TAX, ACCOUNTING, AND AUDIT IN INDIA€¦ · Tax, Accounting, and Audit in India 2014-2015 - 3 Preface Taxation permeates business transactions in India, and a strong understanding

I. India’s Tax Laws

II. Indirect Taxes

III. International Taxation

IV. Accounting Practices in India

V. Accounting Index

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Tax, Accounting, and Audit in India 2014-2015 - 3

Preface Taxation permeates business transactions in India, and a strong understanding of tax liabilities can enable foreign investors to maximize the tax efficiency of their investments while ensuring full compliance with all tax laws and regulations. This guide provides an overview of taxes for businesses and individuals in India and discusses accounting and audit practices in the country.

This guide was created in 2014 based on the most current information available at the time. As the tax situation of each enterprise is unique and India’s regulatory environment is subject to change, it is advisable that firms and investors seek professional tax advice. India Briefing’s “Tax, Accounting, and Audit in India” is produced in collaboration with the tax experts at Dezan Shira & Associates, a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence, and financial review services to multinationals investing in emerging Asia.

Making a strategic and informed decision about investing in India requires a thorough understanding of the diverse options for investment in the country in addition to the regulatory structures that govern operations and compliance. This tax guide is designed to shed light upon some of these regulatory and legal structures, and can be used as a guidebook for companies and investors seeking to operate a business in India.

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4 - Tax, Accounting, and Audit in India 2014-2015

About Dezan Shira & Associates At Dezan Shira & Associates, our mission is to guide foreign companies through Asia’s complex regulatory environment and assist them with all aspects of establishing, maintaining, and growing their business operations in the region. With over 20 years of on-the-ground experience and a large team of professional advisers, we are your reliable partner in Asia. Since its establishment in 1992, Dezan Shira & Associates has grown into one of Asia’s most versatile full-service consultancies with offices across China, Hong Kong, India, Singapore, and Vietnam, as well as liaison offices in Italy, Germany, and the United States, and partner firms across the ASEAN region.

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Contents1. India’s Tax Laws: An Introduction ............................8

1.1 India’s Tax Laws: A History of Taxation in India

1.2 India’s Corporate Tax

1.2.1 Calculating CIT

1.2.2 Tax Treatment of Fixed Assets

1.3 Tax Incentives

1.3.1 Infrastructure Sector

1.3.2 Mineral Oil

1.3.3 Hospitals

1.3.4 Hotels and Convention Centers

1.3.5 Undertakings in India’s North Eastern States

1.3.6 Tax Exemptions

1.4 Minimum Alternate Tax

1.5 Deferred Tax Assets and Liabilities

1.6 Advance Tax

1.7 Withholding Tax

1.8 Person Treated as ‘Agent’

1.9 Individual Income Tax

2. Indirect Taxes ..........................................................232.1. Custom Duties

2.1.1 Basic Customs Duty

2.1.2 Additional Customs Duty

2.1.3 Special CVD

2.1.4 Anti-Dumping Duty and Safeguard Duty

2.1.5 Protective Duty

2.2 Import and Export Procedures

2.2.1 Import Procedures

2.2.2 Export Procedures

2.3 Value Added Tax

2.4 Central Sales Tax

2.5 Service Tax

2.6 Excise Act


3. International Taxation .............................................403.1 Transfer Pricing

3.2 Specified Domestic Transactions

3.3 Advance Pricing Agreement

3.4 Transfer Pricing Documentation

4. Auditing Practices in India...........................................444.1 Audit in India: The Basics

4.2 Types of Audit

4.3 Audit Reporting

5. Accounting Index.........................................................495.1 Core Concepts

5.2 Standards

5.3 Key Documents

5.4 Miscellaneous

1. India’s Tax Laws: An Introduction1.1 India’s Tax Laws: A History of Taxation in India1.2 India’s Corporate Taxes1.3 Tax Incentives 1.4 Minimum Alternate Tax1.5 Deferred Tax Assets and Liabilities1.6 Advance Tax1.7 Withholding Tax1.8 Person Treated as ‘Agent’1.9 Individual Income Tax


1.1 India’s Tax Laws: A History of Taxation in IndiaThe history of India’s Income Tax Department dates back to the year 1922 when, for the first time, a specific nomenclature was established for income tax authorities and the foundation for a formal system of administration laid. In 1924, India’s Central Board of Revenue was constituted as a statutory body for the administration of the country’s Income Tax Act. The amendments to the Income Tax Act in 1939 made two key changes to the country’s tax system that are still important today:

1. Appellate functions were separated from administrative functions.2. A central authority was established in Mumbai.

In 1940, the Directorate of Inspection (Income Tax) was created with the goal of more effectively controlling the Income Tax Department and its activities. This resulted in the separation of executive and judicial functions and the creation of the Appellate Tribunal in 1941. By 1963, the Income Tax Department was burdened with administering several other statutory Acts, such as the Wealth Tax Act and Gift Tax Act, and, as a result, the Central Board of Direct Taxes (CBDT) was constituted. India’s tax system has evolved significantly since its initial establishment and is constantly changing to keep up with India’s business, environmental, and economic needs. Indian taxes and tax laws of primary concern to foreign investors are as follows:

1. Levy of Income Tax on corporates and individuals2. Duties of Excise imposed on manufacturers of goods3. Regulations related to the levy of Service Tax on services rendered4. Regulatory compliances governing the import and export of goods through the Customs Act5. Imposition of tax on the inter-state transportation of goods in the form of Central Sales Tax6. State level imposition of taxes in the form of Value Added Tax

India’s Corporate Taxes

a. Corporate Income Taxb. MATc. Deferred Taxd. Withholding Taxe. Value-Added Taxf. Central Sales Taxg. Customs Dutiesh. Excise Taxi. Service Tax

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India’s Tax Revenues 1990-2013 in Indian Rupees (INR 1 Billion)Year Total Tax

Revenue Direct Taxes Corporate

TaxIndirect Taxes Customs

DutiesUnion Excise

Duties

1990-91 430.41 69.08 53.35 361.32 206.43 140.99

2000-01 1366.58 496.51 251.77 872.64 341.63 497.57

2004-05 2247.98 1321.83 826.79 1727.74 576.10 991.25

2005-06 2702.64 1623.37 1012.77 2038.14 650.67 1112.25

2006-07 3511.82 2250.45 1443.18 2484.67 863.27 1176.12

2007-08 4395.47 3122.20 1929.10 2809.26 1041.18 1236.11

2008-09 4433.19 3198.92 2133.95 2854.05 998.78 1086.12

2009-10 4565.35 3675.94 2447.25 2569.32 833.23 1029.91

2010-11 5698.68 4385.15 2986.87 3545.56 1358.12 1377.00

2011-12 6422.51 4954.57 3276.80 4062.05 1530.00 1500.74

2012-13 7710.71 5643.43 3732.27 5132.68 1866.94 1937.29

a) Article 270 of the Constitution has been retrospectively amended with effect from April 1, 1996. Under the provisions of the Constitution (80th Amendment) Act, 2000, prescribed share of states in the net proceeds of specified central taxes and duties is not to form part of the Consolidated Fund of India.

b) Figures of taxes from 2002-03 onwards include states’ share in Central taxes.

India’s Tax Revenues 1990-2013 in United States Dollars (USD 1 Billion)Year Total Tax

Revenue Direct Taxes Corporate

TaxIndirect Taxes Customs

DutiesUnion Excise

Duties

1990-91 8.60 1.38 1.06 7.22 4.12 2.81

2000-01 27.33 9.93 5.03 17.45 6.83 9.95

2004-05 44.95 26.43 16.53 34.55 11.52 19.82

2005-06 54.05 32.46 20.25 40.76 13.01 22.24

2006-07 70.23 45.00 28.86 49.69 17.26 23.52

2007-08 87.90 62.44 38.58 56.18 20.82 24.72

2008-09 88.66 63.97 42.67 57.08 19.97 21.72

2009-10 91.30 73.51 48.94 51.38 16.66 20.59

2010-11 113.97 87.70 59.73 70.91 27.16 27.54

2011-12 128.45 99.09 65.53 81.24 30.60 30.01

2012-13 154.21 112.86 74.64 102.65 37.33 38.74


1.2 Corporate Income Tax (CIT)Corporate Income Tax is a tax imposed by the Government of India on corporate entities that earn income in the country. This tax is levied according to the Income Tax Act, passed by the Parliament of India. The span of income earned in India is not limited to income earned within the geographical limits of the country, and certain income earned outside India may also be subject to income tax.

In the case of corporates, residential status depends upon where the company’s affairs are controlled and managed. While Indian companies are always resident in India, foreign companies are only considered resident if the control and management of their affairs were wholly situated in India during the previous year. Companies partly or wholly controlled and managed from outside India are treated as non-resident companies.

A 30 percent standard CIT rate is applied to resident enterprises and 40 percent to non-resident enterprises conducting income-generating activities in India. A 20 percent withholding rate is applied to China-sourced income derived by the activities of non-resident enterprises (based on the assumption that the entity is earning income in India without a permanent account number, or PAN).

