Doing Business in India

Simplified
Paras Kuhad &
Associates
Doing Business in India
Simplified
Introduction
The geopolitical changes that have taken place around the
world in the last few years and the gradual changes in India’s
economic policies have led to a transformation in the bilateral
relationship between India and the US which is best reflected in
the vastly increased co-operation of the two countries in
political, strategic and economic spheres.
Indo-US co-operation in battling terrorism around the world is
well established, as is India’s commitment to promote
globalization and democracy, to alleviate poverty both at home
and abroad and to work closely with the US to contain
regionally focused armed tension and promote global peace.
Strategic co-operation between the two countries is probably
at an all time high with the much debated Indo-US nuclear
deal.
In the economic sphere, waves of economic
reform that swept through the Indian economy
from 1991 onwards brought a sea change in the
economy as well as the global perception of it.
India started being perceived as an attractive
destination for investments. The India story
comes for an interesting telling and at this point
the world is witnessing a strong, fast-growing and
vibrant Indian economy, which is rapidly
integrating with the global economy.
Reasons that make India an
attractive investment
destination
• India is the world’s largest democracy with a
stable political environment.
• India has an abundant English speaking,
educated, skilled human resource base which
offers its services at far cheaper rates than that
may be found in any other developing or
developed country.
• India is world’s leader in global outsourcing with
more than 80% of the market.
• India has at this time a young population with
roughly 80% of its population below 45 years of
age.
• The India market is made more attractive by the
fast growing consumer-class that is markedly
western in its orientation
• With favourable foreign investment policies, tax
incentives and strong economic fundamentals,
India offers attractive returns to prospective
investors.
India’s Industrial Policy
The Indian government has removed bureaucratic controls on industry, under its
liberalization policy. However, licensing and restrictions still exist in the following sectors:

• Two sectors reserved for public sector viz., Atomic Energy and Railways
• Five Industries in which licensing is compulsory –
 Distillation and brewing of alcoholic drinks
 Cigars and cigarettes of tobacco
 Electronic Aerospace and Defence equipment
 Industrial explosives
 Hazardous chemicals
• Manufacture of items reserved for Small Scale
Sector.
• Proposals attracting locational restrictions

GREAT OPPORTUNITIES FOR US FDI!

Note – The exemption from licensing also applies

to all substantial expansion of existing units.
Foreign Investment in
India
Foreign Direct Investment (“FDI”)
India welcomes foreign direct investment in almost all
sectors. Foreigners can directly invest in India either
by themselves or as a joint venture. Moreover, the
investment ceilings in certain sectors are gradually
being removed.
Opportunities exist for investing in India in sectors as
diverse as tourism and infrastructure, petrochemicals
and mining technology and engineering, real estate,
biotechnology, bio-informatics and nanotechnology.
India is also being seen as the global destination for
R&D, engineering design and prototype development
and a manufacturing hub for high technology products.
FDI Policy
According to the current policy, FDI is not permitted
in the following sectors –

Certain sectors, namely:

• Atomic energy;

• Lottery business/gambling and betting;

• Agriculture (excluding floriculture, horticulture, seed
development, animal husbandry, pisciculture and
cultivation of vegetables, mushrooms, etc.)
• Plantations (excluding tea plantation)
• Retail Trading (other than single brand retail)
FDI Policy contd….
There are two routes for FDI in India –
Automatic Route

FDI is permitted under the automatic route for all

items/activities except the following-
• Where the foreign collaborator has an existing
venture/tie-up in India in the same field. There are
certain exceptions –
 investment by a Venture Capital Fund registered
with SEBI;
 existing joint venture has less than 3% investment
by either party;
FDI Policy contd….
 Existing joint venture is defunct or sick

• Proposals falling outside notified sectoral policy/caps or

sectors in which FDI is not permitted

FIPB Route (Approval Route)

• In all other cases of foreign investment, where the
project does not qualify for automatic approval, as given
above, prior approval is required from FIPB.

• Decision of the FIPB is normally conveyed within 30 days

of submitting the application.
• The proposal for foreign investment is decided on a case-
to-case basis depending upon the merits of the case and
in accordance with the prescribed sectoral policy.
Acquisition of Shares

• Acquisitions may be made of an existing Indian

company which may be either a private or a
public company.
• Acquisition of shares of a public listed company is
subject to the guidelines of the Securities
Exchange Board of India (SEBI)
• Foreign investors looking at acquiring equity in an
existing Indian company through stock
acquisitions can do so under the automatic route.
Investment by Foreign Institutional
Investors (“FII”)
• An FII must be registered with SEBI and must comply with
certain investment limits. They may purchase shares
and/or convertible debentures of an Indian company under
the Portfolio Investment Scheme.

• The shares/convertible debentures of an Indian company

must be purchased through registered brokers on
recognized stock exchanges in India.

• FII’s are also permitted to purchase shares/convertible

debentures of an Indian company through private
placement/arrangement.

