Financial assets defined as a financial asset of one entity and a financial liability or equity instrument of another entity including cash, equity shares and a contractual right to receive cash or another financial asset will be computed for differently under the new IFRS.

Following the new system, financial assets will be initially recognized at fair value. Loans, advances and investments that a company plans to hold on to until maturity will be computed at amortized cost using the effective interest method with other financial assets also computed at fair value.

The IFRS will also change how companies compute for revenue and receivables.  An extended company credit offer for clients will lead to lower fair value compared to the nominal amount. Receivables and revenue will then be considered at fair value and will not be based on the  invoice amount given to the client.

Fair value is defined as the present value of the amount receivable from the client discounted at the interest rate by which a client could borrow from the market using the same terms and conditions. It is determined by market perception.

Moreover, the fair value of a loan given to an employee, vendor or entity at an interest rate better than market rate will be lower than the nominal amount. This will in turn lead to the difference between the nominal amount and the fair value rate to be filed under the profit and loss account as an expense.

For more help in adopting the new IFRS email mumbai@dezhira.com.

The tax would apply to the construction of complex service or commercial or industrial construction services as well as services offering premium prices based on a flat’s location in a multi-storey building.

“The proposal is to tax construction if the entire payment for the flat is made before completion of construction,” consulting firm RSM Astute executive director K.H. Viswanathan told The Economic Times. “This would increase the cost of the apartment and may discourage potential buyers.”

If the service tax is approved it would amount to 10 percent on 33 percent of the apartment price. There are also proposals to give real estate projects 5 years  to be completed instead of 4 years for claiming deduction of profits.

After New Delhi, the next best cities to live in are Mumbai, Chennai and Bangalore. The survey looked at 37 Indian cities in over a decade to compute for a quality of life index. It also used hard data collected from reliable sources to eliminate the possibility of personal bias or a sampling error obscuring the reality.

Delhi topped the survey in terms of population density, safety, transport, education, job opportunities and accidents but ranked low in terms of healthcare at 17th place. It was Kozhikode, Thiruvananthapuram, Kochi and Kolkata that garnered high scores on this front.

Gurgaon, a de facto suburb of Delhi with a popular development zone, ranked high in terms of housing and educational facilities but lagged behind because of lack of job opportunities, high crime, and unsafe roads and public transport. Noida, a similar area close to Delhi was at 27th place due to poor healthcare, crime rate, no public transport and high rate of accidents.

Mar. 8 - Over the past three years, India has seen something akin to a minor revolution in terms of its attractiveness to foreign investment. This has culminated in four current truths about the Indian market that were not so easily apparent five years ago.

Firstly, the Indian economy supported by a growing middle-class consumer base and as a direct result of sensible and pragmatic reform put in place over the past decade is now a huge and sustainable market economy for foreign investors to sell to. The banking system is stable, India possesses relatively little foreign debt, and none of the specific debt that has afflicted much of the global economy over the past 18 months. Indian exposure to the sub-prime mortgage crisis has been minimal.

India’s middle class is estimated at 250 million people – little wonder that brands such as Porsche and Ferrari are now sold in the country and brands such as Jaguar are now Indian owned. Even at the lower level opportunities also exist, in India Levi’s jeans are considered a status symbol. While poverty remains an issue in many rural areas, India’s current economic models and rural development policy indicate that hundreds of millions will be lifted out of poverty within the next 10-20 years, further creating demand.

Secondly, this process of development and reform has been given a major boost politically. India has had to deal with two decades of coalition governments, with the country’s infamous democracy unable to decide which party should have an overall mandate to govern. The result has been a modern India derided for the shortcomings of its democracy and of a government paralyzed to do any meaningful reform due to the constant horse trading needed to get any legislation through. Legislation that has been passed have so often been watered down by minority views with vested interests that impact has been minimal.

Over the same period, China has stood up, and with a one party state, been able to enact real progress. China is often now held up as a model of optimum governance, whereas India is typically depicted as politically backward, moribund and argumentative. While this may have been true, such pictures are now outdated. India has a government now that can effectively manage reform and get much needed reform passed through the legislative bodies. The Congress Party won a decisive victory in Indian general elections a year ago, and the party has wasted no time in seizing the opportunity to radically reform Indian competitiveness and commerce. India now has strong political leadership with a business friendly government open to transparency and reform. This is expected to continue.