1.2.1 Calculating CIT (Taxable Income)Tax liability is computed on the ‘net income’ chargeable as tax. It is calculated based on either an accrual basis or on a receipt basis, whichever is earlier. To ascertain the ‘total income’ of a company, an aggregate of income falling under the following three categories is considered:

1. Profits and gains of the business 2. Capital gains 3. Income from other sources including interest on securities

To calculate total income, ‘current and brought forward losses’ should be adjusted to arrive at the gross total Income. Depreciation of assets may be either carried forward or set-off indefinitely. However, business losses can be carried forward for eight consecutive financial years and set off against profits from subsequent years.

Generally, all expenses incurred for business purposes can be deducted from taxable income given that the expenses are wholly and exclusively incurred for business purposes, incurred and paid during the previous year, and supported by relevant documentation. Expenses of personal or capital nature cannot be deducted, however. For these expenditures, only depreciation is allowable.

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Calculating CIT Payable (for a domestic entity)Profit as per Income Tax payable 1,500,000

Adjustments (additions/ deductions) as per IT Act 1,000,000

Total taxable profit (A) 500,000

Tax as computed ((A) x 30%) (For a foreign entity, tax rate @ 40%)

150,000

Education Cess and SHEC (@ 3%)(B) 4,500

Total tax payable (A+B) 154,500

From the gross total income, prescribed ‘deductions’ can be factored in to calculate ‘net income.’ Deductions from gross total income can include costs, expenses, losses, reasonable depreciation of fixed assets, and other relevant and reasonable expenditures incurred in the company’s operation.If the result after subtracting the above items from the gross income is a negative number, then the company is deemed to have incurred a loss. Losses from foreign operating institutions are not deductible.

1.2.2 Tax Treatment of Fixed AssetsWhen computing deductions from the taxable income, the depreciation of fixed assets is also deductible. Fixed assets refer to assets held and used by enterprises for business purposes.

To determine the depreciation of fixed assets each year, the written-down value method is applied. The written-down value method computes the depreciation of the value of assets at the end of the year, as reduced by depreciation allowed. These assets are then divided into five classes for the purpose of depreciation as per the Income Tax Act.

Depreciation as per the Income Tax Act is calculated on a block of asset basis. ‘Block of assets’ refers to a class of assets comprising of:

• Tangible assets, such as buildings, machinery, plants, and furniture. • Intangible assets, such as patents, copyrights, trademarks, licenses, franchises, or any other business or commercial rights of a similar nature.


Rates of depreciation as specified in the Income Tax Act

Asset Class Rate of Depreciation

Buildings 10%

Furniture 10%

Plants & Machinery 60%

Intangible Assets 25%

The written-down value method calculates the price of an asset as its recorded value multiplied by the prescribed percentage for depreciation. Only 50 percent of depreciation is admissible if the asset was utilized for less than 180 days during the previous year. There is a provision that permits 100 percent depreciation provided certain conditions are met. General depreciation rates are as listed below, and it is important to keep in mind that these rates may change depending upon the type of asset and its use for business. For example, books purchased by a professional may be depreciated at 60 percent, but books purchased by an individual for lending via a library may be depreciated at 100 percent of their value.


1.3 Tax IncentivesTax holidays in the form of deductions are available for the private sector, and incentives are granted to industries located in special areas/ regions. These can be related to active brownfield projects.

1.3.1 Infrastructure SectorThe deduction of 100 percent of business profits is permitted for a period of 10 years for:

• The development, operation, or maintenance of ports, airports, roads, highways, bridges, rail systems, inland water ways, inland or outland ports or navigational channels, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, and solid waste management systems. • The generation and distribution of power commencing before March 31, 2010. • Laying and operating a cross-country natural gas distribution network.

1.3.2 Mineral OilThe deduction of 100 percent of business profits is permitted for the refining of mineral oil for a period of 10 years for:

• An undertaking wholly owned by a public sector company or any other company in which a public sector company holds 49 percent of voting rights. • An undertaking that commenced refining on or before March 31, 2012.

1.3.3 HospitalsThe deduction of 100 percent of profits from businesses operating and maintaining a hospital for a period of 5 years for:

• Hospitals that were constructed or began functioning any time between April 1, 2008 and March 31, 2013. • Hospitals with at least one hundred beds for patients. • Hospitals located anywhere in India other than in excluded areas.


1.3.4 Hotels and Convention CentersThe deduction of 100 percent of profits from the business of hotels and convention centers for a period of 5 years for:

• Hotels and convention centers located in the National Capital Territory of Delhi. • Hotels that were constructed or began functioning any time between April 1, 2007 and March 31, 2010. Likewise, for convention centers constructed between April 1, 2007 and March 31, 2010. • Hotels located in a World Heritage site district. Hotels that meet this qualification must have been constructed or began functioning between April 1, 2008 and March 31, 2013.

1.3.5 Undertakings in India’s North Eastern States The deduction of 100 percent of business profits for a period of 10 years for:

• Manufacturing, producing goods, or undergoing substantial expansion between April 1, 2007 and March 31, 2017 and providing eligible services between April 1, 2007 and March 31, 2017. • Deduction is not available in respect to the manufacture or production of tobacco, pan masala, plastic carry bags of less than 20 microns, or goods produced by petroleum and gas refineries. • Eligible services are hotels (2 stars and above), nursing homes (25 beds or more), old age homes, vocational training institutes for hotel management, catering and food crafts, entrepreneurship development, nursing and paramedical, civil aviation related training, fashion design and industrial training, IT related training centers, IT hardware manufacturing units, and bio-technology. • The aforementioned activities must take place in a Northeastern State (i.e. Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, and Tripura).


1.3.6 Tax ExemptionsThe following tax exemptions are available in different sectors, and allow for deductions of 100 percent profits for:

• The development, operation, and maintenance of an industrial park or SEZ. • Undertakings in certain notified areas or in certain thrust sector industries in the North Eastern states and Sikkim. • Undertakings set up in certain notified areas or in certain thrust sector industries in Uttaranchal and Himachal Pradesh. • The export of articles or software by undertakings in FTZs, electronic and hardware technology parks, and software technology parks. • The export of articles or software by undertakings in SEZs. • The export of articles or software by 100 percent export oriented units. • An offshore banking unit situated in an SEZ with business activities and units located in the SEZ. • Undertakings engaged in the integrated business of handling, storing, and transporting food grains. • Undertakings engaged in the commercial production or refining of mineral oil. • Undertakings from the export of wood based handicrafts.

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1.4 Minimum Alternate Tax (MAT)A company is liable to pay tax on income computed in accordance with provisions of the Income Tax Act, but the profit and loss account of the company is prepared as per provisions of the Companies Act. In a scenario where Income Tax computed as per the provisions of the Income Tax Act is less than 18.5 percent of the book profit as reported, the amount of tax payable shall be 18.5 percent of profits.MAT is computed at a rate of 18.5 percent on book profit. Book profit is profit as per accounting records prepared for the purpose of the Companies Act, with the following adjustments carried out as outlined under relevant sections of the Income Tax Act. Profit means the net profit as shown in the profit and loss account, prepared in accordance with provisions of the Companies Act. The following must be taken under consideration, with reported profit added to the amount of income tax paid or payable in addition to the provision made:

• Any amount transferred to reserve • The amount of provisions made for meeting liabilities, other than ascertained liabilities • The amount by way of provisions for losses of subsidiary companies • The amount of dividends paid or proposed during the year • The amount of depreciation • The amount of deferred tax and the provision made • The amount set aside as a provision for diminution in the value of any asset • The amount standing in revaluation reserve related to revalued assets upon retirement or disposal of such assets

The above amounts are to be reduced from the book profit if the same have been debited to the profit and loss account. Further, upon reducing the above stated items, the following items are added to the resultant figure:

• The amount withdrawn from any reserve or provision • The amount of income exempt as per the provisions of the Income Tax Act, if any such amount is credited to the profit and loss account • The amount of depreciation debited to the profit and loss account but excluded from depreciation on account of revaluation of assets • The amount withdrawn from a revaluation reserve and credited to the profit and loss account, to the extent it does not exceed the amount of depreciation from the revaluation of assets • The amount of loss brought forward or unabsorbed depreciation, whichever is less as per the books of account

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1.5 Deferred Tax Assets and LiabilitiesThere is always a difference between what a company is permitted to deduct for taxes and what it is permitted to deduct for accounting purposes. For example, there will be a difference between a company’s net profit available for tax and its income computed for tax. A deferred tax asset/ liability records the fact that the company will, in the future, pay more income tax or earn more income because of a transaction that took place during the current period, such as a sale on installment basis receivable in future years.

Deferred tax assets can arise from net loss carryovers or expenses which are not allowed to be claimed in one tax year and are only recorded as a deferred expense if it is deemed more likely than not that the expense shall be utilized in future fiscal periods. To calculate the deferred tax asset, it must be determined that there is more than a 50 percent probability that the company will have positive accounting income in the next fiscal period before the deferred tax asset can be applied.Deferred Tax liability is an account on a company’s balance sheet that is the result of temporary differences between the company’s carrying values on accounting and tax laws, the anticipated and enacted income tax rate, and estimated taxes payable for the current year. This liability may or may not be realized during any given year, which makes the deferred status appropriate.

