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DEEPAK PATEL
'Make in India' and " ease of doing business" have been the key campaigns of Prime Minister Narendra Modi's government but according to official data on companies, aspiring entrepreneurs either seem to be reluctant to or are taking their sweet time to get their enterprises registered. This is a trend over the past few financial years, not only the one since the new government came to power. According to Ministry of Corporate Affairs data, the number of private and public companies registered in the last financial year ( 2014- 15) has been the lowest in the past six years. Around 64,000 companies registered in 2014- 15 compared to 98,029 the previous year — a drop of 35 per cent. The reduction in registration of public companies has been more — from 3,105 in 2013- 14 to 1,468 in 201516 — down around 52 per cent. When it comes to registering a private company, the drop has been around 33 per cent, from 94,924 in 2013- 14 to 62,671 in 2015- 16. On the other hand, 12,348 limited liability partnerships ( LLPs) were registered in the last financial year (till February, 2015) — showing a massive 55 per cent year- on- year ( yoy) increase — reaching its highest level ever over the last six years. A far cry from 1,055 LLPs registered in 2009- 10. So, what is keeping entrepreneurs away from registering their businesses? Consultants and tax experts who guide and assist businesses to get registered say stricter compliance requirements as per companies act is making many of them wary. Companies Act, 2013 — which came into force from April 1, 2014 — has increased the compliance requirements for any public or private company. Businesses are concerned about issues around internal financial controls, mandatory auditor rotation, and stricter watch over related party transactions, among other things. "The general perception among businesses is that there are too many compliance requirements now for listed or private companies," said a Delhibased chartered account. Moreover, there is enhanced liability and responsibility for registration of companies on chartered accountants. A chartered accountant now has to add his or her signature on the form for a company's name approval or for digital signature. This makes many chartered accountants wary. " Those who were used to register 10- 12 companies in a month are now registering just 3- 4 companies," said Agam Gupta, co- founder, quickcompany. in, a company registration portal. Some professionals have stopped registering companies altogether because of such compliance requirements. Another reason for the drop in number of registration in companies is sluggishness in the business environment. Consultants say that market conditions are also playing a part in entrepreneurs' reluctance to register their companies. "Most entrepreneurs who enquire with us for processes and procedures required for starting a business take almost three months to kick start the process," said Lionel Charles, founder, indiafilings. com, which claims to register around 100 companies every month. Clearly, entrepreneurs are taking their time to fine- tune their business model before taking the plunge. Many want to strengthen their business and customer contracts before registering their companies. " The situation would have been a lot different had there been an upswing in economy," added Charles. With the business sentiments not showing signs of improvement in the near future, the situation is likely to remain the same, feel many consultants. One key reason why LLPs are gaining traction among entrepreneurs is that compliance requirements and start- up costs are less, as compared to a private limited company, said com. " This makes an LLP than a private limited for LLPs. However more stringent compliance requirements placed averified balance sheet with are opting to do a LLP incorporation for their clients instead of of companies. The recent is a step in simplifying the process of registration. The Parliamentary Standing Committee on Finance, too, has taken note of the downward trend in registration of companies. The government in its defence has said the drop in numbers is due to restriction in number of shell companies floated by business. However the Standing Committee has asked the government to ' make an enquiry into such negative trends and not merely brush it aside as uncorroborated evidence'. Only time will tell if the government will heed the Committee's advice. | Tax residency of companies | |
The Finance Act, 2015, has introduced a new concept for determining scope of taxation for foreign companies in India. Until the change, a foreign company was considered as a tax resident if its entire control and management resided in India. With the change, it will be considered to be tax resident, and subject to tax on its global income if its " place of effective management" ( POEM) is in India.
