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Place of Effective Management: Concept and Impact

To determine the residential status of foreign companies, the Finance Act 2015 introduced the concept of place of effective management (POEM). By definition in Indian Tax Laws “Place of effective management” means a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

The Finance Act, 2016 has changed the effectivity of the said amendment to section 6(3) of the Act. These amended provisions came into effect from 1st April 2017 and are now applicable for Assessment Year 2017-18 and subsequent assessment years.

‘Place of effective management’ (POEM) is an internationally recognized test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognizes the concept of ‘place of effective management’ for determination of residence of a company as a tie-breaker rule for avoidance of double taxation.

Prior to the 2015 amendment, a company was classified as an Indian resident:

  • If company is incorporated in India; or
  • If during that year, the control and management of its affairs is situated wholly in India

Classification as per these provisions provided tax avoidance opportunities to companies. Companies used to artificially escape the residential status by shifting insignificant or isolated events related with control and management outside India. Further, this liberal test resulted in shift of profits by incorporating shell companies outside India, which were substantially controlled from India.

 General Principles of relevance for determining POEM

  • It depends on the facts and circumstances of a given case for each year.
  • Driven by the concept is one of substance over form.
  • An entity may have more than one place of management but it can have only one POEM.
  • The POEM will be required to be determined on a year-to year basis.
  • Review and study of all facts related to the management and control of the company are necessary as the POEM determination cannot be based on isolated facts.
  • If, during the tax year, the POEM is exists both in and out of India, the POEM is presumed to be in India.

Quantitatively, companies with turnover of INR 50 crore or less in a financial year will be exempt from the POEM provisions. Qualitatively, companies with active business outside India will be exempt from these provisions.

 The CBDT has spelled out the criteria for the active business test:

  • Passive income should not be more than 50% of total income;
  • Less than 50% of total assets should be situated in India;
  • Less than 50% of total employees should be situated in India; and
  • Payroll expenses on such employees should be less than 50% of total payroll expenditure.

 “Passive income” of a company shall be aggregate of:

  • Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
  • Income by way of royalty, dividend, capital gains, interest or rental income.

*Interest is not considered as passive income in case of banks and NBFCs

Once your active income is more than 50%, it will be presumed that your place of effective management is outside India, as long as you have majority of the board meetings outside India which is easy to satisfy but they’ve also said that you can’t misuse this rule.

 For companies except those engaged in ABOI, determination of POEM is a two-stage process:

  • Identifying or ascertaining the person or persons who actually make the key management and commercial decisions for conduct of the company’s business as a whole.
  • Determination of place where these decisions are, in fact, being made.

The CBDT has stated that the intent of POEM is to tap shell companies trying to avoid tax compliances in India. The POEM cannot be established to be in India merely because one or more of the following conditions exist:

  • Foreign company is wholly owned by an Indian company.
  • Foreign company has a permanent establishment in India.
  • One or some of the directors of a foreign company reside in India.
  • Local management in India relates to activities carried out by a foreign company in India.
  • Support functions that are preparatory and auxiliary in character in India

The foreign companies having POEM in India have to pay corporate tax at a rate of 40% instead of 25% payable by companies that have status “resident of India”.

 As it may not be possible to provide a detailed list of all the factors that must be considered, we welcome you to clarify your queries regarding the same. Reach us here.

Transfer pricing with APAs

Transfer pricing made easy with APAs

Over the past few years, the number of transfer pricing audits has been increased and aggressive positions have been adopted by the Indian Revenue Authority, which has contributed to long drawn and protracted litigation. The Central Board of Direct Taxes (CBDT) signed nine unilateral advance pricing agreements (APAs) with Indian taxpayers in July, this year, as it looks to reduce litigation by providing certainty in transfer pricing.
The APA program is designed to avoid the conflict arising in an audit and to nurture more effective communication between taxpayers and the Indian Revenue Authority, by helping both the parties to focus on relevant facts and circumstances in advance.

Advance pricing agreement (APA)
An APA is an agreement between the taxpayer and tax authority determining the pricing of intercompany transactions for future years. In case of a roll-back, it would also include past years. The taxpayer and tax authority mutually agree on the transfer pricing methodology (TPM) to be applied for a certain period of time (generally five years) based on the fulfillment of certain terms and conditions. APA is an effective tool used in several countries with established transfer pricing regimes to avoid future disputes in a cooperative manner.

 APAs pin down

  • Transactions covered by an APA
  • Transfer pricing method (TPM)
  • APA term
  • Operational and compliance provisions
  • Appropriate adjustments
  • Critical assumptions regarding future events
  • Required APA records
  • Annual compliance reporting responsibility

 Types of APAs

  • Unilateral: An APA between a taxpayer and the tax administration of the country where it is subject to taxation.
  • Bilateral: An APA entered into by the taxpayers, associated enterprise (AE) of the tax payer in the foreign country, the tax administration of the host country and the foreign tax administration.
  • Multilateral: An APA that involves the tax payer, two or more AEs of the tax payer in different foreign countries, tax authority of the country where the tax payer is located and the tax authorities of AEs.