• Foreign pension funds, mutual funds, investment trusts,

asset management companies, nominee companies and
incorporated/institutional portfolio managers or their power
of attorney holders may invest In India as FIIs.
Foreign Technology Transfer
Foreign technology induction is encouraged by the
Government both through FDI and through foreign technology
collaboration agreements.
No approvals are required in respect to all those foreign
technology agreements which involve:

– a lump sum payment of up to USD 2 million

– royalty payable up to 5% on net domestic sales and 8% on

exports, subject to a total payment of 8% on sales, without
any restriction on the duration of royalty payments.

Note - It is permissible for an Indian Company to issue

equity shares against lumpsum fee and royalty in
convertible foreign currency
Global Depository Receipts (GDRs)/
American Depository Receipts
(ADRs)/ Foreign Currency
Convertible Bonds (FCCBs)
• Indian companies listed on the stock exchange
are allowed to raise capital through
GDRs/ADRs/FCCBs.
• Foreign investment through GDRs/ADRs/FCCBs is
also treated as FDI.
• Issue of GDRs/ADRs does not require any prior
approvals except where the FDI after such issue
would exceed the sectoral caps, in which case
prior approval of FIPB would be required.
• Issue of FCCBs upto USD 500 million also does
not require any prior approvals
Preference shares
• Indian companies can mobilize foreign investment
through issue of preference shares for financing
their projects/industries.
• Issue of preference shares is permissible only as
rupee denominated instruments.
• All preference shares have to redeemed out of
accumulated profits/ fresh capital within a period of
20 years as per Indian Company Law.
• Preference shares, carrying a conversion option,
must comply with sectoral caps on foreign equity. If
the preference shares do not have conversion
option, they fall outside the FDI cap.
Exchange Control Regulations of India

• Exchange control is regulated under the Foreign

Exchange Management Act, 1999 (“FEMA”)
• Foreign exchange transactions have been divided into
two broad categories – current account transactions and
capital account transactions.
• The Indian rupee is fully convertible for current account
transactions, subject to a negative list of transactions
that are prohibited/ require prior approval.
• The exchange control laws and regulations for residents
apply to foreign invested companies as well.
Repatriation of Capital

Foreign capital invested in India is generally

repatriable, along with capital appreciation, if
any, after the payment of taxes due on them,
provided the investment was on repatriation
basis.
Laws Governing Business in India
• The Companies Act, 1956
• Arbitration and Reconciliation Act, 1996
• The Competition Act, 2002

• The Foreign Exchange Management Act, 1999

• Income Tax Act, 1961

• Central Sales Tax, 1956

• Central Excise Act, 1944
• Information Technology Act, 2000
• Copyright Act, 1957
• Trademarks Act, 1999
Laws Contd…

• Geographical Indications of Goods Act, 1999

• Indian Patents Act, 1970

• Designs Act, 2000

• Industrial Disputes Act, 1947

• Workmen Compensation Act, 1956

• Employees Provident Fund Miscellaneous Provisions Act,

1952

• Consumer Protection Act, 1956

Important Regulatory Authorities for
Foreign Investment
• Secretariat for Industrial Assistance (SIA)
• Foreign Investment Promotion Board (FIPB)
• The Foreign Investment Implementation Authority (FIIA)
• Reserve Bank of India (RBI)
• Registrar of Companies (RoC)
• Securities and Exchange Board of India (SEBI)
• Central Board of Excise and Customs (CBEC)
• Central Board of Direct Taxes (CBDT)
• Authority for Advance Rulings (AAR)
• Investment Commission (IC)
Growth Sectors of economy for
foreign investment–
IT and ITES
• India is world’s leader in global outsourcing with
more than 80% of the market share.
• Electronic Hardware Technology Park (EHTP) and
Software Technology Park (STP) schemes.
• Undertakings setup in EHTP/STP are eligible for
deduction of 100% export profits till March 31,
2009
• 100% FDI permitted without any prior approvals.
Special Economic Zones (SEZ’s)
• SEZ Act and the rules framed thereunder have been
notified with effect from February 2006.
• An SEZ is an export oriented duty free enclave, which
is deemed to be outside the customs territory of India.
• 22 operational SEZ’s in India and over 200 SEZ’s are in
various stages of approval and development.
• 100% tax deduction for 10 years for SEZ developer.
• Exemption from dividend distribution tax for SEZ
developer.
• Exemption of Sales Tax on purchases from Domestic
Tariff Area for both developer and a SEZ unit.
• Exemption from Service Tax for both developer and a
SEZ unit.
SEZ Contd….

• No minimum export obligation.

• A 100% permitted under the automatic route for

SEZ development.
• 15 year corporate tax exemption on export
profits to a SEZ unit.
• Branches of foreign companies in SEZ’s are
eligible to undertake manufacturing activities.
Biotechnology and Bioinformatics
• 100% FDI permitted without prior approval.
• 100% pass through tax incentive to VCFs and FVCIs

• One main reason for growth – implementation of

product patent regime in India in accordance TRIPS.

Nanotechnology
• 100% FDI permitted without prior approval.

• 100% pass through tax incentive to VCFs and FVCIs

Manufacturing
• What is needed? Globalization in Indian manufacturing
capabilities by creation of dynamic manufacturing hubs in
India.

