# Presentation: 327579

## FICCIU.S. – India Business SummitNovember 29-30, 2006

**FICCI****U.S. – India Business Summit****November 29-30, 2006**

**Doing Business with India – Tax & Accounting Aspects**
**Gaurav Taneja**
**Ernst & Young India**

**Global Tax Advisory Services**

## 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 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

- 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 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

- 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

- 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

- 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 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 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

- 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 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

- 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

## Thank You