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Recent tax & regulatory
reforms - India & Singapore perspective
24 October 2019
Strictly for private circulation only
2
Contents
1 India Tax Stimulus: Corporate tax reforms
2 Treaty Benefits and Anti-Abuse provisions
3 Singapore Variable Capital Company
3
Key
features02
01 Backdrop 03
04 Way
forward
1
2
3
4
Impact
India Tax Stimulus (Corporate tax reforms)
Backdrop
Backdrop
Concerns over global growth – major economies facing slowdown
US China Trade war continues to impact global trade
5
• FM introduces 4th round of booster measures via Taxation Laws (Amendment)
Ordinance, 2019
• To encourage investment and manufacturing under ‘Make in India’ initiative
• Roll-back on enhanced surcharge for FPIs
• Tax revenue foregone – INR 1.45 tn
Global scenario
Plummeting growth rate and slowdown in demand and consumption
India tax rate globally uncompetitive, hurting investments and exports
Negative sentiment and low investor confidence
High expectations from government to introduce booster measures
India scenario
India Inc. and Markets cheer tax boosters
6
India Tax Rate - Where do we stand?
* Source- Financial Express, published: 21 September 2019
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Key features
Section 115BAA vs 115BAB
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Particulars 115BAA (General) 115BAB (Make in India)
Coverage • All domestic companies • New domestic company engaged in
manufacture or production of article/
thing AND R&D of article/ thing
Tax Rate • Headline- 22%
• Effective tax rate- 25.17%
• Headline- 15%
• Effective tax rate- 17.16%
Eligibility
criterion
• No eligibility criteria • Company set-up 1 Oct’ 19 onwards
AND commenced manufacturing by
31 March 2023
MAT • Inapplicable • Inapplicable
Option to be
exercised
• In any year on or before due
date for filing ITR
• Not reversible
• In the first of the returns filed,
before due date for filing ITR
• Not reversible
Other
restrictions
• No capital and profit linked
incentives / deductions
• No set off for b/f losses
attributable to above deductions
• Depreciation rates u/s 32 to be
determined may be prescribed
• Same as applicable to section
115BAA
• Anti-abuse conditions provided – no
splitting or reconstruction, limits on
used Plant and Machinery
• Domestic Transfer Pricing to apply
Common aspects
The following incentives/deductions or brought forward losses attributable thereon
will be unavailable to companies opting for section 115BAA/section 115BAB:
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Section Particulars
10AA Tax deduction for units established in Special Economic Zone
32(1)(iia) Additional depreciation
32AD Deduction for investment in new plant and machinery in notified backward areas
35(1)(ii) Deduction for donation made to approved scientific research association,
university, college or other institutes for doing scientific research
35(2AB) Deduction for expenditure on in-house scientific research
35AD Deduction in respect of capital expenditure incurred in respect of certain specified
businesses, i.e., cold chain, warehousing facility, etc.
Others Deductions under sections 33AB, 33ABA, 35CCC, 35CCD
Part C of
Chapter VIADeduction in respect of certain incomes other than specified under section
80JJAA
• Rates enacted in the respective sections and not as per Finance Act
• No prescribed sunset date
Impact
Rate Impact - Choice of entity
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Given DDT incidence and levy of additional tax on dividend income in hands of non-
corporate assessees, LLP structure still looks most attractive
Particulars
Existing/New
companies
New
companiesExisting companies Existing/New
Section
115BAA
Section 115
BAB
Turnover >INR
400cr
Turnover < than
INR 400 crs or u/s
115BA
LLPs
Whether eligible to claim
incentives?No No Yes
Yes (No for 115BA
companies)
Yes (though
limited)
Headline tax rate (%) 25.17 17.16 34.94 29.12 34.94
Profit before tax 100 100 100 100 100
Less: Tax 25.17 17.16 34.94 29.12 34.94
Profit after tax 74.83 82.84 65.056 70.88 65.06
Less: DDT 12.76 14.13 11.09 12.09 0.00
Dividend received by the
shareholder62.07 68.71 53.96 58.79 65.06
Total taxes paid by entity 37.93 31.29 46.04 41.21 34.94
Tax u/s 115BBDA (non-corp) 8.85 9.79 7.69 8.38 0.00
Amount in INR
Rate impact - Tax holiday: 10AA, 80IA, 80IE, etc.
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Amount in INR
Domestic
company
(normal
provisions)
Manufacturing
company (S.
115BA)
Domestic
company not
availing S. 10AA
holiday (S.
115BAA)
Manufacturing
company not
availing S. 10AA
holiday (S.
