Transcript
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18
th
Annual North AmericanGlobal Employment
Services Conference
November 7-10, 2006Miami Beach, FL
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Emerging Economies:IndiaK. R. Sekar
PartnerDeloitte Haskins & Sells, India
November 9, 2006
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The Indian Economy A snapshot
Real GDP growth rate 8.1%
Robust growth rate in all sectors
Manufacturing sector: 9.4% growth rate.
The service sector contributes 54.1% to Indias GDP.
9.8%9.9%Services
8.1%7.5%Overall GDP
9%8.6%Industry
2.3%0.7%Agriculture
2005-062004-05
Double digitgrowth in next few
years
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Indian Economy Projections
World economy projectionsGDP 2003 US$
Largest economies in 2050
ChinaUS
A
INDI
A
Japa
nBr
azil
Russia UK
Germ
any
FranceIta
ly
Source: BRIC Report by Goldman Sachs
BRIC Report Highlights: Indian economy 3rd largest
by 2050
In less than 40 years the BRIC
economies, together, could be
larger than the G6.
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India Economy Growth factors
Spectacular growth
Largest
democracyYoung educated
workforce
Abundant talent
pool
Connectivity : 2nd in roadways
Construction
Improving agriculture 2nd in
Farm output
Information Technology
boom
DETERMINING FACTORS
(Courtesy: World Bank)
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The Indian Economy A snapshot
Key sectors which have performed well -
Manufacturing industry
Textiles, Food products
Consumer Goods and durables
Real estate (construction development projects)
Automobiles, Basic metals
Biotechnology
Entertainment
Handicrafts
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The Indian Economy A snapshot
Services industry
Telecom services
Business Process Outsourcing Information Technology
Medical services / Hospitals
Hospitality services / Tourism Financial and accounting services / Investment advisory
services
Transport Land, air and water
Securities / Stock Trading
Engineering / Technical Consultancy / Banking services
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INDIA ECONOMY
REGIONALDEMOGRAPHICS
TOURISM& IT
TOURISM& IT
TEXTILES
SILICONSTATE
FINANCIAL &BUSINESSCENTRE
AUTOMOBILEINDUSTRY
IT & EDUCATON
INDIA
2006
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Foreign Direct Investments
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Foreign Direct Investment policy overview
FDI - considerably liberalized
FDI prohibited in:
Retail trade
Lottery business
Gambling
Atomic energy
FDI Objective
Infrastructure development
Technological up gradation
Creating employment opportunities
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74%
26%
0%0%0%0%0%0%
FDI Cap Indian holding
z
Sector wise FDI Cap
74%
Banking Private sector
Atomic minerals
Telecommunication services Satellites establishment and
operations
www.dipp.nic.in
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49%51%
0%0%0%0%0%0%
FDI Cap Indian holding
Sector wise FDI Cap
49%
Broadcasting Cable / DTH /Setting up hardware facilities.
Asset reconstruction companies
Air transport services
Companies in infrastructureservices sector (except telecom)
www.dipp.nic.in
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26%
74%
0%0%0%0%0%0%
FDI Cap Indian holding
z
Sector wise FDI Cap
26%
Broadcasting Uplinking a news& current affairs TV channel
Defense production
Insurance
Publishing of newspaper andperiodicals dealing with news andcurrent affairs.
Petroleum and natural gas refining (in case of PSUs)
www.dipp.nic.in
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Sector wise FDI Cap
Others:
20% - Broadcasting (FM Radio)
51% - Single Brand Product Retailing
www.dipp.nic.in
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Industry wise FDI Inflow[05 06]
Sectors attracting highest FDI
ElecE
qup
Te
lecom
Servi
ces
Transp
ortation
Fuels
Che
micals
Food
processin
Pharmac
eutic
als
Cem
ent
MetIndus
Source: www.dipp.nic.in
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FDI Recent developments
Press Note 1 & 5 (2006series)
Press Note 3 (2006series)
Press Note 2(2006 series)
Relevantpress notes
3.
townships,
housing,
built-upinfrastructure
Construction-developmentprojects;
100%
Real estate
Single Brand,
Known assuchinternationally
Branded
duringmanufacture
51%
Retail Trade
Eligibleproducts /activities
FDI Cap
Particulars
Basic, Cellular,
Unified Access,
National /International Long
Distance,
V-Sat,
PMRTS,
GMPCS, etc.