• India is also being seen as the global destination for R&D,

engineering design and prototype development and a
manufacturing hub for high technology products.

• expansion in core sectors in India such as –

– Steel

– Chemicals and petrochemicals

– Consumer durables

– IT hardware and telecom

– Transportation
Retail Trading

• Single brand product retailing permitted under

FDI policy.
• Multi brands are expected to get permission
soon.
• Retails giants like WalMart, Tesco etc are making
foray in India.
• 50% FDI allowed in retail trading (Single Brand)
• Fashion lines worldwide looking to enter India
market
Tourism

• India is fast emerging as one of the most enticing

destinations for the global leisure traveler.
• The tourism sector in India is expected to grow at 8
per cent per annum, in real terms, between 2007
and 2016.
• As travelers surge into India, the demand for rooms,
across segments, has skyrocketed. Hotels in the
luxury and business traveler segment are recording
nearly 100 per cent occupancy, spiraling tariffs, and
a strain on capacity and manpower.
Tourism contd…

The present government’s major policy initiatives include:

• Liberalization in aviation sector

• Pricing policy for aviation turbine fuel which influences
internal air fares

• Rationalization in tax rates in the hospitality sector

• Tourist friendly visa regime
• Immigration services

• Procedural changes in making available land for

construction of hotels

• Allowing setting up of Guest Houses

Tourism Contd….

• 100% FDI is allowed in Tourism in India

• 100% FDI is also allowed in hotels, which includes
restraints, beach resorts and other tourist complexes
providing accommodation and/or catering and food
facilities to tourists.

• Tourism related industries also include travel agencies,

tour operating agencies, units providing facilities for
cultural, adventure and wild life experience to tourists,
surface, air and water transport facilities to tourists,
leisure, entertainment amusement, sport and health
units for tourists and convention/seminar units and
organisations.
Tourism Contd….

Outbound Tourism
• With the rise in living standards, India has
become an impressive source for outbound
tourist traffic.
• Thomas Cook, Cox & Kings India Limited, Star
Luxury Cruises, Queen Mary II Cruise Liners etc
have launched full fledged operation in India
• The introduction of package tours to all five
continents by various travel agencies/companies
has become very popular over the past few
years.
Other growth sectors

• Energy

• Infrastructure

• Non- Banking Financial Services

• Banking

• Real Estate

• Media/Broadcasting
• Telecommunication
Forms of enterprises in India

• Joint Venture Company

Foreign Companies can set up their operations in India
by forging strategic alliances with Indian partners. A joint
venture is also the preferred route for foreign investors
who wish to invest in any sector where 100% foreign
direct investment is not permitted.
• Wholly Owned Subsidiary Company

Foreign companies can set up wholly-owned subsidiary

in the form of a private limited company in sectors where
100% foreign direct investment is permitted under the
FDI policy.
Forms of enterprises contd…

• Branch Office
A Branch Office is basically an extended arm of the
foreign company and can undertake export/import of
goods, consultancy, research, coordination with local
buyers and sellers and provide technical support for
products sold in India, development of software and
operations related to airline/shipping business. However,
a Branch Office is not allowed to undertake
manufacturing activities except research work in which
the parent company is engaged. Prior approval of
Reserve bank of India is required to set up a Branch
office.
Forms of enterprises contd…
Liaison Office

• The role of such offices is limited to collecting

information about the possible market and providing
information about the company and its products to
prospective Indian customers.A liaison office is not
allowed to undertake any business activity other than
liaison activities in India, and therefore cannot earn any
income in India.

Project Office

• Foreign companies planning to execute specific

projects in India can set up a project office for this
purpose. Conditions laid down by RBI need to be
fulfilled. The foreign entity only has to furnish a report
to the RBI giving the particulars of the project/contract.
Tax Regime of India
Direct Tax

• Corporate Tax – Domestic Company – 33.66%

Foreign Company – 41.82%

• Dividend Tax – Company – 16.995% (w.e.f. Apr 1, 2007)

Money Market Mutual Fund – 25%

• Minimum Alternate Tax

• Capital Gains

• Securities Transaction Tax

• Taxation of know how fees in the hands of Foreign Companies –
Royalties/Technical fees payable to non-residents are taxed on net
basis.
Tax Contd…

• Fringe Benefit Tax (FBT)

- ESOPs brought under FBT (w.e.f. Apr 1, 2007)

• Banking Cash Transactions Tax – 0.1% to apply
for withdrawals over INR 50,000
• Double Tax Avoidance Agreements (DTAAs)

• Other Direct Tax – Wealth Tax

• Important concept – Transfer pricing and

determination of arms length price (“ALP”)
Indirect Tax

• Customs Duty

• CENVAT (Excise Duty)

• Sales Tax
• Value Added Tax

• Service Tax

• Octroi Duty/Entry Tax

• Stamp Duty

• R&D Cess

• Works Contract Tax

Indirect Tax Contd…

• Turnover Tax

• Purchase Tax

• Secondary and Higher Education Cess