 Key benefits of an APA

  • An APA provides certainty on transfer pricing and the TPM to be adopted for intercompany transactions covered under agreement.
  • Certainty with respect to tax outcome of the tax payer’s international transactions.
  • A bilateral or multilateral APA also wipes out the risk of potential double taxation arising from controlled transactions.
  • Removal of an audit threat and deliverance of a particular tax outcome based on the terms of the agreement.
  • Substantial reduction in risk and cost associated with audits and appeals over the APA term.
  • For tax authorities, an APA reduces cost of administration and also provides with additional resources.
  • APA renewal provides an excellent leverage of time and efforts expended during negotiating the original APA. The Indian APA rules also allow the taxpayer to convert a unilateral into bilateral and vice-versa, if required.

Consequently, APAs provide a win-win situation for all the stakeholders involved.

 The APA process in India
In line with APA process in other countries around the world, the Indian APA rules prescribe a process that breaks into the following four phases:

  • Pre-filing consultation: The process for APA would start with pre-filing consultation meeting. The taxpayer can request for a pre-filing consultation meeting which shall be held with the objective of determining the scope of the agreement, understanding the transfer pricing issues involved and examining the suitability of international transactions for an APA. The taxpayer also has an option of applying for a pre-filing consultation on an anonymous basis. This process is non-binding on the taxpayers and the Revenue. Taxpayer is required to fill form (From No. 3CEC) for a pre-filing consultation. It is vital not only to the APA process, but also to determine the course of the APA.
  • Formal APA application: After the pre-filing meeting, if the taxpayer is desirous of applying for an APA, an application would be required to be made in prescribed form (Form No. 3CED) containing specified information. The APA application filing fee is also payable at this stage.
  • Negotiation: Once the application is accepted, the APA team shall hold meetings with the applicant and undertake necessary inquiries relating to the case. Post the discussion and inquiries, the APA team shall prepare a draft report which shall be provided to the Competent Authority (for bilateral / multilateral APA), or DGIT (for unilateral APA).
  • Finalization: This phase involves exchange of feedbacks on draft APA, finalization of the APA and giving effect to the initial years covered under the APA term that have already elapsed.

 Statutory fee for filing an APA application
The APA filing fee, i.e. fee to be paid while filing the formal APA application is dependent upon the amount of the proposed covered transactions over the proposed APA term, as below:

  • INR 1 million for international transactions up to INR 1 billion
  • INR 1.5 million for international transactions up to INR 2 billion
  • INR 2 million for international transactions greater than INR 2 billion

*No fee prescribed for the pre-filing consultation process.

If you require any assistance on transfer pricing documentation including transfer pricing reports, Form- 3CEB and Advance Pricing Agreements (APA), you may reach us.

Audit under GST

GST Audits- An overview

Section- 2(13) of the CGST Act defines Audit as the examination of records, returns and other documents maintained or furnished by the registered person under the Act / rules made there under or under any other law for the time being in force to verify the correctness of turnover declared, taxes paid, refund claimed and input tax credit availed, and to assess his compliance with the provisions of the GST Act or the rules made thereunder.

*No audit is required for businesses with turnover less than INR 2 crore.

Types of GST Audit
There are 3 types of GST audits:

  1. Audit to be conducted by a Chartered Accountant or a Cost Accountant: Every taxpayer with revenue exceeding the prescribed limit of INR 2 crore during a financial year shall get his accounts audited by a Chartered Accountant or a Cost Accountant. Such taxpayers whose audit is conducted by a Chartered or Cost Accountant shall submit:
  • An annual return by filling the form GSTR 9B along with the reconciliation statement by 31st December of the next financial year;
  • The audited copy of the annual accounts;
  • A reconciliation statement, reconciling the value of supplies declared in the return with the audited annual financial statement; and
  • Other particulars as prescribed.
  1. Audit to be conducted by the tax authorities: As per Section 65 of the CGST / SGST Act, the Commissioner or any officer of CGST or SGST or UTGST authorized by him by a general or specific order, may conduct audit of any registered / enlisted individual. Intimation of the audit is provided to the taxpayer at least 15 days in advance in Form GST ADT-01 and the audit is to be completed within 3 months from the date of commencement of the audit. In rare cases, the GST Commissioner has the powers to extend the period by another 6 months, if required.
  2. Special Audits: If at any stage of investigation or any other proceedings, tax authority is of the opinion that the value has not been correctly declared or credit availed is not within the normal limits, department may order special audit under the mandate of Section 66, by its nominated Chartered Accountant or Cost Accountant.

The Chartered Accountant or Cost Accountant so nominated shall submit audit report to tax officer within the period of 90 days. This period may be extended further for 90 days by tax officer on application made by registered person or the chartered accountant. The registered person shall be given an opportunity of being heard in respect findings of special audit. The expenses of the audit of records, including the remuneration of such chartered accountant or cost accountant shall be paid by the Commissioner.

Where the special audit conducted results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the officer may initiate required action.

Obligations of the Auditee
Auditees shall have following obligations during the course of audit:

  • The taxable person will be required to provide the necessary facility to verify the books of account / other documents as required.
  • The auditee needs to furnish the required information and render assistance for timely completion of the audit.

