Why Do Indian Start-ups Register in Singapore

Singapore is known to be a compliance-oriented, corruption-free economy with accommodative regulations towards start-ups, which are very pro-growth and innovation friendly. It is currently rated as the second easiest place in the world to do business by the World Bank, and is the only Asian nation to receive an AAA credit rating from all three major credit agencies. It is also the fourth largest financial center in the world, with strong institutions and prudent economic management.

A number of tech start-ups observe while approaching marquee Venture Capital (VC) funds that the investors often request for or prefer a Singapore registered entity to fund. At this juncture, it's important for these businesses to identify the reasons for such ask and how the overall business as well as the investors could benefit from such a structure.

Here's identifying a few such reasons.

A. Tax Benefits in Singapore vis-a-vis India

1) Corporate Tax Rate of ~17% in Singapore as against Indian tax rates of 25-30% for resident entities and 40% for foreign entities. 

2) Indirect Tax, GST/VAT rate of 5% to 28% and more in India, as against a flat ~7% in Singapore.

3) Capital Gains Tax rate between 10-20% in India as against 0% in Singapore. This is one of the most attractive reasons why investors invest through Singapore, as they can substantially save on tax costs at the time of exit.

It is also important to note here that the Indian government attempts to tax capital gains on sale of shares in companies which have substantial business operations in India. However, investors continue to register in other geographies as at least some precautionary safeguard against such capital gains tax by incorporating a company that holds the intellectual property rights to the tech product or software in a foreign land. An Indian entity is registered that uses such intangible to operate in India, while paying royalty for use of the actual intangible to the Singapore entity, which may be its holding company, or an associate enterprise.

4) Dividend Tax: There are no taxes on dividends in Singapore which follows a one-tier corporate tax structure. However, in India, profits are first taxed in the company's hands, and the dividends distributed are then taxed also in the hands of the shareholders/investors with minor exemptions which only benefit very small shareholders. Thus, there is double taxation of dividends in India as per the current structure.

5) Tax Exemption: For the first three years, newly incorporated companies in Singapore can enjoy full tax exemption on their first Singapore Dollar 100,000 of chargeable income. Beyond such threshold, 8.5% tax on the next S$ 200,000 of the chargeable income.

6) Double Tax Avoidance Agreements: Much like India, Singapore also has Double Tax Agreements (DTAA) with more than 50 countries, which ensure that the tax payers do not end up paying taxes in two countries. The benefits being avoidance of double taxation, lower withholding taxes, preferential tax regime.

B. Administrative Benefits in Singapore vs. India

1) Company Incorporation Time: In Singapore, a company registration takes 1-2 business days, which considering all paper work requirements, may extend to a maximum of one week for all practical purposes. However, in India, it practically takes a minimum of 3 weeks to set up a private limited or an OPC. The compliance while registration and the process is also more seamless and one-window in Singapore, which India is attempting to reach, but is yet to.

2) Full Foreign Ownership: Ownership of 100% of shares is allowed in a Singapore company by an Indian citizen or an Indian company. The entity does not need any local partners or shareholders hence there is no dilution of control and one can freely choose the type of capital structure they want for their company. For every Indian company, there has to be at least one Director resident in India for over six months in a financial year. The FDI norms of India also do not allow 100% foreign ownership in a number of sectors discussed later.

3) Listing on Stock Exchange: The Singapore Stock Exchange (SGX) is inviting Indian companies to list on their exchange and raise capital. SGX can play a vital role in providing Indian companies with access to capital markets overseas. The listing requirements in Singapore are more lenient in comparison to the regulatory requirements by SEBI in India.

4) No Corruption: Singapore has economic-political stability and a government structure that is ranked highly on rankings for no-corruption or red-tapism.

5) Intellectual Property & Arbitration Laws: The IP protection laws in Singapore are more mature and robust owing to the number of international companies registered in the geography that are intangible tech product focused. In addition, it is noticed often that in international contracts between parties from different countries, the place for arbitration is preferred to be Singapore as the arbitration laws there are more mature in comparison to India. Further, the arbitration awards in Singapore enjoy more sanctity in comparison to India where almost every award is challenged in the court of law, and arbitration is seen to an expensive process only to delay the resolution process.

