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Regulatory frame work for Doing Business in India

By Samrat Joneja
Chartered Accountant

Agenda
1 Foreign Investment Framework

2
3

Incorporating an Indian Company


Direct Tax Regime

4
5

Indirect Tax Regime


Other Key Economic laws

Financial Reporting frame work & Auditing

Foreign Investment framework


Foreign Direct Investments of 100% is allowed under the automatic route except in sectors where the RBI has specified caps The Foreign Investment Promotion Board (FIPB) considers proposals for foreign contribution that do not qualify for automatic approval. FIPB is a specially empowered board chaired by the Secretary, Ministry of Finance, set up specifically for expediting the approval process for foreign investment Decisions on all foreign investment proposals are usually taken within 30 days of submitting the application

Foreign Investment framework


Free repatriation of capital investments and profits thereon is permitted provided the original investments was made in convertible foreign exchange Use of foreign brand/trademarks for the sale of goods in India is permitted

Indian companies are permitted to raise funds from International capital markets
Single Window clearance facilities and investor escort services are available in various states to simplify the approval process for new ventures

Agenda
1 Foreign Investment Framework

2
3

Incorporating an Indian Company


Direct Tax Regime

4
5

Indirect Tax Regime


Other Key Economic laws

Financial Reporting frame work & Auditing

Incorporating an Indian Company


Companies incorporated in India are regulated by provisions of Companies Act 1956, (Companies Act) Foreign Corporations can set up their subsidiary companies in the form of private companies in India. The subsidiary company incorporated under the laws in India is treated as domestic company for tax purposes Private company is the most prevalent form of presence used by foreign companies intending to undertake business in India. Key characteristics of a private company are as under:
Required to have a minimum of 2 shareholders and a maximum of 50 shareholders Should have atleast 2 directors Minimum paid up capital of a private limited company should be INR 100,000

Prohibits any invitation to public to subscribe to any shares/ debentures of the company

Process Flowchart
Incorporation of Company
Obtain Director Identification Number for proposed directors of Co

Operationalization of Company
Obtain Permanent Account Number and Tax Deduction Account Number from Income Tax Authorities

File online application for incorporation of Co with RoC (Form 1)

Obtain Digital Signature Certificate in name of atleast one director of Co

Simultaneously file (i) Notice of situation of registered office in Form 18 and (ii) Particulars of directors/ manager/ secretary in Form 32 with RoC

Identify a bank and open a current Account

Obtain Approval of name for Co (Form 1A) from Registrar of Companies (RoC)

Pay Registration Fees to RoC

Receive money from subscribers to Memorandum of Association towards share capital

Arrange for drafting of Memorandum and Article of Association

File physical copy of Form 1 on a non judicial stamp paper with original Memorandum and Article of Association with RoC

Allot shares and issue share certificates

Arrange for stamping of Memorandum and Article of Association and pay necessary stamp duty

Obtain Certificate of Incorporation of Co from RoC

File intimation to RBI as regards receipt of inward remittance and issue of shares to foreign shareholder (in Form FC-GPR alongwith relevant documents)

Compliances under the Companies Act


Records to be maintained Minute book of the Directors Meetings Minute book of the Shareholders Meetings Register of Directors Register of Directors Shareholdings

Register of contracts with the Directors or with the firms/ companies in which they are partners/directors
Register of inter company investments and loans Register of shareholders

Register of charges on the assets of the Company

Compliances under the Companies Act


Annual General Meeting
Holding of Annual General Meeting (AGM) wherein the following matters would be considered: consideration of the accounts, balance sheet and report of the board of directors and auditors; declaration of dividend; appointment of directors in place of those retiring; and appointment of, and fixing of remuneration of auditors.

Filing of Annual Return in the prescribed format with the ROC.


Filing of the audited Balance Sheet and Profit & Loss account with the ROC.

First AGM can be held within 9 months from end of financial year Subsequent AGMs to be held within 6 months from end of financial year

Compliances under the Companies Act


Every Quarter
Holding of meeting of Board of Directors of the Company: To review operations of the Company To deliberate and decide on operational issues

Miscellaneous
Filing return of allotment of shares in Form No 2 and issue of Share Certificates.

