When is a customs duty exemption legit?
Q: I have been sending raw materials to a manufacturer in India who sends back the finished goods after processing them. He gets customs duty exemption since the goods sent from here are re-exported by him after the processing is done. The Indian manufacturer now informs me that he wants to get the work processed in India by giving it to another entity on job work basis He claims therefore that the customs duty exemption will not be available to him. Is he right or is he trying to fool me by charging me more for the processing done in India?
A: The Indian manufacturer would now be eligible to claim customs duty exemption for the goods imported into India and which are meant for re-export after the processing is done, even by an entity carrying on job work. The Indian manufacturer-importer has to provide the prescribed information where the imported goods are sent to another entity for doing job work, in order to claim the customs duty exemption. The importer will have to give information to the customs authority in respect of the job work done by the service provider. The details would include giving description of processes undertaken at the facility of the entity undertaking the job work.
The manufacturer-importer who wants to avail of the customs duty exemption will have to maintain an account of the quantity and value of goods imported, the quantity of such goods which are consumed, the quantity of goods which are sent for job work, the nature of job work carried out, quantity of goods received after job work, the quantity of goods re-exported and the quantity remaining in stock. The details will have to be furnished based on the bill of entry. The information has to be furnished in a return which has to be filed every quarter. The job work entity has to maintain an account of receipt of goods and the manufacturing process carried out by him. He also has to maintain an account of the wastage generated while carrying out the job work.
Q: I have been told that if non-residents set up units in an International Financial Services Centre (IFSC) in India, lot of tax advantages can be obtained. Can you please let me know what these advantages are? My company in the Gulf is running a financial services business.
A: In order to promote development of financial infrastructure in India, several incentives are given to entities which are set up in an IFSC, the most recent one being in Gujarat. A unit located in the IFSC is currently entitled to a deduction of 100 per cent of its profits for the first five consecutive years and 50 per cent of the profits are tax-free for the next five consecutive years beginning with the year of setting up of the entity.
The law has been changed this year to provide that the benefit of income-tax exemption will be 100 per cent for 10 consecutive years out of the 15-year period from the date of commencement of the entity. Moreover, interest earned by a non-resident in respect of monies lent to a unit located in the IFSC will be 100 per cent tax-free. Further, a non-resident is not required to pay capital gains tax on the transfer of specified securities made on a recognised stock exchange. Also, dividend distribution tax is not levied on distribution of dividend by a company located in the IFSC.
Q: My friends and I want to set up an entity to manage funds of foreign portfolio investors. Most advisers have suggested that we should form a trust rather than a company. We want to know the advantages of setting up a trust from the point of view of tax liability.
A: If the entity that is in the business of collective investments is set up as a company, there would be possibility of a minimum alternate tax being levied where book profits are higher than the taxable income after claiming various benefits. The normal corporate tax rate is substantially higher. In the case of a trust which is assessable as an association of persons in India, tax on long-term capital gains on transfer of listed equity shares will be 14.25 per cent in the current financial year. Tax on short-term capital gains on transfer of listed equity shares would be 21.37 per cent.
The main advantage of setting up a trust to manage funds of foreign portfolio investors is that in the case of open ended funds investors make new investments and redeem old investments on a day-to-day basis. A trust is, therefore, the preferred method of managing such funds. On the other hand, if a company is managing the funds, the capital of the company would have to be increased at the time of new investments and the capital would have to be reduced at the time of redemption. Therefore, a corporate structure is found cumbersome for managing collective investments. If you and your friends decide to set up a trust for managing funds of foreign portfolio investors, it will have to be registered with the Securities and Exchange Board of India and a permanent account number will have to be obtained from the tax department.
The writer is a practicing lawyer, specialising in tax and exchange management laws of India.
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