6) Access to Venture Capital Funds: A huge number of international VC funds are registered within Singapore, and prefer to invest through this route. Thus, access to a network of mature and upcoming start-ups, VC funds, angel investors, etc. is another big attraction for founders.

C. Foreign Direct Investment (FDI) Restrictions in India

The following are the sectoral caps on FDI (percentage of shareholding as can be held by a foreign company) in India effective October 2020 by which government approval may be required through the RBI before a foreign partner can invest in India in any such industry.

News & Media

Terrestrial Broadcasting FM (FM Radio): 49%

Up-Linking of ‘News & Current Affairs’ TV Channels: 49%

Uploading/Streaming of News & Current Affairs through Digital Media: 26%

Publishing of newspaper and periodicals dealing with news and current affairs: 26%

Publication of Indian editions of foreign magazines dealing with news and current affairs: 26%

Banking & Finance

Infrastructure companies in Securities Markets, namely, stock exchange, commodity exchanges, depositories and clearing corporations in compliance with SEBI Regulations: 49% Automatic

Banking - Private Sector: 74% (Automatic up to 49%)

Banking - Public Sector subject to Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80: 20%

Insurance Company: 49% Automatic

Pension Sector: 49% Automatic

Other Sectors

Multi Brand Retail Trading (MBRT): 51%

Power Exchanges registered under the Central Electricity Regulatory Commission (Power market) Regulations, 2010: 49% Automatic

Further, if you belong to any of the following industries, you may have to specifically go through the FDI Guidelines here to ensure that your category of operations is covered under the 100% Automatic route or there are additional conditions to fulfill.

- Agriculture and Plantation

- Mining

- Petroleum & Natural Gas

- Manufacturing

- Defence

- Broadcasting & Media

- Civil Aviation & Air Transport

- Construction & Infrastructure incl. Industrial Parks, Satellites

- Private Security Agencies 

- Telecom

- Trading

- E Commerce

- Single Brand Retail Trading (SBRT)

- Railways

- Asset Reconstruction Companies, Credit Information Services

- Pharmaceuticals

D. Upcoming Businesses Registering in Singapore

Among several others, the following seem to be upcoming sectors seeing a surge in registrations.

- Digitisation and AI

- Telemedicine

- Ed-tech

- Subscription as a Service (SaaS)

- E-commerce

- Broadcasting, Media and Live streaming

- Cyber Security

- Virtual Reality (VR) and Augmented Reality (AR)

Enable Audit Trail in Accounting Software w.e.f. 01-Apr-2021

The Ministry of Corporate Affairs (MCA) has notified the Companies (Accounts) Amendment Rules 2021 on 24-Mar-2021 by which an important issue of compliance w.r.t. accounting software w.e.f. 01-Apr-2021 has been announced.

For the financial year commencing on or after the 01-Apr-2021, every company which uses accounting software for maintaining its books of account, shall use only such accounting software which has a feature of recording audit trail of each and every transaction, creating an edit log of each change made in books of account along with the date when such changes were made and ensuring that the audit trail cannot be disabled.

Thus, we would recommend that all companies take the following steps with respect to their accounting practices immediately:

1) Enable Audit Trail in Accounting Software: Check if your accounting software has an audit trail feature, and enable it. Tally.ERP9 and Tally Prime have these features, as do most SAP, Oracle, Navision versions. Please check with your software provider to activate this feature if not already done.

2) Restrict Back Dated Entries: Controls should be put on recording accounting transactions in previous dates. If your accounting happens in batch processing, dates only for the past one or two weeks may be allowed for the purpose of recording expenses for which invoices are received late by the accounts department. However, all sales and bank transactions should be carried out in real time on the same day.

3) Cash Expenses: Expenses incurred in cash should be entered on the same day, and not later as a form of batch processing after huge cash-in-hand balances build up and the matter of non-recording of cash expenses is recognized.

4) Monthly Reconciliation with GST: Reconcile books of accounts with GSTR-2A/2B, GSTR-1, GSTR-3B on a monthly basis, and record all transactions on timely basis, not waiting for errors to be recognized through quarterly or half-yearly reconciliations.

