The Finance Bill, 2015 introduced the concept “Place of Effective Management” (POEM) to determine foreign companies’ residential status. This resulted in an amendment in the Income Tax Act, the word “control and management” was replaced with “POEM.”

Accordingly, Indian companies started setting-up subsidiaries in tax havens jurisdictions and vested superficial control of their international operations to continue paying taxes only on Indian operations and avoid paying taxes on overseas operations. To curb such malpractices and avoid erosion of profits from India, the concept of Place of Effective Management (POEM) was introduced by Finance Act, 2015 w.e.f. 1st April 2016.

What is POEM?

POEM refers to a place where the key management and commercial decisions necessary for conducting a company’s business activities are made. Since the residential status of any entity is to be determined every year, POEM is also required to be determined yearly. Under Income Tax law, the residential status of a company shall be determined as follows:

• It is an Indian company; Or

• Its POEM is in India.

How to determine POEM?

There are primary and secondary tests that help determine the POEM of any entity. Both the tests have been explained in the table below:

What is Active Business Outside India (ABOI)?

Key terms which help to determine ABOI:

1. What is Passive Income?

• Passive income of a company shall be aggregate of-

• • Income from the transaction where both the purchases and sale of goods is from/to its associated enterprise, and
  • Income by way of royalty interest capital gains dividend or rental income

Note: If an entity is engaged in the business of banking or is a public financial institution, income by way of interest shall not be considered passive income.

2. How to compute the Value of Assets for tax purposes?

• It shall be the average of the value of the assets in the country of incorporation of the company at the beginning and the end of each year.

3. How to determine the number of Employees in an entity?

• The number of employees shall be the average of the number of employees of the entity at the beginning and the end of the financial year.

4. What does the term ‘Payroll’ mean?

• The term ‘payroll’ has been defined inclusively to include the cost of salaries, wages, bonuses, and all other employee compensation, including the employer’s related pension and social cost.

5. Is there any exemption for the applicability of POEM to any entity?

• Provision of POEM does not apply to a company whose turnover is less than or equal to INR 50 Crores.

What are the key points which help to determine POEM of any entity?

What are the implications of POEM in India for any Foreign company?

Conclusion

POEM is a dual-purpose concept. From the perspective of domestic laws, it may be used to determine the residential status. The principles established by Circular No 6 dated 24th January 2017  for the determination of POEM are not decisive in themselves. 

Thus, the lack of any definite established legal factors for the determination of POEM may lead to several tax disputes. If POEM exists in India for any company, it would be a subject matter of litigation in various other cases and tax laws. 

Moreover, the appointment of Indian directors on the board of foreign companies and participation of directors residing in India in meetings via telephone or video facility would be susceptible to the applicability of POEM in India.

How Can InCorp Help You?

Frequently Asked Questions (FAQs) on Place Of Effective Management(POEM)

In April 2015, the Government of India (GoI) opened India’s first International Financial Service Centre (IFSC) at GIFT City in Gujarat. An IFSC provides the very competitive cost of operations with various tax benefits, single-window clearance,  and relief under various company law provisions. SEBI announced that asset managers can offer portfolio management services (PMS) in IFSC. In this article we discuss the criteria for establishing a PMS in IFSC. Continue reading to know more about the benefits of registering a PMS in IFSC.

An Overview

A portfolio manager (PM) is a legal entity that, under the terms of a contract with a client, advises, directs, or conducts the management or administration of the client’s portfolio of securities, assets, or funds (whether as a discretionary portfolio manager or otherwise). The above mentioned services are known as portfolio management services (PMS). The Indian government publishes various guidelines to promote these services and regulate the PMS in IFSC. These include permissible investors, permissible investments, and costs for IFSC registration.

What is the operational flow of Portfolio Management Services  in IFSC?

*LRS – Liberalised Remittance Scheme

What is the process flow for registering an Portfolio Management Services in IFSC?

What is the framework of Portfolio Management Services in IFSC?

We have detailed the framework of PMS below:

1. Regulatory Framework

• PMS Regulations apply as it is to all IFSC portfolio managers (IFSC PM) subject to SEBI (IFSC) Guidelines, 2015.

