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In this news letter: |
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When small, think big |
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 In this age of a globalized economy, many small and medium sized companies do not yet realize that outsourcing certain business processes are within their grasp too. In recent years, many innovative Business Process Outsourcing solutions (BPO) have been developed to cater for small and medium sized businesses. Moreover, with more than 2.5 million Indian students graduating from universities each year, BPO industries are increasingly offering more complicated services. To give you a scope of the diversity of BPO solutions, consider the following list:
engineering design, healthcare research, customer service, data processing, bookkeeping, administration, legal assistance, software development, graphic design, website construction, video editing, translation and text editing.
Small and mid-sized companies can use BPO on any given scale, from limited, one time processes like the design of their company logo to transferring an entire department to India.
With the global downturn of the economy, entrepreneurs put heavy emphasis on cost reduction domestically, often forgetting solutions beyond the horizon. Ask yourselves why should you pay several thousand Euro for a website design when an identical job can be done for less than one thousand in India? Why spend € 40.000 on a company accountant when you can hire two Indian accountants for € 20.000? Do simple lab tests really have to be performed in expensive Western laboratories when courier companies can ship samples within a day to a lab in India that is just as professional?
Furthermore, entrepreneurs that are considering using BPO should realize that certain tax advantages can be made to reduce costs even more. When you move certain business processes offshore, some of your profits will follow.
The Freemont Group can provide a key role in assisting you with introducing you to the right partner in India that fulfils your criteria as well as getting the maximum out of your profits.
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How to minimize your Indian tax burden |
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 When it comes to investing in India, there are several highly effective solutions for investors who prefer dedicating their full money's worth to the investment at hand without loosing too much to wasteful governments.
In recent years India has concluded very attractive tax-treaties with Cyprus and Mauritius. India assigns the levy of capital gains taxes on sales of Indian subsidiaries of Mauritius or Cypriot holding companies to these respective countries. This is a very common tax treaty arrangement that in fact most countries do. What is special in this case though, is that neither Cyprus nor Mauritius levy any capital gains tax on foreign dividends and both have other tax exemptions in place that make it possible to reduce taxes to almost zero.
Of the two countries, Cyprus is by far the most practical holding company jurisdiction to use. Firstly, because its membership in the European Union allows for free movement of capital within all union member states. Secondly, because the India-Mauritius tax treaty is currently under renegotiation.
Lets consider the following example to illustrate the use of the India-Cyprus tax treaty in the avoidance of capital gains tax:
A Dutch investor would like to invest in India's biggest industry, textile manufacturing. He has formed a Cyprus holding company to direct his investments.
The Cyprus holding company in turn forms an Indian Ltd. to invest in a factory in Ahmedabad, India.
After several successful years, the Dutch investor gets an offer to sell his factory and does so.
In accordance to Article 14 (4) of the India-Cyprus tax treaty, capital gains arising to a resident of Cyprus on disposal of capital assets are liable to tax in the country of residence only (i.e., in Cyprus) and not in India.
Under Cyprus' domestic tax law, disposal of shares are not subject to any capital gains tax, income tax or defence contribution tax. The same goes for any dividends earned on foreign shareholding.
India's domestic tax rates on the textile manufacturing plant will be 33.66% corporate tax and 14.02% dividend tax bringing the effective tax rate to 43%. However, many tax exemptions can be obtained for foreign investments.
The Dutch investor in our example could also consider forming a trading company in Dubai to handle all the sales for the Indian textile manufacturer. By this means profitable income in India can be lowered. Within the margins of transfer pricing regulations, a significant portion of corporate income can be shifted to tax-free Dubai.
The Cyprus-India holding structure works both ways. Indian residents who are looking for a foreign investment can avoid capital gains tax more or less in the same way as the Dutch resident in our example. Contact our Cyprus office to know more. |
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Special Economic Zone companies |
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 Since 1965 the government of India has slowly but steadily been removing obstacles for foreign and domestic investors. The process did not go nearly as fast as in other south- and south-east Asian countries but the willingness to reform still shows. India's first export processing zone was opened in 1965, though it took 35 years before the government really made work of the concept with the Special Economic Zone policy of 2000 and the SEZ act of 2005.
Now foreign and domestic investors enjoy special privileges when they open a business in one of the 13 Special Economic Zones, or SEZ. More than 61 SEZ's are being set up as we speak. SEZ's offer the following advantages:
- Duty free import/domestic procurement of goods for development, operation and maintenance of SEZ businesses.
- 100% Income Tax exemption on export income for SEZ companies under Section 10AA of the Income Tax Act for first 5 years, 50% for next 5 years thereafter and 50% of the ploughed back export profit for next 5 years.
- Exemption from minimum alternate tax under section 115JB of the Income Tax Act.
- External commercial borrowing by SEZ units up to US $ 500 million in a year without any maturity restriction through recognized banking channels.