115BAB)
Income eligible for deduction u/s
10AA100 100 100 100
Less: Deduction for tax holiday
(assumed 60%)60 0 0 0
Gross total income 40 100 100 100
Applicable tax rates (normal) (%) 34.94 29.12 25.17 17.16
Applicable tax rates (MAT) (%) 17.47 17.47 NA NA
Normal Tax payable 13.98 29.12 25.17 17.16
Book profit for computing
MAT/AMT100 100 100 100
MAT payable 17.47 17.47 0 0
Final tax payable (higher of
normal tax or MAT)17.47 29.12 25.17 17.16
MAT/AMT credit which can be
carried forward3.49 0 0 0
Way forward
Make in India tax rate (17.16%)
• Assess the scope of activities covered by “Make in India” rate
− Term ‘manufacture’ defined under section 2(29BA) of the Act
− Term ‘production’ wider than ‘manufacture’
− Whether software development, power generation, real estate development, etc.
entitled
• Restructuring of existing businesses/ undertaking expansions, business split etc for
eligibility under new tax regime, after carefully factoring GAAR implications
• Availing the ‘Make in India’ rate for new manufacturing expansions through a SPV
after factoring transfer pricing
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Migration to new general rate (25.17%)
• Evaluate the migration to reduced tax rate under Section 115BAA (25.17%)
⎼ Straight forward choice for Companies taxed at full rate and not availing
specified incentives e.g. Trading, Banking, Services, etc.
⎼ Companies enjoying tax incentives e.g. IT/ ITeS business, businesses with
SEZ units, North-East units to undertake extensive scenario analysis
• Past positions under litigation impacting c/fd losses, MAT credit to be considered
for rate migration
• Evaluate position to be adopted in current years tax return (31.3.2019) based on
choice shortlisted
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Impact on DTA / DTL balances
• Opting for concessional tax regimes by a company to result in reduction inapplicable tax rates for the purpose DTA/DTL calculations
• Consequently, DTA/DTL balances arising on account of timing differences will berequired to be tested at new reduced rate, say @ 25.17%, as against existinghigher rate of 34.94%
• This restatement of existing DTA / DTL balances will result in reversal of anyexcess DTA / DTL balances to statement of profit and loss
• Evaluation of such impact may be integral part of the overall evaluation whilemigrating to new tax rate
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Indirect taxes – Optimisation
• Assess GST impact on Inter-company transactions, convergence with domestictransfer pricing : use of brand, logo, licenses, other services
• GST Registration & other Compliances
− Transfer of credit, reversal of credit or accumulation of credit : arising as a result
of restructuring of businesses – possibility of credit optimization
• Benefit/Incentives under the Foreign Trade Policy for export of goods & servicesarising as a result of enhanced economic activity in India
− Exemption / remission schemes & incentives available for manufacture -
Definition of ‘manufacture’ under the FTP vs. Income tax
• Backward area incentives : e.g. Maharashtra Package scheme of incentives
− Stamp duty, Electricity duty, Power subsidy, Interest subsidy, SGST
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Treaty Benefits & Anti-Abuse provisions
• Taxation of capital gains
• No exemption for shares acquired in an India company 1 April’ 19 onwards
• Shares acquired upto 31 March 2017 are grandfathered subject to meeting LOB
• However, capital gains on other securities still exempt
• Debt, F&O, CCD, LLP interest
• Single tier v Double tier structure
• Taxation of passive income
• Interest @15% (for banks @10%)
• Dividend withholding tax rate @ 10% - could it apply to DDT
• Anti-treaty abuse provisions in MLI
• Grandfathering from Domestic GAAR for shares acquired upto 31 March’17
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India-Singapore tax treaty – Current Status
Other favorable tax treaty jurisdictions
List of other favorable tax jurisdictions, where capital gains income is not taxed
in India, but in the home jurisdiction, under the tax treaties
JurisdictionTaxed in home jurisdictions
Equity Debt Derivatives
Belgium a* a a
Denmark a* a a
France a* a a
Kenya a a a
Korea a** a a
Philippines a a a
Spain a* a a
The Netherlands a* a a
*Provided that the investor holds less than 10% of the capital stock of the Indian company
**Provided that the investor holds less than 5% of the capital stock of the Indian company
Grandfathering is not a guarantee –AAR Rulings on Treaty Eligibility
• Indian tax authorities increasingly challenging eligibility of Funds to claim Treaty benefits vis-à-vis capital gains on disposal of investments
• AAR ruling have denied Treaty benefits to a Mauritius investing entity despite it holding a valid TRC
• Factors that led to Treaty benefits being denied:
• Directors of Mauritius entity not being signatories to SPA
• BOD of Mauritius entity not managing or controlling crucial investment decisions
• Absence of consideration in SPA
• Inconsistency in financial instruments of Mauritius entity
Highlights importance of documentation and conduct in successfully availing
Treaty benefits
Exits from India – Indirect transfers
FCo1
Indian Entity
FCo2
Sale
Other
subsidiaries
Offshore
SPV
FCo3
Liability to tax in India
• Applicable if:
• Value of assets in India exceeds INR 100 million; and
• Value of assets in India represents => 50% of value of all assets owned by Offshore Fund
• Exemption provided for certain transactions (e.g. transfer by small shareholders, transfer of investment directly or indirectly in Category I or Category II FPI, buy-back/redemption at offshore level post sale of India assets by Cat I and II AIF etc.)