Third, reform involves removing trade barriers, opening up to foreign competition in domestic markets  and getting government out of business. While some progress still needs to be made in key politically hot areas such as insurance and mass retail, generally India is open to foreign investment, and is becoming more so. Such reforms will continue and change, and this is to the benefit of early players who can enter the Indian market and steal a march on their rivals.

Lastly, tremendous opportunities exist at this very moment for foreign investors to get actively involved with. However, these will not stay incumbent for long. One of the points always pointed out to me is the legendary state of disrepair and backwardness of much of India’s infrastructure. Many compare it to the vastly superior infrastructure available in China. Yet the problem is also the opportunity. Just as China’s infrastructure was backward twenty years ago - I recall donkeys and carts along the then main, two lane Beijing airport highway - so India will fix its infrastructure problems too.

As we noted in our previous issue of India Briefing “Investing In India’s Public-Private Partnerships,” the government is making finance and industries available for foreign investment and participation to assist with the redevelopment of the country. For a nation the size of India, the opportunities are staggering. India’s infrastructure problems are not just a problem, they are now the bedrock of reform and a rare chance for multinational businesses to enter into a market that is going to deliver, in the words of Prime Minister Manmohan Singh, “sustained 10 percent growth for the next 25 years.”

Meanwhile, in terms of global opportunities, India offers two faces. The west coast, and the port city of Mumbai, overlooks the Middle East, Africa, and Europe. The east coast, and the main port of Chennai, overlooks Thailand, South-East Asia, Singapore, China, Japan, Australia and to the U.S. west coast. With easy access to these markets, in addition to a wealthy and increasing middle class population, the India of today is strongly reminiscent of China in terms of providing both a domestic market and an operational base for exports.

India, quite simply, is in duality a market and an opportunity for growth that foreign investors simply cannot afford to overlook if they want to achieve sustainable growth. As domestic markets in Europe and the United States slow down, India is the place to be for foreign investors looking to obtain high growth for the next decade and beyond, and may even surpass China in its ability to do so.

Chris Devonshire-Ellis is the managing partner for Dezan Shira & Associates in India, where the firm now has five offices and advises multinational corporations on investment law and tax. He may be contacted at india@dezshira.com.

The newest issue of India Briefing Magazine titled “Setting Up Liaison Offices, Project Offices, Branch Offices and Private Limited Companies in India” will be out later this week. To subscribe to India Briefing click here.

Value added tax

• VAT exemption on paddy, rice, wheat, pulses and products of rice and wheat extended for one more year beginning January 4, 2010

• Tax on masala powder mixtures, macaroni, sports trophies, shields and medals, scrap metal, electric generators of less than 15 KVA, railway concrete sleepers, school bags costing up to Rs 200, reduced from 12.5  percent to 5 percent

• The minimum annual turnover limit for registration increased from Rs. 2 lakhs to Rs. 5 lakhs

• The maximum annual turnover limit for opting for Composition Tax Payment Scheme increased from Rs.15 lakhs to Rs.25 lakhs

• Annual turnover limit for compulsory audit of accounts of dealers increased from Rs.40 lakhs to Rs.60 lakhs

• Optional scheme for dealers in medicines to pay tax based on the MRP even on sale of other goods

• Advance ruling mechanism for dealers to seek clarifications and advance rulings to be introduced

Resource mobilization measures

• VAT rate 4 percent increased to 5 percent on all goods except declared goods

• VAT rate of 12.5 percent increased to 13.5 percent

• VAT rate of 12.5 percent on tobacco products increased to 15 percent

• Levy of VAT on tobacco products on MRP basis

Luxury tax

• Luxury tax on hotels with daily room rents from Rs.1,000 to Rs.2000 increased from 6 percent to 8 percent

• Luxury tax on hotels with daily room rents exceeding Rs.2,000 increased from 10 percent to 12 percent

Entry tax

• Provision for collection of entry tax on sugar at the point of sale by sugar factories

Facility to taxpayers

• Facility for electronic submission of returns and other documents and also payment of tax

Karasamadhana scheme

• Relief extended in payment of interest if sales tax arrears are paid before June 30th 2010.

