Investment in Modern Food Distribution and Investment in Modern Food Distribution and Cold Chain Infrastructure Cold Chain Infrastructure – – Tax and Regulatory perspectiveTax and Regulatory perspective
Jayesh KariyaJayesh Kariya
December 2010December 2010
B S R and Associates
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
ContentsBackdrop
Regulatory Framework
2
Tax Incentives and Issues Faced by the Industry
1.
2.
3.
4.
5.
Impact of DTC and GST6.
Key Considerations for Structuring and funding Avenues
Typical Structures and Exit Mechanisms
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
3
Backdrop
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
4
Backdrop
Trends
Strong macroeconomics fundamentals
Changing tax policy boosting warehousing outsourcing
Realty players foraying into the market
Investments from private equity firms
Government Incentives
Planned shift to GST tax regime
The Warehousing Act, 2007
Private investment in logistics parks and Free Trade Warehousing Zones
Infrastructure developments
Developments of the dedicated freight corridor
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
5
Regulatory Framework
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved. 6
Investment under Schedule 1 to FEMA Notification No. 20 of May 2000
Investment under Automatic Route
Investment on repatriation basis
FDI RouteFDI Route FII RouteFII Route
Investment under Schedule 2 to FEMA Notification No. 20 of May 2000
Investment in accordance with SEBI (FII) Regulations
Investment on repatriation basis
FVCI RouteFVCI Route
Investment under Schedule 6 to FEMA Notification No. 20 of May 2000
Investment in accordance with SEBI (FVCI) Regulations
Investment on repatriation basis
NRI Route NRI Route
On repatriation basis under Schedule 1 and 3 to FEMA Notification No. 20 of May 2000; or
On non-repatriation basis under Schedule 4 to FEMA Notification N0. 20 of May 2000
Foreign Investment Windows
Regulatory framework
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
7
Regulatory framework
FDI Guidelines
Operating warehouse
– 100% FDI is freely permissible
Pure Construction of Warehouse
– Whether conditions of P No.2 of 2005 apply?
Modern Food Distribution
Foreign Direct Investments (FDI)
Warehouse
Food Distribution operators (not traders)
– 100% FDI is freely permissible
Quick Service Restaurants (‘QSR’)
Hotel Operators
- 100% FDI is freely permissible
- Term hotel includes restaurant, beach resorts and other tourism complexes providing accommodation and / or catering food facility to tourism
Cold Chain Industry
Operating Cold chain
– 100% FDI is freely permissible
Pure Construction of Cold Chain Storage
– Whether conditions of P No.2 of 2005 apply?
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
Automatic route – ECB up to USD 500 million (hotel – USD 100 million)
Permissible end-use – import of capital goods, financing of new projects, modernization or expansion of existing production units, for investment in the infrastructure sector in India, obtaining license/permit for 3G spectrum, specific service sectors viz, hotel, hospital and software
End-use restrictions – working capital, general corporate purposes and repayment of existing Indian rupee loan
Only specified lenders permitted – these include financial institutions and shareholders holding specified stake in borrower entity
Minimum maturity – 3 years
All in cost ceilings prescribed – if borrower wants to pay higher interest over the all-in cost ceiling, specific RBI approval required
Broad overview of ECB Guidelines
Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road
including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure
(water supply, sanitation and sewage projects) and (viii) mining, refining and exploration (ix) cold
storage or cold room facility, including for farm level pre-cooling, for preservation or storage of
agricultural and allied produce, marine products and meat.
In case the Offshore Co contemplates making investment through non-convertible debt instruments, such investment would be considered as foreign debt in nature and the ECB guidelines would become applicable
Eligibility of ECBs to the sectors in discussion??
Regulatory framework
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
9
Key Considerations for Structuring and Funding Avenues
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
10
Key Considerations for Structuring and Funding Avenues
Key considerations for structuring
Vanilla Debt
Regulatory Approvals
Managing Cash Trap
Valuation
Tax Influence
Key points Key points for for
consideratioconsiderationn
Business Plan
Constraints under Present ECB regime
Use of Structured products
Tax incentives under the Act Impact of DTC and GST Leveraging of debt cost vis-à-vis
profitability Transfer Pricing
Use of Share Premium
Exit Valuation Strategy
Promote Structure in case of Funds
Payback period and waterfalls
Put and call options including conversion options
Cold Chain and warehousing – freely permissible
QSR and Modern Food Distribution – freely permissible
Overseas Entity
Vehicle Use of FVCI vehicle Use of IHC vehicle
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
11
Key Considerations for Structuring and Funding Avenues
Key funding avenues
Domestic sources
Foreign sources
Funding avenues
Promoter’s contribution
Bank Loan
Initial Public Offering
Domestic Venture Capital
Foreign Direct Investment
Foreign Institutional Investors
Private Equity / Foreign Venture Capital
External Commercial Borrowings
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
Key Considerations for Structuring and Funding Avenues
Funding Instruments
DEBT
EQUITY
CCPs
CCDs
OptionallyConvertibles
RedeemablesECB
ECB, conditions
and restriction
s apply
Currently, Mezz FDI is permissible only in form of CCPS and
CCD
Equity/ADR/GDR
CCPS
CCD
Optionally Convertibles
Redeemables
Debt
Tax arbitrage may be
available on
interest payouts
No tax break on dividend
MEZZ
CapitalAuto Route
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
13
Typical structures and Exit mechanisms
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
Typical structures and Exit mechanisms
Direct Investment
Investment through holding company In India
Outside India
Investment strategy: Enterprise level
Project specific SPV (direct)
Project Specific SPV (through a holding company)
Project Specific SPV (through holding companies)
Co-ownership structure
Offshore Fund / FVCI structure
Enterprise level Exit through stake sale to domestic investor /
JV partner
Exit through an Initial Public Offer listing
Asset Sale Exit through sale to strategic investor
SPV level Exit through transfer of SPV shares by HC to
domestic investor / JV Partner
Exit through transfer of IHC shares overseas / overseas listing – Vodafone controversy
Typical Structure Exit Strategies
Other variations in the transaction model could be possible depending on the commercial objectives
Exit rights like put option and tag-along rights could also be considered
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
15
Tax Incentives and Issues Faced by the Industry
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
16
Tax Incentives and Issues Faced by the Industry
Tax Incentives under the Income-tax Act, 1961 (‘the Act’)
Modern Food Distribution / QSR:
− No special incentives under the Act.