Findings of the Audit
On conclusion of an audit, the officer shall inform the taxable person within 30 days of:

  • Findings of audit;
  • Their reasons; and
  • The taxable person’s rights and obligations.

Where the audit conducted under sub-section (1) results in detection of tax not paid or short paid or erroneously refunded, or input tax credit wrongly availed or utilized, the proper officer may initiate action under section 73 or section 74.

If you are facing challenges in compliance with GST or require any assistance in GST audits, you may reach us. For any questions regarding this, please click here.

GST adviser in India

Highlights of 29th GST council meeting

The 29th GST Council meeting chaired by Union finance minister Piyush Goyal was held at New Delhi on the 4th August, 2018. The meeting was aimed to address the issues of the Micro, Small and Medium Enterprises (MSMEs).

Key decisions taken by council in the meeting

Incentivizing digital transactions
Federal indirect tax body the GST Council, keeping in mind the end goal of digitalization of the economy, enhancing tax compliance and elevating the collection of tax has decided to incentivize digital payments of tax. The council came up with plan to roll out a pilot project for refunding 20% of GST paid on business-to-consumer transactions through RuPay card, BHIM mobile application, unified Payment Interface (UPI), debit card etc.

To implement this, the IT system has to get ready first. Therefore, government will develop the software in assistance with NPCI to process the cashback. The cashback is subject to a cap of INR 100.

Addressing MSME issues
The Micro, Small and Medium Enterprises (MSMEs)  play a significant role in country’s development, by the volume of revenue & employment it generates. The sector contributes to half of the exports and around 29% of the GDP.

The GST council has decided to form a new panel to examine a series of tax and compliance relief proposals pertaining to MSME and small traders. Panel to be chaired by union minister of state for finance Shiv Pratap Shukla will examine all proposals received so far regarding tax relief including the proposal to give relief to MSMEs with sales up to INR 1.5 crores from the central GST (CGST). This would restore the excise duty exemption available to these businesses in the pre-GST era.

This penal will do in depth study of the issues related to MSMEs and small taxpayers and thereafter will submit their findings and recommendations before GST Council.

No GST rate cut
Owing to lower GST revenues, no decisions were taken on the rate cut or rate rationalization. Also, there was no discussion on the GST return filing form simplification either.

The next meeting of the GST Council will be held on 28-29 September in Goa. For further updates stay tuned here!

For any query on this, reach our GST advisors.

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New compliance for directors – DIR-3 KYC

The Central Government of India decided to conduct KYC drive to bring down the shell companies. Ministry would be conducting KYC of all the directors of the companies as a part of updating its registry.

MCA (Ministry of Corporate Affairs) has amended and inserted a new rule, Rule 12A (Directors KYC) vide the Companies (Appointment and Qualification of Director) Rules, Fourth Amendment Rules, 2018 . The rule came into effect on July 10, 2018.

In a registered company or new company registration, every director who has been allotted Director Identification Number (DIN) on or before 31st March, 2018 and whose DIN is in ‘Approved’ status would be mandatorily required to file form DIR-3 KYC by August 31, 2018.

Directors of the company will be going through this KYC procedure annually.

Need for this amendment

  • Government is administering a drive to maximize corporate governance in order to get rid of shell companies, unprincipled and dishonest directors who are running benami companies (where actual owners and directors are not on the records or books). This KYC exercise is undertaken to sift that only genuine individuals are responsible for running the affairs of any company.
  • MCA would be conducting KYC of all the directors of the company as a part of updating its registry.

Who all are covered under this compliance?

  • All the individuals whether residents in India, non-residents or foreign nationals, who are directors / partners any companies / LLP are required to file KYC form.
  • The KYC details are to be mandatorily submitted by director of the company and by disqualified directors as well.

Directors are required to fill the DIR-3 KYC E- Form available on the MCA’s website.

Information Required 

  • It is mandatory for the Indian directors that all the data furnished in the DIR-3 KYC form is in accordance with the information registered with the Income Tax Department (in PAN)
  • The full name of applicant, as mentioned in attached documents, should be provided without using any abbreviations.
  • Using of prefix, Late is not required for a deceased person. The married women are also required to fill in their father’s name only.
  • It is obligatory for a foreign national with a DIN, to possess a passport. The passport number shall be duly filled in the form. For Indian nationals, having a passport isn’t compulsory, but in case the person has a passport then its details must be mentioned in the form.
  • Details of AADHAR should be in compliance with the details furnished in both PAN and DIN.
  • The applicant must provide personal working mobile number and e-mail id. An OTP shall be sent for the verification of both the contact details.
  • Present residential address should be the one mentioned in the documents attached for the address proof. The permanent address may or may not be the same.

Documents to attach with Form

  • Identity proof (PAN / Passport/ AADHAR Card): The document should declare applicant’s and his father’s name along with the photograph of the applicant and his date of birth.
  • Proof of present address: Passport/ AADHAR Card/ Voter Identity.

Signatures

  • The form has to be digitally signed by the applicant using digital signature.