Filing of Form 32 for appointment/ change in directors, managing director, manager or secretary of the Company.

Declaration of dividends
Companies with shares are allowed to pay dividend only out of their profits after providing for depreciation on fixed assets in the manner prescribed and after certain minimum amounts are transferred to the Companys reserve. Payment of dividend is permitted out of companys accumulated reserves subject to compliance with prescribed rules. Dividends can be recommended by the Board of Directors and require Shareholder approval. Dividend can be declared in % terms and can be declared more than once a year.

Agenda
1 Foreign Investment Framework

2
3

Incorporating an Indian Company


Direct Tax Regime

4
5

Indirect Tax Regime


Other Key Economic laws

Financial Reporting frame work & Auditing

Tax Rates
Indian Tax year commences from April 1 and ends on March 31

Tax payer
Domestic companies Individuals

Category of income Business profits


In case of males Upto Rs 1,60,000 Between Rs. 1,60,001 to Rs 500,000 Between Rs. 500,001 to 8,00,000 Over and above Rs 8,00,000 In case of females Upto Rs 190,000 Between Rs. 190,001 to Rs. 5,00,000 Between Rs. 5,00,000 to Rs 800,000 Over and above Rs .800,000

General rate of tax (%) 1 33.22%

MAT(%)2
19.931 (on book profits)

DDT(%)3
16.6091

Nil 10 20 30 Nil 10 20 30

1 2 3

Inclusive of Education Cess @ 2%, Secondary and higher education cess@1% and surcharge (for domestic companies 7.5% if income exceeds 10,000,000) Minimum Alternate Tax (MAT) payable where tax payable under general provisions are lower Dividend distribution tax (DDT) payable by domestic companies declaring dividends

Corporate Advance Tax


Importance
Quarterly advance tax installments to be paid for discharging advance tax liability Deferment and default in payment of these installments attracts penal interest at the of 1% per month Interest so paid not allowed as deduction Excess advance tax payment affects cash flows while shortage has interest implications rate

Mechanism
Estimation of Indian Companys annual taxable income Determining tax positions to be adopted

Computation of advance tax liability for each quarter


Depositing the advance tax installment into the Indian government treasury To be deposited on June 15th , September 15th , December 15th and March 15th

Return of Income
Importance
Return to be filed on an annual basis To ensure correct tax positions are adopted to avoid interest and penalty exposures during assessment proceedings Late filing of return attracts interest and penalty implications India does not provide for consolidation of income or common assessment of group companies . Each company including a wholly owned subsidiary , is assessed separately

Mechanism
Review financial statements (balance sheet and profit & loss account, tax audit report etc.) of Indian Company Determining tax positions to be adopted Computation of taxable income and tax liability Filing return of income To be filed by September 30th of the following year

Wealth Tax
Importance
Return to be filed on an annual basis To ensure correct wealth tax is reported to avoid interest and penalty exposures Late filing of return attracts interest implications

Mechanism
Review balance sheet to determine assets chargeable to wealth tax

Computation of taxable wealth and tax liability computed @ 1% on wealth exceeding INR 3,000,000
Filing return of income

To be filed by September 30th of the following year

Wealth Tax-Computation
Assets chargeable to wealth tax
Any building or land appurtenant thereto, whether used for: residential purposes commercial purposes for the purpose of maintaining a Guest House
Motor cars (other than those used by the assessee in the business of running them on hire or as stockin-trade) Jewellery, furniture, utensils, or any other article made wholly or partly of gold, silver, platinum or any precious metal or any alloy of such precious metal Yachts, boats and aircrafts (other than those used by the assessee for commercial purposes) Urban Land Cash in hand not recorded in the books of account

Withholding Tax
Details
Payment of salaries Payment for carrying out any work in pursuance of a contract Payment of rent

Rate of tax deduction


At the rates as applicable to individuals 1% in case of individuals/ HUF and 2% in case of others 10%

Due Date of Deposit


Within 7 days from end of month in which tax has been deducted Within 7 days from end of month in which tax has been deducted Within 7 days from end of month in which tax has been deducted Within 7 days from end of month in which tax has been deducted

Payment of rent for use of plant, machinery or equipment

2%

Payment of professional fees/ technical fees/ commission/brokerage Payment to non-residents

10%

Within 7 days from end of month in which tax has been deducted

At the domestic tax rates/ rates prescribed by tax treaties

Within 7 days from end of month in which tax has been deducted

For expenses accrued as on March 31, withholding tax can be deposited by May 31.

