Singapore: The Introduction Of GST In India - What Businesses Should Look Out For In 2017

Last Updated: 16 March 2017
Article by S. Sivanesan

Introduction

The Constitution Amendment Bill for Goods and Services Tax (GST) has been approved by The President of India and the GST council have decided to enforce GST from 1st July 2017.

It was agreed that tax revenue from small tax payers with annual turnover of less than INR15 million under the GST regulations will be divided between the states and the centre in the ratio of 9:1 for the purposes of scrutiny and audit. All taxes above this annual turnover threshold will be equally shared between the states and the centre.

Currently, businesses in India have to contend with indirect taxes and restructure their systems and supply chain to fit this current tax regime. With GST being introduced, it will reform the Indian economy by creating a common Indian market and reducing the cascading effect of tax on the cost of goods and services. GST will have a far-reaching impact on almost all aspects of the business operations in the country. Further, it will lead to increased tax compliance which may attract more foreign direct investments across sectors due to tax transparency and ease of doing business.

These are some of the salient features of the proposed GST system:

  1. GST is defined as "any tax on supply of goods and services other than on alcohol for human consumption".
  2. The power to make laws in respect of supplies in the course of inter-state trade or commerce will be vested only in the Union Government. States will have the right to levy GST on intra-state transactions, including services.
  3. Central taxes such as central excise duty, additional excise duty, service tax, additional custom duty and special additional duty as well as state-level taxes such as VAT or sales tax, central sales tax, entertainment tax, entry tax, purchase tax, luxury tax and Octroi will be subsumed under the GST.
  4. Entertainment tax, imposed by states on movie, theatre, etc, will be subsumed under GST, but taxes on entertainment at panchayat, municipality or district level will continue.
  5. GST may be levied on the sale of newspapers and advertisements. This would mean substantial incremental revenues for the Government.
  6. Stamp duties, typically imposed on legal agreements by states, will continue to be levied.
  7. Administration of GST will be the responsibility of the GST Council.

Impact of GST on businesses in India

While companies should still be wary of the exact fixing of the rate at which tax will be charged and chances of inflation in the early days of implementation, on the whole, GST should improve the gross domestic product of the country in the long run.

Some of the other major benefits of GST implementation include reduced logistics cost, supply chain efficiency, reduction in costs for tax and regulatory compliance, better market penetration and export effectiveness.

Taxation of M&A transactions

Amendments have been proposed in relation to the tax treatment of the sale of unquoted shares, receipt of listed securities and capital gains taxable if securities transaction tax was not paid on acquisition of shares in the Indian Union budget for the financial year 2017-2018.

'Fair market value' deemed to be sale consideration for sale of unquoted shares

Under the existing provisions of the Income Tax Act, income chargeable under "capital gains" is computed by taking into account the full value of consideration received on transfer of a capital asset. It is proposed that where the sale consideration of a capital asset, being unquoted shares, is less than the fair market value, the full value of consideration shall be deemed to be the fair market value for the purposes of computing the income under "capital gains tax". Hence, the actual price paid may not be considered to be the sale consideration. However, it is uncertain how the fair market value of an unquoted share of a company will be determined.

From an M&A transaction perspective of structuring and reorganisation, this proposed change may lead to unfavourable tax consequences for a group as a whole notwithstanding the actual value at which such shares were proposed to be transferred. Thus, it could force such transactions to take place at fair market value and consequential tax considerations have to be seriously considered.

One potential issue that may arise is that there are no proposed exceptions for transfer for an unquoted share by a holding company to a subsidiary company which could invite significant amount of unnecessary litigation. Similar to how a transfer of a capital asset by a holding company to its wholly-owned subsidiary company is exempted from tax, it is advisable for the same exception to apply in this scenario.