1.6 Advance TaxAdvance tax is payable only when an assessee’s total tax liability exceeds INR 10,000 (US$170). There are 4 installments of advance tax for corporates. The quantity to be paid along with the due date is as follows:

1. 15 percent of tax payable should be paid as advance tax on or before June 15. 2. 45 percent of tax payable should be paid as advance tax on or before September 15. 3. 75 percent of tax payable should be paid as advance tax on or before December 15. 4. 100 percent of tax payable should be paid as advance tax on or before March 15.

“Advance tax is prepaid tax by the assesse on income earned during the year. In other words, the assesse must pay taxes in advance on estimated income during the year in three installments for individual assesses and four installments for companies and corporate assesses.”


1.7 Withholding TaxEvery person whose total income exceeds the maximum exemption limit is liable to pay income tax at the rate or rates prescribed in the Income Tax Act. The total income of an individual is determined on the basis of their residential status in India. Withholding Tax is an obligation to withhold tax when making payments in specified areas such as rent, commission, salary, professional services, contracts, etc. at rates specified in India’s tax regime. The tax rate is the rate prescribed in the Act or Tax Avoidance Agreement, whichever is lower. Non-residents are liable to pay taxes in India on source income, including:

• Interest, royalties, and fees for technical services paid by a resident • Salary paid for services rendered in India. • Income arising from a business connection or property in India

Current rates for withholding tax payments to non-residents are:

• Interest: 20 percent • Dividends paid by domestic companies: 0 percent • Royalties: 25 percent • Technical services: 25 percent • Other services: a. Individuals: 30 percent of income b. Companies: 40 percent of net income

The above rates are general and applicable to countries with which India does not have a taxation avoidance agreement. However, the rates of withholding taxes mentioned above may be subject to change in each year’s budget. Hence it is important to closely monitor the current rates at the time of any transaction.


1.8 Person Treated as ‘Agent’A foreign company may be assessed either directly or through an individual by treating them as ‘agent.’ Persons who may be treated as ‘agent’ are as follows:

1. An employee of the entity. 2. A person with any business connection to the non-resident. 3. Any person who has made any payment to the non-resident. 4. Any person who has acquired any capital asset in India from the non-resident.

Where a person is required to deduct any amount in accordance with the Income Tax Act but does not deduct, does not pay, or after deducting fails to pay, that person shall be deemed in default and liable for interest and penalties.

Appellate Hierarchy and Jurisdiction

Supreme Court

High Court

Income Tax Appellate Tribunal

Commissioner of Income Tax (Appeals)

Assessing Officer


1.9 Individual Income Tax (IIT)Liability DeterminationFor expatriates, the extent to which services rendered in India are taxable in India is irrespective of whether the salary is received from inside India or outside India. The taxation of individuals is determined by residence status. Under the Income Tax Act, an individual can have the status of Resident and Ordinarily Resident, Non-resident, or Resident but not Ordinarily Resident. A quick guide to residential status is as outlined below:

Period of Stay Residential Status

Conditions Resident Non-resident

Basic Conditions

Stay in India is 182 days during tax period

Satisfies either conditionSatisfies neither

conditionStay in India is 60 days during tax period and 365 days in 4

preceding tax periods

ConditionsResident and

ordinarily residentResident but not

ordinarily resident

Additional Conditions

Non- Resident in at least 9 of the 10 preceding tax years Satisfies neither

conditionSatisfies either condition

Stay in India is 729 days in 7 preceding tax periods

It is also important to note that under the following conditions, 60 days is substituted by 182 days for:

1. An Indian citizen or a person of Indian origin who visits India during any tax period 2. An Indian citizen who leaves India during any tax period for the purpose of employment outside India

Income in the form of salaries includes remuneration in any form for personal services provided under an expressed or implied contract of employment or service. Such income is subject to tax on a ‘due’ or ‘receipt’ basis, whichever is earlier, and includes wages, annuity or pension, gratuity, fees, commission, prerequisites, or profits in lieu of salary, advance salary, leave encashment, etc.Except for under provisions dealing with short stay exemptions, no specific expatriate concessions are available under India’s tax laws.


An expatriate can be a resident of two countries at the same time. In such a scenario, there could be double taxation of the same income, but relief from double taxation may be available under the relevant Double Taxation Avoidance Agreements (DTAAs). Taxation relief can be available in the form of a tax credit in the country of permanent residency. Further, submission of a Tax Residency Certificate containing prescribed particulars is a necessary condition for availing of benefits under DTAAs. An application under Form 10FA must be made to obtain a tax residency certificate in India.An individual’s tax return must be filed by July 31, immediately following the end of the tax year on March 31. Individuals must obtain a Permanent Account Number (PAN), as allotted by Indian tax authorities. The PAN must be communicated while filing income tax returns and every other correspondence with income tax authorities. Additionally, an advance tax is also liable to be paid when total tax liability exceeds INR 10,000 (US$170). For individuals, installments of advance tax are to be paid as follows:

1. 30 percent by September 15 2. 60 percent by December 15 3. 100 percent by January 15

Dezan Shira & Associates’ Delhi and Mumbai offices provide tax consulting and business advisory services

for companies and investors seeking to enter the Indian market or expand existing operations in the country.

For more information, please visit www.dezshira.com/services or email [email protected]

“For income tax purposes in India, individuals are classified as a ‘Resident Indian,’ ‘Non-Resident Indian,’ ‘Resident and Ordinarily Resident,’ or ‘Resident but not Ordinarily Resident,’ ”


2. Indirect Taxes2.1 Customs Duties 2.1.1 Basic Customs Duty 2.1.2 Additional Customs Duty 2.1.3 Special CVD 2.1.4 Anti-Dumping Duty and Safeguard Duty 2.1.5 Protective Duty2.2 Import and Export Procedures 2.2.1 Import Procedures 2.2.2 Export Procedures2.3 Value Added Tax2.4 Central Sales Tax2.5 Service Tax2.6 Excise Act


2.1 Customs Duties Customs Duty is an indirect tax imposed on goods imported and exported from India. The situation surrounding the export or import of goods determines the imposition of tax. The import of goods refers to bringing goods into India from a place outside India. The geographical boundaries of India include territorial waters, which may extend up to 12 nautical miles into the sea from the coast of India (India’s Exclusive Economic Zone or EEZ). Conversely, export refers to the activity of taking goods outside of India.

Regulations related to Customs Duty are governed by the Customs Act, which provides for the levy and collection of duty on imports and exports, import/export procedures, prohibitions on the importation and exportation of goods, and penalties and offences. The Central Board of Excise & Customs (CBEC), a part of the Department of Revenue under the Ministry of Finance, is the legal authority on matters related to customs. Customs Duties generally comprise of the following types:

1. Basic Duty2. Additional Customs Duty3. Countervailing Duty4. Education Cess5. Anti-Dumping Duty6. Safeguard Duty

2.1.1 Basic Customs Duty Basic Customs Duty (BCD) is the standard tax rate applied to goods or the standard preferential rate in the case of goods imported from specified countries. The rates of customs duties are outlined in the First and Second Schedules of the Customs Tariff Act, 1975. The First Schedule specifies rates of import duty, and the Second specifies rates of export duty. BCD is divided into standard and preferential rates, with goods imported from countries holding trade agreements with the Indian central government eligible for lower preferential rates.

2.1.2 Additional Customs Duty This duty is imposed to counter the impact of excise duty. It is equal to central excise duty as imposed on similar goods produced or manufactured in India and is commonly referred to as Countervailing Duty or CVD. The conditions for imposing CVD are such that the duty is imposed if the imported article is produced in India, and it shall amount to ‘manufacture’ as per the definition in the Central Excise Act. The imposition of additional duty is based on the aggregate value of goods including landing charges and BCD. Other duties, such as the anti-dumping duty, safeguard duty, etc., are not taken into account. In the case that goods are covered by provisions under the Standards of Weights and Measures Act, the value base will be the retail sale price declared on the package of the goods minus the rebate as notified for such goods.


2.1.3 Special CVD This duty is payable at 4 percent on imported goods. Similar to the CVD mentioned above, this duty is levied to counter-effect the impact of VAT/Sales Tax to provide a more level playing field to Indian goods. 2.1.4 Anti-Dumping Duty and Safeguard Duty When the need arises to protect the domestic industry from unfair market practices, the Anti-Dumping Duty and Safeguard Duty are imposed. These do not apply to goods imported by a 100 percent EOU (Export Oriented Unit) and units in FTZs (Free Trade Zones) and SEZs (Special Economic Zones). Anti-dumping measures are resorted to only if it has been established that a sudden spurt in imports threatens serious injury to the domestic market. Education Cess and Secondary and Higher Education Cess (EC & SHEC), presently levied at 2 percent and 1 percent respectively, are imposed at the prevailing rates of Customs Duty. The same is imposed as a percentage of aggregate customs duties.