Withholding Tax
Failure to deduct or deposit withholding tax leads to a disallowance of the expense amount as a deduction from income for computation of taxes.

The same is allowed as an expense in the year in which withholding taxes are deducted and deposited.
Failure to deduct/ deposit tax attracts interest and penalty implications

Withholding Tax-Returns
Importance
Quarterly (for 3 months) withholding tax returns required to be filed in respect of taxes withheld during the year
Delay in filing the returns attracts penalty implications

Mechanism
Review financial statements (balance sheet and profit & loss account) of Indian Company
Determine tax deducted and deposited Filing return of income Quarterly returns July 15th, October 15th and January 15th Return for quarter January March to be filed by June 30th

Indian Transfer Pricing Regulations


Comprehensive Transfer Pricing Regulations (TPRs) have been introduced, effective from 1 April 2001 with the objective of preventing Multinational Companies from manipulating prices in intra-group transactions such that the profits are not shifted outside India. Under TPRs, international transactions between two or more associated enterprises (including permanent establishments) must be at arms length price . These regulations also applies to cost sharing agreements

Contemporaneous documentation requirements: Detailed documentation to be maintained by the due date (6 months after the end of the financial year)
Stringent penalties for non compliance

Annual audits by tax authorities commenced from the year 2003 onwards

Domestic Law Dispute Resolution Process


Transfer Pricing Officer

Alternate Dispute Resolution Panel

Appellate Tribunal

High Court

Supreme Court

Order passed within 43 months from the end of financial year

Proceedings to be completed within 9 months of reference AO to finalize order only after the adjudication of the panel Order appealable in ITAT

Final fact-finding Authority No specific time limit Generally, order passed within 2 to 4 years from filing of appeal Revenue can also go on appeal if Commissioner decides in favor of Taxpayer

Only substantial questions of law can be raised before the High Court and Supreme Court Cases generally take 3-5 years at each level

Recent developments: DTC 2010


The four decade old Income Tax Act 1961 is all set to be replaced by the Direct Tax Code 2010 from 1 April 2012. The key features of this new legislation are as follows:
The rate of tax for Domestic Companies is same as under the existing Act The concept of previous year replaced with a new concept of financial year which inter alia means a period of 12 months commencing from the 1st day of April Every person is liable to pay income-tax in respect of his total income for the financial year at the rates/conditions specified in the Schedules to the DTC after allowing credit for pre-paid taxes (including foreign tax credits)

Income has been proposed to be classified into two broad groups: Income from Ordinary Sources and Income from Special Sources Income from Ordinary Sources refers to: - Income from employment - Income from house property - Income from business - Capital gains - Income from residuary sources.

Recent developments: DTC 2010


Income from Special Sources to include specified income of non-residents, winning from lotteries, horse races, etc. However, if such income is attributable to the PE of the non-resident it would not be considered as Special Source income. Accordingly, such income would be liable to tax on net income basis Losses arising from Ordinary Sources to be eligible for set off or carry forward and set-off against income only from ordinary sources without any time limit. Similar treatment would apply for set off and carry forward of losses from Special Sources. Loss arising from speculative business, losses under the head capital gains, and losses from the activity of owning and maintaining horse race to be set off only against such income in the same or succeeding financial years In case of delayed filing of return of income for any particular year, only losses pertaining to that year would now not be allowed to be carried forward for set off in future years.