• Could be exempt from tax in India under India-Singapore and certain tax treaties
• Withholding tax considerations to be addressed
• MLI provisions relevant while availing treaty benefits (apart from GAAR)
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Multilateral Instruments (MLI) –Key features
• MLI is multilateral treaty designed to modify an existing tax treaty without subjecting
to rigors of bilateral negotiations
• Both India and Singapore have become signatories to MLI which shall be effective
from 1 April 2020 (Financial Year 2020-21)
• MLI amongst other things - aims to deny tax treaty benefits if it is reasonable to
conclude (having regard to all facts and circumstances), that obtaining tax benefit
was one of the principal purposes of any arrangement or transaction that
resulted directly or indirectly in that benefit [i.e. Principle Purpose Test (PPT)]
• Essential to satisfy PPT under MLI regime to obtain tax treaty benefit
⎼ Treaty benefits not available if PPT test not satisfied – grandfathering benefits lost
⎼ Existing Singapore funds with feeder/pooling vehicles outside Singapore could face
challenges on the eligibility of the India-Singapore tax treaty benefits under MLI and
GAAR
⎼ Essential to establish ‘commercial rationale’ coupled with economic realities
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Singapore’s VCC framework is a significant development for investment
fund industry and could be a game-changer for FDI in India
Singapore Fund structure –Variable Capital Company (VCC)
Concept of VCC
Covers both traditional and alternative assets strategies
Can be open-ended or close-end fund entity
Can be set-up as a standalone fund or an umbrella fund with multiple sub-funds that may have different investment objectives, investors as well as assets and liabilities
Is governed by Variable Capital Companies Act and Securities and Futures Act
Regulated by both MAS and ACRA
VCC Fund structure – Standalone Fund
VCC
Investors
Fund
Manager* Capital contribution
Management services
Local
investmentsOverseas
investments
*Singapore based licensed or regulated fund manager (unless exempted under the regulations)
Single family office, private real estate funds, REIT managers, Business Trust managers not eligible for VCC structure
Fund
Administrator
VCC Fund structure – Umbrella Fund
Sub Fund 2
Investors
Fund
Manager*
Management
services
Investments Investments
Sub Fund 1 Sub Fund 3
Investments
VCC
Investors Investors
Fund
Administrator
Advantages of VCC structure
Limitations in the current
frameworkParticulars Benefits in VCC framework
Public has access to financial statements
and shareholders information and hence
no confidentialityConfidentiality
No requirement for financial statements to
be made public – Offering privacy to
investors
Redemption of capital requires insolvency
statement and shareholder’s approval
Capital
redemption
Redemption of capital at fund’s net asset
value does not require insolvency
statement and shareholder’s approval
Dividend can be paid only out of profitsDividend
payments
Dividends can be paid out of capital and
not only profits
LP’s and Trust does not have eligibility to
Double Taxation Avoidance AgreementTaxation
Taxation wise more efficient and benefits
under DTAA can be availed
Administration burden for multiple funds in
the current structureAdministration
Economies of scale and cost efficiencies
due to umbrella fund structure as they can
share board of directors, fund manager,
custodian, auditor and administrative agent
VCC – Other key aspects
• Economic conditions (i.e. minimum fund size, business spending) will be applied at umbrella VCC level (and not to each sub-fund)
• Investment objective condition must be satisfied at the VCC level (and not to each sub-fund)
• No MAS approval required for addition of new sub-funds under umbrella VCC
• For umbrella VCC, assets and liabilities of each sub-fund to be segregated
• VCCs can adopt either SFRS or other recognised accounting standards (i.e. IFRS, US GAAP)
• Inward re-domiciliation of foreign corporate entities as VCCs permitted, subject to certain conditions
Key tax aspects governing VCC structure
Treated as a single entity for
tax purposes
COR is available subject to
VCC establishing that it is
controlled and managed from
SG
10% concessionary tax rate
for fund managers subject
to successful application
Benefit of withholding tax
exemption for payment
falling under Section 12(6) is
extended to VCC
Tax exemption under
sections 13R and 13X of the
Income Tax Act extended to
VCC
Existing GST remission for
funds will be extended to
VCCKey tax aspects
governing VCC
structure
• Pooling in Singapore under VCC structure – India GAAR perspective
• Application of International Transfer pricing guidelines for inter-se
transactions between sub-funds?
• Loss offsets in international jurisdictions
• Certain aspects as mentioned below - At sub-fund level or VCC level?
✓ Obtaining Permanent Account Number in India
✓ Indian Indirect transfer provisions – 50% threshold test
• Singapore & other countries’ Stamp duty on transfers amongst sub-funds?
Key points for consideration
Disclaimer
This document is for informational purposes only and should not be construed as
professional advice. The user should not construe the material contained herein as
business, financial, legal, regulatory, tax or accounting advice. Dhruva Advisors
disclaims any and all liability to any person for any loss or damage caused by errors
or omissions, whether such errors or omissions result from negligence, accident or
any other cause. Dhruva assumes no liability for the interpretation and/or use of the
information contained on this document, nor does it offer a warranty of any kind,
either expressed or implied.
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