Certification of DIR-3 KYC form

  • The form has to be certified subsequent to its verification, with the original documents, by a practicing CA/CS/CMA professional.

Fee for filing DIR -3 KYC form

  • No fees to fill form DIR-3 KYC provided the form is being filled within the specified time-frame.
  • The applicant will be filed with a fee of INR 5000 in case of delayed submission.

Consequences for not filing e-form DIR-3 KYC

  • After expiry of the due date by which the KYC form is to be filed, in case of non-compliance, the DIN shall be marked deactivated along with the reason “Non-filing of DIR-3 KYC” .However, the de-activated DIN shall be re-activated only after filing of E-form DIR-3 KYC.
  • Also late fee penalty of INR 5000 shall be levied on filing after the expiry of due date.

Make sure you file DIR-3 KYC before 31st August 2018. If you need any assistance to comply with this new rule reach out our experts.

GST Returns

Key outcomes of the 28th GST Council meet held on 21st July 2018

GST return filing process

  • Small taxpayers with less than INR 5 crores of turnover can opt to file GST return quarterly against earlier limit of INR 1.5 crores. Quarterly return filing will be similar to the monthly return. However, tax payment would still be monthly, through a challan. Only small taxpayers making B2C supply or making B2B and B2C supply can enroll for quarterly GST return filing. Small taxpayers involved in only B2B supply cannot file quarterly returns under this scheme.
  • Two simplified returns have been designed- “Sugam” and “Sahaj”, where in the first one, report only B2C supplies and the other report both B2B & B2C supplies, respectively.
  • The returns that have to be filed monthly, has also been simplified. The new return is simple with two main tables. One for reporting outward supplies and one for reporting inward supplies for availing input tax credit. The process would be based on Invoice “UPLOAD – LOCK – PAY TAX” for most tax payers.
  • A new facility is proposed by the GSTN wherein NIL return filers (no purchase and no sale) can file Return by just sending an SMS.

Composite dealers

  • Limit not exceeding 10% of the turnover of services rendered in the preceding financial year, or INR 5 lakhs, whichever is higher shall be fixed for opting into the composite scheme. Restaurant services are not be considered for this measure.
  • Threshold limit for opting for composition scheme to be raised to INR 1 crore from existing INR 1.5 crore.

GST registration

  • Taxpayers may opt for multiple registrations within a State / Union territory in respect of multiple places of business located within the same State / Union territory. Earlier it was restricted to multiple businesses in the separate States.
  • Now it becomes mandatory to register under GST for those E-commerce operators who are required to collect tax at source.
  • The threshold exemption limit for GST registration increased to INR 20 lakhs from INR 10 lakhs for 6 States -Taxpayers operating in Sikkim, Arunachal Pradesh, Himachal Pradesh, Uttarakhand, Assam & Meghalaya.
  • Registration to remain temporarily suspended for the time cancellation of registration is under process, so that the taxpayer is relieved of continued compliance burden under the law.

 Reverse charge mechanism

  • An amendment is proposed to levy GST on reverse charge mechanism on receipt of supplies from unregistered suppliers, to be applicable to only specified goods in case of certain notified classes of registered persons.

E-way bills compliance

  • As the RFID readers or tags will be introduced with Goods and Services Tax Network (GSTN) for transporters in the next 6 months, this is supposed to relieve the transporters from wait at check posts.
  • Standard operating procedure to be adopted to reduce harassment of transporters avoid unnecessary hardship at checkpoints and to give effect to a uniform.

GST migration re-opened

  • Those businesses that had VAT or Service Tax or Central Excise registration were required to migrate and obtain GSTIN by registering under GST. This migration was later closed.
  • The 28th GST Council has now approved the proposal to open the migration window for taxpayers, who received provisional IDs but could not complete the migration process.
  • Taxpayers who filed Part- A of form GST REG-26, but not Part- B need to approach the jurisdictional Central Tax / State Tax nodal officers with the necessary details on or before 31st August, 2018 to complete the procedure.
  • All such taxpayers who are now migrating will also be not levied a penalty for late filing GST return. However, such taxpayers will have to file GST return first along with the payment of late fee. On filing the GST return, the GSTN would provide credit by way of a reversal of the amount paid as late fees in the cash ledger under the tax head.

*To encourage the same the late fee payable for delayed filing of return in such cases is decided to be waived.

For exporters

  • Exemption on outward transportation of all goods by air and sea is extended by another year till 30th September, 2019.
  • Services provided in sectors like banking, IT have been provided relief by exempting services supplied by an establishment of a person in India to any establishment of that person outside India (related party).

Other key points

  • Currently, the fiber material is charged at a higher GST rate of 12% as compared to the final apparel that was made out of it attracted only 5%. Due to this, ITC on fiber material was not being able to be utilized. On account of the inverted duty structure that currently prevails in this industry, GST council has proposed for the provision of allowing refund of the accumulated ITC by giving prospective effect to its applicability from 27th July 2018.
  • Registered persons may issue consolidated credit / debit notes in respect of multiple invoices issued in a Financial Year.
  • Hotels to be taxed on actual tariff basis not on declared tariff.