2.1.5 Protective Duty In order to protect the interest of Indian industries from malpractice, protective duties and a Protective Customs Duty are imposed at the recommended rate. The Protective Duty will be valid until the date prescribed in the notification. A sample calculation of Export/ Import duty is as follows:

No. Duty Description Duty % Amount Total Duty

(A) Assessable Value 1,000

(B) Basic Customs Duty 10 100.00 100.00

(C) Sub-Total for evaluating CVD (A+B) 1,100.00

(D) Countervailing Duty ((C) x applicable excise duty rate) 12 132.00 132.00

(E) Sub-total for EC & SHEC on customs (B+D) 232.00

(F) EC of Customs – 2% of (E) 2 4.64 4.64

(G) SHEC of Customs – 1% of (E) 1 2.32 2.32

(H) Total for SCVD (C+D+F+G) 1,238.96

(I) Special CVD – 4% of (H) 4 49.56 49.56

Total Duty 288.52

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2.2 Import and Export Procedure

2.2.1 Import ProceduresIn India, the import and export of goods is governed by the Foreign Trade (Development & Regulation) Act, 1992 and India’s Export Import (EXIM) Policy. India’s Directorate General of Foreign Trade (DGFT) is the principal governing body responsible for all matters related to EXIM Policy.

Import Procedures

File Bill of Entry with Business Identification Number (BIN)

Determine rate of duty for clearance from warehouse

File requisite documents with customs department

Submit import report/manifest

Receive permission to import goods

Importers are required to register with the DGFT to obtain an Importer Exporter Code Number (IEC), issued against their Permanent Account Number (PAN), before engaging in EXIM activities. After an IEC has been obtained, the source of items for import must be identified and declared. The Indian Trade Classification – Harmonized System (ITC-HS) allows for the free import of most goods without a special import license. Certain goods that fall under the following categories require special permission or licensing, however:

1. Licensed (Restricted) Items: Licensed items can only be imported after obtaining an import license from the DGFT. These include some consumer goods, such as precious and semi-precious stones, products related to safety and security, seeds, plants, animals, insecticides, pharmaceuticals and chemicals, and some electronic items. 2. Canalized Items: Canalized items can only be imported via specified transportation channels and methods or through government agencies such as the State Trading Corporation (STC). These include petroleum products, bulk agricultural products such as grains and vegetable oils, and some pharmaceutical products. 3. Prohibited Items: These goods are strictly prohibited from import and include tallow fat, animal rennet, wild animals, and unprocessed ivory.


Bill of Entry - Every importer is required to begin by submitting a Bill of Entry under Section 46. This document certifies the description and value of goods entering the country. The Bill of Entry should be submitted as follows:

1. The original and duplicate for customs 2. A copy for the bank 3. A copy for the importer 4. A copy for making remittances

Under the Electronic Data Interchange (EDI), no formal Bill of Entry is required (as it is recorded electronically) but the importer is required to file a cargo declaration after prescribing particulars required for the processing of the entry for customs clearance. Bills of Entry can be one of three types:

• Bill of Entry for Home Consumption: This form is used when the imported goods are to be cleared on payment of full duty. Home consumption means use within India. It is white colored and hence often called the ‘white bill of entry’. • Bill of Entry for Housing: If the imported goods are not required immediately, importers may store the goods in a warehouse without the payment of duty under a bond and clear them from the warehouse when required on payment of duty. This will enable the deferment of payment of the customs duty until goods are actually required. This Bill of Entry is printed on yellow paper and is thus often called the ‘yellow bill of entry’. It is also called the ‘into bond bill of entry’ as the bond is executed for the transfer of goods in a warehouse without paying duty. • Bill of Entry for Ex-Bond Clearance: The third type is for ex-bond clearance. This is used for clearance from the warehouse on payment of duty and is printed on green paper.

It is important to note that the rate of duty applicable is as it exists on the date a good is removed from a warehouse. Therefore, if the rate changes after goods have been cleared from a customs port, the customs duty as assessed on a yellow bill of entry (Bill of Entry for Housing) and paid on the value listed on the green bill of entry (Bill of Entry for Ex-Bond Clearance) will not be the same.

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If a Bill of Entry is filed without using the Electronic Data Interchange system, the following documents are also generally required:

1) Signed invoice 2) Packing list 3) Bill of Lading or delivery order/air waybill 4) GATT declaration form 5) Importer/CHA declaration 6) Import license wherever necessary 7) Letter of credit/bank draft 8) Insurance document 9) Industrial license, if required 10) Test report, in case of chemicals 11) Adhoc exemption order 12) DEEC Book/DEPB in original, where applicable 13) Catalogue, technical write up, literature in case of machineries, 14) Spares or chemicals as may be applicable 15) Separately split up value of spares, components, and machinery 16) Certificate of Origin, if preferential rate of duty is claimed

Noting is now done electronically in large ports, while it is done manually in small ports. Typically, a Serial Number is given while noting the Bill of Entry.

2.2.2 Export Procedures

Obtain Business Identification Number

Opening of current account with designated bank

Filing of requisite documents with customs department

Submission of export manifest

Receipt of permission for the movement of goods in the form of Entry Outward


Entry Outward – Loading can begin after entry outward has been granted to a vessel. Steamer agents can file an application for entry outward14 days in advance so that intending exporters can start submitting shipping bills. This ensures that formalities are completed as quickly as possible and loading a ship starts quickly.

Loading with Permission- Export goods can be loaded only after a shipping bill or bill of export is duly passed by a customs officer and handed over by the exporter to the person in charge of conveyance. In the case of baggage and mail bags, a shipping bill is not necessary, but permission from a customs officer is required (section 40).

Export Manifest - An Export Manifest/Export Report in prescribed form should be submitted before departure. The report is popularly called the ‘Export General Manifest,’ or EGM. The details required are similar to an import manifest. Every exporter should take the following initial steps:

1. Obtain BIN (Business Identification Number) from DGFT, a PAN-based number. 2. Open current account with designated bank for credit of duty drawback claims. 3. Register licenses / advance licenses / DEPB etc. at the customs station if exports fall under the Export Promotion Schemes.

Exporters must also submit a shipping bill for export by sea or air and bill of export for export by road. Goods must be assessed for duty, even if no duty is payable for exports as ‘Nil Duty.’ The Shipping Bill and Bill of Export Regulations prescribe the form of shipping bills that are submitted in quadruplicate. If a drawback claim is made, one additional copy must be submitted. The five forms of shipping bills include:

a) A green shipping bill for the export of goods claimed under duty drawbacks. b) A yellow shipping bill for the export of dutiable goods. c) A white shipping bill for the export of duty-free goods. d) A pink copy of the shipping bill for the export of duty-free goods. e) A blue shipping bill for export under the DEPB scheme.

The shipping bill form requires details such as the name of the exporter, consignee, invoice number, details of packing, description of goods, quantity, FOB value, etc. The appropriate form of the shipping bill should also be used. Relevant documents (i.e. copies of packing list, invoices, export contracts, letter of credit, etc.) are also to be submitted. In the case of excisable goods, form ARE-1 must be prepared at the time of clearance from the factory and should also be submitted. Customs authorities assign serial numbers to shipping bills when they are presented during duty drawback formalities. If the exporter intends to claim a duty drawback on exports, they must follow prescribed procedures and submit the necessary papers.


Other documents required for export – Exporters must also prepare several other documents including:

a) Four copies of the commercial invoice b) Four copies of the packing list c) Certificate of origin or pre-shipment inspection where required d) Insurance policy e) Letter of credit f ) Declaration of value g) Excise ARE-1/ARE-2 form as applicable h) GR / SDF form prescribed by RBI in duplicate i) Letter showing BIN number

RCMC certificate from Export Promotion Council – Various export promotion councils have been set up to promote and develop exports (e.g. Engineering Export Promotion Council, Apparel Export Promotion Council, etc.). Exporters must become members of the relevant export promotion council and obtain an RCMC (registration cum membership certificate).

Examination of goods before export - After a shipping bill is passed by the export department, the goods are presented to the shed appraiser (exports) for examination. This inspection is necessary to:

• Ensure that prohibited goods are not exported. • Ensure goods match the description and invoice. • Ensure the duty drawback, where applicable, is correctly claimed.

Let Export Order by Customs Authorities – A customs officer will verify the contents and, after they are satisfied that the goods are not prohibited for export and that the export duty (if applicable) has been paid, permit clearance by giving a ‘let ship’ or ‘let export’ order. GR-1, ARE-1, octroi papers, quota certification for export, etc. are also signed. The exporter’s copy of the shipping bill, GR-1, and ARE-1 etc. should also be duly certified and handed over to exporter or CHA. Drawback claims papers are also processed at this time.


2.3 Value Added Tax India has a Federal structure of taxation. The graphic below provides a description of the existing administration.

FEDERAL STRUCTURE OF TAXATION

Authority to Tax

ExciseDuty

CustomsDuty

ServiceTax

Central Sales Tax

Value Added Tax

Central Sales Tax (duty to collect)

CentralGovernment

State Government

The Central Sales Tax imposes a tax on manufacturing, and the state government imposes a tax on the selling and distribution of goods. Hence, the manufacturer and service provider pay excise duty and service tax and claim credit for the same at the time the goods are sold to manufacturers under the nomenclature of CENVAT Credit (i.e. Centralized Value Added Tax), and the dealer pays VAT and claims VAT credit.