The POEM concept is mostly found in tax treaties and domestic laws of OECD members, and has been borrowed by the Indian legislature primarily to dilute the test described above. It is aimed at fundamentally altering the test for Indian residents who have companies outside India which in effect are being controlled and managed from India. The new rule is different from the concept of a controlled foreign corporation (" CFC"), envisaged under the draft Direct Taxes Code, which taxes passive income of foreign companies, controlled more than fifty percent by residents of foreign jurisdiction. While India has shied away from the CFC rule, the new tax residency criteria could be even harsh to levy tax on global income of such foreign companies. POEM is essentially a substance test and has been defined to mean a place where key management and commercial decisions necessary for the conduct of the business as a whole are, in substance made. The OECD principles regard such a place to be where decision makers or such ( for example a board of directors) take decisions, the place where the actions to be taken by the enterprise as a whole are determined. At the same time, the OECD realises that no definitive rule can be given and all relevant facts and circumstances must be examined to determine the place of effective management. In its view, an enterprise may have more than one place of management, but it can have only one place of effective management at any given point in time. The new rule leaves several unanswered questions and room for discretion to determine whether a foreign company can be said to be resident in India. Typically, POEM exist in a place where the board of directors of a company take their decisions. Where would this place be in a world where directors dial into such meetings or conduct proceedings using other tools of communication? Would it be the place where such meetings are chaired from? If yes, what about situations in a digital economy whereby a " chairless" meeting is held via video conference with participation from different geographies? In an era where conduct of business via digital technologies, the concept of physical presence seems to have little relevance and such identification to a geography would become complex. A traditional interpretation could possibly create multiple POEMs in different jurisdictions, involving a complicated web of treaty interpretations besides economic double taxation. A distinction needs to be made between shareholder rights and management decisions. Enough room for doubt is created in situations where shareholders exercise affirmative rights to protect their investment in an offshore company as compared to situations where shareholders take effective decisions with stamp of foreign board. Substance and capability of aboard to take decisions may become a moot question to determine tax residency status of such foreign companies in India. A foreign company being brought to tax in India under POEM would be taxed at a rate as high as 40%, considering the rate applicable to domestic resident companies is 30%. Subsequently, when income is distributed to the Indian shareholders, there is another level of tax of 30 per cent on such dividends. The new law warrants separate provisions to cater to and provide for a taxation regime for such foreign companies under POEM. Typically, tie breaker rule in tax treaties provides for a POEM test to determine tax residency in the event that both the countries consider it to be resident in their respective jurisdictions. In that situation, the competent authorities of the respective states would be required to resolve the dispute through the mutual agreement procedure. The BEPS Action Plan 6 on Treaty Abuse advocates use of 'primary place of management and control' in place of the POEM. This term has been defined to include the place where senior management exercises day to day responsibility extensively for strategic, financial and operational decisions. The OECD emphasis in its Action Plan seems to shift from the POEM concept to management of day- to- day operations by both the senior management and support staff. The fate of the ambitious BEPS project would determine whether India would follow suit and re- write its residency laws all over again. Ambiguities make one wonder whether the government may have better achieved its purpose of taxing outbound "paper" companies through a robust CFC law rather than re- inventing its residency tests. I wonder if an exercise was undertaken to analyse the revenue implications or what was the extent of tax leakage. While the new law brings fresh issues to address, the government needs to supplement it with a succinct and clear promised guidance note to avoid a spate of disputes. (Assisted by Parul Jain) The author is a managing partner, BMR Legal. Views are personal New rule leaves room for discretion in determining whether a foreign company can be said to be resident in India SIMPLY TAX MUKESH BUTANI | | | BRIEF CASE N M J ANTONY
A weekly selection of key court orders | |
Pardon delay, but not at high cost