Receipt of listed securities at less than fair market value to be taxable

The Finance Bill 2017 (the Finance Bill), expected to come into force on 1 April 2018, proposes the following to be included as being taxable under "other income":

  1. sum of money without consideration, the aggregate value of which exceeds INR50,000; or
  2. any immovable property without consideration (the stamp duty value of which exceeds INR50,000) or for a consideration which is less than the stamp duty value by an amount exceeding INR50,000; or
  3. any property, other than immovable property, without consideration (the aggregate fair market value of which exceeds INR50,000) or for a consideration which is less than the aggregate fair market value of the property by an amount exceeding INR50,000.

From an investor's viewpoint, the proposed changes could impact private placement transactions. In effect, investments would likely need to be made at the fair market value. If this is not adhered to, there may be potential tax outflows of up to 30% of the discount (to the fair market value) granted to the specific resident investors. The impact on non-resident investors should also be considered given the exchange control regulations in India and double tax avoidance agreements entered into between India and the investors' respective home jurisdictions.

Capital gains taxable if securities transaction tax not paid on acquisition of shares

Provided that the sale of equity shares or units of equity is subject to Securities Transaction Tax (STT), long-term capital gains resulting from any transfer of such equity shares or units of an equity oriented fund is exempt from tax under the current provisions of the Income Tax Act. Many taxpayers have been misusing this exemption to declare their unaccounted income by entering into sham transactions. Hence, it has now been proposed that this exemption would only be applicable if STT was paid on the acquisition of such equity shares. Whilst curing this misuse, this amendment could also negatively affect certain genuine investment transactions like domestic private equity investments, strategic investments by domestic investors, preferential allotments to certain investors including financial institutions, shares acquired through off market transactions, employees allotted shares under an employee stock option scheme, shares acquired through a merger or demerger, etc. In such cases, shares would have been previously acquired by the investor without payment of STT.

Customs duty and the introduction of "beneficial owner"

On 1 February, 2017, India's Finance Minister Arun Jaitley introduced the Finance Bill. The Finance Bill introduced the concept of "beneficial owner" to subsection (3A) section 2 of Customs Act, 1962, stating that "beneficial owner means any person on whose behalf the goods are being imported or exported or who exercises effective control over the goods being imported or exported".

Further, subsections (20) and (26) of section 2 (i.e. definitions of exporter and importer respectively) have been amended accordingly to replace the words "any owner", with words "any owner, beneficial owner".

Rationale of amendment

In India, companies are given a unique Importer Exporter Code (IEC) which they use for import/export activities. However, companies have been misusing the code by "loaning out" their IECs to hide non-compliance for purposes of saving on duty payable at the time of import, where the final recipient is, in many situations, not the IEC holder. Therefore, in order to enforce accountability under the Customs Act and recover duty payable, the government is including "beneficial owners" as a legal basis for pursuing investigations of tax fraud and duty avoidance.

Impact on Singapore companies

Potential difficulties surrounding the exact definition and application of beneficial ownership may have implications on Singapore companies doing businesses with India in the trade and industry sector. Singapore companies must be particularly prudent when exporting goods into India and ensure that the parties in India they are dealing with comply with the applicable laws and regulations and possess the necessary IECs. In applying the beneficial concept, if ownership lies with the Singapore company, this could lead to the possibility of the Singapore company being made liable to duty and accountable for custom compliance under the Customs Act, as they would now be considered the importer.

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
15 Aug 2017, Workshop, Singapore, Singapore

The development of the global LNG market and the commoditisation of hitherto expensive floating storage technology (both FSUs and FSRUs) have provided an impetus for a modern twist on power projects, allowing power stations to accept gas from international LNG cargoes.

This workshop seeks to give insights and a better understanding of power generation from LNG and gas.

19 Sep 2017, Seminar, New York, United States

This year's highly anticipated Energy Outlook Series event will draw industry leaders, members of the diplomatic corps, congressional staff and members of the press, among others, for a half-day of panel discussions covering significant developments in the global energy sector.

 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.