Doing Business in India

Doing business in India
Doing Business in India
Contents
1.
India at a glance
2.
Banking, Finance and Capital Markets
3.
Foreign Investments - Policy and Framework
4.
Industry Specific Investment Avenues
13
5.
Entry Strategies for Foreign Investors
19
6.
Technology Collaborations
23
7.
Corporate Governance
25
8.
Corporate Restructuring
27
9.
Accounting and Audit
29
10. Direct Taxes
31
11. Taxation of Foreign Enterprises
35
12. Transfer Pricing Regulations
41
13. Expatriate Taxation
43
14. Tax Assessment
45
15. Indirect Taxes
47
16. Intellectual Property Rights
51
17. Labour Laws and Regulations
53
Annexures
Annexure 1 : Industries requiring Compulsory License
55
Annexure 2 : Industries reserved for Public Sector Enterprises
55
Annexure 3 : Sector specific guidelines for Foreign Direct Investments in India
56
Annexure 4 : Checklist for setting up Business presence in India
65
Annexure 5 : Deductions under Income-tax Act, 1961
66
Annexure 6 : Tax Incentives under Income-tax Act, 1961
69
Annexure 7 : Compliance requirements under Income-tax Act, 1961

for foreign enterprises having operations in India
71
Annexure 8 : Countries with which India has entered into Agreements

for Avoidance of Double Taxation
73
Annexure 9 : Withholding Tax Rates under various Double Taxation

Avoidance Agreements signed by India
75
GLOSSARY OF TERMS
AAI
AAR
AO
AS
AY
BOT
BSE
CCI
CENVAT
CIT(A)
CST
DTAA
EHTP
EPZ
ESOP
FDI
FEMA
FII
FIPB
FTC
FTS
FTZ
FY
ICAI
IPR
IRDA
ISP
IT Act
JV Co.
NRI
NSE
OCB
PE
RBI
ROC
SEBI
SEZ
SIA
STP
VAT
VSAT
WOS
Airport Authority of India

Authority for Advance Rulings
Assessing Officer
Accounting Standards
Assessment Year
Build, Own & Transfer
Bombay Stock Exchange
Controller of Capital Issue
Central Value Added Tax
Commissioner of Income-tax (Appeals)
Central Sales Tax
Double Tax Avoidance Agreement
Electronic Hardware Technology Park
Export Promotion Zone
Employees Stock Option Plan
Foreign Direct Investment
Foreign Exchange Management Act, 1999
Foreign Institutional Investors
Foreign Investment Promotion Board
Foreign Telecasting Companies
Fees for Technical Services
Free Trade Zones
Financial Year
The Institute of Chartered Accountants of India
Intellectual Property Rights
Insurance Regulatory & Development Authority
Internet Service Provider
Income Tax Act, 1961
Joint Venture Company
Non Resident Indians
National Stock Exchange
Overseas Corporate Bodies
Permanent Establishment
Reserve Bank of India
Registrar of Companies
Securities & Exchange Board of India
Special Economic Zone
Secretariat for Industrial Approval
Software Technology Park
Value Added tax
Very Small Aperture Terminal
Wholly Owned Subsidiary
2
CHAPTER 1
INDIA AT A GLANCE
India is a country of great cultural heritage and rich religious background, coupled
with huge intellectual property. India has been recognised as a major market and
investment destination for global players. The U.S. Department of Commerce has
rated India as one of the worlds top 10 Big Emerging Markets. Recently, India has
emerged as a leading global player in Information Technology more particularly in
software developments and IT enabled services.
Indian Economy
India is one of the fastest growing economies of the world. It is growing at an
average rate of 6% of Gross Domestic Product (GDP) since its opening in 1992 and
it targets to achieve a growth rate of 8% of GDP.
Economic Reforms
The Indian economy was a mixed economy with a socialist bend till nineties.
Liberalisation and privatisation of the Indian economy was initiated in 1991, which
has continued with accelerated pace since then. The first step in this direction was
abolishment of industrial licensing regime to allow Foreign Direct Investment in
various sectors of the Indian economy. Also, Foreign Institutional Investors were
allowed to invest in India.
Currently there is significant presence of foreign investments and Foreign
Institutional Investors in India. Foreign investments can be made in several sectors
with minimum regulatory approvals. These include infrastructure sectors like power,
telecommunication, ports et al. Service sectors like insurance sector have been
opened up for private players including foreign investors. Further, convertibility of
Rupee on trade account is fully allowed.
Investment Policies
Indias economic policies are designed to attract significant capital inflows on a
sustained basis and to encourage technology collaboration with foreign technology
providers. Policy initiatives taken have resulted in significant inflows of foreign
investment in almost all areas of the Indian economy.
Key features of economic policies and incentives for foreign investments
Automatic approval for foreign equity participation upto 100% is allowed in almost
all sectors.
The Foreign Investment Promotion Board (FIPB), a specifically empowered Board
in the Ministry of Industry, grants approvals for foreign equity participation in
certain other areas on a case to case.
Free repatriation of profits and capital investment is permitted.
Indian capital markets are open to Foreign Institutional Investors.
Indian companies are permitted to raise funds from international capital markets.
Extensive network of Double Tax Avoidance Agreements. Currently, India has
signed comprehensive agreements for the avoidance of double taxation with as
many as 65 countries.
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KEY ECONOMIC INDICATORS

The following are the key indicators of the Indian Economy:
Chapter 2
BANKING, FINANCE AND CAPITAL MARKETS
India has an extensive banking network, in both urban and rural areas. All large
Indian banks are nationalised and all Indian financial institutions are in the public
sector. About forty five foreign banks operate in India with full banking licenses.
Several private banks are also functioning on a large scale with countrywide network
of branches.
The Reserve Bank of India (RBI) is the central banking institution in India. It is the
sole authority for issuing bank notes and the supervisory body for banking
operations in India. It supervises and administers exchange control and banking
regulations and administers the governments monetary policy. It is also responsible
for granting licenses for new bank branches.
Banking System
Commercial Banks
Commercial banks transact all types of commercial banking business in India. They
provide working capital finance as well as long term finance. The following five
categories of scheduled commercial banks are covered in the Indian Banking
Regulation Act, 1949:
The State Bank of India and its associate banks;
Other nationalised banks;
Private sector banks;
Regional Rural banks; and
Foreign banks operating in India.
India has a vast network of bank branches catering to the needs of household and
business sectors.
Under banking regulations, RBI has introduced prudent accounting standards and
appropriate methods of income and revenue recognition for banks in India.
RBI is granting license for private sector banks on a case to case basis. Some of the
major private sector banks established so far include:
HDFC Bank
ICICI Bank
UTI Bank
Global Trust Bank
Foreign Banks
Foreign banks are allowed to set up their business presence in India with RBI
approval. Foreign banks from major countries are represented in India through
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branches, networks, representative offices etc. Foreign banks in India are highly
profitable and offer a variety of services, including foreign currency loan syndication,
foreign exchange risk management and other innovative financial products/services.
Some of the premier foreign banks operating in India include:
Bank of America
CitiBank
ABN Amro Bank
Standard Chartered Bank
Hongkong Bank
Chase Manhattan Bank
BNP Paribas
Specialised Financial Institutions
There are a number of large and specialsied financial institutions in India providing
long term finance for economic and industrial development of the country. The major
institutions include:
Industrial Development Bank of India (IDBI)
Industrial Finance Corporation of India (IFCI)
Industrial Credit and Investment Corporation of India (ICICI)
These financial institutions provide term finance and other structured finance to
different sectors of the economy and play an important role in the economic
development of the country.
Indian Capital Markets
India has a well-developed capital market acting as an important source of finance to
public as well as private sector enterprises. With a view to regulate and oversee the
development of Indian capital markets, Securities and Exchange Board of India
(SEBI) has been set up. SEBI also looks after the interest of small and household
investors investing in capital markets. Some of the important developments in the
Indian capital market include:
Free-market pricing of share issues and the introduction of the concepts of
Book-Building and market-making.
Foreign Institutional Investors (FIIs) can make investments up to 49%. Recently,
this limit of 49% has been increased to the limit of sectoral cap for FDI with the
approval of the Board of Directors and the shareholders.
A new takeover code is in place to protect the interests of small investors and to
strengthen the regulatory framework for takeovers to promote efficiency,
transparency and fairness. Under the new code, any proposed acquisition of
more than 15% of the voting capital of a listed company requires the acquiring
company to make a public offer to the remaining shareholders for the acquisition
of a stake of at least 20% in the target company. The new code also applies when
a change in control of the target company occurs.
The National Securities Depository has been established to facilitate scripless
trading of shares.
6

Tax incentives, including lower tax rates, encourage foreign institutional
investments in India.
The government has drawn up plans to offer up to 49% shares of many public
sector companies to private investors.
Stock Exchanges
Currently, there are 23 recognised stock exchanges in India. The premier among
them is the Bombay Stock Exchange (BSE) established way back in 1875. Around
10,000 companies are currently listed on BSE and the average daily turnover in July
2001 was Rs.10 billion. The National Stock Exchange (NSE) is the first electronic
exchange of India set up in November 1992. Over the Counter Exchange of India is
another feature of Indian capital markets, which was set up as Indias first national
electronic stock exchange. It basically serves the need of small and medium size
companies having limited access to capital markets.
Listing requirements
Public companies whose shares are offered to public for subscription are required to
list their shares on a recognised stock exchange in India. Companies desirous of
listing their shares on a recognised stock exchange are to comply with the listing
requirements and guidelines in this behalf along with payment of prescribed annual
listing fee.
Mutual Funds
Mutual funds play a significant role in Indian capital markets. They act as a vehicle
for collective investment by pool of small investors. There are a number of private
and State owned Mutual Funds operating in Indian capital markets managed by
professionals with expertise in finance and investment activities. From investors
protection perspective, the functioning of Mutual Funds is under the supervision of
SEBI.
Venture Capital Funds
Venture capital refers primarily to equity investments in growing startups and
unlisted companies with the investor participating to some degree in the
management process. The investment scope covers companies at all stages of
maturity and in virtually every industry. Such investment is generally maintained for a
three to five years period.
Investor Protection Measures
Investors protection is sought to be achieved through various regulations under
Indian Companies Act, 1956 and the Securities (Regulations) Act, 1956. Investor
protection guidelines framed by SEBI apply to the listed companies, Mutual Funds
and the Stock Exchanges in India.
The concept of Corporate Governance is fast gaining ground in India for
transparency and better credibility in the management and functioning of large
corporates, so as to ensure protection of investors interest in the company as
stakeholders.
7
SEBI Guidelines
SEBI has been entrusted with the responsibility of capital market regulation and
investors protection. It has laid down guidelines called SEBI (Disclosure and Investor
Protection) Guidelines, 2000 as amended from time to time.
These guidelines apply to all public issues by listed and unlisted companies. The
key features of the guidelines are as under:
Guidelines for public issue of shares by unlisted companies
Applicability of track record
In order to access capital market by offering shares to public, an unlisted
company should have track record of having distributable profits in terms of
provisions of Companies Act, 1956 for at least three years out of five years
preceding the year of public issue. It should also have a pre-issue net worth of
atleast Rs. 10 million in three out of preceding five years and in immediately
preceding two years.
Promoters contribution
While making public issue of shares, promoters contribution shall not be less
than 20% of the post-issue capital of the company, which is to be brought in
before public issue. A certificate from a Chartered Accountant certifying receipt
of promoters contribution is to be filed with SEBI.
Basis for issue price
An unlisted company eligible to make a public issue and desirous of getting its
shares listed on a recognised stock exchange pursuant to a public issue can
freely price its equity shares.
Lock-in period of shares for promoters
Subject to certain relaxation, promoters minimum contribution is subject to
lock-in for a period of three years. The lock-in period starts from the date of
allotment in the proposed public issue and the last date will be reckoned as
three years from the date of commencement of commercial production or the
date of allotment of shares in the public issue, which ever is later. Any excess
contribution would be locked-in only for one year.
Further, the entire pre-issue share capital, other than that locked-in as
promoters contribution, will be locked-in for a period of one year from the date
of commencement of commercial production or the date of allotment in the
public issue, which ever is later.
Guidelines for public issue of shares by listed companies
A listed company is eligible to make public issue of equity shares provided the
issue size does not exceed five times its pre-issue net worth as per latest
available audited financial statements.
A listed company which does not fulfill the above condition can make public
issue of shares only through the Book building process in which 60% of the
issue size is to be allotted to the qualified institutional buyers.
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Chapter 3
FOREIGN INVESTMENTS POLICY AND FRAMEWORK
The last one-decade has witnessed gradual opening up of the Indian economy for
foreign investments in India. India has substantially liberalised its policy and
exchange control regulations on Foreign Direct Investments (FDI). The Foreign
Exchange Regulation Act, 1973 has been replaced by FEMA which came into effect
from June 1, 2000 to facilitate foreign investments in India.
The last few years have seen Indias external economic indicators improve
considerably. Foreign exchange reserves have increased to approximately US$ 44
billion from US$ 9 billion in 1992.
Industrial Licensing Regime
Under the existing liberalised foreign investment policy, no licence is required for
setting up an industry, except in the following cases:
Industries covered under the compulsory licensing regime (See Annexure 1);
Industries/sectors reserved for the Public Sector (See Annexure 2);
Items reserved for the small-scale sector; and
Industrial proposals in areas having locational restrictions.
Foreign Investments in India
The objective of Indias foreign investment policy is to invite and encourage FDI in
India. The regulatory approval process has been substantially liberalised to
facilitate FDI.
FDI can be divided into two broad categories:
FDI under automatic approval route; and
FDI with prior approval of the Government.
Under automatic approval route, FDI can be made without any prior Government
approval. Only an intimation needs to be given to the RBI within 30 days of making
the investment.
FDI in the following sectors/activities has been recently brought under automatic
approval route:
Drugs and Pharmaceuticals
FDI up to 100% is permitted for manufacture of drugs and pharmaceuticals,
provided the activity does not attract compulsory licensing or involve use of
recombinant DNA technology and specific cell/tissue targeted formulations.
9
Hotel and Tourism