Value Added Tax (VAT) is a tax on the final consumption of goods or services, and is ultimately borne by the consumer. It is a multi-stage tax with the provision to allow Input Tax Credit (ITC) on tax at an earlier stage, which can be appropriated against the VAT liability on subsequent sale. This credit means setting off the amount of input tax by a registered dealer against the amount of output tax. It is given for all manufacturers and traders for the purchase of inputs/supplies meant for sale, irrespective of when these will be utilized/sold. The VAT liability is calculated by deducting input tax credit from tax collected on sales during the month. If the tax credit exceeds the tax payable on sales in a month, the excess can be carried over to the end of the next financial year. If there is any balance excess or unadjusted input tax credit at the end of second year, then the same shall be eligible for refund.

VAT is managed exclusively by respective states, for which the states are free to take decisions. The state governments, through taxation departments, carry out the responsibility of levying and collecting VAT. The central government plays the role of facilitator for the successful implementation of VAT.


Every dealer of goods and commodities is required to register under the relevant state act as applicable according to their area of operation. The limit for the threshold is set by the states and may vary between them. It may vary from INR 1,000,000 (US$16,900) to INR 1,500,000 (US$25,300). Further, the premise of availing the tax credit for any amount of VAT paid is based on the issue of an invoice. An invoice plays a pertinent role in the functioning of the VAT system as it aids in substantiating the VAT claim during subsequent sales. The entire system of claiming input tax credit is crucially based on the documentation of a tax invoice or bill. Mandatory to follow, this tax invoice is to be signed and dated by the dealer, showing the requisite particulars.

For identification/ registration of dealers under VAT, the tax payer’s Tax Identification Number (TIN) is used. TIN consists of 11 digits with its first two characters representing the state code and the set-up of the next nine characters varying by state.

At the central level, there is Central Value Added Tax (CENVAT) which relates to rationalizing India’s central excise duty structure. The CENVAT has been introduced to end disputes regarding the classification of various types of inputs as rates on different varieties. The CENVAT Credit Rules are changed occasionally, and the current rules are the CENVAT Credit Rules, 2004. As per these rules, a manufacturer or producer of goods and provider of services is allowed to take credit, commonly referred to as CENVAT credit, of the duty of excise, as mentioned in the Rules, paid on specified inputs and capital goods used in, or in relation to, the manufacture of goods or the provision of services.

This credit can be utilized to pay for an amount equal to:

1. Service tax on any output service, as per the conditions laid down in the rules. 2. Any duty of excise on any product. 3. An amount equal to CENVAT credit taken on inputs, only if such inputs are removed as such or after being partially processed. 4. An amount equal to the CENVAT credit taken on capital goods, only if such capital goods are removed as such.

Presently, there are two basic rates of VAT (4 percent and 12.5 percent). There is also an exempt category and a special rate of 1 percent for a few select items. Gold, silver, and precious stones, for example, have been put in the 1 percent schedule. VAT paid on items such as motor spirit (petrol, diesel and aviation turbine fuel), liquor, etc. are not eligible for offsetting VAT payment.

“An overseas company is not liable to register for VAT in India unless it has an office in India which is engaged in the business of sale of goods. However, there is no restriction on overseas companies applying for voluntary registration. ”


Some of the other VAT features at the state level are:

1. State taxes on the purchase or sale of goods subsumed in VAT, not excluding Entry Tax. 2. A provision for allowing Input Tax Credit (ITC) which is the basic feature of VAT. 3. An intra-state transaction does not cover inter-state sales transactions (i.e. credit for VAT paid within the state shall not be allowed on inter-state purchases). 4. Items destined for export have been made zero-rated by giving credit for all taxes on inputs/purchases related to such exports. 5. The procedure for the VAT system is favorable for businesses as it provides for self- assessment by dealers. Further, there is a provision for introducing a threshold limit for the registration of dealers when annual turnover is INR 10 lakhs (US$16,850) and a provision for the composition of tax liability up to an annual turnover limit of INR 50 lakhs (US$84,300). It should also be noted that no credit is available on the basis of invoices provided by unregistered dealers or to those opting for the composition scheme.

VAT Procedure

• Input VAT - Payable on goods and services purchased from another dealer.• Output VAT - Payable on goods and services rendered.

Manufacturer SupplierGoods and Service purchased

Input VAT payable

Dealer CustomerGoods and Service sold

Output VAT payable

VAT payable Output VAT Input VAT = -

Example: A dealer is purchasing taxable goods within the state and selling those goods as such within the state, without any inter-state sales, and the total turnover is INR 990,000. In this case, the dealer does not need to register under TNVAT Act, 2006, since the dealer’s turnover is below INR 10 lakhs (US$16,850).

If the dealer voluntarily registers, then the dealer can collect tax on sales. The dealer has to pay that tax amount to the department, even if the dealer’s turnover does not exceed INR 10 lakhs (US$16,850) in that year.


Example 1

A registered dealer under VAT affects purchases and sales, both locally, in a yearINPUT OUTPUT

Exempted goods 200,000 Exempted goods 150,000

Goods taxable at 4% 300,000 Goods taxable at 4% 180,000

Goods taxable at 12.5% 800,000 Goods taxable at 12.5% 670,000

TOTAL 13,00,000 TOTAL 10,00,000

INPUT TAX CREDIT OUTPUT TAX CREDITExempted goods 0 Exempted goods 0


Goods taxable at 12.5% 100,000 Goods taxable at 12.5% 83,750

TOTAL 1,12,000 TOTAL 90,950

VAT PayableOutput VAT payable : 90,950Input VAT available : 112,000VAT payable : NILVAT credit carried forward : 21,050

Example 2

A registered dealer under VAT affects purchases and sales, both locally and inter-state, in a year

INPUT OUTPUTExempted goods 200,000 Exempted goods 150,000


TOTAL 400,000 TOTAL 330,000

VAT payable NIL

No liability under VAT Act, since total turnover under VAT Act is less than Rs 5 lakhs

OUTPUT(CST)Goods taxable at 4% - 150,000(with form C)

The dealer is liable under the CST Act irrespective of total turnover under the VAT Act. There is no liability under the VAT Act, but the dealer can avail input tax credit for liability under the CST Act.

INPUT TAX CREDIT (under VAT) OUTPUT TAX CREDIT (Central Sales Tax)Exempted goods 0 Exempted goods 0

Goods taxable at 4% 8,000 CST due 6,000

Goods taxable at 12.5% 100,000 Adjustment from Input Tax credit 6,000

CST payable NIL

Input Tax Credit (to be carried over to next month): 2000


2.4 Central Sales TaxCentral Sales Tax (CST) is a tax levied by the central government on the sale of goods from one state to another. CST is applicable only in the case of inter-state sales. For sales executed within the state, VAT is applicable, and for sales in the nature of import/ export, customs duty shall be levied. Inter-state is deemed to be executed when a sale or purchase constitutes the movement of goods from one state to another state. In accordance with the same transfer of commodities from one branch to another, the transfer shall not be considered a sale as per the CST Act.

CST, though levied by the central government, is payable in the state where the goods are sold and movement commences. The CST is collected and retained by the state in which the tax is collected. Thus, CST is administered and collected by the sales tax authorities of each respective state. To be assessed under the CST Act, the following conditions must be complied with:

1. The sale must not be in the nature of import or export from India. 2. The dealer of goods must be registered under the CST Act. 3. There must be a sale and not a transfer from one branch to another. 4. The company must carry on any business. 5. The sale should be made in the course of inter-state trade or commerce.

Prescribed Forms Under the CST Act

Form CIf the inter-state sale is under the cover of Form C, the sales tax on the inter-state sale is either 4 percent or the applicable sales tax rate for sale within the state, whichever is lower. The form signifies that the sale is to a dealer registered under CST and the goods are covered in the registration certificate of the purchasing dealer. The purchasing dealer is eligible to receive these goods at a concessional rate if the declaration in Form C is submitted to the selling dealer.

Form DSale to the government is taxable at 4 percent, or the applicable sales tax rate for sale within the state, whichever is lower. This concession on CST is applicable if Form D is issued by the government department which purchases the goods.

Form E1This form is issued by the dealer who makes the first inter-state sale during the movement of goods from one state to another and enables the purchaser to claim exemption from CST on the second inter-state sale during the movement of goods by transfer of documents of title.


Form E2This form is issued by the second or subsequent seller when the goods move from one state to another in a series of inter-state sales by transfer of documents of title. This form enables the purchaser to claim exemption from CST on the subsequent sale of goods.

Form FThis form is issued when goods are dispatched to another state (i.e. to the branch of a dealer in another state). The CST is not payable if there is only inter-state stock transfer and there is no sale. To claim the inter-state movement of goods, the dealer must produce a declaration in Form F received from a consignment agent or branch office in another state. One Form F covering receipts from one calendar month must be issued.

Form HThis form is issued by an exporter for the purchase of goods. The purchase of goods is for an export order or in pursuance of an export order. These goods are then sold in export and the form enables the seller of the goods to claim a deduction on the goods sold for export.

Form IThis form is issued by a dealer located in a Special Economic Zone (SEZ). No CST is levied when sales are made to a dealer located in an SEZ.

