight station

Bee-keeping

Setting up and operating a warehouse facility for storing sugar

Laying and operating a slurry pipeline for the transportation of

iron ore

Setting up and operating a semi-conductor wafer fabrication

manufacturing unit

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Double Taxation Avoidance Agreement

with Japan • Comprehensive Treaty between India and Japan

• Override domestic tax law, to the extent that treaty more

beneficial to taxpayer

• Apart from DTAA, India also has two other bilateral agreements

with Japan

Comprehensive Economic Partnership Agreement(CEPA)

wherein India has committed to reduce tariffs from 87% of its

tariff lines, whereas Japan will reduce tariffs from 92% of its

tariff lines

Social Security Agreement (SSA) wherein employees posted

to the host country under short term contracts are exempt

from making social security payments in host country if paid

in home country

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Article Heading / Purpose of Article

5 Permanent Establishment (PE)

6 Income From Immovable Property

7 Profits From Business

10 Dividend Income

11 Interest Income

12 Income From Royalties and Fees From Technical Services

13 Income From Capital Gains

14 Independent Professional Services

15 Income From Salary, Wages and Other Similar Remuneration

16 Director’s Fees

Main articles of DTAA between India and Japan is

summed up below:

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Transfer Pricing

• Applicable to specified international transactions with Associate

Enterprises one of which is a non-resident

• 5 recognized methods for Arms Length Price (ALP)

determination

-Comparable Uncontrolled Price

-Resale Price Method

-Cost Plus Method

-Profit Split Method

-Transactional Net Margin Method

• Specified records like Transfer Pricing Study Report, information

and documents related to international transactions, records of

uncontrolled transactions, manner, assumptions of determining

Arm’s Length Price 24

• Documents to be maintained for 8 years

• No need to maintain documents prescribed under the Income Tax Laws, if book value of international transactions does not exceed INR 10 Million. However, the assessee need to justify the Arm’s Length Price

• Audit under Transfer Pricing required

• From Assessment Year 2017-18, the entities claiming profit liked deductions under 80IA,section 10AA of the act are governed by provisions of Domestic Transfer Pricing Act

• Scrutiny of transactions by Income Tax Authorities in certain cases

• Government provides option for Advance Pricing Agreement, Safe Harbor Rules to reduce litigations and easy compliances with the law

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Indirect Taxes

Excise Duty

• Duty payable by manufacturer on manufacture or production of

goods

• To be paid at the time of removal from factory

• Normally payable on selling price – generally recovered from

customer

• Excise duty rates ranges from 0 % to 12%. However, generally

basic rate of excise duty being 12%

• Cenvat Credit available for excise duty paid on inputs & service

tax paid on input services

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Service Tax

• Payable by service provider on provision of specified services

• Most services taxable, other than medical services

• Payable on value of services under normal and reverse charge

mechanism

• Rate of Service Tax being 0 % to 14 %. However, generally

effective rate is 15 % including two cess of 0.5% each

• Generally recovered from customer

• Payable by service recipient on import of services under Reverse

Charge

• Export of services exempt

• Cenvat Credit available for excise duty paid on inputs & service

tax paid on input services

• Website www.servicetax.gov.in 27

Customs Duty

• Payable to Central Government (CG) on import and export of

goods into India on value of transactions at the time of clearance

of goods from port/airport

• Normal Customs Duty rate of 10% plus education cess but differs

from product to product

• Products classified on internationally accepted Harmonized

System of Nomenclature (HSN)

• CG can impose concessional/ preferential custom duty

• Basic Customs Duty, Countervailing Duty, Special Duty are few

components of customs duty

• Credit of various components available in Excise, VAT, etc.

• To promote exports, CG introduced various schemes like Export

Oriented Units(EOU), Software Technology Parks (STP), Bio-

Technology Parks (BPT), Special Economic Zones (SEZ) under

Foreign Trade Policy. 28

Value Added Tax (VAT)

• Payable on sale of goods to the state government

• Payable on sale price, including excise duty

• Lease and works contracts deemed to be sales

• Composition scheme available for small entities

• VAT rate ranges from 0 % to 20 %. Generally on most of the

items rate of 12.5% is levied

• Set off available for VAT paid on purchases

• Central Sales Tax on inter-state transfers

• No VAT on purchases during course of import or on exports

• It is proposed that the Excise duty, VAT, Service Tax will be

merged into a common tax Goods and Services Tax

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GOODS AND SERVICES TAX (GST)

Overview of GST

• At present various Indirect Taxes are levied both at Central and

State level

• Under the current system not all kinds of Indirect Taxes are

creditable against each other, leading to tax cascading

• Just like consumption tax in Japan, a system of unified Goods

and Services Tax (GST), has been proposed to bring a

fundamental shift in the way business transactions are taxed in

India

• GST is proposed as a comprehensive value added tax levied on

the supply of all goods and services (except for a negative list)