FDI up to 100% is permitted.
Mass Rapid Transport Systems
FDI upto 100% is permitted for Mass Rapid Transport Systems in all
metropolitan cities, including associated commercial development of real
estate.
Banking
FDI upto 49% is permitted from all sources subject to guidelines issued by
RBI.
Non-banking Financial Institutions
FDI upto 100% is permitted subject to compliance with guidelines of the RBI
and also minimum requirement of capital introduction.
The current FDI policy permits foreign investments in trading companies engaged in
export activities. 100% foreign equity is permitted in the case of the following
activities:
Exports
Bulk imports with export/expanded warehouse sales
Cash and carry wholesale trading
Other import of goods or services where at least 75% is for procurement and sale
of goods and services among the companies of the same group
The automatic approval route for FDI exceeding 51% is not available for trading
activities. Such proposals would require approval from FIPB/SIA.
Investment in activities/industries, where automatic approval route is not
available, can be made with the approval of the Government. Such approval is
granted by the Foreign Investment Promotion Board (FIPB) or The Secretariat
for Industrial Assistance (SIA) functioning under the Ministry for Commerce &
Industry of the Government of India.
Following investments need prior approval of FIPB/SIA:
Proposals that require an Industrial Licence which includes:
Items requiring an Industrial Licence;
Foreign investment being more that 24% in the equity capital of units
engaged in items reserved for small scale industries; and
Items, which require an Industrial Licence under locational policy notified
under the New Industrial Policy of 1991.
Proposals in which the foreign collaborator has a previous venture or tie-up in
India.
Proposals relating to acquisition of existing shares in an Indian Company.
Proposals falling outside the notified sectoral caps. For activities wise sectoral
caps, refer Annexure 3.
10

To accelerate the approval process, FIPB generally gives its decision within 30
days of receiving the application. A Foreign Investment Implementation Authority
(FIIA) has also been set up to facilitate speedy implementation of foreign
investment projects in India.
Currently FDI in Agriculture (including plantation) and Print media is not
permitted.
Investment by Foreign Institutional Investors
Foreign Institutional Investors (FIIs) can invest up to the level of FDI permitted
under various sectors with the approval of the Board of directors and the
shareholders of the investee company. Earlier, FIIs could make investment upto
49%. The investment limit for FIIs in Indian companies has now been brought on
par with the level of FDI applicable to various sectors. FII investment in sectors like
hotels and tourism, petroleum, airports, roads, highways, ports, et al. can be upto
100%.
Investments by Non-Resident Indians (NRIs) and Overseas Corporate Bodies
(OCBs)
NRIs and OCBs can invest in India under automatic approval route in all sectors
which do not require government approval. They are allowed to invest in housing
and real estate development sector, in which FDI is otherwise not permitted. They
are also allowed to hold upto 100% equity in civil aviation sector in which foreign
equity is otherwise permitted only upto 40%.
External Commercial Borrowings
Any legal entity duly registered under the Indian Companies Act, 1956 can raise
External Commercial Borrowings (ECB) for its business purposes with an average
maturity period of not less than 3 years for an amount upto US$ 50 million under the
automatic approval route of the RBI on fulfillment of the following conditions:
ECB should be raised from internationally acceptable lenders like foreign
collaborators, foreign equity holders, international capital markets, reputed
international banks and financial institutions;
Borrowings should be organised through merchant bankers registered with the
regulatory authorities of the host country; and
The lender is registered in the host country for extending international finance.
Repatriation of Capital Investment and Return on Investment
Repatriation of Capital
Capital invested in India can be repatriated alongwith profits on fulfillment of certain
conditions.
Dividend remittance
Dividend on the shares including dividend on non-repatriable investments held by
foreign investors is fully repatriable subject to certain conditions.
11
Permitted Current Account Transactions

Under Foreign Exchange Management Act, 1999 (FEMA), remittance of foreign
exchange for current account transactions has been liberalised. Remittance is
now permitted for almost all current account transactions except few transactions
where remittance is prohibited. For instance, remittance for the following
transactions is not permitted:
Payment of commission on exports made towards equity investment in Joint
Venture/Wholly Owned Subsidiaries abroad of Indian companies
Payment related to Call Back Services of telephones
However, payment for certain specified current account transactions is permitted
with the approval of the Government of India. For instance:
Remittance under technical collaboration agreements where payment of
royalty exceeds 5% on local sales and 8% on exports and lump-sum payment
exceeds US$ 2 million
Multi-modal transport operators making remittance to their agents abroad
Further, payment for certain current account transactions can be made with the
approval of the RBI. For instance:
Remittance of royalty and payment of lump sum fee under technical
collaboration agreement not registered with RBI
Remittance exceeding US $ 100,000 for architectural/consultancy services
procured from abroad.
12
Chapter 4
INDUSTRY SPECIFIC INVESTMENT AVENUES
Infrastructure Sector
Infrastructure sector, which was hitherto reserved for public sector, has been opened
up for private players including foreign investment. In order to develop the
infrastructure network, the Government of India is encouraging foreign participation
in infrastructure development projects involving investment in terms of finance and
technology.
MAJOR SECTORS
Telecommunication
Provision of international standard telecommunication infrastructure is the key to
rapid economic and social development of the country. There have been far
reaching developments in the recent past in the telecom, Information Technology,
consumer electronics and media industries worldwide. Convergence of markets and
technologies is a reality that is forcing realignment of the industry.
Recently, a Communication Convergence Bill has been tabled before the
Parliament to promote, facilitate and develop in an orderly manner, the carriage and
content of communications (including broadcasting, telecommunication and
multimedia) and to establish a single regulatory and licensing authority and an
appellate tribunal.
FDI upto 49% is permitted in basic, cellular, paging, Very Small Aperture Terminal
(VSAT) and other wireless services. In line with the ongoing liberalisation, FDI upto
100% has been permitted for following activities in telecom sector:
Internet Service Providers (ISPs) not providing gateways (both for satellite and
submarine cables);
Infrastructure providers providing dark fibre (IP Category 1);
Electronic mails; and
Voice mail.
The above FDI is subject to the following conditions:
FDI upto 100% is permitted if companies divest 26% of their equity in favour of
Indian public in 5 years if they are listed in other parts of the world;
Such services would be subject to licensing and security requirements; and
FDI exceeding 49% will require approval of FIPB.
Recently, FDI upto 74% has been permitted in ISP, Internet Gateway, Radio Paging
and End to End Bandwidth services.
13
Tax Holiday
Profits of specified undertakings engaged in providing telecommunication services
are fully exempt from tax for first five years and to the extent of 30% for the next five
years.
Power
Power is the driving force for any nation and a crucial input for industrial and
economic development. Currently, Power utility sector in India is dominated by the
Government Enterprises.
The Government of India has regulatory powers vis-a-vis bulk generators and
distribution licensees with regard to important elements in the permitted tariff (rate of
return, rates of depreciation). Central Electricity Authority (CEA) formulates safety
standards and overall technical regulations.
Policy highlights
India has to set a target of generating additional 100,000 MW of electricity by the
year 2012
Private sector including foreign equity upto 100% is permitted in generation,
transmission and distribution of power
Earlier, automatic approval for foreign equity upto 100% was permitted for
projects not exceeding Rs.15 billion in electric generation, transmission and
distribution. This limit has been recently removed. As a result, such project
exceeding Rs. 15 billion will now qualify for investment under automatic approval
route
Tax Holiday
Effective Financial year 2001-02 (Assessment Year 2002-03), complete tax holiday for
10 consecutive years out of initial 15 years is available. The date for commencing
generation of power has also been extended from 31-3-2003 to 31-3-2006.
Roads
India has a vast network of road ranging about 3 million kilometres. The National
Highways network of about 38,500 kilometres carries about 40% of the total road
traffic. Development of road network has been on priority agenda of the Government
of India. The private participation including foreign investment is now being
encouraged.
Policy highlights
FDI upto 100% is allowed on automatic approval basis
National Highways Authority of India (NHAI) has been set up to execute
externally aided projects and implement private sector participation in the
National Highways
Private sector participation including foreign investment is permitted upto 100%
for construction and maintenance of National Highways on the basis of Build,
Operate and Transfer (BOT) concept
14

Local laws concerning acquisition of land for development and maintenance of
highways are streamlined to facilitate road development
Tax Incentive
Effective Financial Year 2001-02 (Assessment Year 2002-03), complete tax holiday is
available for 10 consecutive years subject to certain conditions. The date of
commencing provision of specified services has been extended from 31-3-2000 to
31-3-2003.
Ports
Indian Sub-continent is covered from three sides by sea with a coastline of over
7,000 kilometres with 12 major ports and 165 minor and intermediate ports dotting it.
Linkage of shipping to the hinterland through well-developed ports to connect
various cities, towns and villages as also industrial centres is essential for growth of
industry and trade.
With the enactment of the Major Ports Trust Act, 2000, the private sector investments
along with foreign investment is expected to be around Rs.30 to Rs.40 billion over a
period of next 2 years.
Many Foreign Ports have offered their services to Indian Ports. They are prepared to
extend facilities, build new berths, modernize the ports or to take a stake in the
management. 26 major port projects have been identified for private participation.
Automatic approval of foreign equity upto 100% is allowed in the construction of
ports and harbours.
Tax incentive
Effective Financial Year 2001-02 (Assessment Year 2002-03), complete tax holiday is
available for 10 consecutive years in a block of 15 years.
Civil Aviation
Indian aviation industry
There are a total of 449 airports/airstrips in India. Airports are classified as
international and domestic airports. The Ministry of Civil Aviation is the central
agency formulating policies for development and regulation of Civil Aviation sector
and for devising and implementing schemes for orderly growth and expansion of
Civil Air Transport in India.
Policy highlights
FDI upto 100% is permitted in building airports. FDI above 74% will require FIPB/
SIA approval
Foreign equity upto 40% and investment by NRIs/OCBs upto 100% is permitted in
domestic air transport services on a case to case basis
To achieve economies of scale, the minimum fleet size for a scheduled operator
has been raised from the existing three aircrafts to five. Further, the minimum
amount of shareholders funds has been increased from the existing Rs.50 million
15
(US$ 1.4 million) to Rs.100 million (US$ 2.9 million) for aircraft of all-up weight
below 40,000 kg. and from Rs.100 million (US$ 2.9 million) to Rs.300 million
(US$ 8.7 million) for all-up weight exceeding 40,000 kg
OTHER SECTORS
Information Technology
The information technology sector has made drastic progress in last few years. India
has emerged as a global leader in the field of software development. In the first
quarter of 2001-02, Indian software exports stood at whopping Rs.8.6 billion. Foreign
investment upto 100% is permitted in software sector under automatic approval
route.
Tax Incentives
Income from IT sector enjoy complete tax exemption under Section 10A/10B of the
Indian Income tax Act, 1961 (IT Act), or partial exemption under Section 80HHE of
the IT Act subject to certain conditions.
Under Section 10A, profits
from export of computer
conditions. Similarly, under
from export of computer
conditions.
of industrial undertakings set up in Free Trade Zones