2.
74% (composite)1.
TelecomSl.
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India Income Tax An
overview
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Personal Taxation Snapshot
Tax rates - FY 2006 - 2007
30Above 250,000
20150,001 250,000
10100,001 150,000
Nil0 - 100,000
Rate of tax (%)Slab of income (Rs.)
Surcharge 10% [if income exceeds Rs. 1,000,000]Education Cess 2%
Basic exemption:
Women - Rs. 135,000
Senior Citizens Rs. 185,000
Highest effective rate 33.66%
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Corporate Taxation - Snapshot
14.03Dividend Distribution Tax41.82Foreign company
33.66Domestic company
Effective tax rate (%)Class of persons
Minimum alternate tax 10%
Key exemptions / deductions:
Undertakings in free trade zones (FTZ)
Undertakings in Special Economic Zones (SEZ)
Hundred percent export oriented undertakings (EOU)
Income of a Mutual Fund
Applicable to foreigncompany branch; PE
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Corporate tax impactInternational transactions
Transfer pricing regulations Key points
Transactions between associated enterprises must be at arms lengthprice (ALP).
ALP based on Most Appropriate Methodology
Assessees having international transactions with AEs to fileAccountants certificate (Form 3CEB)
TP documentation to be prepared including prescribed data
TP assessments taken up based on annual parameters set by the taxauthorities
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Corporate tax impactInternational transactions
Transfer pricing some current and relevant issues
Losses of a distributor not acceptable
Initial setting up costs / losses
Justification for Management Service payments benefits to behighlighted and detailed documentation to be maintained
Sharing of costs w.r.t. marketing intangibles
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Recent Legislative
Amendments
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Finance Act 2006 Corporate Taxation
Filing of return of income mandatory for claiming specific taxexemptions / deductions.
Rate of Minimum Alternate Tax increased from 7.5% to 10%.
Removal of exemption to income of an Infrastructure capital fund /company.
Interest converted into loan or borrowing or advance does notamount to payment
Tax paid outside India and eligible for credit / relief not allowableas deduction
All Equity Oriented Funds exempted from payment of DDT
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Recent tax amendments
Special Economic Zones (SEZ)
Zones deemed to be foreign territory for duty purposes.
Any private/public/joint sector including a foreign company or StateGovernment or its agencies can set up Special Economic Zone(SEZ).
Permitted activities
Manufacture of goods
Rendering services
Free trade and warehousing
100% FDI permitted for development of SEZ and for SEZ units. Establishment of Offshore banking unit and International Financial
Service Centre allowed in SEZ.
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Benefits available to SEZ developer
Tax benefits to SEZ developer
Tax holiday for any block of 10 years in 15 years
Tax / duty free import or domestic procurements for development,operation and maintenance of SEZ
Exemption from Service Tax/ Central Sales Tax/Value Added Tax
Specified income from investments in SEZ exempt from tax
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Benefits available to SEZ units
Benefits available to SEZ Units:
100% FDI (automatic route) in manufacturing sector
ECB up to $ 500 million a year allowed - no maturity restriction.
Specific exemptions under Companies Act and FEMA with respect to managerialremuneration, realization of export proceeds etc.
Tax benefits:
Tax holiday for up to 15 years.
Exemption to capital gains in specific situations
Exemption from MAT
Exemption from WHT in certain transactions of offshore Banking Units.
Exemption from Customs Duty, Central Excise Duty, Service Tax, ValueAdded Tax and Central Sales Tax (on raw material procurements).
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Fringe Benefit Tax an overview
The Finance Act 2005 introduced a new levy, namely FBT asa presumptive tax on the employer
Rationale: Inherent difficulty in isolating the personal element
Expenditure incurred by the employer ostensibly for businesspurposes but includes in partial measure, a benefit of a personalnature
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Fringe benefits - Definition
Any consideration for employment provided by way of-
(a)any privilege, service, facility or amenity, directly or indirectly, provided
by an employer, whether by way of reimbursement or otherwise, to hisemployees (including former employee or employees);
(b) any free or concessional ticket provided by the employer for privatejourneys of his employees or their family members; and
(c) any contribution by the employer to an approved superannuation fund
for employees.