Rate rationalized

  • Common-use foot wares having retail price up to INR 1,000 to be taxed at 5 % for those with price exceeding INR 1000, 18% GST rate will be applicable.
  • Ethanol oil for oil companies to be taxed at 5 per cent in place of 18 % earlier.
  • GST rates for all leather items reduced to 18 per cent from 28 %.
  • GST rates cut to 18% for special purpose vehicles, work truck, trailers.
  • Rates on scents, toilet spray now under 18 % slab.
  • GST on bamboo flooring put under 12 % category.
  • Handicraft items to now be taxed at 12 %.
  • GST on handbags, jewellery box, wooden box for paintings, artware of glass, stone endeavour, ornamental framed mirrors, handmade lamps etc. reduced to 12%.
  • GST on imported urea reduced to 5%.
  • Rates for 17 white goods including — Washing machine, Refrigerators, TV, Video games, Vacuum cleaners, Trailers, Juicer mixer, Grinders, Shavers & Hair driers, water cooler, water heaters, Lithium ion batteries, electric iron – reduced by 10 % from 28 % to 18 %.

Exempted items

  • Sanitary napkins that were earlier taxed at 12 % has been put under exempted category.
  • Marbles, stone and wood deities get exemption.
  • Rakhi and fortified milk are also exempted.

New GST rates

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Next Council meet is going to be held on 4th August 2018.For further updates stay tuned here!
For any query on this, reach our GST advisors.

Residential taxability of an individual

Residential status and taxability of an individual

The residential status under Income Tax law plays a vital role while considering taxation of certain incomes of an Individual. It is not related to citizenship of a country.

The residential status of a person is required to be determined for each assessment year in order to ascertain the scope of his total income. The residential status of a taxpayer is worked out on the basis of tenure of his physical stay in India during the Financial Year.

For tax purpose all tax payers are classified into two broad categories based on their period for which they were physically present in the country:
1. Resident
2. Non-resident(NR)

Residents are further classified into:
1. Resident and ordinarily resident (ROR)
2. Resident but not ordinarily resident (NOR)

An individual is said to be Resident in India in any previous year, if he satisfies any one the following conditions:
a) He has been in India for a period or periods amounting in all to a minimum of 182 days during the previous yearor
b) He has been in India for a total of 365 days or more during the 4 years immediately preceding the previous year and for at least 60 days during the previous year.

If any individual satisfies any of the one conditions mentioned above, he is a Resident of India. If none of the above mentioned criteria is fulfilled by an individual then he is categorized as Non-resident.

*The 60-day period mentioned above (in point b) will be substituted for 182 days in case of the following persons:-

  • A citizen of India who leaves the country as a crew member of an Indian ship or for the purposes of employment outside India.
  • A Citizen of India or Person of Indian Origin who visits India in any previous year.

A resident individual will be treated as ROR in India during the year if he satisfies both the following conditions:
a) He is resident in India for at least 2 years out of 10 years immediately preceding the relevant financial year.
b) His stay in India is for 730 days or more during 7 years immediately preceding the relevant financial year.

A resident individual who does not satisfy any of the aforesaid conditions or satisfies only one of the aforesaid conditions will be treated as NOR.

Key points to consider while ascertaining residential status of an individual

  • Receipt of Income: If an amount is 1st received outside India and then subsequently remitted to India, it will be considered as Income received outside India just remittance of such income would not make it an income received in India.
  • Citizenship of a country and residential status: Residential status of an Individual is not nexus to his citizenship. An Indian citizen may be a resident of India or not. On other hand a person may not be citizen of India /foreign citizen but resident of India.
  • Calculation of period of stay: In calculation of period of stay for purpose of determining residential status, it is not compulsory that person had a continuous stay. Total number of days of stay in India during that financial year are to be considered.
  • Residential status for a particular year: Every year the residential status of the taxpayer is to be determined by applying the provisions of the Income-tax Law laid in this regard. So, it may happen that in one year the individual would be a resident and ordinarily resident and in the next year he may become non-resident or resident but not ordinarily resident and again in the next year his status may change or may remain same.

The following table highlights the tax incidence as per residential status:

Nature of income ROR NOR NR
Income which accrues or arises in India Taxable Taxable Taxable
Income which is deemed to accrue or arise in India Taxable Taxable Taxable
Income accrue or arise outside India but received in India Taxable Taxable Taxable
Income which is deemed to be received in India Taxable Taxable Taxable
Income accruing outside India from a business controlled from India or from a profession set up in India Taxable Taxable Not taxable
Income other than above (i.e., income which has no relation with India) Taxable Not taxable Not taxable

For assistance in determination of your residential status and computation of tax liability based on it, please contact AJSH & Co LLP. You can click here and reach our taxation experts for further queries.

SEZ in India

Establishing a unit in SEZ in India

India is among the foremost Asian countries who have considered the idea of setting up an Export Processing Zone (EPZ) model to promote country’s exports. To attract more foreign investment and provide an internationally competitive and hassle free environment for export promotion in India, Special Economic Zone (SEZ) was introduced. In the year 2000, with an inception of SEZ policy, India had begun to walk on the path of success.