Agenda
1 Foreign Investment Framework

2
3

Incorporating an Indian Company


Direct Tax Regime

4
5

Indirect Tax Regime


Other Key Economic laws

Financial Reporting frame work & Auditing

Excise duty
Excise duty is payable on the manufacture of goods within India and is payable by the manufacturer
Rate of Excise Duty Most products attract a uniform rate of 10% plus education cess at 2% and SHEC at 1% of the excise duty, making the effective duty exposure as at 10.3%

Valuation/Basis for levy: Excise duty is mostly levied on ad volerm basis, expressed as a percentage of either transaction value or maximum retail price (for certain specified goods)
Export Goods manufactured in India can be exported without payment of excise duty, subject to specified conditions. Inputs used in manufacture of these goods can be procured without payment of excise duty Credit of Duty paid on Inputs The Government has prescribed rules which allow manufactures to take credit of specified duties , including excise duty paid on input and capital goods and service tax paid on inputs services used in the manufacture of dutiable goods. The manufacturer can utilize such credit to pay the excise duty applicable on the goods manufactured

Service Tax
Service tax is applicable on more than 100 specified services in India. It is also applicable on the import of specified services
Service tax is levied at a uniform rate of 12% of the value of service plus education cess at 2% and SHEC at 1%, making the effective service tax exposure to be 12.36%. The Government has prescribed rules for determining the value of taxable services The person providing the services collects service tax from the receiver, and is responsible for depositing it with the government. But when services are imported , the importer of the services is responsible to deposit it with the government On export of services, no service tax is applicable subject to export conditions. The Government has issued rules that provide specific criteria based on which a particular service would qualify as export. In case of export of specified service a mechanism has been provided , which prescribes the option to claim rebate/refund of excise duty /service tax paid on inputs used in export of services

VAT, CST and Entry tax


Value Added Tax (VAT)
VAT is a intrastate multi-point tax system, and is levied on value added at each stage . Presently all the states have replaced the erstwhile sales tax regime with VAT. The basic rate of slabs under the VAT are as follows : - 0% for natural and unprocessed products and other essential goods - 1% for Silver, gold ornaments - 4% for agricultural and industrial inputs , IT products , capital goods , intangible goods and other items of basic necessities - 12.5% for other goods

Central Sales Tax Act (CST)


Interstate sales continue to be liable to CST which is imposed by the Central Government and administered by State Government. Recently the rate of CST has been reduced from to 3% ( from 4%) subject to provision of declaration forms. It is proposed that CST shall be phased out by 31 March 2011

Octroi/Entry Tax
Octroi/Entry tax is levied on the entry of goods into particular municipal/state jurisdiction for use, consumption, or sale within such jurisdiction. The rate of entry tax on different products may vary from state to state

Recent developments: GST


Introduction of Goods and Service tax (GST) legislation A comprehensive dual model GST legislation proposes to replace various central and state enactment, including existing central and state level sales tax legislation. The government has announced its intention to implement GST from 1 April 2012 Salient features are as follows:-

Tax to be levied on the sale of goods and service based on multistage consumption Federal level GST and state level GST proposed All goods and service to be taxed except those covered under negative list Multiple rates for goods and common rate for services proposed All exports to be zero rated The central GST could be between 14-16% and state GST could be between 12-14%

Agenda
1 Foreign Investment Framework

2
3

Incorporating an Indian Company


Direct Tax Regime

4
5

Indirect Tax Regime


Other Key Economic laws

Financial Reporting frame work & Auditing

Key Economic laws IPR Protection


Intellectual property rights (IPR) protection The laws relating to intellectual property in India are still in the process of transition, and are being harmonized with corresponding laws in developed countries. As a signatory to General Agreement on tariffs and trade (GATT) and trade related aspects of intellectual property rights (TRIPS) agreement in the capacity of being a member of WTO, India is required to lay down minimum norms and standards with respect to Copyrights and other related rights, Trade marks, Geographical indications, Patents and Industrial Designs o Copyrights Act 1957:As per the Copyright Act 1957 copyright subsists in original literary, dramatic , musical and artistic work or a cinematographic film or a sound recording. o The Trademarks Act 1999 provides for registration of trademarks for services and goods including collective marks and for the assignment and transmission of trademarks. o Geographical Indications of Goods (GI) Act 1999: The GI Act seeks to provide for registration and better protection of geographical indication related to good in India, and is designed to protect the use of such geographical indication from indication infringement s by others and to protect the consumers from confusion and deception. o Indian Patents Act 1970 provides for the grant, revocation, registration, license , assignment , and infringement of patents in India o Industrial Designs: The Designs Act , 2000, passed to give recognition to the obligations under the WTO agreements , encourages and protects those who produce new and original designs .