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FBT Overview of Provisions
Applicability and Rate of tax
Fringe benefits provided or deemed to have been provided by anemployer to his employees taxable at 33.66%
Quantum of fringe benefits % of total expense
Ranges from 5% to 100% depending on:
Nature of expense
Industry
Some examples:
Travel 20% / 5%
Employee welfare 20%
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FBT Categories of expenses
(A) Entertainment
(B) Provision of hospitality
(C) Conference & expenses related to it(excludes participation fee)
(D) Sales promotion including publicity(excludes advertisement & other legitimatebusiness expenditure)
(E) Employee Welfare
(F) Conveyance, tour and travel incl. foreigntravel
(G) Hotel, Boarding and lodging
(H) Repair, running (including fuel) andmaintenance of motorcars anddepreciation thereon
(I) Repair, running (including fuel) andmaintenance of aircrafts and depreciationthereon
(J) Use of telephone other than leased lines
(K) Maintenance of any accommodation in thenature of guest house other than for
training purposes
(L) Festival celebrations
(M) Use of Health Club and similar facilities
(N) Any other Club facilities
(O) Gifts, Scholarship
(P) Free or concessional ticket for privatejourneys of employee or family members
(Q) Contribution to approved superannuationfund
excludes
Expenditure on food or beveragesprovided to employees at office orfactory
Expenditure on paid voucherswhich are non transferable andusable only at eating joints)
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FBT Overview of Provisions
Who is liable to pay FBT
liability to pay FBT is on the employer
payable, notwithstanding the fact that the employer is not liable to payincome tax in India.
Exceptions are any fund eligible for exemption u/s 10(23C), or trust or institutionregistered u/s 12AA.
Procedural compliances:
Return of Fringe Benefits to be filed by 31 October to be filedelectronically
Quarterly deposit of fringe benefit tax within prescribed timelines
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FBT Applicability to foreign companies
A liaison / branch office of a foreign company liable to pay FBT.
Foreign companies are liable to pay FBT only if:
it has employees based in India other than for a short duration
if it has a permanent establishment in India.
No tax credit available for Fringe benefit tax
Points to be addressed:
Determination on the quantum of expense that qualifies as fringebenefits
Compliances by the foreign company
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RECENT SIGNIFICANTJUDGEMENTS -
Internationaltaxation
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Recent significant judgments
Hiromi Hirose, Japan Broadcasting Corporation (NHK)
[ITAT Delhi]
Issue Is salary received overseas by a Not ordinarily resident subject totax in India?
Held - Salary received overseas for period of service rendered outside
India, held taxable.
Ruling significant for
assignees deputed to India who are required to frequently
travel outside India in connection with the assignment.
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Recent significant judgments
Ericsson (Sweden), Motorola (USA) and Nokia (Finland)
[ITAT (SB) Delhi]
Issue: Business connection / PE on account of deputation of personnel
Ericsson Held - There was no business connection or PE in India hence noincome could be liable to be taxed in India
Motorola Held - There was a business connection but not a PE in India and
hence in the absence of PE no income could be liable to be taxed in IndiaNokia Held - There was a PE in India as the Indian subsidiary was a virtualprojection of the Finish company and hence income was attributable to the IndianPE. As the PE was engaged in networking an planning activities 20% of the incomewas attributable to Indian PE.
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Ericsson, Motorola, Nokia Key decisions.
Summary of decisions
NoNofixed base PEfixed base PE
~ facilities~ facilities
extended byextended by
EFC/ECI to visitingEFC/ECI to visiting
employees of ERAemployees of ERAnot sufficient tonot sufficient to
trigger fixed basetrigger fixed base
PE under ArticlePE under Article
5(1)5(1)
No Service PE ~No Service PE ~
employees presentemployees present
in India prior toin India prior to
signing contractssigning contracts
Employees deputedEmployees deputed
by MUS worked forby MUS worked for
MUS as well as MILMUS as well as MIL
Employees officeEmployees office
facilities of MILfacilities of MIL Resulted in virtualResulted in virtual
projection of MUSprojection of MUS
in India throughin India through
MIL,MIL, hence PEhence PE
Exclusions appliedExclusions appliedas activitiesas activities
preparatorypreparatoryinin
naturenature
Common employeeCommon employee
Nokia was inNokia was in
position to controlposition to control
NIPLNIPL
Virtual presenceVirtual presence
of Nokia in Indiaof Nokia in India
~ through NIPL~ through NIPL
and one commonand one common
employee Mr. Kemployee Mr. K
NIPLNIPLconstituted PEconstituted PE
in Indiain India
Ericsson Motorola Nokia
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Recent significant judgments
The Population Council, INC, USA[AAR Delhi]
Issue: FBT impact on foreign companies- Does FBT liability exist even if no income tax is
payable by the employer in India?Held - Liability to pay Fringe Benefits Tax exists even if no income tax is payable by theemployer in India.
