Seminar on Venture Capital Karnataka State Chartered Accountants Association 19 January 2008 Agenda Rules, Regulations and Compliances for New Entrepreneurs.

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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