Recent tax & regulatory

reforms - India & Singapore perspective

24 October 2019

Strictly for private circulation only

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Contents

1 India Tax Stimulus: Corporate tax reforms

2 Treaty Benefits and Anti-Abuse provisions

3 Singapore Variable Capital Company

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Key

features02

01 Backdrop 03

04 Way

forward

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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

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• 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

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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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