2. Structuring

• SEBI-registered intermediaries or international associates (by establishing a branch) may function as PM in IFSC with SEBI’s prior approval.
• If the PM is formed up as a subsidiary, the subsidiary must meet the net worth requirements.
• If the subsidiary fails to meet the standards, the parent company’s net value will be taken into account.

3. Net Worth

• In the IFSC, the minimum net worth for a PM is USD 750,000. In the case of a branch, the parent must meet the required net worth.

4. Certificate requirement

• Non-resident principal officers and employees with decision-making capacity must be certified by organisations recognised by the Financial Markets.

5. Regulator in foreign jurisdiction

• In the Indian securities market, NISM (National Institute of Securities Markets) certification is required.

6. Manpower requirement

• In case of IFSC PM, exclusive manpower shall be allocated for providing portfolio management services from an IFSC branch.

7. Ring-fencing

• Legally, financially, operationally, and technologically, the parent corporation must separate its domestic operations from its IFSC branch operations.
• The parent company is responsible for ensuring that the branch – PM entity in the IFSC complies with the applicable law.

8. Qualification requirement

• Any other organisation, institution, association, or stock exchange recognised or authorised by a financial market regulator in that foreign jurisdiction must certify principal officers and decision-making personnel who are based outside of India.

9. Certification Requirement

• A NISM certification is mandatory in case of the above deal in Indian securities markets.

10. Segregation of funds

• PM operating in IFSC shall keep the funds of all clients in a separate account to be maintained by them in the IFSC Banking Unit (IBU) as permitted by RBI.

11. Registration fees

• The application fee is USD 1,500, while you do have to pay an one-time registration fee of USD 15,000 for your new registration
• There is a fee of USD 10,000 every five years for post registration for all registered entities.

What are the advantages for Portfolio Management Services registered in GIFT City- IFSC?

In comparison to regular PMS registered elsewhere, PMS registered under GIFT city received a variety of privileges. The following are a few advantages:

Investment Opportunities

• PMS in IFSC can provide services only to:
  • Non-resident Indian.
  • Person resident outside India.
  • Resident financial institution resident eligible under FEMA to invest funds offshore,
  • Person resident in India, to invest funds offshore as per criteria laid down under FEMA regulations.
    Note: PMS operating in the IFSC must accept funds or securities worth at least USD 70,000 from the client.
  • The Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), India’s two main stock exchanges, have established international exchange and clearing organisations at the GIFT IFSC. The exchanges offer over 140 trading goods, allowing international investors and non-resident Indians to trade from anywhere in the world.
• PMS incorporated in GIFT City IFSC is allowed to invest in following securities:
  • Securities Listed in GIFT City- IFSC
  • Securities issued by Companies incorporated in GIFT City – IFSC
  • Securities issued by Companies incorporated in India or foreign jurisdiction
• PMS registered in IFSC of GIFT City can invest in India using the following methods:
  • Foreign venture capital investment (“FVCI”) route
  • Foreign portfolio investor (“FPI”) route
  • Foreign direct investment (“FDI”) route.

Taxation benefits

• Business income for the first ten years of the first fifteen years of the tax vacation u/s 80LA of the Income Tax Act of 1961. Business revenue earned by PMS registered elsewhere in India, on the other hand, is taxable.
• At 9% of book earnings, the Minimum Alternate Tax (MAT) / Alternate Minimum Tax (AMT) is applied. However, only companies opting for the previous tax scheme are subject to the same rules.
• Transactions carried out on IFSC exchanges by registered PMS are exempt from STT, CTT, and stamp duty.
• There is no GST on services received by IFSC units or supplied to IFSC units, or on services provided to offshore clients.

Operational Benefits:

• Lower operational costs as a result of Gujarat government’s subsidies
• Abundance of skilled labor,
• Easy access to onshore market,
• Infrastructure of the highest quality, unmatched connection, and transportation accessibility
• IFSC provides access to a variety of markets.