software is exempt for 10 years subject to certain
Section 10B, profits of 100% export oriented undertaking
software are exempt for 10 years subject to certain
Under Section 80HHE, profits from export of computer software derived by Indian
companies or other persons resident in India are eligible for deduction. This
deduction is being gradually phased out over a period of 5 years beginning from
financial year 1999-2000 (Assessment Year 2000-01).
IT Enabled Services
IT Enabled Services are business processes and services performed or provided
from a location different to that of their users or beneficiaries and are delivered over
telecom network and the Internet. It is an emerging area in the IT Sector with huge
business potential.
By outsourcing IT Enabled Services requirements to India, large overseas
companies, including increasing number of Fortune 500 companies, are achieving
significant benefits in cost, quality and time. Major IT Enabled Services include:
Call Centres
Back Office Operations
Medical Transcription
Data Processing
Customer Interaction Services
Insurance Claims Processing
Support Centres
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Tax Incentives
Profits from provision of IT Enabled Services are fully exempt from tax under Section
10A/10B of the IT Act subject to certain conditions.
Hotels and Tourism industry
India is a vast country having immense opportunity for hospitality industries. India
attracts tourists from across the globe. Foreign investment upto 100% is permitted
under the automatic approval route.
For foreign technology agreements, automatic approval is granted if:
Upto 3% of the capital cost of the project is proposed to be paid for technical and
consultancy services including fee for architects, design, supervision, et al;
Upto 3% of the net turnover is payable for franchising and marketing/publicity
support; and
Upto 10% of the gross operating profit is payable for management fee, including
incentive fee.
Insurance
In a significant move, India has recently opened up the insurance sector for private
players and foreign entities. This sector was hitherto reserved for Government
enterprises.
Foreign equity investment upto 26% is allowed in insurance sector under the
automatic approval route. An Indian insurance company having foreign participation
can carry on the life insurance business, general insurance business or reinsurance
business in India. Such company shall have a minimum paid-up equity of Rs.1
billion.
Drugs and Pharmaceuticals
Pharmaceutical is a continuous growth industry, immune to economic recession and
commodity cycles. Rising population, new disease incidence or resurgence of
certain diseases spurs the growth. The global pharmaceuticals industry, presently
valued at US$ 305 billion is projected to grow at a Compound Annual Growth Rate
(CAGR) of 8% p.a. in the next 5 years.
Foreign investment is permitted upto 100% under the automatic approval route for
manufacture of drugs and pharmaceuticals provided the activity does not attract
compulsory licensing to involve use of recombinant DNA technology and specific
cell/tissue targeted formulations.
100% Export Oriented Units/Export Processing Zones/Special Economic Zones
100% Export Oriented Units (EOUs) and units in the Export Processing Zones
(EPZs)/Special Economic Zones (SEZs), enjoy a package of incentives, which
include duty free imports of capital goods, raw materials and tax holidays on export
profit, subject to certain conditions.
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Foreign investment in EOUs/EPZs can be made under automatic approval route,

subject to the sectoral caps. Investment proposals not covered under the automatic
approval route need Government approval.
Electronic Hardware Technology Park and Software Technology Park Schemes
In order to provide impetus to the electronics industry, to enhance its export
potential and to develop an efficient electronic component industry, Electronic
Hardware Technology Park (EHTP) and Software Technology Park (STP) schemes
offer a package of incentives and facilities like duty free imports on the lines of the
EOU Scheme and tax holiday.
Automatic approval
The Directors of STPs in respect of STP proposals; and the Designated Officers in
respect of EHTP proposals accord automatic approval subject to certain conditions
like:
The items do not attract compulsory licensing
Location is in conformity with the prescribed parameters
Export obligation laid down in the respective EHTP or STP scheme is fulfilled
Foreign investments in EHTP/STP units can be made under automatic approval
route subject to certain conditions. Proposals, which do not meet the parameters for
automatic approval route, would need Government approval.
18
Chapter 5
ENTRY STRATEGIES FOR FOREIGN INVESTORS
Foreign entities can set up their business operations in India in any of the following
ways:
As a Foreign Company
A Foreign Company is one which is incorporated outside India and conducts
business in India. Such companies are required to comply with the provisions of the
Indian Companies Act, 1956. Foreign Companies can set up Liaison, Project and
Branch Offices in India by complying with the registration requirements.
Liaison Office
One of the practices for foreign entities to enter the Indian markets is the setting up
of a Liaison office in India. The role of Liaison office is limited to collecting
information about market opportunities and providing information about the
company and its products to the prospective Indian customers. Liaison office cannot
undertake any business activity in India and therefore, cannot earn any income in
India.
The setting up of Liaison offices is regulated by FEMA. Such offices can be opened
with the approval of the RBI. Permission for such offices is initially granted for a
period of 3 years, which may be extended from time to time. Following conditions
apply for operations of such offices:
Expenses of Liaison offices are to be met through inward remittances of foreign
exchange from the Head Offices abroad
Such offices should not charge any commission or receive other income from
Indian customers for providing liaison services
Project Office
Foreign Companies planning to execute specific projects in India can set up
temporary Project/Site offices in India with the approval of the RBI. Such approval is
generally granted to execute projects approved by the appropriate authorities or
where the projects are financed by an Indian bank/Financial Institution or a
multilateral/bilateral international financial institution. On completion of the project,
the Project office can be closed and the funds lying in India can be remitted after
payment of taxes on income earned from the Indian project.
Branch Office
Foreign Companies can set up their Branch offices in India for the following
purposes:
Representing parent company in India (like acting as buying/selling agents in
India)
19
To conduct research work in the area in which the Parent Company is engaged
To undertake export and import trading activities
To promote technical and financial collaborations between the Indian Companies
and the Overseas Companies
Rendering professional or consultancy services
Rendering services in IT and development of software in India
Rendering technical support to the products supplied by the parent/group
Companies
Permission for setting up Branch offices is granted by the RBI on a case-to-case
basis. Factors like operating history of the applicant worldwide and its proposed
activities in India are taken into account in granting the approval.
As an Indian Company
A foreign Company may also set up its presence through an Indian Company in any
of the following manners:
As a joint venture with Indian partner (called JV Co)
By setting up a Wholly Owned Subsidiary (WOS)
A Foreign Company can operate in India through a joint venture, where in, the
shares can be held partly by the Foreign Company and partly by the Indian
Company.
Incorporation of an Indian Company is governed by the Indian Companies Act,
1956. A Company structure would have the following additional basic operating
abilities compared to a Project Office or a Branch Office set up:
Borrowing and granting loans on its own account
Making investments on its own account
Entering into contracts in its own name
Having limited liability
Acquisition and disposal of immovable property.
Indian Companies can be basically divided into two categories:
Private Limited Company; and
Public Limited Company.
A
Private Company is a Company which:

Restricts the right of its members to transfer the shares;
Limits the number of its members to fifty; and
Prohibits invitation to the public to subscribe to its shares and debentures.
A Public Company is one, which does not have the above restrictions. Such a
company can be listed on a recognised stock exchange in India and abroad.
20

Company Formation
Formation of a Company in India is governed by the Indian Companies Act, 1956.
The procedure for Company formation is as under:
A suitable name is to be decided for the proposed company
Drawing up Memorandum of Association which will, among others, state:
Name of the Company
Main objects of the Company
Share Capital of the Company
Statement of liability of the members
State in which registered office of the Company will be situated
Payment of prescribed registration fee and stamp duty
On fulfillment of the above requirements, a certificate of incorporation is issued
evidencing incorporation of the company.
Shares with differential rights
As a significant development in the Indian corporate laws, Indian Companies have
been permitted to issue shares with differential rights as to dividend entitlements,
voting rights et al. to meet their business requirements. Thus, a foreign investor can
have control over an Indian company without holding 51% equity by holding shares
having higher voting rights. Issue of shares with differential rights also helps in
raising additional capital without dilution of control over the company.
Postal Ballot
Listed Companies are required to pass shareholders resolution to transact the
prescribed businesses through postal ballot. This includes voting by postal or
electronic mode instead of voting personally. The objective is to provide an
opportunity to all the members of the Company to participate in the voting process
to uphold democratic principles. The voting right on postal ballot would be in
proportion to the shareholders share in the paid up equity capital of the Company.
Management of Company
Whereas the ultimate management of a Company lies in the hands of its general
body of the shareholders, it is the Board of Directors (Board) who manage the day to
day affairs of the Company. The authority of the Board is decided as per the Articles
and the Memorandum of Association of the Company and the regulations of the
Indian Companies Act, 1956.
Joint Venture Company
Foreign Companies can set up operations in India by forging strategic alliances with
Indian business partners. A joint venture Company in India is similar to any other
Indian Company. The regulations for incorporation of an Indian Company are same
as discussed earlier. A Foreign Company can participate in a JV Co. with the
approval of RBI/FIPB/SIA as the case may be.
21
A joint venture may offer the following advantages for the foreign investors:
Established contacts of the Indian partner, which help smoothen the process of
setting up Indian operations
Access to established marketing and distribution set-up of the Indian partners
Availability of the financial resources of the Indian partner
Wholly Owned Subsidiary
A foreign entity may also operate in India by setting up a WOS. The steps involved in
formation of a WOS are similar to formation of a normal Indian Company as
discussed earlier.
Partnership Firm
Partnership is yet another structure, which can be used for making investments in
India. Partnership is created by an agreement between parties (individuals/
companies, et al.) to share the profits of a joint business. Partnership law in India is
governed by the Indian Partnership Act.
Foreign entities and foreign individual investors can form partnerships in India.
Registration of partnership is advisable as it confers certain legal rights upon the
partnerships and its partners.
Tax Benefits to Partnership
Profits of a partnership evidenced by a Deed of Partnership and specifying the
share of the partners, is entitled to certain tax benefits. For instance, income of a
Partnership Firm is taxed at the rate of 35% as against the tax rate of 48% applicable
to Foreign Companies operating in India. Further, once the profits of the business
are taxed in the hands of the partnership, then the partners are not taxed on the
share of profits received from the partnership firm.
A Checklist for setting up business presence in India is given in Annexure 4.
22
Chapter 6
TECHNOLOGY COLLABORATIONS
With a view to injecting the desired level of technological dynamism in Indian
industries, foreign technology induction is encouraged both through FDI and
through foreign technology collaboration agreements. Foreign technology
collaborations are permitted either through the automatic approval route of RBI or
through the FIPB approval.
The technology collaboration agreements pertain to provision of technology by a
foreign entity to an Indian concern for agreed consideration, which can be of the
following nature:
Initial lump-sum payment
Royalty
Under technology collaboration agreement, generally the foreign technology
provider does not participate in the equity of the Indian entity.
Technical Collaboration Agreements-Automatic approval
RBI accords automatic approval to all industries for foreign technology
collaboration agreements subject to the following conditions:
The lump sum payment not to exceed US$ 2 million;
Royalty being limited to 5% for domestic sales and 8% for exports, subject to a
total payment of 8% on sales over a 10 year period; and
The period for payment of royalty should not exceed 7 years from the date of
commencement of commercial production or 10 years from the date of
agreement, whichever is earlier.
Payment of royalty upto 2% for exports and 1% for domestic sales is allowed
under the automatic approval route on use of trademarks and brand name of the
foreign collaborator without any technology transfer.
Payment of royalty upto 8% on exports and 5% on domestic sales by wholly
owned subsidiaries to offshore parent companies is allowed under the
automatic approval route without any restriction on the duration of royalty
payments.
Government approval
Government approval is necessary in the following cases:
Proposals attracting compulsory licensing
Items of manufacture reserved for the small scale sector
23
Proposals involving any previous joint venture, or technology transfer/trademark

agreement in the same or allied field in India
Extension of foreign technology collaboration agreements (including cases which
may have received automatic approval in the first instance)
Proposals not meeting parameters for automatic approval
24
Chapter 7
CORPORATE GOVERNANCE
Maximising shareholders wealth is the cornerstone of Corporate Governance. It is a
voluntary ethical code of business for corporates. Corporate Governance is a set of
systems to ensure that company is managed to suit the best interests of all the
stakeholders which may be internal stakeholders (promoters, members, workmen)
and external stakeholders (customers, lenders, dealers, bankers, community,
government).
SEBI has framed regulations to promote and raise the standard of Corporate
Governance in respect of listed companies. Regulations on Corporate Governance
have also been inserted by the Stock Exchanges in their listing agreements with the
companies. The key provisions include:
Board of Directors
Board of Directors of a company should have an optimum combination of
executive and non-executive directors with not less than fifty percent of the Board
comprising of non-executive directors. In case the company has a non-executive
chairman, at least one third of the Board should comprise of independent
directors.
Non-executive chairman should be entitled to maintain a chairmans office at the
companys expense and allowed reimbursement of expenses incurred in
performance of his duties to enable him to discharge the responsibilities
effectively.
Audit Committee
A qualified and independent audit committee should be set up by the Board of
the company.
Remuneration Committee
Board should set up a remuneration committee to determine on its behalf and on
behalf of the shareholders with agreed terms of reference, the companys policy
on specific remuneration packages for executive directors including pension
rights and any compensation payment.
Board Meeting
Minimum of four Board meetings should be held in a year with a maximum time
gap of four months between any two meetings.
A director should not be a member in more than ten committees or act as
chairman of more than five committees across all companies in which he is a
director.
25
Companies should be required to give consolidated accounts in respect of all its

