Emerging Economies - India

8/9/2019 Emerging Economies - India

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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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Copyright 2006 Deloitte Development LLC. All rights reserved.4 18th Annual NA IAS Conference in Miami Beach, FL

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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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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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%


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%


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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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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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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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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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

Documents

Emerging Economies - India