State excise

• 10 percent growth expected through normal growth and intensification of enforcement activities

• Rs. 7,500 crore of revenue expected

Revision in stamp duty rate

• Stamp duty on sale agreement reduced from 0.25 percent to 0.1 percent limited to a maximum of Rs.20,000

• Stamp duty on joint development agreements and GPA at 1 percent of market value limited to a maximum of Rs.1.5 lakhs

• Stamp duty on agreements relating to shares, debentures and other marketable securities reduced from Rs.200 to Rs.50 and on note or memos given to brokers, depositors and fixed at 0.01 percent limited to a maximum of Rs.50. o stamp duty on DTD reduced from 0.25 percent to 0.1 percent limited to a maximum of Rs.50,000

• Amendment to Act to plug evasion of stamp duty in transfer of apartment/flat

• Provision for adjustment of duty when property is sold to GPA holders

• Rationalization of fee for cancellation of deeds

• Stamp duty on amalgamation and demerger of companies reduced from 5 percent to 3 percent

• Levy of stamp duty at 1 percent on TDR agreements

• Further rationalization in stamp duty on lease and license of properties for duration of less than 1 year stamp duty of 0.5 percent and a maximum of Rs.500 for residential buildings levied. From 1 year to 10 years 1 percent on average annual rent and advance, from 10 years to 20 years 2 percent, above 20 years up to 30 years 3 percent

• Exemption in stamp duty and registration fee on clearance certificates relating to loans availed by farmers, rain water harvesting units, student education, non-conventional energy source units like solar, biogas and houses built under Indira Avas Yojane

• Total stamp duty and registration fee exemption on documents relating to transfer for public purposes to local bodies and urban development authorities

• Estimated collection of revenue for the year 2010-11 is Rs.2200 crore

• Increase in quarterly tax on two wheelers purchased by central government employees from Rs. 25 to Rs. 125 and on other vehicles from Rs. 187.50 to Rs. 500

• Lifetime tax scheme extended to light goods vehicles up to 5,500 kilograms. This scheme applicable to even goods vehicles already in use

• Increase in quarterly tax on stage carriages from Rs.500 to Rs.600 per seat

• Increase in lifetime tax on two wheelers

• Increase in lifetime tax on cars and jeeps

• Increase in quarterly tax on omni buses with national permits from Rs.2,500 per seat to Rs.2,750

• Life time tax of 10 percent levied on all construction equipment vehicles such as cranes, mobile cranes and forklift

For more professional advice on doing business in India email Dezan Shira & Associates at mumbai@dezshira.com.

Motor vehicles tax

Liaison office
A liaison office may be established with the approval of the Reserve Bank of India. However, this is normally a formality. The role of a liaison office is limited to collection of information, marketing of exports/imports (without entering into any contracts) and facilitation of technical/financial collaborations. The liaison office cannot undertake any commercial activity, directly or indirectly. All expenses for establishing and running the liaison must be met through inward remittances, no income can be generated locally. As the liaison office is not permitted to be engaged in any commercial activity, it earns no income and is therefore generally not liable to pay any income tax.

Project office
Foreign companies planning to execute specific projects in India can set up temporary project site offices in India for facilitating that project. The Reserve Bank of India has previously given approval, and has granted general permission for foreign entities to establish project offices, subject to certain conditions.

Branch office
Foreign companies engaged in manufacturing activities abroad may set up branch offices in India for the purposes of export/import of goods, rendering professional or consultancy services, research and development, promoting technical or financial collaborations, representing the parent company, acting as buying/selling agents, rendering services in information technology and development of software, or rendering technical support to the products supplied by the parent/group companies/shipping companies. Foreign companies may set up branch offices in designated special economic zones (SEZs) for undertaking manufacturing and service activities. The company must register with India’s Registrar of Companies. The Reserve Bank of India then gives approval, the company pays Indian taxes (tax is higher than that of an Indian company – 41.86 percent compared to 33 percent), then may remit profits of branch outside of India (subject to RBI guidelines).

A branch office can perform almost all of the activities that a parent company can perform in India without the hassle of incorporation. A branch office typically carries out the following activities: entering into contracts for the import/export of goods; rendering professional or consultancy services; R&D; promoting technical or financial collaboration; acting as buying/selling agents; and rendering services or technical support. One major advantage of a branch office is the ease of setting up and exiting the entity.

Investors must weigh the legal and tax benefits of various business organizations to determine the best model for their business. Investors should note restrictions on the activities that are imposed on business organizations, such as with the branch and liaison office. On the whole, companies remain the most popular mode of business organization among investors, although specific needs of certain investors may compel another choice of corporate entity.

Dezan Shira & Associates can assist with the establishment of representative, project and branch offices and private limited foreign-invested companies throughout India. Please contact the firm at India@dezshira.com for further information.

