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FICCI U.S. – India Business Summit November 29-30, 2006 PowerPoint Presentation
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Global Tax Advisory Services FICCI U.S. – India Business Summit November 29-30, 2006 Doing Business with India – Tax & Accounting Aspects Gaurav Taneja Ernst & Young India Overview of Tax Regime Worldwide system of taxation for resident companies

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Global Tax Advisory Services

FICCIU.S. – India Business SummitNovember 29-30, 2006

Doing Business with India – Tax & Accounting Aspects

Gaurav Taneja

Ernst & Young India

overview of tax regime
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
overview of tax regime3
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
overview of indirect taxes
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
overview of indirect taxes5
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
tax incentives
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
tax issues faced by u s mncs
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”
key tax challenges
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
key tax challenges9
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
key tax challenges10
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
accounting aspects
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
accounting aspects12
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
moving forward
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