Impact of sale covered under CST ActIn an inter-state sale to a registered dealer against Form C, the rate of CST is 4 percent or the local sales tax rate, whichever is lower. Under the local sales tax law, transactions regarding the sale/ purchase of goods are exempt from CST. In an inter-state sale to a government against Form D, the rate of CST is 4 percent or the local sales tax rate, whichever is lower. In case of the inter-state sale of declared goods without Form C or D, the rate of CST is twice the rate of tax applicable to the local sale or purchase of such goods in that state. The rate of CST in the case of other goods (i.e. non-declared goods) is 10 percent or the applicable local sales tax of that state, whichever is higher.


2.5 Service TaxA tax on services was put into effect in India for the first time in 1994. With the initial imposition of only 3 services, over the years various other services have been added raising the count to 119 in the year 2011. The basic premise of imposing a service tax is that the manufacturing sector can only be taxed to a certain extent on specified activities while fostering healthy competition. Presently, services form more than 57 percent of India’s GDP, and are expected to reach around 70 percent. This tax will be subsumed into the Goods and Services Tax, which is expected to be in place in the near future. The regulatory provisions pertaining to service tax are given in Chapter V and V(A) of the Finance Act 1994. The levy of the service tax extends to the whole of India except that it does not extend to a service provider offering taxable services from the state of Jammu and Kashmir by virtue of section 64, Chapter V, of the Finance Act.

A new service tax regime was introduced in India’s 2012 budget, under which all services are taxed, with services specified under the negative list entry otherwise exempted. The CBEC also issued a notification in June 2012, commonly referred to as the ‘Mega Exemption Notification’ enumerating the services which shall be exempt from the payment of service tax with effect from July 2012. Earlier there were numerous notifications and litigations challenging the service tax. The present rate of service tax is 12 percent, and EC and SHEC of 1 percent and 2 percent shall be charged to the existing rate. The negative list of services signifies that all services, excluding those specified by the negative list, will be subject to service tax. Additionally, there will be exemptions, abatements, and composition schemes as issued by the CBEC from time to time.

Procedure for Service Tax Registration

Filing the Service Tax registration form (Form ST – 1) online

Generation of acknowledgement

Arrangement of relevant documents

Submission of documents with jurisdictional officer

Verification of documents by the jurisdictional officer

Award of certificate of registration


The Mega Exemption Notification mentions 38 services on which service tax can be exempted, thereby including all other services. A simplistic approach has been laid out that services which are not mentioned in the negative list will attract service tax liability. Services covered in the negative list category are as follows:

1) Health care services by a clinical establishment, an authorized medical practitioner, or paramedics

2) Services provided by an individual as an advocate or a partnership firm of advocates by way of legal services to: a) An advocate or partnership firm of advocates providing legal services b) Any person other than a business entity c) A business entity with a turnover up to INR 10 lakh (US$16,600) in the preceding financial year

3) Services provided to a recognized sports body by: a) An individual as a player, referee, umpire, coach, or team manager for participation in a sporting event organized by a recognized sports body b) Another recognized sports body

4) Auxiliary educational services and renting of immovable property by educational institutions

5) Services by way of training or coaching in recreational activities related to arts, culture, or sports

6) Temporary transfer, or permitting the use or enjoyment, of a copyright relating to original literary, dramatic, musical, artistic works, or cinematograph films

7) Services provided in relation to the serving of food or beverages by a restaurant, eating joint, or a mess, other than those having: a) The facility of air-conditioning or central air-heating in any part of the establishment at any time during the year b) A license to serve alcoholic beverages

The payment of service tax must be completed on a monthly basis. The due date is the 7th of the month following the month to which the amount of tax pertains. Additionally, a service tax return must be filed on a half yearly basis. The due date for filing the return falls on the 25th of the month following the period ending in September and March.


2.6 Excise ActAs per the Central Excise Act (CEA), excise duty is levied if there is a commodity that is moveable, marketable, manufactured in India, and mentioned in the Central Excise Tariff Act. It is applied to the manufacture or production of goods in India and is payable at the time of removal of goods. Thus, it becomes taxable at the time goods are removed from a factory. Excise duty is levied on the production of goods, but the liability of excise duty arises only when goods are removed from their place of storage (i.e. factory or warehouse). Excise duty is levied even if the duty has already been paid on the raw materials used in production. Excise duty is also levied on government undertakings, and railways, for example, are liable to pay duty on manufactured goods. Excise duty is an expense paid while calculating the profits in accounting. Excise duty is levied if goods are marketable. Therefore, goods which are given for free replacement during a warranty period are liable for excise duty.

Excise duty is payable on the basis of:

1. Specific duty based on measurements like weight, volume, length, etc.2. Percentage of tariff value3. Maximum retail price4. Compounded levy scheme5. Percentage of assessable value (ad valorem duty)

In the case of a manufacturer with small-scale operations, governments allow manufacturers to pay excise duty on the basis of specified factors, such as the size of equipment employed, at the specified rates.

For more information about India’s indirect taxes and how they apply to your business,

please contact Dezan Shira & Associates’ tax experts in Delhi and Mumbai.

Please visit www.dezshira.com/services or email [email protected] for more details.


3. International Taxation: Connecting India to the Global Market3.1 Transfer Pricing3.2 Specified Domestic Transactions 3.3 Advance Pricing Agreement 3.4 Transfer Pricing Documentation


3.1 Transfer PricingIndia’s Transfer Pricing Laws are enumerated under Sections 92 to 92F of the Indian Income Tax Act and cover intra-group cross-border transactions. Rules and regulations prescribe that income arising from international transactions or specified domestic transactions between Associated Enterprises (AE) should be computed using the arm’s-length price principle.

‘International transactions’ refers to transactions between two (or more) AEs involving the sale, purchase, or lease of tangible or intangible property, the provision of services or cost-sharing agreements, the lending/ borrowing of money, or any other transaction with a bearing on the profits, income, losses, or assets of such enterprises.

Relationships falling under the AE category include direct/indirect participation in the management, control, or capital of an enterprise by another enterprise. They also cover situations in which the same person participates in the management, control, or capital of both the enterprises.

For tax purposes, companies are required to record the exchange of goods using the arm’s-length principal, which states that the prices charged by affiliated companies should be equivalent to the prices that would have been charged by a third-party. The following methods are prescribed under the Act for the determination of the arm’s-length price:

• Comparable uncontrolled price (CUP) method • Resale price method (RPM) • Cost plus method (CPM) • Profit split method (PSM) • Transactional net margin method (TNMM) • Such other methods as may be prescribed

It has been notified that the ‘other method’ for determination of the arm’s-length price in relation to an international transaction shall be any method which takes into account the price which has been charged for the same or similar transactions, with or between non-associated enterprises, under similar circumstances considering all the relevant facts. No particular method has been accorded priority and the most appropriate method for the transaction would need to be determined with regard to the nature and class of transaction or associated persons and functions performed by such persons, as well as other relevant factors.

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3.2 Specified Domestic TransactionsUntil fiscal year 2011-12, transfer pricing regulations were not applicable to domestic transactions. The Finance Act, 2012 has extended the application of transfer pricing regulations to domestic transactions, labeled ‘Specified Domestic Transactions.’ This amendment is applicable from fiscal year 2012-13 and onwards. The following transactions with related domestic parties qualify as Specified Domestic Transactions, provided the aggregate value of such transactions exceed INR 5 crore (US$800,000):

• Any expenditure with respect to which deduction is claimed while computing profits and gains of a business or profession • Any transaction related to businesses eligible for profit-linked tax incentives (e.g. infrastructure facilities under Section 80-IA and SEZ units under section 10AA) • Any other transactions as may be specified

3.3 Advance Pricing Agreement APA is an agreement between a taxpayer and at least one tax authority. The subject matter for an APA concerns the TP method functional to a taxpayer’s inter-company transactions and will usually cover multiple years. Through the APA, the tax authority may accept not to look for a TP adjustment for enclosed transactions as long as the taxpayers follow the terms and conditions as agreed by the APA.

APAs can be one-sided, two-sided, or bilateral. An independent APA is an agreement between a taxpayer and a tax authority. Two-sided or multilateral APAs concern connected taxpayers and more than one tax authority, present by joint agreements between the governments’ capable authorities.

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3.4 Transfer Pricing DocumentationTaxpayers are required to maintain information related to international transactions undertaken with AEs. The rules prescribe detailed information and documentation that must be maintained by the taxpayer. Such requirements can broadly be divided into two parts.

The first part includes information on the ownership structure of the taxpayer, a group profile, and a business overview of the taxpayer and AEs, including prescribed details such as the nature, terms, quantity, and value of international transactions. The rules also require the taxpayer to document a comprehensive transfer pricing study.

The second part of the rules require adequate documentation be maintained to substantiate the information, analysis, and studies documented under the first part of the rule. It also contains a recommended list of such supporting documents, including government publications, reports, studies, technical publications, and market research studies undertaken by reputable institutions, price publications, relevant agreements, contracts, and correspondence.

Taxpayers having aggregate international transactions below the prescribed threshold of INR 1 crore (US$160,000) and Specified Domestic Transactions below the threshold of INR 5 crore (US$800,000) are relieved from maintaining the prescribed documentation. However, it is imperative that the documentation maintained should be adequate to substantiate the arm’s-length price of the international transactions or specified domestic transactions.

Companies to which transfer pricing regulations are currently applicable are required to file their tax returns on or before November 30 following the close of the relevant tax year. The prescribed documents must be maintained for a period of eight years from the end of the relevant tax year, and must be updated annually on an ongoing basis.