Key Economic laws Labor laws


Industrial Disputes Act (IDA) 1947 IDA provides for investigation and settlement of industrial disputes or certain other matters in an industrial establishment related to lock outs, lay offs and retrenchment Payment of Bonus Act 1965 This Act provides for payment of Bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity and matters connected therewith Payment of Gratuity Act 1972 This Act provides for a scheme of payment of gratuity to all employees getting wages to do any skilled, semi-skilled or unskilled, manual, supervisory, technical or clerical work whether terms of such employment are express or implied . Gratuity is payable to an employee on his retirement/ resignation or termination. Workmens Compensation Act 1923 (WCA) The object of WCA is to compensate an employee for any injury suffered during the course of employment Minimum Wages Act , 1948 (MWA) MWA seeks to determine the minimum rates of wages in certain employments specified in the schedule of the Act. MWA applies to any person who is employed for hire or reward to do any work in scheduled employment , and includes an outdoor worker to whom any articles or materials are given for doing some work either at home or at any premises

Key Economic laws Anti trust regulations


Monopolies and Restrictive Trade Practices Act , 1969 (MRTP): The Act governs the activities /practices of all the industrial undertakings being such enterprises, which are engaged in production, storage , supply or distribution of articles /goods either directly or indirectly through any of its units or divisions . It encompasses within its ambit following types of prohibited trade practices , namely restrictive trade practice ,unfair trade practice and monopolistic trade practice Competition Act 2002 The Competition Act 2002 seeks to replace the MRTP act and seeks to achieve the following objectives : o Promote and sustain competition in Market o Protect the interest of consumers oEnsure freedom of trade oProvide for establishment of Competition Commission of India

Consumer Protection Act


This legislation has been enacted for the protection of consumer interest . It provides for establishment of consumer councils and other authorities to settle consumer disputes.

Key Economic laws Labor laws


Payment of Wages Act , 1936 (PWA) The object of PWA is to ensure that the wages are payable to the employees covered under PWA are disbursed by the employers within the prescribed time limit and no other deductions , other than those authorized by law , are made by the employers. Employees Provident Fund and Miscellaneous Provisions Act 1952 (EPMPA) EFMPA seeks to ensure financial security of the employees in an establishment by providing for a system of compulsory savings. A provident fund , as required to be established under EFMPA, is a contributory fund created to secure the future of the employees after retirement. Factories Act 1948 The Factories Act extends to the whole of India and it is a principal legislation that governs the health safety, and welfare of workers in factories . The Act also contains regulation s for functioning of the factories and detailed procedure related to inspection, registration and licensing of factories.

Key Economic laws - Others


Indian Contract Act (ICA) 1872 The Indian law of contract is based on the common law principles of contract. ICA has borrowed extensively from the provisions of codes governing the law of contracts in other contracts. Sale of goods Act 1930 The Sale of goods Act is complimentary to the Contract Act in so far as it prescribes the essential conditions for transfer of property in a sale of goods contract. Negotiable Instruments Act 1881 This Act relates to promissory notes, bills of exchange, cheques and other negotiable instruments. The main object of this Act is to legalize the system by which the instruments contemplated by it could pass from hand to hand through negotiations like any other goods.

Agenda
1 Foreign Investment Framework

2
3

Incorporating an Indian Company


Direct Tax Regime

4
5

Indirect Tax Regime


Other Key Economic laws

Financial Reporting frame work & Auditing

Financial Reporting Framework


Sources of generally accepted accounting principles

The Accounting Standards Board of the Institute of Chartered Accountants of India issues the accounting standard to be followed by enterprises. All Accounting Standards issued by are mandatory in nature subject to certain relaxations for small and medium companies and companies are required to comply with these standards and disclose significant accounting policies in the preparation and presentation of their financial statements Indian Accounting Standards (IAS) have been sourced from International Financial Reporting Standards (IFRS). However it may be noted that there are certain areas of significant differences between IFRS and IAS. A list of all the existing Indian Accounting Standard (IAS)is given in the Appendix 2
Recent developments IFRS Recently, the Institute of Chartered Accountants of India has published a Concept Paper on convergence with International Financial Reporting Standards (IFRS) in India. India is yet to adopt IFRS In the meeting of the Council held in 2006, the council expressed a view that IFRS may be adopted in toto atleast for listed and large entities. The Accounting Standards Board accordingly set up a task force on convergence with IFRS. Please refer Appendix 1 for the detail on convergence roadmap .