subsidiaries. Segmental reporting is to be adopted where a company has
multiple lines of businesses.
Management discussion and Analysis Report
A management discussion and analysis report should form part of the annual
report to the shareholders covering industry structure, opportunities and threats,
segment-wise or product-wise performance, outlook, risks and concerns, internal
control system, financial and operational performance and material developments
in human resources/industrial relations.
The management must make disclosures to the Board relating to all material
financial and commercial transactions, where they have personal interest, which
may have a potential conflict with the interest of the company at large.
Compliance Certificate
The company should obtain a certificate from its auditors certifying due
compliance of the Corporate Governance provisions and copies of such
certificate should be provided to the concerned Stock Exchange and the
shareholders.
26
Chapter 8
CORPORATE RESTRUCTURING
The focus on corporate restructuring in recent times is indicative of the changing
ambience of the Indian economy. Restructuring allows companies to explore
business synergies, enhance business focus to unlock its hidden shareholder
value. Increase in market share, better utilisation of combined capacity,
economies of scale, et al., are the other considerations that make restructuring
activity all the more vital for the survival and growth of companies in toadys
competitive era.
Broadly, following types of restructuring are in vogue in India:
Merger and Demerger
Merger implies amalgamation of two or more companies into a single entity.
Demerger refers to transfer or split of an undertaking or a division of a company into
another company. Following are the key regulations in this regard:
Companies Act, 1956
Schemes of merger and demerger of companies need approval of the
jurisdictional High Court.
Income-Tax Act, 1961
The amalgamation of companies and demerger/spin off with the approval of the
Courts are tax neutral subject to certain conditions. Hence such restructurings do
not involve any income tax implications.
Stamp Duty
Transfer of movable and immovable properties in India attract stamp duty.
Corporate restructuring involves transfer of assets/liabilities of the Transferor
Company to the Transferee Company, which attracts stamp duty. The liability to
stamp duty would depend upon the State in which the instrument evidencing
transfer of property is executed. The rate and incidence of stamp duty varies from
State to State.
Exchange Control Regulations
The acquisition and transfer of shares and other securities of Indian Companies
by a foreign entity are governed by the regulations under FEMA. Pursuant to the
liberalisation, foreign investments in most of the sectors are now covered under
the automatic approval route. However, under certain circumstances (such as
foreign investments exceeding sectoral limits), approval of the FIPB may be
necessary.
27
Takeover Code
SEBI has formulated Substantial Acquisition of Shares and Takeovers
Regulations for listed companies concerning substantial acquisition of shares
and takeovers which apply to a case when there is acquisition of shareholding or
voting rights exceeding 15% of the capital of the Target Company. The acquirer in
such a case would need to make an open offer for acquiring another 20% of the
share capital of the Target Company. However, such regulations do not apply to
acquisitions pursuant to arrangement or reconstruction including merger or
demerger under any Indian or foreign laws.
Buyback of Shares
An Indian Company can buyback its own shares if authorised by its Articles of
Association and a special resolution is passed in the general meeting of the
Company. Buyback can be made upto 25% of the total paid-up capital of the
Company. Companies can buyback their shares through any of the following
methods:
From existing shareholders on a proportionate basis through tender offer; or
From the open market; or
From odd lots; or
Purchasing shares issued to employees of the company pursuant to an
Employee Stock Option Scheme or Sweat Equity.
The quantum of fund to be utilised for buyback would be restricted to 25% of the
paidup capital and free reserves of the company. Buyback can be undertaken by a
company out of its free reserves that are available for distribution as dividends or out
of securities premium account or proceeds of an earlier issue of shares/securities.
However, buyback is not permitted out of proceeds of an earlier issue of the same
kind of shares or same kind of other security. Pursuant to the buyback, the debt
equity ratio of the company should not exceed 2:1.
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Chapter 9
ACCOUNTING AND AUDIT
Books of Account
Indian Companies are to maintain books of account in respect of their income and
expenditure which are to be kept at the registered office of the company unless the
Board of Directors decides otherwise. The books of account are to give a true and
fair view of the state of affairs of the company.
Method of Accounting
Indian Companies are required to maintain their books of account on accrual basis
and the double entry system of accounting.
Books and Records
Following records needs to be maintained by Indian Companies:
Registers of shareholders, debenture holders, directors, managers, et al.
Register of charges detailing the assets pledged as security for specific debts
Register of Directors shareholdings
Minutes book for shareholders meetings and directors meetings
Register of investments
Register of contracts with specified related parties
Financial Statements
Indian companies are required to prepare annual financial statements which would
consist of the following:
A Balance Sheet to give a true and fair view of the state of affairs of the
company as at the end of the financial year; and
A Profit and Loss Account to give a true and fair view of the profits or losses of
the company for the financial year.
The Profit and Loss Account and the Balance Sheet are to be prepared in
accordance with the Accounting Standards issued by the Institute of Chartered
Accountants of India and the requirements of the Indian Companies Act, 1956.
Audit Requirements
Statutory Audit
Indian Companies are required to get their annual accounts audited by the statutory
auditors appointed by the shareholders of the company.
29
Tax Audit
Tax Audit is to be conducted under the provisions of the IT Act where the total sales,
turnover or gross receipts of the business exceed Rs.4 million in the concerned
financial year of the company. A tax audit report is to be submitted to the tax
authorities alongwith the Return of Income of the company.
Cost Audit
Companies engaged in production, processing, manufacturing and mining activities
are required to maintain prescribed cost accounting records. In certain cases, cost
accounts and records are to be audited by the Cost Auditors.
Internal Audit
Companies having a paid up equity capital exceeding Rs.2.50 million at the
commencement of the concerned financial year or having an average annual
turnover exceeding Rs.20 million for last three consecutive financial years, needs to
have an internal audit system in place.
30
Chapter 10
DIRECT TAXES
INCOME TAX
The tax year (known as Assessment Year) runs from April 1 to March 31, following
the year in which income is earned (known as Previous Year). Income of the
Previous Year is assessed to tax in the Assessment Year. The income-tax liability in
India is basically determined based on the following criteria:
Residential status of the taxpayers; and
The scope of taxable income.
Tax Residential Status
Taxpayers are primarily divided into the following two categories:
Resident in India; and
Non-resident in India.
In the case of Individual taxpayers, there is yet another category called Not
ordinarily resident in India.
Residential Status of Individuals
An individual is resident in India if:
He is in India in the relevant year for 182 days or more; or
He is in India for a period of 60 days or more in the relevant year and has been
in India for 365 days or more in 4 preceding years.
An individual is considered as Not ordinarily resident in India if he is a resident
in the relevant year and:
His total stay in India in the last 7 years preceding the year of evaluation was
less than 730 days; or
He was not resident in India in 9 out of 10 years, preceding the year of
evaluation.
Residential Status of Companies
A company is resident in India if:
It is an Indian Company; or
The control and management of its affairs is situated wholly in India.
Foreign enterprises generally operate in India either as a Foreign Company or as an
Indian Company. A Foreign Company is a company, which is not a Domestic
Company. A domestic company means an Indian Company or other company,
which declares and pays dividends in India. Generally, a company registered
outside India is regarded as a Foreign Company.
31
A company is non-resident in India if it is not resident in India applying the above

criteria.
Residential Status of other Entities
Other entities like Partnerships or Association of Persons are resident in India if
control and management of their affairs is situated in India.
Scope of Taxable Income
Income tax is levied on taxable income, which means receipts minus deductible
expenses incurred in earning such income. The taxable income covers income from
any source which:
is received or is deemed to be received in India; or
accrues or arises or is deemed to accrue or arise in India; or
accrues or arises outside India.
Categories of Taxable Income
Resident tax payers: Resident taxpayers (individuals, corporates and other legal
entities) are subject to tax in India on their world income whether received in India
or outside India.
Not ordinarily resident tax payers: This category of tax payers are subject to tax in
India on income received or accrued in India or income derived from a business
controlled or a profession set up in India.
Non-resident tax payers: Non-resident taxpayers (individuals, corporates and
other legal entities) are subject to tax in India only in respect of income received
or accrued in India or deemed to be received or accrued in India.
Heads of Income
Under Indian IT Act, income of a taxpayer is divided into the following categories:
Salaries
Income from house property
Profits and gains of business or profession
Capital gains
Other incomes
The IT Act contains separate statutory provisions dealing with computation and
taxation of each category of above income. In respect of business income, the IT Act
contains provisions relating to allowable deductions. As a general proposition,
legitimate expenditure incurred exclusively for business purposes is deductible in
computing the taxable business income.
The aggregate of income computed under each of the above five heads of income is
known as Gross Total Income.
32

Determination of Taxable Income
Taxable income is determined by reducing from the Gross Total Income,
permissible deductions under the IT Act. The income tax is levied on the net taxable
income so computed. Various deductions are available under the IT Act from the
Gross Total Income. An illustrative list of deductions available from Gross Total
Income is given in Annexure 5.
The provisions relating to allowable deductions, incentives and set-off of loss are
discussed below.
Incentive Provisions
Several incentives in the form of tax holidays or tax exemptions are available for
certain specified developmental activities. Certain incomes are fully exempt from tax.
An illustrative list of important tax deductions and incentives is given in Annexure 6.
Set-off of Losses
As a general rule, if the net result of computing the taxable income under any head
of income is a loss, such loss can be set-off against other income except capital
losses, which can be set off only against capital gains. Unabsorbed business losses
can be carried forward for a period of eight assessment years for adjustment against
future business profits.
Minimum Alternative Tax (MAT)
Where income-tax payable by corporate taxpayers is less than 7.5% of their Book
profits, then 7.5% (plus surcharge of 2%) of the Book profits is regarded as their tax
liability. Thus, the effective rate of minimum tax would be 7.65% of the book profits.
For Foreign Companies, the rate of MAT is 7.5% of the book profits as no surcharge
is payable by Foreign Companies.
Book profits mean profits as per Profit and Loss Account prepared in accordance
with the Indian Companies Act as reduced by the specified adjustments.
Tax on dividend distribution
In addition to the normal income-tax, a Domestic Company is liable to pay tax
@ 10% (plus 2% surcharge) on amount distributed as dividends. On the other hand,
receipt of dividend is fully exempt from tax in the hands of the recipient
shareholders.
Tax Rates
The tax rates are fixed by the annual Finance Act. The current tax rates applicable for
financial year 2001-2002 are as under :
Domestic Company
35%
Foreign Company
48%
Foreign companies are eligible for a lower rate of tax in respect of income like
royalty, fees for technical services, interest under the applicable Tax Treaties
[Refer Chapter 11].
33
Surcharge: A Domestic Company is liable to pay a surcharge of 2% in addition to the

normal income-tax. Thus, the effective tax rate is 35.70%. No surcharge is payable by
Foreign Companies.
Tax Rates for Individual tax payers
Income Level (Rupees)
Tax-Rates
Upto 50,000
Nil
50,001-60,000
10%
60,001-150,000
20%
150,001 and above
30%
A surcharge of 2% is levied on the amount of tax where income exceeds

Rs.60,000.
WEALTH TAX
Wealth tax is levied on certain specified categories of taxpayers on their net wealth
held on the last date of the relevant financial year known as Valuation date. Wealth
tax is levied @ 1% on the net wealth exceeding Rs.1.5 million. This tax is an annual
tax payable on the net wealth computed as per the provisions of the Wealth Tax Act.
Applicability
The wealth tax applies, inter alia, to the following taxpayers:
Individuals
Companies
The following assets are subject to wealth tax:
Residential properties
Commercial Building/Property
Motor Cars
Jewellery, Bullion, Utensils of Gold, Silver, et al unless held as stock in trade
Yatch, Boats and Aircraft unless used for commercial purposes
Urban Land
Cash in hand exceeding Rs.50,000
Exemptions
Certain assets are exempt from levy of wealth tax. For instance, a residential property
or a commercial property is not subject to wealth tax subject to certain conditions.
34
Chapter 11
TAXATION OF FOREIGN ENTERPRISES
The tax liability of foreign enterprises deriving income in India is governed by the
principles of taxation as discussed in Chapter 10. If the foreign enterprise belongs to
a country with which India has signed a Tax Treaty, the beneficial provisions of the
Tax Treaty would apply.
Foreign enterprise can operate in India under different legal structure. From incometax perspective, various legal entities broadly fall into any of the following category:
A foreign company; and
An Indian company.
Foreign company
A foreign company is a company, which is not a domestic company. A domestic
company means an Indian company or other company, which declares and pays
dividends in India. Generally, a company registered outside India is regarded as a
foreign company.
A foreign enterprise may carry on its business operations in India in any of the
following manner:
Without any physical presence in India
Through a branch set up in India
Through a Project office in India
Business operations without physical presence in India
A foreign enterprise may operate in India without any actual physical presence in
India. For instance, a foreign company may supply goods, plants & machinery to
Indian parties from its home country. As discussed earlier, a non-resident is taxable
in India on the income received or income accrued/arising in India. Where the
supply of plants & machinery and other goods is effected in a manner that no
income therefrom is received or accrues in India, then any tax liability may not arise
in India.
The above would be a case where sale of plant & machinery is effected outside
India; the title in goods is transferred in favour of the Indian buyer outside India; and
the payment for such supply is received outside India. In such a case, income from
such transaction may not be taxable in India. However, where a foreign entity has a
business connection in India, tax is payable on the income arising from operations
in India.
The normal business income is computed by reducing from the gross business
receipts, expenses incurred in earning such income subject to certain restrictions
prescribed under the IT Act.
35
Supply of Technical Services/Know-how