It is also imperative to obtain an Independent Accountant’s Report in respect to all international transactions between AEs, and the same must be submitted by the due date of the tax return filing, on or before November 30.

To learn more about international taxation in India, please contact Dezan Shira & Associates’ staff in Delhi and Mumbai.

For more information, please visit www.dezshira.com/services or email [email protected]


4. Auditing Practices in India4.1 Audit in India: The Basics4.2 Types of Audit 4.3 Audit Reporting


4.1 Audit in India: The BasicsAudits of company accounts have been compulsory in India since the passing of the first Companies Act in 1913. Since then, the Institute of Chartered Accountants of India (ICAI), a statutory body established under the Chartered Accountants Act, 1949, has regulated the profession of chartered accountants in India and ensured the maintenance of India’s accounting standards. All chartered accountants are members of the ICAI, and must comply with the standards stipulated by the ICAI and the Audit and Assurance Standards Board (AASB). Essentially, an audit is the inspection of an individual, business or organization’s accounts, and is traditionally completed by an independent individual or firm with specialized skills and knowledge of auditing procedures in the country in question. In other words, accountants verify that a company’s business transactions were recorded accurately, and provide a true and fair reflection of that company’s financial situation. The importance of the audit process cannot be understated, as the results can be used for the following purposes:

• Helping investors know the financial health of the company. • Assuring the government that the company is properly discharging its legal duties. • Helping lenders evaluate the credibility of the company. • Drawing management’s attention to any shortcomings in the company’s business operations. • Helping management improve business efficiency.

Auditing ObjectivesAs mentioned earlier, there are two key objectives associated with annual audit in India: expressing to shareholders and the Indian government a true and fair view of the company’s financial statements, and detecting and preventing instances of fraud and error. Ensuring a company’s balance sheet provides a true and fair reflection of its current state of affairs requires an auditor who, after completing the audit process, will express their opinion of the company’s financial statements via an auditor’s report. These financial statements should include a balance sheet, profit and loss account, cash flow statements, and notes to accounts. A “true and fair view” can only be satisfied if the financial statements are accurate and not misleading. A company can expect the auditor to feel they have provided a true and fair assessment if the following criteria are satisfied:

• The accounts are prepared with reference to the entries in the account books • Entries are supported by proper vouchers, documents, or other evidence • No entry in the account book is omitted while preparing the financial statements, and nothing is included in the financial statements that were not in the account books • The financial statements are prepared in accordance with the relevant accounting standards

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4.2 Types of Audit Basic audits in India are generally classified into two main types:

• Statutory Audits • Internal Audits

Statutory audits are conducted to report the current state of a company’s finances and accounts to the Indian government and shareholders. Such audits are performed by qualified auditors working as external and independent parties. The audit report of a statutory audit is made in the form prescribed by the government agency.

Internal audits are conducted at the behest of internal management in order to check the health of a company’s finances, and analyze the organization’s operational efficiency. Internal audits may be performed by an independent party or by the company’s own internal staff. In India, every company whose shares are registered on the stock exchange must have an internal auditing system in place. A company whose shares are not listed on the stock exchange, but whose average turnover during the previous three years exceeds INR50 million, or whose share capital and reserves at the beginning of the financial year exceeds INR5 million, must also have an internal auditing system in place. The statutory auditor of the company must additionally report on the company’s internal auditing system of the company in the final report.

Statutory AuditsIn India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the calendar year. The two most common types of statutory audits in India are:

Tax AuditsTax audits are required under Section 44AB of India’s Income Tax Act 1961. This section mandates that those whose business turnover exceeds INR10 million, and those working in a profession with gross receipts exceeding INR2.5 million, must have their accounts audited by an independent chartered accountant. The audit report is made using Form 3CD along with either Form 3CA (for companies) or Form 3CB (for entities not included under Form 3CA). It should be noted that the provision of tax audits are applicable to everyone, be it an individual, a partnership firm, a company, or any other entity. The tax audit report is to be completed by September 30 after the end of the previous fiscal year. Non-compliance with the tax audit provisions may attract a penalty of 0.5 percent of turnover or INR100, 000, whichever is lower. There are no specific rules regarding the appointment or removal of a tax auditor.

An Introduction to India’s Audit ProcessIndia Briefing MagazineApril, 2014available here

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Company AuditsThe provisions for company audits are contained in the Companies Act 1956 and Companies Act 2013 as applicable. Every company, irrespective of its nature of business or turnover, must have its annual accounts audited each financial year. For this purpose, the company and its directors must first appoint an auditor at the outset. Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders of the company who will hold the position from one AGM to the conclusion of the next AGM. After the completion of the term, the auditor must be changed.

Only an independent chartered accountant or a partnership firm of chartered accountants can be appointed as the auditor of a company. The following persons are specifically disqualified from becoming an auditor per the Companies Act:

• A body corporate. • An officer or employee of the company. • A person who is partnered with an employee of the company, or employee of an employee of the company. • Any person who is indebted to a company for a sum exceeding INR1,000 or who has guaranteed to the company on behalf of another person a sum exceeding INR1,000. • A person who has held any securities in the company after one year from the date of commencement of the Companies (Amendment) Act, 2000.

The auditor is required to prepare the audit report in accordance with the Company Auditor’s Report Order (CARO) 2003. CARO requires an auditor to report on various aspects of the company, such as fixed assets, inventories, internal audit systems, internal controls, and statutory duties, among others. The audit report must be obtained before holding the AGM, which itself should be held within six months from the end of the financial year.

“An audit report can be an invaluable tool for both the detection and avoidance of fraud. Effective audit professionals will seek to obtain a thorough understanding of a company’s accounts and activities to enable a comprehensive audit. Interim audits are strongly recommended to further mitigate the risk of fraud or financial mismanagement. ”


4.3 Audit Reporting As discussed earlier, audits are conducted to ensure a company’s financial statements present a true and fair view of its financial affairs. Therefore, the auditor’s opinion expressed in the ultimate report is based on the information gathered during the audit and the verification of financial statements. Upon completing the report, the auditor may express one of the following four opinions:

• Unqualified Opinion • Qualified Opinion • Disclaimer of Opinion • Adverse Opinion

Unqualified OpinionAn unqualified opinion is expressed when the auditor concludes that the financial statements give a true and fair view in accordance with the financial reporting framework used for the preparation and presentation of the financial statements. It confirms that:

• Generally accepted accounting principles are consistently applied in the preparation of financial statements. • Financial statements comply with the relevant statutory requirements and regulations • There is adequate disclosure of all material matters relevant to the proper presentation. of financial information (subject to statutory requirements).

Qualified OpinionA qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot be expressed, but that the effect of any disagreement with management is not so material and pervasive as to require an adverse opinion, or the limitation of scope is not so material and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed as being “subject to’” or “except for” the effects of the matter to which the qualification relates.

Disclaimer of OpinionA disclaimer of opinion is expressed when the possible effect of a limitation on scope is so material and pervasive that the auditor has not been able to obtain sufficient and appropriate audit evidence and is, therefore, unable to express an opinion on the financial statements.

Adverse OpinionAn adverse opinion is expressed when the effect of a disagreement is so material and pervasive to the financial statements that the auditor concludes that a qualification of the report is not adequate to indicate the misleading or incomplete nature of the financial statements.

Dezan Shira & Associates can offer assistance with pre-audit preparation, internal audits, accounting, and the detection and mitigation of risks associated with fraud. We additionally partner with several statutory auditors in India and can make recommendations for the provision of auditing services.

For more information, email [email protected] or visit us online at www.dezshira.com/services

Dezan Shira & Associates


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5. Accounting Index 5.1 Core Concepts5.2 Standards5.3 Key Documents5.4 Miscellaneous

Under Section 129 of the Companies Act, 2013, every profit/loss account and balance sheet must comply with India’s Accounting Standards. ‘Accounting Standards’ are the standard of accounting recommended by the ICAI and prescribed by the central government in consultation with the National Advisory Committee on Accounting Standards (NACAs) constituted under Section 129 of Companies Act, 2013.Dezan Shira & Associates


5.1 Core ConceptsBorrowing costs: Enterprises sometimes borrow funds to acquire, build, and install fixed assets and other assets. These assets take time to become useable or saleable and, therefore, enterprises incur interest (cost of borrowing) to acquire and build these assets. The objective of the Accounting Standard is to prescribe the treatment of borrowing cost (interest + other cost) in accounting, whether the cost of borrowing should be included in the cost of assets or not.

Disclosure of Accounting Policies: Accounting Policies refer to specific accounting principles and the method of applying those principles adopted by the enterprise in preparation for the presentation of financial statements.

Depreciation accounting: This is a measure of wearing out, consumption, or other loss of value of a depreciable asset arising from use or the passage of time. Depreciation is the distribution of the total cost of an asset over its useful life.

Earnings per share: Earnings per share (EPS) is a financial ratio that gives the information regarding earnings available to each equity share. It is a very important financial ratio for assessing the state of the market price of a share. This accounting standard gives computational methodology for the determination and presentation of earnings per share, which will improve the comparison of EPS. The statement is applicable to the enterprise whose equity shares or potential equity shares are listed in a stock exchange.

