Transcript CENVAT Credit Rules, 2004 Service Tax

Seminar on Venture Capital
Karnataka State Chartered Accountants Association
19 January 2008
Agenda
 Rules, Regulations and Compliances for
New Entrepreneurs
Vishnu Bagri
Managing the Regulatory Function
Common decision points
 Applicable laws, compliances and
registrations
 Choice of entity structure
 Choice of funding structure
 Choice of operating structure
Applicable Laws
 Broadly the objectives which the Central or State Governments
propose to achieve through implementation of various Rules
and Regulations could be categorized as:
 Governance
 Revenue
 Social
Governance (Select Laws)
 The Companies Act,1956
 The Indian Partnership Act,


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
1932
The Indian Contract Act,
1872
Foreign Exchange
Management Act, 1999
Foreign Trade Policy
Securities and Exchange
Board of India Act, 1992
(SEBI)
 Reserve Bank of India Act,
1934 (Banking companies
and NBFCs)
 Industry specific regulations
 Incentive regulations (such
as The Special Economic
Zones Act, 2005 etc)
 State specific regulations
Revenue (Select Laws)
 Income Tax Act, 1961
 Double Tax Avoidance
Agreements entered into by
India with select jurisdiction
 Wealth Tax Act, 1957
 Service Tax (Finance Act
1994)
 Central Excise Act, 1944
 The Central Sales Tax Act
1956
 Research and Development
Cess Act, 1986
 State Laws
 Commodity taxes
 Property taxes
 Professions Tax
Social (Select Laws)
 Labour Laws, such as
 State laws such as
The Employees’
Provident Fund And
Miscellaneous Provisions
Act,1952
 The Factories Act,1948
 Employee State
Insurance, 1948
 Intellectual Property Laws
Karnataka Shops &
Commercial
Establishments Act
 Prevention and Control
of Pollution Acts, etc
 Micro, Small and Medium
Enterprises Act
 Others
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Tax Laws… A Perspective
Tax Laws…A Perspective
 Direct taxes (Income tax, Wealth tax)
Central Levy
 On the profits earned or wealth accumulated (e.g. property and
vehicles)
 Is a direct cost of operations
 Transaction Taxes or Indirect Taxes
 Central and State levies on the value of goods or services
 An indirect cost of operation !
 Affects the procurement costs
 Increases the transaction price for customer
 Generally each of the laws have registration, periodic remittance and
reporting requirements

Income Tax
 Any person earning income would generally be liable to tax
 Tax incidence dependent upon
Residency of the person and source of income during a
previous year
 Indian resident person liable to tax on the global income
with credit for foreign taxes (if any)
 Tax Rates

Business Stage
Company
Operational business income
Profit declaration
- In the hands of the entity
- In the hands of the entrepreneur
30.90%/33.99%
- 17% dividend distribution tax
- Nil
Income Tax
 Fringe benefit tax
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Tax on the fringe benefits provided to employees (travel,
staff welfare, entertainment expenses, telephone charges,
sales promotion and publicity expenses, gifts, club facility
provided, etc)
Valuation principles provided
Effective tax on these expenses could be in the range of
1.70% to 6.80% of the expenditure. Few expenses such as
gifts attract 17%.
ESOP and superannuation benefits also liable to FBT @
33.99%
Income Tax
 Withholding taxes (TDS)


Rates of tax dependent upon the nature of payments and
interplay of double tax avoidance agreements in case of
cross-border transactions
Usually not an incremental cost of operations. The deductee
to get a credit of such amounts withheld
 Exception: Case where the consideration is net of tax
Indirect Taxes
 Commonly referred to as transaction taxation or the
commodity tax. The tax incidence arises on:



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Import of goods into India (customs duty)
Manufacture of goods (central excise duty)
Sale of goods (sales tax / VAT)
Provision of services (service tax)
A single transaction can include more than 1 tax.
They can co-exist.
Indirect Taxes
 Customs duty



Levy on import of goods
into India
Concessions provided
under various export
promotion schemes
Average duty at 34.09%
 Manufacturers
eligible for credit of
23.25% (effective
incidence 10.84%)
 Service providers
eligible for credit of
18.12% (effective
incidence 15.97%)
 Central excise

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Levy on manufacture or
processing of goods
Tax on ‘value addition’
Exports exempt
Typical rate of duty at
16.48% (including
education cess)
Indirect Taxes
 Sale of goods

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Levy of tax on sale of goods (within and between States
administered separately)
Archaic systems of Sales tax replaced with VAT
Multiple rate/s of tax replaced with 4 rates across India with
broad uniformity on classification of goods
Provides for benefit of input tax credits
CST to currently continue
 To be phased out by April 2010
Exports kept out of the tax net with a benefit of input tax
refunds
Indirect Taxes
 Service Tax