Initially, the SEZ policy was included under foreign trade policy 2000. The policy was implemented through piecemeal and ad hoc amendments to different laws, besides executive orders. In order to overcome these drawbacks and to give a stable long term policy framework with minimum regulation, the Special Economic Zone Act, 2005 was introduced. The Act provided broad legal framework, covering all important legal and regulatory aspects of SEZ development as well as for units operating in SEZs.

SEZ is a specific duty-free enclave and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs. In other word, SEZ is a geographical region that has economic laws different from the country’s economic laws. SEZs have been established in several countries, including China, India, Jordan, Poland, Kazakhstan, Philippines and Russia.

Main objectives of establishing a SEZ

  • Generating additional economic activity
  • Promoting exports of goods and services
  • Promoting investments from domestic and foreign sources
  • Creation of employment opportunities
  • Development of infrastructure facilities
  • Exposure to technology and global market

Benefits and incentives of setting up a business unit in a SEZ

  • Tax benefits (tax holidays, income tax exemptions, etc.)
  • Liberal labor regulations
  • Exemption from excise and customs duty on procurement of capital assets, consumable stores, raw-materials from domestic market
  • Streamlined procedures for getting approvals (online / single window)
  • Liberal approach in foreign direct investments
  • Increased capital account convertibility
  • Relaxed export regulation
  • Full repatriation of profits
  • Non-applicability of related environmental laws

Setting up a unit in SEZ
A company planning to setup unit in a specific SEZ needs to apply with the respective Development Commissioner’s (DC) office of SEZ zone. To file an application, company needs to fill the Form-F, stipulated by SEZ rules. The applicants filing the form, needs to submit this form online through SEZ online system using module New Unit Application (NUA).

The steps for NUA are as summarized below:
1. Creating user ID: This is the initial stage for setting up a SEZ unit. For setting up a new unit in SEZ, the user, for the purpose of registration, shall login to SEZ online system and create a new user ID.

2. Raising NUA request: After registration, users are required to fill a “new user application” providing the necessary details which includes general details of company, details of directors, item / products, in which the company deals in, and other details like investments, equity, for-ex, applicant and marketing collaborations of the company.

3. Submitting Form- F and other documents: Further in this procedure, applicants need to upload the below listed documents with a filled Form – F, as mentioned in “Add Documents” field. These enlisted documents have to be submitted physically in DC’s office:

  • Copy of incorporation certificate, Articles and Memorandum of Association of the company
  • Demand draft of INR 5000/- in favor of “The Pay & Accounts Officer,< payable location>”
  • Copy of company’s profile, directors’ profile and project report
  • Copy of board resolution
  • List of imported and indigenous capital goods
  • Form 18 and 32 filed with ROC
  • Copy of residential proof and identity proof of directors
  • Income tax returns of last 3 years
  • Copy of audited financials
  • Copy of IEC of the company
  • Copy of PAN of the company
  • Copy of term sheet for incubation premises
  • Copy of term sheet for main premises
  • Letter for marketing / buyback plan
  • List of directors with their details
  • Letter mentioning website and e-mail address
  • Undertaking for pollution control
  • Affidavit

Along with these documents, applicant needs to submit Form – F containing the details of NUA.

4. Rectification of deficiencies: If the DC does not get satisfied with the submitted documents, he may raise a demand for additional documents. In case, the request is sent back by DC office and the demand is raised from DC office, applicant shall submit the documents within the stipulated

5. Approval of request: After verification of all the documents submitted and other requirements fulfilled by applicant, DC is authorized to approve the request of NUA. Further the approval, an e-mail will be sent to applicant on the registered e-mail describing the supplementary

6. Payment of registration fee: After approval from DC office, a link for payment of registration fee will be enabled; enquiring a few details for payment. On payment of fee, NSDL Database Management Ltd. (NDML) representative will verify receipt of payment and will authorize the payment upon verification of valid payment entry in SEZ online system. Upon authorization of payment, applicant can create administrator and operational users IDs.

7. Submission of lease deed details to DC’s office for approval: After acceptance of letter of approval, the unit is expected to enter into a lease agreement with the developer of the SEZ in which it is commencing business. After entering into the agreement, the unit will have to enter the lease deed details in the SEZ online system and submit it online to the DC’s office. The unit shall also have to submit a copy of the lease deed to the DC’s office in physical form.

8. Intimation of date of commencement: As soon as the unit commences production, the date of commencement of production has to be intimated to the DC’s office. The unit shall online intimate the date of incorporation through SEZ system. In addition, the DC may also require the unit to submit supporting documents in physical form.

For the Fact: As of March 2018, 223 SEZs are in operation and a massive 419 SEZs have been approved.

Deciding on which SEZ is best for your business, it can be a difficult and stress-inducing process. We at AJSH & Co LLP can guide you in setting up a SEZ unit in India as per your business requirements. To know more about this, click here.

tax

Filing tax return for a deceased person

It is a misconception that person’s tax liabilities end with his life. Filing an income tax return (ITR) is mandatory if your income is taxable. But, it’s not only the living who are required to pay their taxes. ITR for deceased person also needs to be filed in case where a person dies and had taxable income. It is common that after the death of the taxpayer, family members often concentrate only on the debts, investments, savings accounts, insurance and transfer of estates of the deceased and ignore the taxation aspect.