Morgan Stanley and Co., Inc., USA (MS USA)
[AAR Delhi]
Issue: Do Stewardship services and secondment of personnel give rise to a PE in India
Held MS, USA has service PE in India on account of deputation of personnel. Payment ofarms length fees by MS USA to the Indian group company extinguishes any tax liability forMS USA in India
No further attribution of profits arises
provided the PE is compensated at arms length.
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Recent significant judgments
Western Union Financial Services Inc.
[AAR Delhi]
Issue: Does Business connection / PE arise when agents appointed in India bya non resident for money transfer business?
Held - Indian agents appointed by a non resident for its money transfer
business results in a business connection, though not a PE.
Hindalco Industries Ltd.[Mumbai ITAT]
Issue: Nature of payment to Foreign company Royalty / Fees for includedservices (FIS); Is reimbursement of expense taxable as FIS?
Held - Payments made to a US company to acquire know-how, processtechnology and technical assistance are taxable as Royalties
Reimbursement of expenses taxable as FIS as essentially a part of fees.Training fees paid for learning to use the know-how is FIS.
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Recent significant judgmentsCiticorp Trustee Co. Ltd. UK
[AAR]
Issue: Liability to tax on transfer of shares of Indian Company upon reorganisation of thetrustee company
Held - Transfer of shares of an Indian company by a non-resident upon reorganization ofthe trustee company does not constitute a transfer for the purpose of the Indian Income
Tax Act or the India UK tax treaty.
Oman International Bank SAOG
[Mumbai ITAT]
Issue: Allowability of bad debts
Held - Debts written off as irrecoverable by the taxpayer - sufficient for claiming exemption
and cannot be questioned by the assessing officer.
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Recent significant judgmentsGeneral Electric Pension Trust
[AAR]
Issue: Nature and taxability of profits of US Pension Trust in India and availability of treatybenefits to US pension trust
Held 1) Profits from sale of portfolio investments are in the nature of business income
2) Applicant not taxable in the US; hence not entitled to treaty benefits and taxable inIndia on such business income
Headstart Business Solutions
[AAR]
Issue: Whether payment for software purchase liable for WHT
Held WHT obligation arises on any other sum chargeable under the provisions of theAct which contemplates amounts, the whole of which is taxable, a mixed compositionwhich is partly taxable and gross revenue receipts; Hence software purchase subject toWHT
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Recent significant judgments
PanAmSat International Systems Inc., USA
[ITAT-Delhi]
Issue: Taxability of use of transponder capacity
Held - Payment for use of the capacity of the transponder is not royalty as the samewould not amount to use of the transponder itself. Payments made by broadcasters toPanAmSat for transmission of programs not liable to tax in India.
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Service tax
Export of services
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Export of Services
Key factors
Payment of service tax is exempted on service
exported out of India;
Determination of export is based on the category
97 taxable services divided into three categoriesCategory I Based on immovable property
Exempt if the immovable property is situated outside India
Services such as construction services, interior decoratorsservice fall under this category
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Export of Services
Category II Based on performance of service
Exempt if performed either fully or partly, outside India
Services such as Chartered Accountants, Maintenanceservice, Technical testing & Analysis, etc., fall in this category
Category III Based on location of recipient Exempt if Recipient located outside India
If such recipient has any commercial establishment or anyoffice in India, an additional condition applies
Service such as business auxiliary service, IntellectualProperty, Business Support services, ManagementConsultancy, etc., fall in this category
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Export of Services
Additional conditions for exemption
for all the above categories
Services must be delivered and used outside India
Consideration to be received in foreign exchange
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