seminar on venture capital karnataka state chartered accountants association 19 january 2008 agenda...
TRANSCRIPT
Seminar on Venture CapitalKarnataka State Chartered Accountants Association19 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, 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 The Employees’
Provident Fund And Miscellaneous Provisions Act,1952
The Factories Act,1948
Employee State Insurance, 1948
Intellectual Property Laws
State laws such as Karnataka Shops &
Commercial Establishments Act
Prevention and Control of Pollution Acts, etc
Micro, Small and Medium Enterprises Act
Others
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
Business Stage Company
Operational business income 30.90%/33.99%
Profit declaration- In the hands of the entity- In the hands of the
entrepreneur
- 17% dividend distribution tax
- Nil
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
Income Tax
Fringe benefit tax 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: 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 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 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 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 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 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 2 3 4 5 6 7
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
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 cross-
border 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]: 91.80.4153 8287
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