On the death of the assesse, the income from his / her assets and the tax liability is transferred to his / her legal heirs. So, it becomes liability of legal heirs / representative to file the return on his behalf and such heirs can pay taxes in their representative capacity. The return needs to be filed for the income earned by person passed away during that financial year up to the time of his/her death.

Procedure of filing ITR as representative of deceased assessee
Get the legal heir certificate: To register as legal heir, any of the following documents are accepted as legal heir certificates:

  • Legal heir certificate issued by a court.
  • Legal heir certificate issued by local revenue authorities.
  • Surviving family member certificate issued by local revenue authorities.
  • The registered WILL.
  • The family pension certificate, issued by State/Central Govt.

Register on income tax website as legal heir: According to section 159 of Income Tax Act 1961, the legal heir or representative is deemed the assessee. Registration as a legal heir is must for e-filing of return on behalf of deceased person. Legal heir needs to register online by submitting his details with the details of deceased. He is required to upload legal heir certificate along with other documents like copy of Death Certificate, copy of the PAN Card of the deceased, self-attested PAN copy of the Legal heir.

Computation of income of the deceased: The total earnings of the deceased during the year have to be bifurcated into two parts – Income earned while he was alive and income earned after the date of his death. Income earned during the period of April 1 to the date of death shall be considered as deceased person’s own and legal heir is supposed to file return for this income in name of deceased assessee. Income earned after the date of death till the end of the financial from the inherited asset shall be considered as legal heir’s income and he would be liable to pay tax on this income.

Filing ITR of the decease: After successful registration, the legal heir has to file the return on behalf of the deceased for income earned from the 1st April of the financial year till the date of death. The legal heir needs to log in to E-filing portal for online filing of the tax return using his own. Then the legal representative should furnish the details of the deceased like his name, PAN, date of birth, Date of death etc. Also, he need to provide the scanned copy his PAN, the death certificate, PAN copy of deceased.

Key points to consider while filing ITR of a deceased assessee

  • The ITR of the deceased should be filed in the same format and time as for all other tax payers.
  • The tax must be payable on income earned from starting of the financial year (April 1) till the date of death.
  • The legal representative gets the benefits of all the rebates and deductions that the deceased would have been eligible for.
  • Any proceeding taken against the deceased before his death shall be deemed to have been taken against the legal representative and may be continued against the legal representative from the stage at which it stood on the date of the death of the deceased;
  • Property of the deceased person inherited to his legal heir shall not be reported in the Income-tax return of the deceased person, because this transaction is not carried out as transfer for the capital gain purpose.
  • Money or property received by legal heirs by way of inheritance shall not be reported in income-tax return because Section 56(2)(x) does not apply to money or property received by way of inheritance.
  • Income earned after the date of death, from any inherited property shall be considered as legal heir’s own income and is to be reported in his tax returns.
  • If the total income of a legal heir, including the income of deceased person from the date of death, exceeds INR 50 lakhs, the heir shall be required to provide details of all Assets and Liabilities held by him at the end of the financial year in Schedule AL. These details shall include all assets and liabilities including the assets acquired by way of inheritance.
  • Proceeds from the sale of property by legal heir he received by the way of inheritance  shall be taxable as capital gain in hands of a legal heir and is required to be reported under scheduled capital gains in ITR forms.

Extent of liability of a legal representative: The liability of the legal heir would be limited to the extent of assets of the deceased which are or might come into his possession.  The money to recompense the taxes does not go out of the legal heir’s pocket.

Claiming refund on behalf of deceased assessee: Where there is any refund of a tax has to be claimed in the Income-tax return a deceased assessee, the refund can be received by the legal heir just like he/she can file ITR on behalf of the deceased assessee. Usually, the refund is directly credited to the bank account. If the deceased tax payer holds a joint account with the legal heir, then it becomes convenient to receive the amount. In case of absence of a joint account, the account can be operated by the nominee who is appointed by the deceased. In the absence of a nominee, the legal heir can operate the account.

Tax compliances that legal representative need to be adhere to while filing his own ITR
Carry forward and Set off of Deceased Person’s Business loss: When a legal heir takes over in the business of his predecessor by inheritance, he is entitled to carry forward the loss incurred by the previous owner. However, the total period of carrying forward cannot exceed 8 assessment years immediately succeeding the assessment year for which the loss was first computed.

Tax on inherited property: The tax on inheritance, called ‘Estate Duty’ was abolished in 1985 and so, there is no tax on inheritance in India. Transfer of capital asset under inheritance will is not taxable in hands of deceased as well.

Though no tax shall arise either in hands of a legal heir or deceased at the time of inheritance, yet capital gain tax liability arises in hands of a legal heir in case of subsequent sale of the inherited property. For calculation of capital gain on proceeds from sale of inherited property, the actual cost of acquisition is taken as the same at which the property was acquired by the previous owner. While determining the period of holding of, the period of holding of inherited assets by the deceased shall also to be taken into consideration.