Several litigants approach the court to claim their rights long after the period of limitation set by law. Some do it deliberately as a strategy; some others out of sheer neglect. The chronic defaulters in this aspect are revenue departments and arms of government. Years of delay are common and the courts " condone" the delay of the government entities because if the department's appeal is dismissed, the beneficiary would be assesses who are private companies trying to avoid taxes. There is even a suspicion, expressed in Supreme Court judgments, that government servants abet the delay. On the other hand, sometimes the courts could be harsh on private parties for coming with application for condoning delay. The Supreme Court found last fortnight that the trial court and the Madras high court imposed " unreasonable and onerous" condition on a litigant who approached them for condoning delay ( GMG Engineering Industries vs Issa Green Power Solution). The courts below directed the party to deposit ₹ 1.5 crore and ₹ 10 lakh respectively in two suits if the delay had to be condoned. The Supreme Court reduced it to ₹ 50,000. The high court, said the apex court, should have kept in view that the parties had not even got a chance to contest the suits on merits. So it was wrong to shut them out with a heavy financial burden, especially since they had given satisfactory explanation for the delay. Multiplexes get extended time The Supreme Court has set aside the judgment of the Gujarat high court which had held that the state's policy named "New Package Scheme of Incentives for Tourism Projects, 1995- 2000" had come to an end and the fiscal incentives would no longer would be available to multiplex cinemas set up in entertainment complexes. The construction was delayed due to an earthquake and communal riots. However, the government did not grant extension of the time given for starting operations. The court held the multiplexes were entitled to have full benefit of the scheme and the curtailment of the period was bad in law. However, since commercial operations have already started, the court asked acommittee to examine the eligibility of individual licencees within three months to decide whether they are eligible for the benefit. Arbitration in dispute with Korean firm The Supreme Court has appointed its former judge, B Sudershan Reddy, to arbitrate between a Korean firm in the business of biometrics research and development and an Indian company which had ordered 10,500 G10 fingerprint scanner at the instance of Electronic Corporation of India Ltd ( Supreme Inc vs 4G Identity Solutions Ltd). Disputes arose over payment. The Korean firm invoked the arbitration clause in the master agreement and the procedure commenced in Singapore under the Singapore International Arbitration Act. The Indian firm objected to it and pointed out that the arbitration should be according to the Indian Arbitration and Conciliation Act according to the supply agreement. The Supreme Court agreed that according to the relevant clause, the site was India and the law applicable was the Indian law. Airport Authority, contractor lose appeal The Delhi High Court last week dismissed the cross appeals of both IDEB Projects Ltd and Airports Authority of India against arbitration award relating to a project for construction of the airport terminal at Khajuraho, the tourist centre in Madhya Pradesh. The project was to be completed by September 2008, but despite repeated extensions, it was not done. So the contract was cancelled leading to arbitration. The court upheld the award which blamed the contractor for the delay, but rejected the certain counterclaims of the AAI. Discretion in licensing not unlimited A government entity cannot arbitrarily cancel a commercial licence granted to a private contractor merely because the agreement uses phrases like " at the discretion", " not obliged to assign any reasons whatsoever" and the like. Courts have repeatedly interpreted these words to mean that the discretion has to be exercised in a " fair, reasonable, non- arbitrary and nondiscriminatory manner", the Delhi High Court stated last week in its judgment, R K Associates & Hoteliers vs Indian Railways Catering and Tourism Corporation. In this case, the corporation granted licence to run a quick service food kiosk at a railway station for five years plus three years. Licence fee for eight years was paid, and huge investments were made before starting the venture. However, after five years, the corporation floated a new tender presumably to fetch higher profit. This was challenged by the contractor. The corporation contended that courts should not interfere in commercial contractual matters. Rejecting this argument, the judgment said that a writ petition is maintainable against the state and its instrumentalities, which are public sector enterprises completely owned and controlled by the state even in contractual matters. Even where there exists an alternative remedy in the form of an arbitration clause, the court can interfere if there is violation of principles of natural justice and fundamental rights. The high court allowed the petition and directed the corporation to let the contractor complete eight years. Compassionate appointments in bank The Supreme Court has dismissed the appeals of public sector Canara Bank against the Kerala High Court judgment which directed it to grant compassionate appointment to dependents of several deceased employees according to its " dying in harness scheme" introduced in 1993. The claim was resisted by the bank on the ground that the financial condition of the family members of the deceased employees was good and that the scheme had been replaced with another in 2005 scrapping the provision of compassionate appointment and instead introducing a new scheme of ex- gratia payment. However, the court pointed out that the 2005 scheme providing only for ex- gratia payment in lieu of compassionate appointment stood superseded by the scheme of 2014 which revived the scheme providing for compassionate appointment. Therefore, the scheme in force is to provide compassionate appointment. The court thus upheld the high court order to consider the applications of the dependents. | | |
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