Financial Reporting Framework


Financial Statements: The formats of Balance Sheet and Profit and Loss Account are described by Schedule VI of the Companies Act 1956.Financial Statements should consists of the following Balance Sheet Profit and loss account Cash flow statements Notes to the financial Statements

- The Balance Sheet and profit and loss account should provide all disclosures necessary to give a true and fair view of the companys financial position and the results of operation
- Financial statements must be signed by and dated by the Company Secretary, if any, and by at least two directors, including a managing director, if any, apart from statutory auditor. Directors Report: The Directors report must accompany each set of financial statements and must contain prescribed information

Audit under Companies Act 1956


Requirements: All companies, banks and financial institutions must have their accounts audited by an auditor who is a practicing member of Institute of Chartered Accountants of India Appointment of Auditors: The first auditor of the Company is usually appointed by the Directors. The shareholders appoint subsequent auditors at every Annual General Meeting and establish their remuneration.

Contents of Auditors report: The auditors report must include an opinion on the financial statements as to whether they give a true and fair view of the financial statements. In addition the auditors are also required to report on matters stated in Companies (Auditors Report) Order 2003 which includes inter alia reporting on various aspects of internal controls , inventory valuation, payment of statutory dues , contested liabilities, description of fraudulent transactions and utilization of long term / short term funds .

Filing Requirements
Annual financial statements including Auditors Report and Directors Report must be sent to all shareholders at least 21 days before the date of Annual General Meeting. Listed companies must send annual financial statements to their stock exchanges . After the annual financial Statements have been presented at the Annual General Meeting, three certified copies of the same must be filed with Registrar of Companies within 30 days of adoption by the shareholders

Appendix 1: Roadmap for Convergence with IFRS


IAS Converged with IFRS
Phase I : Companies which are part of NSE- Nifty 50 or BSE Sensex 30, or Listed outside India or whether listed or not having net worth in excess of 1000 crore

Existing IAS*

Phase 2 : The companies, whether listed or not, having a net worth exceeding Rs. 500 crore but not exceeding Rs. 1,000 crore

Phase 3: Listed companies which have a net worth of Rs. 500 crore or less

Applicable to Non-listed companies which have a net worth of Rs. 500 crore or less and SMCs

* Refer Annexure 2

Appendix 2: Existing Indian Accounting Standards


AS1: Disclosure of Accounting Policies AS 2 Valuation of Inventories AS 3 Cash Flow Statements AS 4 Contingencies and Events Occurring after the Balance Sheet Date AS 5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies AS 6 Depreciation Accounting AS 7 Construction Contracts AS 8 Accounting for Research and Development (Withdrawn pursuant to AS 26 becoming mandatory) AS 9 Revenue Recognition AS 10 Accounting for Fixed Assets AS 11The Effects of Changes in Foreign Exchange Rates AS 12 Accounting for Government Grants AS 13 Accounting for Investments AS 14 Accounting for Amalgamations AS 15 Employee Benefits AS 16 Borrowing Costs AS 17 Segment Reporting AS 18 Related Party Disclosures AS 19 Leases AS 20 Earnings Per Share AS 21Consolidated Financial Statements AS 22 Accounting for Taxes on Income AS 23 Accounting for Investments in Associates in Consolidated Financial Statements AS 24 Discontinuing Operations AS 25 Interim Financial Reporting AS 26 Intangible Assets AS 27 Financial Reporting of Interests in Joint Ventures AS 28 Impairment of Assets AS 29 Provisions, Contingent Liabilities and Contingent Assets AS 30 Financial Instruments: Recognition and Measurement AS 31 Financial Instruments: Presentation

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