• Various State and Central level Indirect taxes such as Excise duty,

State level taxes on sale of goods, Service tax would be

subsumed under GST

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• GST is expected to have a dual structure with Centre and State

jointly levying one tax called Integrated Goods and Services Tax

(IGST) on the same supply of goods / services

• IGST will comprise of Central Goods and Services Tax (CGST)

and State Goods and Services Tax (SGST)

• IGST shall not be levied upon the export and import of goods

• Provisions for cash refund of duty paid on inputs used to

manufacture or provide services

• Option for temporary registration under the GST law for specific

period available

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Key Benefits / Concepts of GST

• Taxable event changed to ‘supply’ from manufacture or

production

• Uniform and harmonized classification of Goods and Service

across all the states

• Majority of indirect taxes both at State and Central level to be

subsumed

• Consistent basis of valuation for all goods and services

• Easy credit of GST paid available

• Option for composition scheme available

• No need to register under GST if gross annual turnover does not

exceed INR 1.9 Million

• GST is to paid, if gross annual turnover exceed INR 2 Million

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Sectors to be benefited most from GST

• Automobile Sector

• Auto Ancillary Sector

• Building Materials

• Consumer Durables

• Fashion Retail

• Infrastructure

• FMCG

• Infrastructure

The average indirect tax outflow combined together is around

20% - 45% in above sectors under current tax regime, with

introduction of GST, proposed rates being 17% - 18%, net out

flow of taxes is bound to reduce, resulting in price reduction

thereby stimulating the demand for these products. 33

Start-ups and Tax Incentives

• To promote business in India, GOI has started various

programmes and provides various incentives to businesses being

set up in India

• One of such programme is Start up Businesses

• Entity being Company, LLP or partnership firm new or existing

incorporated between April, 2016 to March, 2019 shall be

considered as start up upto 5 years from date of incorporation /

registration and turnover for any financial year does not exceed

INR 50 Million and works towards innovation, development of

products or services driven by technology or Intellectual

Property.

• To avail tax and other benefits, Start ups has to register with

Department of Industrial Policy and Promotion (DIPP)

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• 100% of profits of start-up business is exempt for the first seven

years subject to MAT from existing three years.

• No Capital gains for equity shares held for 2 years or more of

start-ups. Smooth exit for foreign investors provided.

• Turnover limit for presumptive taxation for small businesses

raised to INR 20 Million from earlier INR 1o Million.

• Tax rates reduced to 25% from 30% for MSME’s with turnover

less then INR 500 Million and who forgoes exemptions

• Excise duty and customs duty rates reduced significantly

• Government to make EPF contribution (employer’s contribution)

of 8.33 per cent for all new employees for first three years, which

shall save cost for the start-up companies and provide security

benefits to the employees.

• Easy financing options for start-ups.

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Repatriation of Funds

• Foreign Capital invested in India can by repatriate along with

appreciation, after payment of taxes due subject to FDI rules

• Foreign Capital can be repatriated either by way of Buy Back of

shares or Capital reduction

• Buy back of shares attracts Dividend Distribution Tax (DDT)at

effective rate of 23.07 % on consideration less amount received

for issue of shares whereas in case of capital reduction , DDT of

20.36% is payable by company to the extent of accumulated

profits. Consideration in excess of accumulated profits is taxable

as capital gains in the hands of shareholders

• Profits earned by an Indian Company can be repatriated after

payment of DDT at an effective rate of 20.36% without approval

of RBI

• Partners of an LLP can freely draw a share of profits without any

tax outflow 36

Who we are

Established in 1985,

V S P V & Co, Chartered Accountants has a goal to provide highest quality services to clients. The firm is dedicated to take multiple roles, leadership and responsibilities in a complex, dynamic and rapidly changing business environment. With world becoming a global village, the firm has satisfactorily served domestic and global clients.

What we do

Business Advisory II Business Analysis and Initial Statutory Setup II Book Keeping and Financial Reporting II Assurance and Due Diligence II Taxation Advisory II Payroll Management II Mergers and Acquisitions II Legal Advisory

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Services We Offer • Business Advisory

• Assurance

• Due Diligence

• Tax Advisory

• Book Keeping

• Financial Reporting

• Payroll Management

• Mergers and Acquisitions

• Legal Advisory

• Statutory Compliances

Sectors We Cater • Construction and

Infrastructure

• Banking and Finance

• Engineering

• Food Processing

• BPO Services

• Freight Forwarding

• Hospitality

• Telecom

• Travel

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Why We

At V S P V & Co, our professionally qualified and experience

professionals has vast knowledge of India’s Economic, Legal,

Political and Cultural framework to guide you for business expansion

and processes to create maximum wealth for your investment.

Thank You!

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V S P V & Co Chartered Accountants

A 2/78,

Safdarjung Enclave,

New Delhi – 110 029

India

No.8, 2nd Main,

9th Cross Road,

1st Stage,

Indiranagar,

Bengaluru, India