Income from supply of technical know-how or technical services to Indian parties is
taxable in India either as Royalty or as Fees for Technical Services (FTS) as
defined under the IT Act.
Recently, the definition of royalty has been expanded to cover payment for the use
of or the right to use, industrial, commercial or scientific equipments. Under the IT
Act, Royalty is taxed @ 20% on gross payment or at a lower withholding tax rate
under the applicable Tax Treaty.
FTS is defined to mean consideration for provision of any technical, managerial or
consultancy services including supply of technical personnel. Like Royalty, FTS is
also taxed @ 20% on gross basis in certain cases or at a lower withholding tax rate
under the applicable Tax Treaty.
Taxation of interest income
Interest income earned in India is taxable in India at the normal tax rate applicable to
foreign entities viz., 48%. Under Tax Treaties, generally, the interest income is taxed
at the reduced rate of 10% to 15%.
Taxation of Foreign Telecasting Companies
Previously, income of Foreign Telecasting Companies (FTCs) from advertisements
was computed on a presumptive basis by taking 10% of the advertisement revenue
as their taxable income. Pursuant to a recent amendment to the IT Act, income of
FTCs would now be determined as per the normal provisions and will be taxed at the
normal tax rate applicable to foreign companies.
Where a FTC is resident of a country with which India has a Tax Treaty, its
business income (including advertisement revenue) can be taxed in India only if it
has a Permanent Establishment (PE) in India and the income is attributable to
such PE.
Shipping profits
The taxable income of a foreign enterprise engaged in operation of ships is
considered @ 7.50% of the gross revenue from such activities. Tax is levied on such
income at the rate applicable to foreign enterprises viz., 48%.
Profits from Mineral oils
The taxable income of foreign enterprises engaged in supply of plant and machinery
on hire for prospecting, extraction or production of mineral oils is considered @ 10%
of the gross revenue from such activities. Tax is levied on such income at the rate
applicable to foreign enterprises viz., 48%.
Profits from operation of aircrafts
The taxable income of foreign enterprises engaged in the operation of aircraft is
considered @ 5% of the revenues from carriage of passengers, livestock, mails or
goods from any place in India. Tax is levied on such income at the rate applicable to
foreign enterprises viz., 48%.
36

Income from business of civil construction in turnkey power projects
The taxable income of foreign enterprises engaged in civil construction, erection,
testing or commissioning in connection with approved turnkey power projects is
considered @ 10% of the contractual revenues from such activities. Tax is levied on
such income at the rate applicable to foreign enterprises viz., 48%.
Applicable compliance requirements under the Indian IT Act for foreign enterprises
having operations in India is given in Annexure 7.
DOUBLE TAX AVOIDANCE AGREEMENTS
Purpose
In order to give a boost to the economic development of the country by encouraging
cross border transactions and attracting foreign investments in India, the
Government of India has entered into Tax Treaties with several developed countries
like USA, UK, Japan, Germany, France, Australia, Austria, et al and many developing
countries, to reduce the tax incidence in the hands of foreign entities on income
sourced in India. A list of Countries with whom India has signed Double Tax
Avoidance Agreements is given in Annexure 8.
Operations of Tax Treaties
A Tax Treaty applies to the residents of any of the contracting states. A non-resident
has an option to be governed by the domestic tax laws of India or by the applicable
Tax Treaty, whichever is more beneficial. Generally, the tax incidence under the Tax
Treaty is beneficial as compared to the domestic tax laws. By virtue of Tax Treaty,
India basically seeks to tax the operating income sourced in India. For instance,
income of a foreign enterprise from sale of immovable property situated outside
India is generally not taxed in India.
Withholding tax
An Indian resident is obliged to withhold tax while making payment to a foreign
party. The withholding tax rates vary depending upon the nature of payments like
Royalties, FTS, interest, et al. Generally, under Tax Treaty mechanism, withholding
tax rates are lower as compared to the tax rates under the domestic tax laws of India.
Applicable withholding tax rates under various Tax Treaties signed by India is given
in Annexure 9.
Under the domestic tax laws of India, a mechanism has been provided whereby if
the entire income of a non-resident is not believed to be taxable in India, the payer or
the payee of the income can obtain a lower rate withholding tax order from the tax
authorities to effect the payment.
Taxation of Business profits
Business profits derived by a foreign enterprise are taxable in India only if the
enterprise has a Permanent Establishment (PE) or a fixed base in India. Business
profits can be taxed in India only to the extent they are attributable to the PE. In other
words, such profits are not taxable in India if the foreign entity does not have any PE
or a fixed base in India.
37
It is pertinent to note that but for a Tax Treaty, Business profits would be taxable in
India under the domestic tax laws of India to the extent profits are attributable to
operations carried out in India.
Permanent Establishment
PE means a fixed place of business through which a foreign entity carries on
business in India. Instances of PE include an office, branch, factory or other place of
management. It postulates the existence of a substantial element of a permanent
nature of a foreign enterprise in another country, which can be attributed to a fixed
place of business in that country. PE also includes construction, assembling or other
site lasting for specified period under the relevant Tax Treaty. Furnishing of services
for certain specified period of time may also give rise to a service PE in India
depending upon the applicable Tax Treaty.
Royalties
Royalty for hire of an equipment or use of or right to use copyright of literary, artistic,
scientific work, cinematographic film, any patent, trademark, design or model plan,
secret formula or for information concerning industrial, commercial or scientific
experience are subject to withholding tax in India @ 10% to 20% of gross payments
Technical service fee means consideration for rendering any technical, managerial
or consultancy services. Such fees are subject to withholding tax in India @ 10% to
20% depending upon the applicable Tax Treaty.
Interest
Interest income derived in India is subject to withholding tax in India @ 10% to 15%
Capital gains
Gain arising from transfer of a capital asset is liable to capital gains tax in India.
Most of the Tax Treaties signed by India provide for taxation of capital gains as per
domestic tax laws of the respective countries. Accordingly, capital gains from sale
of capital assets/immovable properties situated in India are generally taxable in
India.
Independent Personal Services
Income from activities of independent nature involving technical or professional skills
like doctors, chartered accountants, lawyers, architects, engineers, artists, et al. are
treated as income from Independent Personal Service.
Such income is taxable in India if the service provider has a fixed base in India or the
stay in India exceeds the prescribed number of days under the relevant Tax Treaty
(generally 90 to 183 days in a financial year).
38

Dependant Personal Services
Income from employment like salary income earned by foreign national exercising
employment in India is treated as income from Dependant Personal Services. Such
income is generally taxable in India. However, such income may be exempt in India
if the following conditions are fulfilled :
The recipients presence in India during the relevant year (April to March) does
not exceed 183 days in aggregate;
The remuneration is paid by or on behalf of an employer who is not a resident of
India; and
The remuneration is not borne by a Permanent Establishment or a fixed base of
the employer in India.
Elimination of double taxation
At times, a particular income is being taxed both in the source country and in the
country of residence of the taxpayer. Under the Tax Treaties, such double taxation of
income is eliminated by any of the following methods :
Credit method; and
Exemption method.
Under Credit method, tax paid in India is allowed as credit against tax liability of the
foreign enterprise in its home country. Under Exemption method, income earned in
India is given complete tax exemption in the home country.
Most Favoured Nation Clause (MFN Clause)
Tax Treaties signed by India with countries like France, Spain, Sweden, Netherlands,
et al, contains MFN Clause. This clause provides that if after signing of a Tax Treaty
with a country, India enters into a Tax Treaty with another country (which is member
of Organisation for Economic Cooperation and Development) and which provides
for lower rates of taxation or provides for restricted scope of taxation, then such
lower rates of taxation or restricted scope of taxation will also apply to the Tax Treaty
with the former country.
Non-discrimination provisions
Tax Treaties entered into by India, by and large, contain an article relating to nondiscrimination. This article generally provides that there should be no
discrimination in respect of taxation between the Indian companies and the foreign
companies, which operates under the same circumstances in India. These
provisions ensure that the tax incidence on foreign companies is at par with the
Indian companies.
Recently, the Indian IT Act has been amended to the effect that the charge of tax on
foreign companies at a rate higher than the rate applicable to Indian Companies will
not by itself amount to discrimination.
39
ADVANCE RULINGS
In order to determine the tax liability in India in advance and thereby to avoid
litigation and uncertainty in tax matters, a mechanism of Advance Rulings is
available to non-residents in relation to Indian transactions. Indian residents can also
seek advance rulings on transactions undertaken or proposed to be undertaken with
non-residents.
For this purpose, an Authority for Advance Rulings (AAR) has been constituted
which is headed by a retired judge of the Supreme Court of India. Advance ruling is
binding on the applicant and on the tax authorities. Application can be made to the
AAR seeking ruling on any question of facts or law on payment of prescribed fee.
Advance ruling cannot be sought on a question which is pending for adjudication
before the tax authorities, Appellate Tribunal or a Court of law in India. Ruling is
generally delivered within six months of making the application and is made in
writing giving reasons for the decision of the AAR.
40
Chapter 12
TRANSFER PRICING REGULATIONS
Transfer pricing is the price charged by one enterprise to another related or
associated enterprise in respect of goods, services, know-how, et al. The concept of
transfer pricing assumes importance from the viewpoint of tax authorities. Every
country is interested in collecting its due share of tax revenues from economic
activities carried out therein by the multinational and other entities. Transfer Pricing
Regulations seek to achieve this.
The Regulations
The Transfer Pricing Regulations prescribes that the transactions between
associated enterprises should be at arms length price i.e., at a price at which two
unrelated parties would enter into in similar transactions. This is to ensure that each
party pays tax on its real economic profits and thereby each country gets its fair
share of tax revenues.
The newly introduced transfer pricing regulations prescribes the following methods
for determining arms length price:
Comparable Uncontrolled Price Method
Resale Price Method
Cost Plus Method
Price Split Method
Transactional Net Margin method
Any other method prescribed by the Government
The taxpayers have a choice of following any of the above methods, which is most
appropriate having regard to the prescribed factors.
Most Appropriate Method
The most appropriate method is the one, which is best suited to the facts and
circumstances of a transaction and which provides the most reliable measure of
arms length price.
In selecting such method, the factors which need to be taken into account include,
nature and class of the international transaction; functions performed, assets
employed and risks assumed by the Associated Enterprise entering into the
transaction; availability, coverage and the reliability of data, et al.
Information & Documentation
Persons entering into International Transactions are required to keep prescribed
information and documents which include, ownership structure; profile of the
multinational group together with particulars of Associated Enterprises with whom
41
international transactions have been entered into; description of the business