5) Evaluate MIS Reports - Stocks, Ageing, etc: We recommend a monthly MIS report to be examined to check for stock levels, debtors outstanding, creditors outstanding with ageing reports, and analysis of important financial ratios on a monthly basis if not on a weekly or fortnightly basis so that any issues in non-recording of accounting entries or incorrect accounting are identified immediately and addressed without a delay of over 30 days.

ITC Allowed on CSR Activities - AAR Order

Whether Input Tax Credit (ITC) is available on expenses incurred towards Corporate Social Responsibility (CSR) activities in compliance with the provisions of the Companies Act 2013 was an area of ambiguity and there were several divergent opinions on the same.

Several companies were voluntarily treating the same as not allowable for ITC, using the analogy of the Income Tax laws by which spend on CSR activities is treated as not allowed as business expenditure, and taking such a stand to avoid litigation.

However, in a recent Order by the Authority for Advance Rulings (AAR) - CBIC, Uttar Pradesh, there has been some clarification on the matter. It is to be remembered though that an Advance Ruling is only applicable to the entity for which such Order is passed. Though the Order comes as a guiding light for companies wanting to claim ITC on such CSR spend.

AAR-CBIC-UP Case: M/s Dwarikesh Sugar Industries Limited vide Order No. 52 dated 22-Jan-2020 

Held: Expenses incurred towards CSR by the Company in order to comply with the requirements under the Companies Act, 2013 qualify as being "incurred in the course of business" and therefore, eligible for ITC in terms of the Section 16 of the CGST Act, 2017.

Facts: The applicant is a company engaged in the business of sugar production and trade. The company undertakes CSR activities as required in terms of Section 135 of the Companies Act for which it procures various goods and services on which GST is charged by the supplier.

Points of Contention:

(i) Whether expenses incurred by the company to comply with the requirements of CSR under the Companies Act qualify as being "incurred in the course of business" and eligible for ITC under GST laws?

(ii) Whether free supply of goods as part of a company's CSR activities is restricted under Section 17(5)(h) of CGST Act?

(iii) Whether goods and services used for construction of school building and not capitalized in the books of accounts restricted under Section 17(5)(c)/(d) of CGST Act?

Verdict:

- Any Company that meets the criteria for CSR is mandatorily required to incur expenses for the purpose of undertaking CSR activities to be in compliance with the Companies Act. Non-compliance of these provisions may lead to business disruptions.

- The term "gift" has not been defined under the CGST Act. However, a gift is provided to someone occasionally, without consideration and is voluntary in nature. It was agreed that a clear distinction needed to be drawn between supplies given as "gift" and those made as part of a company's CSR activities. While the former is voluntary and occasional, the later is obligatory and regular in nature. 

- CSR expenses incurred by the Applicant have been mandated under the Companies Act, and it is therefore the Applicant's obligation to incur such expenses. The Applicant is compulsorily required to undertake CSR activities in order to run its business and accordingly, it becomes an essential part of his business process as a whole. Therefore, the CSR activities are to be treated as incurred "in the course of business".

- Since CSR expenses are not incurred voluntarily, accordingly, they do not qualify as "gifts" and therefore, its credit is not restricted under Section 17(5) of the CGST Act.

- Section 17(5)(c) and Section 17(5)(d) of the CGST Act have specifically restricted the ITC on construction and works contract service to the extent of capitalization. Accordingly, the ITC of goods and services used for construction of school building will not be available to the Applicant to the extent of capitalization.

POSH Compliance - Prevention of Sexual Harassment at the Workplace Law

One labor law, which most entities are found to not comply with is The Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act (“POSH”), which was notified in 2013.

The law and its compliance applies to every entity which has 10 people or more people, be it in the form of staff, employees, workers, interns, contracted labour or by any name called.

Each employer is required to file an Annual Compliance Report (ACR) every year as per the law with the concerned District Officer as well.

Details of compliance under this law are as under.