Exempt from compliance under Companies act:

• For the first five years after the start of business in Gift City IFSC, CSR (corporate social responsibility) rules are not applied.
• Resident director is required only after the first year of incorporation.
• Internal audit provisions are only applicable if they are included in the company’s AOA (Articles of Association).
• There is no need to form an Audit Committee, Nominations Committee, or Remuneration Committee.
• Managerial compensation is not subject to any restrictions.
• There is no requirement for an IFSC company to follow the same fiscal year as its holding company.

Conclusion

The Indian government and all the regulatory agencies have been working to enable GIFT City to offer a business and regulatory environment that is comparable to other leading IFCs. While the world has witnessed the growth of international financial hubs such as London, New York, Hong Kong, Singapore and Dubai, the time is now ripe to enhance capital flows through the GIFT City in India. The IFSC in GIFT City provides numerous benefits to the entities setting up operations there, some of the benefits include, a state-of-the-art infrastructure at par with other leading global financial centres, a liberal tax regime and a strong regulatory and legal environment.

How Can InCorp Help You?

FAQs

The growing popularity and demand for online services demonstrate that digitization is the way of the future. Today, every action is automated, whether it is a domestic function or a corporate operation. 

One of the most noticeable changes in the digital economy is the growth of e-commerce operators (mostly foreign-based). In this article, we discuss the income tax and other direct tax implications for e-commerce operators who could either be a resident or a non-resident.

An overview

E-Commerce transactions consists of the following:

What is the Flow of Transactions in an E-commerce Ecosystem?

What Are The Applicable Income Tax Provisions For E-commerce Taxation in India?

Let us take a look at the various provisions under Income Tax Act, that you need to be aware of as an E-commerce operator in India:

For Resident ECO:

An ECO registered in India or having a Permanent Establishment in India or fulfilling the provisions of Section 6 (residency test) is regarded as a Resident ECO. Following compliances are required by Resident ECO under Income Tax provisions:

1. Income Tax Return

Commission on sale, which is the major source of Income for ECO, is grouped under the head ‘Profits and Gains from Business and Profession’ to compute Income Tax. The compliance for resident ECO is tabulated below

Type of PersonRateCompliance

2. TDS under Section 194-O

ParticularsSection 194-O

For Non-resident ECO:

An ECO not registered in India and not fulfilling the provisions of Section 6 is regarded as a Non-resident ECO.

Provisions of Equilization Levy and Income Tax for NRI E-commerce Operators is mentioned as below::

1. Income Tax Return

Type of ECORateCompliance

2. Equalisation Levy under Sec 165A:

ParticularsNon-resident E-commerce Operator

Summary – Income Tax for Ecommerce in Current Ecosystem

Summary: Implications of Section 194-0 and Equalization Levy on ECO

We have prepared a comprehensive list of the direct tax implications on an E-commerce operator under various circumstances:

Conclusion

The digital economy is swiftly becoming intertwined with the traditional economy, thus making it harder to delineate the digital economy’s true meaning. India has been at the forefront of digital economy taxation. Businesses will need to continually review their operating models to assess the effect, identify risks, explore planning possibilities, and meet their commitments as tax law evolves.

The taxation for e-commerce operators in India has a widespread applicability and so, e-commerce businesses should be aware of the same.

Why Choose Incorp?

Our Advisory and Taxation Team at Incorp offers seamless assistance with advisory services. We shall evaluate and assist in assessing ECO’s impact under the Direct Tax Laws. We shall help with transactions subjected to foreign taxes and comply with all applicable rules and regulations.

Apart from direct taxation, we can take care of GST on your e-commerce business as well along with other indirect taxation levies.

The efficient implementation of the indirect taxation law, known as GST, necessitates tough penalties for tax evaders. To encourage people to comply with the GST regime in India, the government has established three key strategies: interest, monetary penalties, recovery, and suspension of GSTIN. The penalties and prosecution when gst return is not filed are discussed in this blog.

What is GST?

The Indian government passed the Goods and Service Tax Act on March 29, 2017, and it went into force on July 1, 2017. The Goods and Services Tax (GST) is a single domestic indirect tax law that applies across the country.

The Goods & Services Tax (GST) is a tax that applies to both goods and services. It is an indirect tax that has primarily replaced various other indirect taxes in India, such as VAT, Service tax, Excise duty, etc. This will make tax collection easier, reduce double taxation, and increase process efficiency.