industry and the business of the concerned Associated Enterprises; particulars of
International Transactions with the Associated Enterprises, et al.
The above documentation need not be maintained if the aggregate value of
the International Transactions entered into by a taxpayer does not exceed
Rs.10 million.
Based on the available information, the tax authorities in the course of assessment
proceedings, can determine the arms length price where such price is not in
accordance with the aforesaid provisions or the prescribed information is not
maintained or the data used for computing such price is not reliable or the
prescribed information is not furnished. However, where the arms length price
determined by a taxpayer is upto 5% less or upto 5% more than the price
determined by the tax authorities, such transaction price would be accepted.
42
Chapter 13
EXPATRIATE TAXATION
Residential Status
For income tax purposes, expatriate employees can be divided in the following three
categories:
Resident in India;
Not ordinarily resident in India; and
Non-resident.
The tax liability in India basically depends upon the residential status determined as
per the IT Act. Rules for determination of residential status of individuals are
discussed in Chapter 10.
Where an expatriate employee belongs to a country with which India has signed a
Tax Treaty, then his Indian tax liability is determined as per the provisions of the Tax
Treaty if they are more beneficial.
Taxable income
Resident in India : A person, resident in India, is subject to tax in India on his
world income whether received in India or outside India.
Not ordinarily resident taxpayers : This category of tax payers are subject to tax
in India on income received or accrued in India and on income derived from
business controlled or a profession set up in India.
Non-resident : A person, not resident in India, is subject to tax in India only in
respect of the income received or accrued in India or deemed to be received or
accrued in India.
Salary income
Salary, allowances and other benefits/perquisites received by expatriate employees
for services rendered in India are considered as income earned in India. Such
income is taxable in India whether received in India or outside India and irrespective
of the residential status of the expatriate employees. Similarly, salary received for the
rest or leave period preceded and succeeded by services rendered in India and
forming part of the employment contract is also taxable in India.
Employee Stock options
Profits on sale of shares given to the employees by the employer under an
Employee Stock Option Scheme (ESOP) are taxed as long term or short term
capital gains depending upon the period of holding before sale, if the ESOP scheme
is in accordance with the guidelines issued by the Government of India in this
regard. Profits from sale of shares held for more than twelve months before sale is
regarded as long-term capital gains, otherwise as short-term capital gains. Longterm capital gains are taxed at a concessional rate of 20% duly indexed for inflation
(10% in case of listed companies) as against normal progressive tax rate with
maximum rate of 30% applicable for short-term capital gains.
43
Where the ESOP Scheme is not in accordance with the Government guidelines, the
employee will have to pay perquisite tax at the time of exercise of option on the
difference between the market price of the shares and the exercise price. Further, on
actual sale of such shares, capital gains tax would be payable by the employee on
the gain derived from sale.
Exemption to Foreign Nationals and Non-Residents
Certain exemptions/concessions, as discussed below, are available to the expatriate
employees who are not citizens of India:
Stay in India not exceeding 90 days
Salary received by an employee of a foreign enterprise for services rendered in India
is exempt from tax in India if the following conditions are fulfilled:
The foreign enterprise is not engaged in any trade or business in India;
Employees stay in India does not exceed 90 days in the previous year; and
Such salary is not tax deductible in computing employers income in India.
Tax paid by the employer
Generally, the tax liability of an employee, if discharged by the employer, is regarded
as a taxable perquisite in the hands of the employee. However, in case of foreign
nationals who satisfy the criteria of being technicians under Section 10 (5B) of the
IT Act, the tax paid by employer on their salary income would be exempt from tax in
India for a period of forty eight months from the date of employees arrival in India.
Allowances & Benefits
Certain special allowances/benefits granted to meet the expenses wholly,
necessarily and exclusively in the performance of the duties of an office or
employment for profit are exempt from tax. For instance, cost of travel on tour or on
transfer; ordinary daily charges incurred by an employee on account of absence
from his normal place of duty; conveyance expenses incurred in performance of
official duty, et al are exempt from tax.
Benefit under Tax Treaties
Where expatriate employees are residents of a country with which India has signed
Tax Treaties, their tax liabilities in India will be determined under the provisions of the
applicable Tax Treaty if they are more beneficial as compared to the Indian IT Act.
Tax Treaties generally provide that salary earned by resident of a contracting state
from exercise of employment in India would be exempt in India if the following
conditions are fulfilled:
Expatriates presence in India does not exceed 183 days in the relevant year;
Salary is paid by an employer who is not a resident of India; and
Such salary is not borne by a PE or a fixed base of the employer in India; or it is
not tax deductible in computing the employers taxable income in India.
Where salary of an expatriate employee is taxable both in India and in the home
country, tax paid in India is generally allowed as a credit against the tax liability of
the expatriate on such income in the home country.
44
Chapter 14
TAX ASSESSMENT
Return of Income
Under the IT Act, taxpayers are required to file their Returns of Income (ROI) annually
for every assessment year. Different dates have been prescribed for filing of ROI by
different categories of taxpayers. Currently, such dates are as under:
Category of taxpayers
Due Date
Corporate
by October 31 following the end of

the financial year
Other taxpayers (individual,

partnership, et al.)
by July 31 following the end of the

financial year
For instance, ROI of a corporate taxpayer for the financial year ending on March 31,
2002 would have to be filed by October 31, 2002 with the jurisdictional Assessing
Officer. The Tax Department designates Assessing Officers, depending upon the
class of taxpayers and their income level. Non-filing or delay in filing the ROI attracts
penal interest.
Payment of Tax
Advance Tax
In India, taxpayers are required to pay advance tax on their estimated tax liability for
the relevant financial year. Corporate taxpayers have to pay advance taxes in four
installments and in three installments by other taxpayers as tabulated below:
Due dates
Estimated Advance Tax Payable

Companies
Other taxpayers
On or before June 15
15%
On or before September 15
45%
30%
On or before December 15
75%
60%
100%
100%
On or before March 15
Self-Assessment tax
Taxpayers are required to make self-assessment of their taxable income for the
relevant year and pay the tax on such income before filing of ROI. Credit can be
taken for advance tax paid and the tax deducted at source from their income.
45
Deduction of tax at source

Taxpayers are required to deduct tax at source from certain specified payments at
the time of making the payment or at the time of credit of such amount to the
account of the payee, which ever is earlier. The tax so deducted is treated as
payment of tax on behalf of the payee who can claim credit for such tax deduction
against his gross tax liability. The specified payments include salaries; payment to
contractors; rent for properties; fees for professional or technical services;
commission, et al.
Assessment
Tax payment on completion of assessment
The Assessing Officer may determine further tax payable on completion of the
assessment of the taxable income. Such tax needs to be paid within the prescribed
time limit. Delay in payment of such tax may attract penal interest.
Appeals against assessment order
A taxpayer may challenge the assessment order passed by the Assessing Officer if
he is not satisfied with the correctness of the assessment by filing an appeal with the
appellate authorities. The mechanism of appellate proceedings is as under:
Appeal before the Commissioner of Income tax (Appeals) [CIT (A)]
CIT (A) is the first appellate authority in the hierarchy of the appellate forum. Appeal
against an assessment order can be filed with the CIT (A) within 30 days of the
receipt of the assessment order.
Appeal before Income-tax Appellate Tribunal (ITAT)
Appeal against the order of CIT (A) can be filed with the ITAT which is the final fact
finding authority and its decision on facts are final. Such appeals can be filed both
by the taxpayers and the Assessing Officer within 60 days of the receipt of CIT (A)s
order.
Appeal to High Court
Appeal against order of ITAT, involving adjudication upon a substantial question of
law, can be filed with the jurisdictional High Court within four months of the receipt of
ITATs order. Order of High Court is binding on all the authorities functioning within
its jurisdiction.
Appeal to Supreme Court
Appeal against order of the High Court may be filed to the Supreme Court of India
and its decision is binding throughout the country including all the High Courts.
46
Chapter 15
INDIRECT TAXES
Indirect tax is an important source of revenue for the Government of India.
Besides the Central Government of India, indirect taxes are also imposed by
the State Governments and the local authorities. The key indirect tax statutes
include:
Central levies
Customs duty
Antidumping duty
Central Value Added Tax (Cenvat)
Service tax
Research & Development cess
State/Local Authority levies
Sales Tax/Value Added Tax
Customs Duty
Import of goods in India attracts levy of Customs Duty. The imposition of this duty is
governed by the Customs Act, 1962 and the Customs Tariff Act, 1975. This duty is
payable by the importer, on the clearance of the goods, upon their arrival into India.
Customs duty consists of:
Basic duty
Basic customs duty rates are fixed at varying levels, peak rate being 35% on the
value of the goods. In some cases like liquor, special rates in excess of 35% are
also charged.
Additional duty (known as Countervailing duty CVD)
Countervailing Duty is a duty equal to the Cenvat (excise duty), levied on a like
article, if produced in India. This duty is levied on the aggregate of the value of
the goods imported and the basic duty.
Special Additional Duty (SADD)
SADD is levied with a view to provide a level playing field in relation to sales tax
and other taxes levied by State Governments on Indian goods. SADD is levied at
the rate of 4% on the aggregate of:
Value of goods
Basic duty
Additional duty (i.e. CVD).
47
Drawback is allowed on the re-export of duty paid goods. Thus, duty paid
on goods imported and put to use is allowed as a drawback on their subsequent
re-export. The drawback is allowed up to certain percentage of the import duty paid
on the goods based on the period for which goods are used.
Anti-dumping duties
Indian Customs Act contains Anti-dumping and Countervailing provision.
Pursuant to the amendments made to the Customs Tariff Rules, 1995, rules
were enacted establishing a Designated Authority for Anti-dumping and Allied
duties.
The Designated Authority conducts the investigations over a period of one year,
however provisional duties are usually recommended within 60 90 days of the
initiation of the case. Final Anti Dumping and Countervailing Duties are both
imposed for a period of five years, subject to review. Appeal against the levy lies to
the Customs, Excise and Gold Control (Appellate) Tribunal and from there on to the
Supreme Court of India.
The Anti-Dumping Provisions and the Countervailing Duty Rules, both provide for
refund of duties. In the case of Anti Dumping Duties, the exporter may also offer a
price undertaking.
Since Anti Dumping Duties are country specific and exporter specific, it is possible
for individual exporters to get low or no duty, on the basis of their data, while others
from the same country to get much higher duties.
The safeguard provisions are enacted in the Customs Tariff Act, 1975. The safeguard
provision, under Article XIX of the GATT Agreements empower a nation to impose
duties as an emergency measure when there is a sudden spurt in imports which
causes or threatens serious injury to the domestic industry.
Central Value Added Tax
A duty of excise called, Central Value Added Tax (Cenvat) is leviable on
the manufacture or production of excisable goods in India. It forms the single
largest source of revenue for the Government of India. The taxable event for
Cenvat is manufacture or production of goods though for administrative
convenience, tax is actually collected at the stage of removal or clearance of
goods from the factory.
Exemption
The Government in general public interest can grant full or partial exemption from
payment of Cenvat. A number of such exemptions have been allowed.
Tariff and Rates of Cenvat
Rates of Cenvat are given in the Schedule to the Central Excise Tariff Act, 1985. The
rate for a product is determined by first ascertaining the relevant tariff heading or
sub-heading under which it is covered. Against each tariff heading or sub-heading,
rates of excise duty are specified which are commonly known as Scheduled Rates
or Tariff rates. Cenvat is payable at such scheduled rates. There are three basic
rates of Cenvat, the normal rate of 16%, a concessional rate of 8% and a higher rate
48