- Exemption from Central Sales Tax.
- Exemption from Service Tax.
- Single window clearance for Central and State level approvals.
- Exemption from State sales tax and other levies as extended by the respective State Governments.
The Freemont Group can direct the entire application procedure for SEZ companies as well as the set up of an appropriate holding structure. |
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Capitalism in India |
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 When entrepreneurs are venturing a foreign investment, it is important to know a little bit about local sentiments with regard to foreigners and foreign investments. A culture that is hostile to 'meddling westerners' is not a good place to do business, no matter how attractive their tax system or labour market is. Fortunately, India is a very open and tolerant society, where honest businessmen searching a profit are generally viewed with respect. To illustrate this, one only has to compare American Hollywood cinema with its Indian equivalent, Bollywood.
Artist seldom have a positive attitude towards capitalism. Perhaps they resent the limitations of economic reality on the scope of their artistic endeavours, or maybe it is the complexity of capitalism that blinds the artistic mind from its virtues. Either way, Hollywood has a very negative image of capitalism and big business.
To compile a list of Hollywood films in which businessmen are viewed in a negative light is almost impossible. From early classics like Citizen Kane and Metropolis to the recent blockbuster Avatar, capitalism is always the culprit. Time and time again Hollywood portrays businessmen as greedy, narcissistic Gordon Gekko's who will stop at nothing in their pursuit of money.
Compare that with a film like Jab We Met, in which a businessman's search for true love goes hand in hand with the successful management of his multi-billion dollar firm. Or the film Guru, where a simple village boy builds a textile empire in the stifling business environment of post-independence India. For entrepreneurs with an interest in films, Bollywood cinema is like a breath of fresh air. No longer are you forced to feel guilty about your success. Instead, you can take pride in yourself for your achievements and for being such a good example for society.
Capitalism has lifted millions of Indians out of poverty, yet many millions are still struggling. Their suffering could be an easy target for tear jerking films or Michael Moore-style documentaries promoting a return to socialism. Yet many Bollywood directors have the courage to point the finger at the real cause: government corruption. In the action movie Khakee for instance, we see a brave police official escorting a key witness to a different town, while his corrupt superiors are doing anything to stop them. In the controversial film Rang de Basanti a group of students, faced with corruption, decide to take the law into their own hands. Capitalism is not to blame.
Surely one can refute that there are many Indian films that are not at all positive about capitalism. But that is not the point of this article. Compared to Hollywood, the sheer fact that many Bollywood films do depict capitalism as a positive phenomenon is already amazing. Come to think of it, I can only name two Hollywood films that show a positive image of a businessman: Tucker, and Cash McCall. The first film was funded by Tucker's heirs, and the second has fallen to such levels of obscurity that you cannot even download it.
To explain why Bollywood has not succumbed to the leftist clichés that are so predominant in the west we have to look at the difference in incentives between Indian and Western directors/producers.
Hollywood yields most profits from box office sales, whereas Bollywood is largely depending on sponsorship by businesses, usually mentioned in the opening credits. While some might argue that it limits artistic freedom, it has certainly proven to limit the release of garbage for which Hollywood is so often criticised.
Secondly we should not forget that India has tried radical socialism and has seen the blessings of equal poverty and starvation. Millions of Indians escaped poverty by going abroad and making a success of themselves in places like London, New York, Singapore and Dubai. India's gradual return to economic freedom saw many of those emigrants return to their country and launch successful businesses. It has resulted in a whole new forward looking successive generation of highly educated ambitious young Indians with dreams of success. Whether Bollywood is stimulating their ambitions or the other way around is a question of the chicken and the egg. What matters is that India has transformed into a highly competitive, energetic market that is open to any newcomer. |
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Events Calendar |
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Visit our website (section agenda) to keep informed on upcoming activities. Below you'll find our schedule for the upcoming month.
August 26, the Netherlands: TAX PLANNING SEMINAR.
In association with Paritax international Tax Advisors we organise an afternoon seminar concerning tax planning on Thursday 26 of August. The programme appeals to entrepreneurs and consultants who would like to know more about structural tax savings by means of Cyprus and Dubai.
Date: Thursday 26 of August 2010 at 14.00 hours.
Location: Rondweg 11d, 8091XA Wezep, The Netherlands.
Programme:
14.00 familiarisation/coffee
14.15 introduction
14.30 Tax planning: the principles and the main points
15.00 Tax planning by means of Cyprus and Dubai
15.30 break
16.00 how to respond to new tax legislation & anti-avoidance regulation
17.00 discussion and questions
17.30 conclusion
The seminar is free of charge. Naturally coffee, tea, biscuits, drinks and snacks are served and sufficient time will be made for your personal questions. If you want to participate in this seminar, send an email to seminar@freemontgroup.com.
The next seminar will be held on 21 September.
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