What is the penalty for late filing your GST returns?

Fortunately, there is no penalty prescribed under the GST law for late or non-filing of GST returns. Instead of penalty, the GST registered dealer is subjected to Late fees for late filing of returns.

What is the applicable amount of late fees?

The following table details the late fees applicable to various returns under GST law. The late fees will increase every day until it hits the capping limit.

Further late fees need to be mandatorily be paid by debit to the Electronic cash ledger. Input tax credit (ITC) cannot be utilized for payment of late fees.

What are the other consequences of not filing GSTR-1/3B?

Input tax credit denial to your customers

• Your customer will be denied input tax credit of GST charged by you on your sales invoices.

Blocking of E-waybill

• You will not be able to generate E-waybill if two consecutive GSTR 3B is not filed

Blocking of GSTR-1

• You will not be able to file GSTR-1 if two consecutive GSTR 3B is not filed

Penalty for non-payment of GST

• For certain specific offences, there are provisions of penalties in GST. One of such offences is not paying collected tax amount within 3 months from the due date. The Penalty will be equal to the amount of tax collected subjected to a minimum of Rs. 20,000

Suspension and then Cancellation of GSTIN

• If you (a regular taxpayer) does not file a return for a continuous period of six months, then the GST Officer may cancel the GST registration of such person. Before cancellation, the officer will issue a Notice seeking your clarification. You are required to reply in 7 working days, giving reasons to the officer for not cancelling your GST registration. However, officers don’t need to initiate the cancellation immediately after the non-filing of the 6th consecutive months return. If officers choose to initiate the procedure of your GST Registration cancellation, then your GSTIN will be suspended. Until the suspension is revoked, you can not supply any Taxable Goods.

Recovery Proceedings under section 79

What are recovery proceedings under Section 79?

If you do not file your GSTR 3B despite constant reminders and notices, the department will initiate the recovery proceedings. We have detailed the entire process for your understanding as follows:

• First Reminder – 3 Days before Due Date to nudge taxpayer to file return on or before the due date
• Second Reminder – Immediately after the due date to inform that return was not filled on the due date
• Notice – 5 Days after Due date, notice in Form GSTR 3A, requiring the person to file returns in 15 Days
• Order – Any time after the lapse of 15 Days of service of notice in form GSTR 3A, provided the return is not filled. Officer may proceed for assessment.
  Here the officer will compute the tax liability to the best of his/her judgment. The Officer may take into account the details of outward supply furnished by the person, inward supply is shown by his/her suppliers, e-waybill details, etc.
  Order will be issued in ASMT – 13, and a summary will be uploaded in Form DRC -07 by an officer.
• Initiation of proceedings: After 30 Days of serving of order in form ASMT -13, the Officer may initiate the recovery proceeding under section 78 and actual recovery under section 79. In the GST regime, officers are empowered to recover the tax payable from your debtors, refund dues, seized Goods, Property etc.

What are consequences of delayed filing of GSTR-1/3B apart from late fees?

The consequences are as follows:

• If a taxpayer is required to pay tax within the prescribed time but fails to pay, interest @18 % will be levied for the delay in payment.
• The interest will be payable only if you use the cash ledger balance to pay taxes. In other words, if you have enough input tax credit and you do not pay taxes using net banking/challan/balance already added in the cash ledger, then there won’t be any interest leviable on you.
• There is no concept of maximum capping in case of interest.

Conclusion

In India, all GST registered dealers must file their GST returns on a monthly, quarterly, or annual basis, depending on the nature of the business. A GST return is a document that comprises the details of outward and inward supplies that a registered taxpayer must file with the Indian tax authorities. A late fee and interest are imposed on the taxpayer if the GST Return is not filed on time.

How can we help you?

At InCorp, our team has extensive expertise and experience that can assist you in complying with GST requirements and managing your taxes in a timely manner.

Our service scope includes:

• GST Compliances
• GST Operational Assistance
• GST Audit Services
• GST updates on recent notifications
• GST Representation And Litigation Support
• Other Indirect Taxes Advisory And Litigation