Effects of changes in foreign exchange rates: The effect of changes in foreign exchange rates shall be applicable in respect to the accounting period commencing on or after April 1, 2004 and are mandatory in nature. This accounting standard is applicable to accounting transactions in foreign currencies in translating the financial statement of foreign operation integral as well as non- integral and also accounting for forward exchange. Accounting for the effect of changes in a foreign exchange rate, an enterprise should disclose the following aspects:

a) The amount of exchange difference included in net profit or loss b) The amount accumulated in foreign exchange translation reserves c) Reconciliation of the opening and closing of a balance of foreign exchange translation reserves

Financial instrument: Recognition and measurement, issued by The Council of the Institute of Chartered Accountants of India, comes into effect in respect to accounting periods commencing on or after April 1, 2009 and will be recommendatory in nature for an initial period of two years. This accounting standard is mandatory in respect to accounting periods commencing on or after April 1, 2011 for all commercial, industrial, and business entities except for small and medium-sized

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entities. The objective of this accounting standard is to establish principles for recognizing and measuring financial assets, financial liabilities, and some contracts to buy or sell non-financial items. Requirements for presenting information about financial instruments are in the Accounting Standard.

Financial instrument presentation: The objective of this standard is to establish principles for presenting financial instruments as liabilities or equities and for offsetting financial assets and financial liabilities. It applies to the classification of financial instruments, from the perspective of the issuer, into financial assets, financial liabilities, and equity instruments; the classification of related interest, dividends, losses, and gains; and the circumstances under in which financial assets and financial liabilities should be offset. The principles in this standard complement the principles for recognizing and measuring financial assets and financial liabilities in accounting standard financial instruments.

Financial reporting of interest in joint ventures: A joint venture is defined as a contractual arrangement whereby two or more parties carry on an economic activity under ‘joint control.’ Joint control is the power to govern the financial and operating policies of an economic activity so as to obtain benefit. ‘Joint control’ is the contractually agreed upon sharing of control over economic activity.

Impairment of assets: The definition of ‘impairment of asset’ is a weakening in the value of an asset. In other words, when the value of an asset decreases, it may be labelled the impairment of an asset. As per AS-28, an asset is said to be impaired when the carrying amount of an asset is more than its recoverable amount.

Intangible assets: An intangible asset is an identifiable non-monetary asset without physical substance held for use in the production or supply of goods or services for rental to others or for administrative purposes.

Interim financial reporting (IFR): Interim financial reporting is the reporting for periods of less than a year, generally for a period of 3 months. As per clause 41 of the listing agreement, companies are required to publish financial results on a quarterly basis. The listing agreement contains the contractual terms, as enumerated by the Securities and Exchange board of India, to be complied concerning those who are listed on recognized stock exchanges.

Provisions, contingent liabilities, and contingent assets: The objective of this standard is to prescribe the accounting for provisions, contingent liabilities, contingent assets, and provisions for restructuring cost.

a. Provision: This is a liability which can be measured only by using a substantial degree of estimation. b. Liability: A liability is the present obligation of an enterprise arising from past events or the settlement of which is expected to result in an outflow of resources from the enterprise.


Related party disclosure: Sometimes, business transactions between related parties lose the feature and character of the arm’s-length principle. Related party relationships often affect the volume and decision of the business of one enterprise for the benefit of the other enterprise. Hence, disclosure of related party transactions is essential for the proper understanding of financial performance and the financial position of an enterprise.

Segment reporting: An enterprise often has needs for multiple products or services and operations in different geographical areas. Multiple products and services and operations in different geographical areas are often exposed to different risks and returns. Information about multiple products and services, and their operation in different geographical areas, is called segment information. Such information is used to assess the risk and return of multiple products and services, and their operation in different geographical areas. Disclosure of such information is called segment reporting.


5.2 StandardsContingencies and events occurring after the balance sheet date: In preparing financial statements, accounting is done by following the accrual basis of accounting and prudent accounting policies to calculate the profit or loss for the year and recognize assets and liabilities in a balance sheet. While following prudent accounting policies, the provision is made for all known liabilities and losses, even for those liabilities and events which are probable. Professional judgment is required to classify the likelihood of the future events occurring and therefore, the question of contingencies and their accounting often arises.

The objective of this standard is to prescribe the accounting of contingencies and events which take place after the balance sheet date, but before the approval of the balance sheet by the Board of Directors. The Accounting Standard deals with contingencies and events occurring after the balance sheet date.

Discontinuing operations: The objective of this standard is to establish principles for reporting information about discontinuing operations. This standard covers ‘discontinuing operations’ rather than ‘discontinued operations.’ The focus of the disclosure of the information is about the operations which the enterprise plans to discontinue rather than disclosing on the operations which are already discontinued. However, the disclosure about discontinued operations is also covered by this standard.

Employee benefits: This accounting standard has been revised by the ICAI and is applicable in respect to the accounting period commencing on or after April 1, 2006. The scope of this accounting standard has been enlarged to include accounting for short-term employee benefits and termination benefits.

Financial instruments, disclosures, and limited revision to accounting standards: The objective of this standard is to require entities to provide disclosures in their financial statements that enable users to evaluate both the significance of financial instruments for the entity’s financial position and performance; and the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, as well as how the entity manages those risks.

Net Profit or loss for the period, prior period items, and changes in accounting policies: The objective of this accounting standard is to prescribe the criteria for certain items in the profit and loss account so that comparability of the financial statement can be enhanced. The profit and loss account is a period statement which covers items of income and expenditure of the particular period. This accounting standard also deals with changes in accounting policy, accounting estimates and extraordinary items.


Revenue recognition: This standard explains when revenue should be recognized in a profit and loss account and also states the circumstances under which revenue recognition can be postponed. Revenue means the gross inflow of cash receivable or other considerations arising from the course of ordinary activities of an enterprise such as the sale of goods, rendering of services, use of enterprise resources by other yielding interest, and dividends and royalties. In other words, revenue is a charge made to customers and clients for goods supplied and services rendered.

Valuation of inventories: The objective of this standard is to formulate the method of computing the cost of inventories and stock, and determining the value of closing stock and inventory when the inventory is shown on the balance sheet until it is sold and recognized as revenue.


5.3 Key DocumentsCash flow statements: Cash flow statements are additional information for users of financial statements. These statements exhibit the flow of incoming and outgoing cash. These statements also assess the ability of the enterprise to generate and utilize cash. These statements are one of the tools used for assessing the liquidity and solvency of the enterprise.

Construction contracts: Accounting for long term construction contracts involves questions as to when revenue should be recognized and how to measure revenue in the books of a contractor. Because the period of a construction contract is long, questions often arise regarding how the profit or loss of a construction contract by a contractor should be determined. There are two ways to determine profit or loss: on a year-to-year basis based on the percentage of completion, or on completion of the contract.

Consolidated financial statements: The objective of this statement is to present the financial statements of a parent and its subsidiaries as a single economic entity. In other words the holding company and its subsidiaries are treated as one entity for the preparation of these consolidated financial statements. Consolidated profit/loss accounts and consolidated balance sheets are prepared for disclosing the total profit/loss of the group and total assets and liabilities of the group. As per this accounting standard, the consolidated balance sheet, if prepared, should be prepared in the manner prescribed by this statement.


5.4 MiscellaneousAccounting for amalgamation: This accounting standard deals with accounting to be made in the books of a transferee company in the case of amalgamation. This accounting standard is not applicable to cases of the acquisition of shares when one company acquires or purchases the shares of another company and the acquired company is not dissolved while a separate entity continues to exist. This standard is applicable when the acquired company is dissolved, the separate entity ceases to exist, and the purchasing company continues with the business of the acquired company.

Accounting for fixed assets: This is an asset which is held with the intention of being used for the purpose of producing or providing goods and services not held for sale in the normal course of business. These are expected to be used for more than one accounting period.

Accounting for government grants: Government grants are assistance by the government in the form of cash or kind to an enterprise in return for past or future compliance with certain conditions. Government assistance, which cannot be valued reasonably, is excluded from government grants. Those transactions with the government which cannot be distinguished from the normal trading transactions of the enterprise are not considered government grants.

Accounting for investments: These are assets held for earning income by way of dividend, interest, and rentals, for capital appreciation or other benefits.

Accounting for investments in associates in consolidated financial statements: This accounting standard was formulated with the objective of setting out the principles and procedures for recognizing the investment in associates in the consolidated financial statements of the investor, so that the effect of investment in associates on the financial position of the group is indicated.

Accounting for leases: A lease is an arrangement by which the lessor gives the right to use an asset for a given period of time to the lessee on rent. It involves two parties, a lessor and a lessee, and an asset which is to be leased. The lessor who owns the asset agrees to allow the lessee to use it for a specified period of time in return for periodic rent payments.

Accounting for taxes on income: This accounting standard prescribes the accounting treatment for taxes on income. Traditionally, the amount of tax payable is determined on the profit/loss computed as per income tax laws. According to this accounting standard, tax on income is determined on the principle of accrual concept. According to this concept, tax should be accounted in the period in which corresponding revenue and expenses are accounted. Put simply, tax shall be accounted on accrual basis, not on a liability to pay basis.

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