for selected luxuries of 24%. In some cases, a special additional duty of 16% is also
leviable.
Cenvat Set-off
Duty paid on inputs used in manufacture of final excisable product can be set off
against the duty liability on the final product through a scheme called Cenvat Credit
Rules.
Valuation of goods for levy of duty
Almost all the rates are specified as ad valorem rates. It is, therefore, necessary to
determine the assessable value of goods in order to compute the amount of duty
leviable thereon. Elaborate provisions, including certain deeming fictions, have been
incorporated for determination of assessable value.
Sales Tax
Sales tax is an ad valorem levy on the sale of moveable goods in India. The sale of
moveable goods attracts sales tax at rates, which vary depending upon the type and
nature of goods and the State in which the sale takes place. Sales tax is a duty
levied and collected by the States. A central statute The Central Sales Tax Act has
been enacted to levy duty on inter-state sales. This statute is also administered by
the State Government.
Sales tax legislation is thus broadly sub-divided into:
Central Sales Tax Act, 1956 (CST Act); and
State Sales Tax Acts (SST Acts).
The SST Acts deal exclusively with intra-state sales i.e. sales within the respective
States. Under the CST Act, the rate of tax depends on the class of the goods sold,
the category of the purchaser and the rate of sales tax applicable in the sellers
State. The scheme of the Act requires dealers to pay tax as follows:
Where the goods under the SST Act of the sellers State are subject to tax at lower
than 4%, the rate of CST is such lower rate.
Where the goods under the SST Act of the sellers State are subject to tax at 4%
or more, the rate of CST is:
10%; or
the rate specified by the SST Act of the sellers State, whichever is higher.
This rate is, however, reduced to 4% upon the purchaser furnishing a prescribed
declaration. The declaration may be issued where the buyer purchases the goods
for the purposes (amongst others) of:
use in manufacture; or
resale.
Service Tax
Service tax is a relatively new form of indirect tax legislation introduced in India in
1994. Currently, it seeks to levy tax on more than forty one types of services. Service
49
tax is imposed at a uniform rate of 5% on the gross value of specified services. The
major services include:
General insurance services
Wide range of Consultancy services including management consultants,
consulting engineers, et al.
Communication services
Courier service
Advertising agency services
Services related to production and broadcasting of content such as video tape,
production service, sound recording service, photography service, et al.
Financial services including leasing, asset management, credit cards, et al.
Research & Development cess
The Research and Development cess Act has been enacted for the levy and
collection of a cess on payments for import of technology to encourage commercial
application of indigenously developed technology and to adopt imported technology
to wider domestic application. The cess is presently levied at the rate of 5% on
payments for import of technology.
The following payments are subject to cess:
Payments for import of technology approved by the Government of India in terms
of any foreign collaboration agreement;
Payments for cost of designs and drawings as approved by the Government of
India;
Payments to foreign collaborator or other persons concerning deputation of
technical personnel to India as per Government approval; and
Other payments relating to import of technology approved by the Government of
India.
Value Added Tax (VAT)
The Government of India has after detailed consideration come to the conclusion
that Value Added Tax (VAT) is better form of levy than the existing forms which
provide for Excise Duty on the manufacture of goods and Sales Tax on their
distribution and sale.
Accordingly, the Excise Duty on manufacture has been converted into a Central
Value Added Tax (Cenvat) discussed earlier. The State Governments are now in the
process of converting the Sales Tax into a Value Added Tax on trade both at the
Wholesale and Retail level.
VAT, as is presently proposed, is a multi point sales tax which will enable set-off of
tax paid and prevent cascading effect.
VAT enjoys certain advantages over sales tax, like simplification of the tax structure
by rationalising various taxes levied by State like turnover tax; reduce tax evasion by
encouraging dealers to issue invoices to avail the benefit of tax already paid;
consumers will have a clear idea on amount of VAT paid on products purchased,
et al.
50
Chapter 16
INTELLECTUAL PROPERTY RIGHTS
Intellectual Property Rights (IPR) means rights that the owner has over his own
creations, inventions or forms of expression and covers various types of industrial
property rights including copyrights and confidential information. IPR also means
information with commercial value.
In todays era of invention and technology upgradation, protection of ones idea and
invention is of vital importance. Under Indian laws, the IPRs are regulated and
protected under the following key enactment:
Patents
Patents are the monopoly rights granted by the Government to an inventor who
has invented something new, useful and non-obvious, in light of presently known
technology.
Copyright
Copyright is the exclusive right to publish and sell works that involve original and
creative efforts. Expressions embodied in a literary, musical and artistic work are
covered by copyright. Copyrights in India are governed and protected by
Copyright Act, 1957.
Trademarks
A trademark can be defined as a commercial symbol used to identify goods and
services and their producers. A trademark is strictly not intellectual property but
an intangible property of value to the owner.
Registration of trademarks is governed by Trade & Merchandise Marks Act,
1958 and Trade & Merchandise Rules, 1959. It provides the proprietor, an
exclusive right to use the trademark in relation to the goods for which it is
registered.
Industrial Designs
Copyright in an industrial design or product design is governed by the Designs
Act, 1911.
Information Technology
India has emerged as a major player in Information Technology sector
especially in software developments. To keep pace with the peculiarity of the
computer technology and the related issues, Information Technology Act has
51
been enacted which is operative from October 2000. Its key features are as
under:
Digital records and signatures have been given legal recognition
Punishment by way of imprisonment and fine has been provided for tampering
with computer source documents; hacking computer information and
publishing of information, which is obscene in electronic form
Cyber Appellate Tribunal has been set up to adjudicate upon issues relating to
cyber laws and crime
52
Chapter 17
LABOUR LAWS AND REGULATIONS
India, being second largest populated country in the world, has a large pool of
skilled, semi-skilled and raw labour force. Its labour policy has been framed with the
objective of maintaining cordial relations, industrial peace and promoting the welfare
of labour class.
Following are the key labour laws in India:
The Factories Act, 1948
The Factories Act basically deals with safety and welfare of workers employed in
factories. The Act contains provisions for:
protecting workers from industrial and occupational hazards;
prescribing 48 hours week for adult workers;
providing for minimum standards of lighting, ventilation and safety measures;
providing for rest rooms and lunch rooms; and
providing for safety and health measures.
Industrial Disputes Act, 1947
The layoff, retrenchment and closures of industrial units are regulated under the
provisions of this Act. Generally, a worker who has completed a minimum of one
year of continuous services is entitled to a compensation for retrenchment.
Employees Compensation
While the remuneration of employees is to be decided by the employee and
employer, the following key legislations have been enacted to take care of interest of
labour class:
Minimum Wages Act, 1948
This Act empowers the government to fix minimum wages for employees working in
different types of specified places and to review and revise the minimum wages at
certain intervals.
Payment of Bonus Act, 1965
This Act provides for payment of bonus to workmen falling in different
categories like skilled or unskilled, et al. The minimum amount of bonus is 8.33% of
the annual wages and the maximum amount is presently capped at 20% of such
wages.
53
Trade Unions Act

This Act governs the activities of trade unions in India. It contains provisions for
registration of trade unions as well. The underlying idea of trade unions is to create
a statutory body to protect the interest of its constituents vis--vis the management.
Social Security
The social security measures in India are regulated through following enactment:
Employees Provident Fund
Under the Employees Provident Fund Scheme, employees are required to
contribute a specified percentage of their wages to provident fund which is currently
12% of the wages. Employers can also make a matching contribution to employees
provident fund account.
Employees State Insurance Scheme
The Employees State Insurance Act provides for medical care in cash and in kind in
case of sickness. A contribution is to be made by the employer to the Government,
which run hospitals for treatment of workers and their families. The workers also
contribute from their wages.
The Payment of Gratuity Act, 1972
This Act provides for payment of gratuity to employees for services rendered for the
specified period. Gratuity is paid when an employee leaves service after completing
minimum of five years of services. It is calculated at 15 days wages for each year of
completed service. Currently, employers maximum liability to pay gratuity is fixed at
Rs.350,000/-.
Pension Scheme
This scheme provides for pension to employees on their retirement after completing
the specified years of service.
54
Annexure 1
LIST OF INDUSTRIES FOR WHICH INDUSTRIAL LICENSING
IS COMPULSORY
Distillation and brewing of alcoholic drinks;
Cigars and cigarettes of tobacco and manufactured tobacco substitutes;
Electronic Aerospace and defence equipment;
Industrial explosives including detonating fuses, safety fuses, gun powder,
nitrocellulose and matches;
Hazardous chemicals; and
Drugs and Pharmaceuticals (according to modified Drug Policy issued in
September, 1994).
Note: Compulsory licensing provisions would not apply in respect of the small
scale units taking up the manufacture of any of the above items reserved for
exclusive manufacture in small-scale sector.
Annexure 2
LIST OF INDUSTRIES RESERVED FOR PUBLIC SECTOR
Arms and ammunition and allied items of defence equipment, defence aircraft
and warships (Process has been initiated to dereserve this entry)
Atomic Energy
Railway transport
55
Annexure 3
SECTOR SPECIFIC GUIDELINES FOR FOREIGN DIRECT
INVESTMENT IN INDIA
Sr. No.
1.
Sector
Guidelines
Private Sector
Banking
49% from all sources on the automatic route

subject to guidelines issued by RBI.
Non Banking
Financial
Companies (NBFC)
(a) FDI/NRI/OCB investments are allowed in the

specified NBFC activities as per levels
indicated below:
(b) Minimum Capitalisation Norms for fund
based NBFCs:
(i)
For FDI upto 51% US$ 0.5 million to

be brought upfront
(ii) For FDI above 51% and upto 75%

US$ 5 million to be brought upfront
(iii) For FDI above 75% and upto 100%
US$ 50 million out of which US$ 7.5
million to be brought upfront and the
balance in 24 months.
(c) Minimum capitalisation norms for
non-fund based activities:
Minimum capitalisation norm of US$ 0.5
million is applicable in respect of all
permitted non-fund based NBFCs with
foreign investment.
(d) Foreign investors can set up 100%
operating subsidiaries without the condition
to disinvest a minimum of 25% of its equity
to Indian entities, subject to bringing in
US$ 50 million as at (b) (iii) above (without
any restriction on number of operating
subsidiaries without bringing in additional
capital).
(e) Joint Venture operating NBFCs that have
75% or less than 75% foreign investment will
also be allowed to set up subsidiaries for
undertaking other NBFC activities, subject
56
Sr. No.
2.
Sector
Guidelines
to
the subsidiaries also complying with

the applicable minimum capital inflow
i.e. (b)(i) and (b)(ii) above.
(f)
FDI in the NBFC sector is put on automatic

route subject to compliance with guidelines
of the Reserve Bank of India.
Insurance
FDI upto 26% in the Insurance sector is

allowed on the automatic route subject to
obtaining licence from Insurance Regulatory and
Development Authority (IRDA).
Civil Aviation
(Detailed guidelines have

Ministry of Civil Aviation)
Airlines
In the Domestic Airlines Sector

(i)
been
issued
by
FDI upto 40% permitted subject to no direct

or indirect equity participation by foreign
airlines.
(ii) 100% investment by NRIs/OCBs.

(iii) The automatic route is not available.
3.
Airports
FDI upto 100% is permissible, with FDI beyond

74% requiring Government approval.
Telecommunication
(i)
In basic, cellular, value added services and

global mobile personal communications by
satellite, FDI is limited to 49% subject to
licencing and security requirements and
adherence by the companies (who are
investing and the companies in which
investment is being made) to the licence
conditions for foreign equity cap and
lock- in period for transfer and addition of
equity and other licence provisions.
(ii) ISPs with gateways, radio-paging and

end-to-end bandwidth, FDI is permitted upto
74% with FDI, beyond 49% requiring
Government approval. These services would
be subject to licencing and security
requirements.
57
Sr. No.
Sector
Guidelines
(iii) No
equity
cap
is
manufacturing activities.
applicable
to
(iv) FDI upto 100% is allowed for the following

activities in the telecom sector:
(a) ISPs not providing gateways (both for
satellite and submarine cables);
(b) Infrastructure Providers providing dark
fibre (IP Category 1);
(c) Electronic Mail; and
(d) Voice Mail.
The above would be subject to the following
conditions:
(a) FDI upto 100% is allowed subject to the
condition that such companies would
divest 26% of their equity in favour of
Indian public in 5 years, if these
companies are listed in other parts of
the world.
(b) The above services would be subject
to licensing and security requirements,
wherever required.
(c) Proposals for FDI beyond 49% shall be
considered by FIPB on case to case
basis.
4.
Petroleum
(other than Refining)
(a) Under the exploration policy, FDI upto

100% is allowed for small fields through
competitive
bidding;
upto
60%
for
unincorporated JV; and upto 51% for
incorporated JV with a No Objection
Certificate for medium size fields.
(b) For petroleum products and pipeline sector,
FDI is permitted upto 51%.
(c) FDI is permitted upto 74% in infrastructure
related to marketing and marketing of
petroleum products.
(d) 100% Wholly Owned Subsidiary (WOS) is
permitted for the purpose of market study
and formulation.
58
Sr. No.
Sector
Guidelines
(e) 100% WOS is permitted for Investment/

Financing.
(f)
Petroleum (Refining)
For actual trading and marketing, minimum

26% Indian equity is required over 5 years.
The automatic route is not available.

(a) FDI is permitted upto 26% in case of Public
Sector Units (PSUs). PSUs will hold 26%
and balance 48% by public. Automatic route
is not available.
(b) In case of private Indian Companies, FDI is
permitted upto 100% under automatic route.
5.
Housing & Real

Estate
No foreign investment is permitted in this sector

except for development of integrated townships
and settlements where FDI upto 100% is
permitted with prior Government approval.
Investments by NRIs/OCBs are allowed in the
specified activities.
6.
Coal and Lignite
(a) Private Indian Companies setting up or

operating power projects as well as coal or
lignite mines for captive consumption are
allowed FDI upto 100%.
(b) 100% FDI is allowed for setting up coal
processing plants subject to the condition
that the company shall not do coal mining
and shall not sell washed coal or sized coal
from its coal processing plants in the open
market and shall supply the washed or sized
coal to those parties who are supplying raw
coal to coal processing plants for washing
or sizing.
(c) FDI upto 74% is allowed for exploration or
mining of coal or lignite for captive
consumption.
(d) In all the above cases, FDI is allowed upto
50% under the automatic route subject to
the condition that such investment shall not
exceed 49% of the equity of a PSU.
59
Sr. No.
Sector
Guidelines
7.
Venture Capital
Fund (VCF) and
Venture Capital
Company (VCC)
Offshore VCFs/Companies are allowed to invest

in domestic venture capital undertaking as well
as other companies through the automatic route,
subject only to SEBI regulations and sector
specific caps on FDI.
8.
Trading
Trading is permitted under automatic route with

FDI upto 51% provided it is primarily export
activities, and the undertaking is an export
house/trading house/super trading house/star
trading house. However, under the FIPB route:
(i)
100% FDI is permitted in case of trading

companies for the following activities:
(a) exports;
(b) bulk imports with ex-port/ex-bonded
warehouse sales;
(c) cash and carry wholesale trading; and
(d) other import of goods or services
provided at least 75% is for
procurement and sale of goods and
services among the companies of the
same group and not for third party use
or onward transfer/distribution/sales.
(ii) Certain specified kinds of trading are

also permitted subject to provisions of
Export-Import Policy.
9.
10.
Investing Companies
in Infrastructure/
Service Sector
In respect of the companies in infrastructure/

service sector, where there is a prescribed cap
for foreign investment, only the direct investment
will be considered for the prescribed cap and
foreign investment in an investing company will
not be set off against this cap provided the
foreign direct investment in such investing
company does not exceed 49% and the
management of the investing company is with
the Indian owners. The automatic route is not
available.
Atomic Energy
The following three activities are permitted to

receive FDI/NRI/OCB investments through FIPB
60
Sr. No.
Sector
Guidelines
(as per detailed guidelines issued by