Surrender of the PAN card: Legal heir is advisable to surrender the PAN card of the person who is no more, after submission of his last income-tax return and payment of tax dues or receipt of a refund if any.

We cannot compensate for the loss of your loved ones, but can definitely help you in the complex process of filing his / her tax returns .For further assistance click here.

 

llp registration in Delhi India

A hybrid corporate entity-Limited Lability Partnership

Limited Liability Partnership (LLP) is a new corporate structure introduced in India in April 2009, through the LLP Act of 2008. Aimed at small and medium sized businesses; a LLP is hybrid form
which integrates many of the benefits of limited corporations and the traditional partnership firms. In other words, it is an alternative corporate business vehicle that provides the benefits of limited liability of a company, and also allows its members the flexibility of organizing their internal management on the basis of a mutually arrived agreement, as a partnership firm. Low registration fee and easy maintenance make LLP a preferred category of entity for many of the small and medium businesses in India.

Features
Most enticing features of a LLP are:

  • Simplicity and ease of formation and registration
  • No prescribed minimum capital requirement for each partner
  • Liability of each partner is limited to the contribution mention in agreement
  • Cost of formation is limited
  • Least regulatory compliances
  • Separate legal entity

The minimum number of partners required to incorporate an LLP is two. There is no constraint on the maximum number of partners in LLP in India. Among the partners, there should be minimum two designated partners with proper Designated Partner Identification Numbers (DPINs), and at least one of them should be resident in India. The rights and duties of designated partners are governed by the LLP agreement.

Documents Required
To register a LLP in India, the following documents are required:

  • PAN of the partners
  • Address proof of the partners
  • Utility bill of the proposed registered office of the LLP
  • No-Objection certificate from the landlord
  • A copy of rent agreement between the LLP and the landlord

PAN of the partners and their address proof are required to start the LLP formation procedure. The documents pertaining to the registered office of the LLP can be submitted after obtaining name approval for the LLP from the Registrar of Companies (ROC).

Following is step wise registration process for incorporation of Limited Liability Partnership (LLP):
Director Identification Number (DIN): Every individual intending to be appointed as designated partner of proposed limited liability partnership has to apply for allotment of DIN. Earlier partners had to apply for DPIN. Ministry of Corporate Affairs (MCA) has vide its notification amended the limited liability partnership rules, 2009. Now instead of DPIN, every partner who will be appointed as a designated partner has to apply for DIN. The application for allotment of DIN has to be made in Form DIR- 3. You have to attach the scanned copy of documents (usually Aadhaar and PAN) to the form. The form must be signed by a Chartered Accountant, Company Secretary, Cost Accountant or Advocate.

Digital Signature Certificate (DSC): Designated partner of proposed LLP, whose signatures are to be affixed on the e-forms has to obtain Digital Signature Certificate (DSC) from any authorized certifying agency. Also, they should obtain either class 2 or class 3 category of DSC. This is because all the documents for LLP are filed online and are required to be digitally signed.

You can click here & let our expert help you procure DIN.

Reservation of Name: Once two DINs are available, fill Form 1 for the reservation of name of proposed LLP. But before quoting the name in the form, it is recommended that you use the free name search facility available on MCA portal. The system will provide the list of closely resembling names of existing companies/LLPs based on the search criteria filled up. This will help you in choosing names not similar to already existing names. You need to provide six names in the order of preference in Form 1.

Once, the application for reservation of name is submitted to the MCA, it will be processed by the ROC in the State of Incorporation. The registrar will approve the name only if the name is not undesirable in the opinion of the Central Government and does not resemble any existing partnership firm or an LLP or a body corporate or a trademark.

Incorporation of LLP: Once the name approval application is accepted by the MCA and name approval letter is issued to the proposed Partners you have to apply for incorporation of the LLP through Form-2. All the details in the form must be filled correctly like – total number of partners and designated partners, amount of partner’s contribution, etc. You have to pay the prescribed registration fee based on the contribution of partners in the proposed LLP.

The form must be digitally signed by a person named in the incorporation document as a designated partner having DIN. Also, it has to be digitally signed by an advocate / Company Secretary / Chartered Accountant / Cost Accountant in practice. On the submission of the form, if the registrar is satisfied, they will register the proposed LLP. It takes 15-20 days for the registration of LLP subject to government processing time and submission of necessary documents.

File Limited Liability Partnership Agreement: LLP agreement governs the mutual rights and duties amongst the partners and also between the LLP and its partners. It has to be carefully drafted as per the rules and provisions given in the Indian LLP Act of 2008. LLP agreement must be filed in form 3 online on MCA Portal. Agreement may be conveniently submitted online to the MCA, within thirty days from the date of registration of the proposed LLP. The LLP Agreement has to be printed on stamp paper. The value of stamp paper is different for every state.

To get your business registered as a Limited Liability Partnership, please get in touch with us. Also, for assistance in setting up business in India, company formation in India, income tax return filling, bookkeeping, accounting, GST and auditing. Click here.