Mandatory Requirements under POSH

1. Drafting of a Policy for Prevention of Sexual Harassment at the Workplace

2. Setting up and formalizing an Internal Complaints Committee (IC) to handle related complaints

3. Appointment of an External Member with knowledge on POSH as a member in the IC

4. Proving regular training to employees on POSH

5. Filing of the Annual Compliance Report with the District Officer

6. Reporting on the IC's functioning and other related matters in the Director's Report filed with ROC (in case of companies)

7. Changing Employment Contracts to reflect compliance with POSH

Contents of a POSH Policy Document

1. Objectives of the Policy: Making a safe work environment for women at the workplace, and ensuring all compliance is made with the law to imbibe the spirit of the law and not just for the purpose of documentary compliance

2. Applicability: Details on who all does the policy cover and the places where it applies, including and not limited to office, homes (work-from-home), other sites of work. The policy should specify that it covers all people engaged in the work of the enterprise including interns, contractual staff, part-time workers, consultants, etc. While the law covers only females as victims, a company should aim to make the policy as gender neutral as possible and include men too.

3. Defining Sexual Harassment: This has to be the most detailed and carefully drafted part of the Policy, to clearly mention all acts which may tantamount to sexual harassment of various degrees.

4. List of Do's and Don'ts: A list of acts permissible or impermissible should be laid out in as much detail as possible, and an attempt should also be made to display such lists on display boards and ensure that the people working are trained in recognizing them as well as understanding what constitutes acceptable or unacceptable decorum.

5. Organogram of the IC: Define how the IC will be constituted, members will be appointed, external member be included - with rights, responsibilities of all such members. The details of current IC members must be included with their professional profiles.

6. Processes: Define all procedures and processes to be followed by the following:

a) Aggrieved at the time of the incident and on how to raise a complaint

b) IC members on how to handle an incident in an unbiased manner, lawfully and respectfully

c) Investigation process, questionnaire to be followed, manner of summons and examination

d) Proofs considered as valid, validity of oral claims, etc.

7. Penalties and Repercussions: The penalties, fines, repercussions for degree of harassment should be defined, which might include expulsion from the office or even filing of a criminal complaint. Further, it would be important to specify if there are any compensation methods towards the complainant, and in which case would such provisions kick in.

8. Confidentiality: Concerns around confidentiality must be clearly spelled out, covering not just the complainant but witnesses, investigation process, etc.

9. Employment Terms: Terms which may be added to all employment contracts may also be defined herein and then taken as a base to execute with all employees or contracted consultants and workers of the entity.

GST Checklist Before Year End

Here is a quick checklist of things to do under GST before the end of the financial year.

1. Creation of New Series of Invoices for the new Financial Year

2. E-Invoicing preparedness for all businesses, as the Central Government may mandate e-invoicing for businesses with turnover thresholds less than Rs. 100 crore starting 1st April 2021 

3. Examine the "Aggregate Turnover" for FY 2020-21 as per the definition under the GST laws, which means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), but includes exempt supplies, exports of goods or services or both and inter-State branch transfers.

The aggregate turnover is a determining factor for the following decisions:

a) To choose options for filing of GSTR-1 in the FY 2021-22 on quarterly QRMP scheme or on monthly frequency

b) Decide on number of digits to be shown for HSN codes (turnover up to Rs. 5 crores - 4 digits, turnover above Rs. 5 crores - 6 digits)

c) Whether to opt for the composition scheme

4. Filing of Letter of Undertaking (LUT) online to be able to export without payment of IGST in FY 2021-22

5. Reconciliation of GSTR-2A with ITC claimed in GSTR-3B - contact vendors who have not uploaded the invoices and reverse ITC wrongly availed either due to blocked credit or due to refusal of vendor to upload the invoice on his GSTR-1

6. Examine vendors unpaid for over 180 days as on 31.03.2021 and either pay them immediately or reverse the ITC taken on supplies received from them.

7. Check if any Blocked Credit under section 17(5) of the CGST Act has been availed during the year and reverse the same with payment of interest.

8. Ensure that items sent for job-work are received back within one year to prevent them being treated as supplies and outward GST be payable. Reconcile and update transactions in ITC-04.

9. Reconciliation of GSTR-1 with GSTR-3B and Sales as per books of accounts

10. Reconciliation of E-Way Bills with GSTR-1

11. Reconciliation of ITC ledgers such as Cash Ledger and Credit Ledger balances with those balances in your books of accounts.

12. Reconciliation of physical stock with stock as per books of accounts

13. Invoicing for administrative supply by Head Office to all branches for support services provided throughout the year