− Normal provisions governing taxability of ‘Income from business / profession’ would apply.
Cold Chain Industry and Warehousing:
− Investment linked incentives to the operator of cold chain facility and warehousing facility for storage
of agricultural produce (subject to certain conditions):
Accelerated deduction of capital expenditure
Expenses incurred before commencement of operations – 100% in the 1st year of operation
– Incentives to Developers of Free Trade Warehousing Zones (‘FTWZ’) in the Special Economic Zone
(‘SEZ’):
100% deduction for ten consecutive assessment years out of fifteen years
Exemption from Minimum Alternate Tax (‘MAT’) and
Exemption from Dividend Distribution Tax (‘DDT’)
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
17
Tax Incentives and Issues Faced by the Industry
Tax Issues Faced by the Industry
Cold Chain Industry and Warehousing:
– Meaning of Agriculture produce
– MAT liability
– Rent payment to Cold Chain Storage Operator – withholding tax implications
Taxability of Subsidy from Government – capital vs. revenue receipt
Characterization of the income
Tax depreciation – as plant or as building
Deduction to ICDs / CFCs
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
18
Impact of DTC and GST
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
19
Impact of DTC
Impact of DTC
Incentives to operator of cold chain facility and warehousing facility for storage of
agricultural produce (subject to certain conditions):
– Investment linked incentives continued
Incentives to Developer of FTWZ in the SEZ:
– Grandfathering of profit linked incentives – SEZs notified upto 31 March 2012
– Investment linked incentives – SEZs notified on or after 1 April 2012
– No MAT and DDT exemption
Corporate tax rate – flat tax rate of 30% irrespective of residential status of the assesses
MAT rate 20% – additional burden
Additional tax liability for non-resident companies – branch profit tax @ 15%
Relaxation in DDT credit provisions
Ordinary Source vs. Special Source
– Rental Income – whether taxed as business income?
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
20
Impact of DTC
Impact of DTC
Other aspects:
– GAAR
– CFC regulations
– Place of effective management
– Branch profit tax
– Treaty overrides
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
Excise duties/ Service tax/ CVD/ SAD/ Surcharges/ Cesses
VAT/ Entertainment tax/ Luxury tax/ Entry tax (except in lieu of Octroi)
Cesses and surcharges on goods and services supply
Certain petroleum/other products likely to be outside the purview of GST
LIKELY RATE and CREDITS
C
GST
FRAMEWORK
Dual GST for Centre and States
IGST on inter-state transactions incl. stock transfers
Separate legislation, levy and administration
Place of supply rules for determining “situs” of services
Peak rate of 20 percent (with
gradual reduction)
Concessional rate for select goods
(not for services) at 12 percent
Tax on services at 16 percent
COVERAGE B
TIMELINED
1 April 2011?
A
Impact of GST - Proposed Structure
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
Impact of GST
22
The impact of GST on the subject business needs to be established from the following two perspectives:
Internal impact Impact on revenue, Tax cost on sourcing/ distribution/ logistics, cash
flows, pricing, Invoicing, returns etc
External Impact
Impact on the business decisions and operations of 3PL service
provider, arising out of the supply chain decisions taken by their
customers in the proposed GST regime
B S R and Associates
© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
Impact of GST - Supply Chain
23
Existing scenario
GST scenario
Points for consideration – supply chain
Interstate sale attracts CST – non creditable
Stock transfers not liable to CST/ VAT
Need for depots to stock transfer and make onward sales
Interstate sale to attract IGST – creditable
Stock transfers to attract IGST – creditable. However, such IGST to result in blockage of working capital till inventory disposed
Shift of trend in movement of goods:
– interstate freight likely to increase
– reduction in number of depots
– reduction in stock transfers
– more stocking at mother warehouses
Identifying the correct number and appropriate location of depots
Developing efficient distribution plans – movement points, quantity for distribution
Optimize the tax implications
Cost for opening and operating of depot
GST to force industry to re-visit existing logistics and warehousing set up
– Opportunity for 3 PL service providers
Jayesh KariyaPartner
Tax and Regulatory Services
B S R and Associates
Phone: +91 (22) 30902080
Email: [email protected]
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© 2010 B S R and Associates, a firm of Chartered Accountants, duly registered under the Indian Partnership Act, 1932. All rights reserved.
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