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China Representative Offices vs. India Liaison Offices

China RO vs. FICE

This is a radical change that companies will have to prepare for by making sure that their accountants are adequately trained with the new system. The system is expected to be adopted by India’s top listed companies by the set deadline and eventually by all companies in India by 2013.

Moreover, companies will need to begin submitting their documents using the Extensible Business Reporting Language (XBRL) format. The format makes tax filing easier by allowing easy access to financial information and improved accuracy.

The system is a boon for organizations that need access to comprehensive financial information including governments, regulators, stock exchanges, financial information companies, economic agencies, accountants and auditors.

The royalty free advanced reporting language tool will enhance the quality of financial information available. In India, XBRL is facilitated by the Institute of Chartered Accountants of India. The system has already been adopted by members of XBRL India including government agencies Reserve Bank of India, Insurance Regulatory and Development Authority, Securities and Exchange Board of India , Ministry of Corporate Affairs, Bombay Stock Exchange Limited and National Stock Exchange of India Limited.

The tax breaks under Section 80 IA are given to companies building infrastructure. In the telecommunications sector, companies can choose a 10 year period out of the first 15 years of operations to qualify for the tax benefits.

Companies can choose to avail of a 100 percent exemption on taxable profit in its first five years and a 30 percent exemption for the next five years.

The government will not give 3G companies the same tax benefits on the basis that the auction is for the allocating spectrum, not including new licenses. Tax breaks under Section 80 IA will only be available for companies beginning their services prior to 2005 and operators launching up to 2010 will not qualify.

Chris Devonshire-Ellis with Dhanendra Kumar

Mar. 4 - In discussions with Gajendra Haldea, the advisor to the Deputy Chairman of Infrastructure Planning Commission, and with Dhanendra Kumar, the Chairman of the Competition Commission of India, two things stood out as the mantras for the execution of public-private partnerships.

Firstly, that the Indian government knows full well the constraints it is operating under and that any arrangements must adhere on both government and private sectors to principals of being cost effective, commercially sustainable and affordable, and having time-bound deliverables.

Secondly, that competition will drive India forward, and that “legal certainty” is a prerequisite of a competitive society. The competition issue is of particular note, as is the governments understanding of the issue at the highest levels. India has gone through a period of stagnation and self interests, with corruption rife.

Developments in India’s booming telecommunications sector – a market that is now growing faster than China’s – have led the government to take a stance that competition succeeds where government regulations could not. Despite government regulations to the contrary, without legislation in place to fully open up markets, competitors in India would tend to form cartels and block entrance to other participants, thus resulting in a moribund and underperforming market, despite a government desire to see otherwise.

In throwing the market open to outside investors, the Indian telecoms market was able to exponentially expand, and now offers its subscribers many more features and at some of the lowest call costs in the world.

This new, get-government-out-of-commerce sutra is a major driving force for foreign investors in India. Barriers are coming down, and the government wishes to see infrastructure development perform in the same, competitive manner to rebuild the nation. That, coupled with the previously mentioned, yet sensible fiscal policies over affordability and sustainability are the new mantras of Indian government policy. These make for a welcome change.

Chris Devonshire-Ellis is the founding partner of Dezan Shira & Associates and is responsible for the firm’s activities in India, where the practice maintains five offices and advises on foreign direct investment legal and tax structures into the country. He may be contacted at india@dezshira.com.

The formation of a Group of Ministers (GoM) to monitor and review the implementation of this broadband initiative is also being considered. Whether the GoM will invite the private sector to participate in the planning of this initiative and focus on wireless as a means of delivery remains to be seen.

An infrastructure company will be carved out of BSNL to implement the project and work with other PSUs like Power Grid Corporation of India (PGCIL) and RailTel. The venture will be supported financially by the Universal Services Obligations Fund (USOF), which holds a large amount of unutilized resources.

The committee is tasked with creating a roadmap for extending affordable broadband connectivity to all villages by leveraging existing infrastructure and augmenting optical fiber wherever necessary. It is also mandated to pull financial resources from various ministries, including finding ways to subsidize consumer premise equipment using the USOF.

While the plan seems ambitious, the two parts that are missing are private sector participation and using wireless broadband for such connectivity. The work of the committee has been focused on government or government resources despite the fact that the telecom revolution is almost entirely led by the private sector, at least where mobile telephony is concerned. And, despite its limitations, wireless broadband connectivity is a faster and cheaper way to reach unconnected areas.

With 3G spectrum auctions being scheduled this year, the Committee might consider it important to include wireless as an equally important, if not superior, mode for connecting rural India.