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Levy of tax on provision of services @ 12.36%
Follows selective principle of taxation wherein only
specified services are taxable
 Currently 100 in number
Normally, the provider of services liable to pay tax,
however, in certain instances the recipient of services
obligated to,
 E.g. goods transport and services received from the
overseas
Exports entitled for tax exemption with a benefit of input tax
refunds
Cross-sectoral credit of service tax
vis-à-vis central excise provided
Indirect Taxes
 Technology Transfers


Research and Development Cess @ 5%
Payable on transfer of technology from foreign country
Incentive Regimes
 Exporters

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Software Technology Park (STP) Scheme or 100% Export
Oriented Scheme (EOU) Scheme provides a host of direct
and indirect tax incentives. Income tax holiday to expire in
March 2009
Other schemes such as export promotion capital goods,
advance authorisation schemes etc., provided
 Locations specific
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Special Economic Zones
Economically Backward/Developing regions e.g.
Uttaranchal, North-east regions, etc
Provides for tax / duty exemptions and concessions
Key Business Registrations
Registration
Business critical event
In Weeks
1
Company Incorporation
To establish the entity
Permanent Account
Number
Mandatory for a business and also an
essential document for other registrations
Tax Deduction Account
Number
Withholding tax on vendor payments
Service Tax registration
Raising the invoice or claiming input credits
VAT / CST registration
Raising the invoice or claiming input credits
Import/Export Code (IEC)
Any cross-border movement of
goods/services
Shop & Establishment
Functioning in an office premise
Professions Tax
(Establishment and
Employer)
Upon commencement of operations and
Prior to first salary pay-out
2
3
4
5
6
7
Typical Decision Variables…
a regulatory and tax perspective
Choice of Entity Structure
 Unincorporated (sole proprietor/partnership firm) vis-à-vis
incorporated (company)
 Company a preferred format from an investor, employee and
customer perspective
 Incorporation is the process of forming or uniting into a
corporation either by a charter or by a statute, so as to form a
single body
 Immediately after incorporation, the business concern shall
be constituted as a corporate body, legally authorized to act
as an entity [An artificial person]
 Regulations expected on Limited Liability Partnerships
 These could open up further structuring prospects
Choice of Investment Structure
 Investment or holding company structure needs consideration,
particularly in case of
 cross-border investments
 strategic objective entails listing in an overseas stock
exchange
 e.g. Mauritius/Singapore holding company structure
Choice of Funding Structure
 Alternative instruments
Equity & Preference share capital
 Debt
 External commercial borrowing
 Hybrid instruments
 Review under following laws imperative; illustrative comments
 Companies Act - governs the minimum capital requirements,
characteristics of the instrument and reporting/documentation
 SEBI for sweat equity and employee stock option guidelines
 FEMA in case of overseas funds – Guidelines for foreign investment
and external commercial borrowings
 Income Tax and DTAA implications
 Tax implications during operational phase (leverage on interest
cost and withholding tax)
 Tax cost upon repatriation

Choice of Operating Structure
 Understanding of alternative contracting structure essential prior to
implementation
 Key considerations
 Identify registration/approval requirements and time required; examples
 Review the company’s charter documents to ensure it is an approved
activity
 Registration under incentive regimes
 Industry specific approvals in case of certain operations
 Exchange control implications in case of operations involving crossborder investment/trade
 Tax implications
 Tax costs to be factored in building cost of operations
 Use of incentive regimes for tax optimization
 Supply chain design influences transaction tax costs
 It helps to have a dashboard summary of the chosen structure design with
articulation of do’s and don'ts
Cross-Border Transactions
 Indian exchange control regime considerably liberalized
 Foreign direct investments in most sectors (IT/ITES/Automotive parts
manufacturing) possible under automatic route
 Indian companies can invest abroad upto 400% of their net worth
 Investment, entity and operational structures can provide tax
optimization opportunities
 Typical cross-border tax pressure-points
 Structuring aspects
 Employee secondment and his tax equalization issues
 Taxes in foreign country
 Employee presence for more than six months
 Passive income streams such as interest, dividend, royalty and
fee for technical services
 “Transfer pricing” a critical tax planning and compliance
requirement
Concluding Remarks
 A common approach: Lets get started and
business reach some maturity before
investing on regulatory reviews
 An objective approach: Lets understand
and face it
 Proactive considerations of legal,
tax and regulatory factors will
provide operational flexibility and
tax efficiencies upfront
 More importantly avoid pains of
unwinding a wrong decision
 Business flexibility should not mean
“being non-compliant”…..

The early stage behavior is a strong
contributor to an organizational culture
Thank You
email: [email protected]
Tel: 91.80.4153 8287
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