Department of Atomic Energy vide Resolution
No. 8/1(1)/97-PSU/1422 dated 6.10.98):
(a) Mining and mineral separation.
(b) Value addition per se to the products of (a)
above.
(c) Integrated activities (comprising of both (a)
and (b) above.
The following FDI participation is permitted:
(a) Upto 74% in both pure value addition and
integrated projects.
(b) For pure value addition projects as well as
integrated projects with value addition upto
any intermediate stage, FDI is permitted
upto 74% through joint venture companies
with Central/State PSUs in which equity
holding of at least one PSU is not less than
26%.
(c) In exceptional cases, FDI beyond 74% will
be permitted subject to clearance of the
Atomic Energy Commission before FIPB
approval.
FDI, including NRI/OCB investment, is permitted

upto 26% with prior Government approval
subject to licensing and security requirements
and guidelines issued by the Ministry of
Defence.
11.
Defence and
Strategic
Industries
12.
Agriculture
(including
plantation)
FDI/NRI/OCB investment is not permitted.
13.
Print Media
FDI/NRI/OCB investment is not permitted.
14.
Broadcasting
FDI upto 49% in uplinking hub for leasing or

hiring out facilities to broadcasters to uplink their
TV channels subject to licensing and security
requirements and conformity with broadcasting
codes. Government approval required.
FDI upto 20% in DTH broadcasting for
distribution of multi channel TV programmes in
61
Sr. No.
Sector
Guidelines
Ku-band by using satellite system for

providing TV signals direct to subscribers
subject to licensing and security requirements
and conformity with broadcasting codes.
Government approval required.
15.
Power
Upto 100% FDI allowed in respect of projects

relating to electricity generation, transmission
and distribution, other than atomic reactor power
plants. There is no limit on the project cost and
quantum of FDI.
16.
Drugs &
Pharmaceuticals
FDI upto 100% is permitted on the automatic

route
for
manufacture
of
drugs
and
pharmaceutical, provided the activity does not
attract compulsory licensing or involve use of
recombinant DNA technology, and specific cell/
tissue targeted formulations.
FDI proposals for the manufacture of licensable
drugs and pharmaceuticals and bulk drugs
produced by recombinant DNA technology, and
specific cell/tissue targeted formulations will
require prior Government approval.
17.
Roads & Highways,

Ports and Harbours
FDI upto 100% under automatic route is

permitted in projects for construction and
maintenance of roads, highways, vehicular
bridges, toll roads, vehicular tunnels, ports and
harbours.
18.
Hotels & Tourism
100% FDI is permissible in the sector on the

automatic route.
The term hotels include restaurants, beach
resorts, and other tourist complexes providing
accommodation and/or catering and food
facilities to tourists. Tourism related industry
include travel agencies, tour operating agencies
and tourist transport 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, sports, and health
62
Sr. No.
Sector
Guidelines
units for tourists and Convention/Seminar units

and organisations.
For foreign technology agreements, automatic
approval is granted if:
(i)
upto 3% of the capital cost of the project is

proposed to be paid for technical and
consultancy services including fees for
architects, design, supervision, etc.;
(ii) upto 3% of net turnover is payable for

franchising and marketing/publicity support
fee; and
(iii) upto 10% of gross operating profit is
payable for management fee, including
incentive fee.
19.
Mining
(i)
For exploration and mining of diamonds and

precious stones FDI is allowed upto 74%
under automatic route.
(ii) For exploration and mining of gold and

silver and minerals other than diamonds and
precious stones, metallurgy and processing
FDI is allowed upto 100% under automatic
route.
(iii) Press Note No. 18 (1998 series) dated
14.12.98 would not be applicable for setting
up 100% owned subsidiaries in so far as the
mining sector is concerned, subject to a
declaration from the applicant that he has
no existing joint venture for the same area
and/or the particular mineral.
20.
Postal Services
FDI upto 100% is permitted in courier services

with prior Government approval excluding
distribution of letters, which is reserved
exclusively for the State.
21.
Pollution Control
and Management
FDI upto 100% in both manufacture of pollution

control equipment and consultancy for
integration of pollution control systems is
permitted on the automatic route.
63
Sr. No.
22.
Sector
Guidelines
Advertising and
films
Automatic approval is available for the following:

Upto 74% FDI in advertising sector.
Upto 100% FDI in film industry (i.e. film
financing, production, distribution, exhibition,
marketing and associated activities relating to
film industry) subject to the following:
(i)
Companies with an established track

record in films, TV, music, finance and
insurance would be permitted.
(ii) The Company should have a minimum

paid up capital of US$ 10 million if it is
the single largest equity shareholder and
at least US$ 5 million in other cases.
(iii) Minimum level of foreign equity
investment would be US$ 2.5 million for
the single largest equity shareholder and
US$ 1 million in other cases.
(iv) Debt equity ratio of not more than 1:1,
i.e., domestic borrowings shall not
exceed equity.
23.
Mass Rapid
Metro Transit
System
FDI upto 100% is permitted on the automatic

route in mass rapid transport system in all
metros including associated real estate
development.
24.
Township
Development
FDI upto 100% is permitted for development of

integrated
townships,
including
housing,
commercial premises, hotels, resorts, city and
regional level urban infrastructure facilities such
as roads and bridges, mass rapid transit
systems; and manufacture of building materials.
Development of land and providing allied
infrastructure will form an integral part of
townships development, for which necessary
guidelines/norms
relating
to
minimum
capitalisation, minimum land area, etc., will be
notified separately by the Government. FDI in
this sector would be permissible with prior
Government approval.
64
Annexure 4
CHECKLIST FOR SETTING UP BUSINESS PRESENCE IN
INDIA
It is advisable for foreign investors setting up a business presence in India to
broadly checklist the following key matters:
Marketing strategy
Market potential
Market survey for assessment of
market for products/services
Export potential
Intellectual Property Rights (Patent/
Trademark/Copyright protection)
Business blue print
Formulating marketing strategy

Product Distribution channels
Advertisement policy
Pricing policy/trading policy
Applicable Government
regulation on pricing
Record keeping and financial

statements
Nature of business
Applicable regulatory framework
Maintenance of prescribed
books of account
Capital cost of the project and

means of finance
Financial statements
Assistance from Professional

consultants/Advisors
Audit requirements
Applicable Statutes
Legal entity/structure
The Companies Act, 1956
Corporate entity (Private Ltd/Public

Ltd Company)
Shop & Establishment Act
Branch
Project office
Applicable Double Tax

Avoidance Agreement
Indian Joint Venture Company with

local partner(s)
Foreign Exchange Management

Act, 1999
Income-tax Act, 1961
Sales tax and Excise laws
Physical location
Taxation
Location of the presence

Availability of raw materials/labour/
skilled work force
Broad tax implications

Available tax planning avenues
Infrastructure : Transport/Water/
Electricity
Obtaining mandatory tax

registration numbers
Available incentives (Sales tax/

income-tax/excise duty)
Withholding tax obligations

Filing of applicable tax returns
65
Annexure 5
DEDUCTIONS UNDER INCOME TAX ACT, 1961
Deductions from Gross Total Income (GTI) (subject to specified conditions)

Section
Assessee
(Tax Payer)
Qualifying
Payments/
Income
Qualifying
Amount
80HHB
Resident
Person/
Indian
Company
Profits from
Profits or
A.Y. 2000-2001: 50%
projects outside gains derived A.Y. 2001-2002: 40%
India
from the
A.Y. 2002-2003: 30%
project
A.Y. 2003-2004: 20%
A.Y. 2004-2005: 10%
A.Y. 2005-2006 and
thereafter: NIL
80HHBA
Resident
Person/
Indian
Company
Profits and
gains derived
from execution
of a housing
project
80HHC
Resident
Person/
Indian
Company
Profits from
Export Profits
exports of
computed
goods directly
u/s.80HHC(3)
or through
Export House or
Trading House
A.Y. 2000-2001: 100%

A.Y. 2001-2002: 80%
A.Y. 2002-2003: 70%
A.Y. 2003-2004: 50%
A.Y. 2004-2005: 30%
A.Y. 2005-2006 and
thereafter: NIL
80HHD
Resident
Person/
Indian
Company
Profits from
services
provided to
foreign tourists
in case of
assessee
engaged in
following
businesses:
Business of
an approved
Hotel;
In A.Y. 2000-2001:
50% plus amount of
reserve created not
exceeding 50% of
profit.
In A.Y. 2001-2002:
40% plus amount of
reserve created not
exceeding 40% of
profit.
In A.Y. 2002-2003:
30% plus amount of
66
Deduction
Available
Profits or
As above
gains derived
from the
project
Profits or
Gains
Section
Assessee
(Tax Payer)
Qualifying
Payments/
Income
Qualifying
Amount
Business of
an approved
Tour
Operator;
Travel Agent
licensed by
RBI.
Deduction
Available
reserve created not

exceeding 30% of
profit.
In A.Y. 2003-2004:
20% plus amount of
reserve created not
exceeding 20% of
profit.
In A.Y. 2004-2005:
10% plus amount of
reserve created not
exceeding 10% of
profit.
In A.Y. 2005-2006 &
thereafter: NIL
80HHE
Resident
Person/
Indian
Company
Profits derived
from export
outside India of
Computer
software or
Its transmission from
India or
Providing
technical
services for
development or
production
of software
Export
Profits
computed
u/s. 80HHE(3)
A.Y. 2000-2001: 100%

A.Y. 2001-2002: 80%
A.Y. 2002-2003: 70%
A.Y. 2003-2004: 50%
A.Y. 2004-2005: 30%
A.Y. 2005-2006 and
thereafter: NIL
80HHF
Resident
Person/
Indian
Company
Profits from
Profits
business of
computed
export or
u/s. 80HHF(3)
transfer out
of India of
any software
(film, television,
music, television news)
including
telecast rights
A.Y. 2000-2001: 100%

A.Y. 2001-2002: 80%
A.Y. 2002-2003: 70%
A.Y. 2003-2004: 50%
A.Y. 2004-2005: 30%
A.Y. 2005-2006 and
thereafter: NIL
67
Section
Assessee
(Tax Payer)
Qualifying
Payments/
Income
Qualifying
Amount
80JJA
Any
Assessee
Income from
Such
business of
income
collecting &
processing or
treating of
bio-degradable
waste for
generating
power or
producing
bio-fertilizers,
bio-pesticides or
other biological
agents or for
producing
bio-gas making
pellets or
briquettes for
fuel or organic
manure
Entire profits for

first 5 consecutive
years.
80O
Indian
Company
& any
Resident
Person
Income received Such

from a Foreign Income
Government/
Enterprise for
use outside
India if any,
of patent,
invention
design or
Registered
Trade mark
A.Y. 2000-2001: 50%

A.Y. 2001-2002: 40%
A.Y. 2002-2003: 30%
A.Y. 2003-2004: 20%
A.Y. 2004-2005: 10%
A.Y. 2005-2006 and
thereafter: NIL
68
Deduction
Available
Annexure 6
TAX INCENTIVES UNDER INCOME TAX ACT, 1961
Profits from New Undertakings

Profits of specified new industrial undertakings enjoy certain tax exemptions. New
undertakings means undertakings formed by means other than the division or
reconstruction of an existing business or by transfer to a new business of plant and
machinery previously used for another purpose. The following table sets forth the
available tax exemptions.
Type of investment
Date of
commencement
of business
Percentage of profits
exempt
Company Others
Enterprise engaged in developing;

maintaining and operating; or
developing, maintaining and
operating infrastructure facilities:
Road, Bridge, Rail System,
Highway projects, water supply
project, et al.
After
1-4-1995
100
100
Enterprise engaged in developing;

maintaining and operating; or
developing, maintaining and
operating infrastructure facilities:
Airport, Port, Inland waterway and
Inland Port.
After
1-4-1995
100
100
Undertakings engaged in telecommunication: basic; cellular,

radio paging, domestic satellite
services.
1-4-1995
to
31-3-2003
(Note 2)
100
100
Undertakings engaged in developing/maintaining notified industrial

parks or special economic zone.
1-4-1997
to
31-3-2006
(Note 2)
100
100
(Note 1)
(Note 2)
69
Type of investment
Date of
commencement
of business
Percentage of profits
exempt
Company Others
Undertakings engaged in generation;

generation and distribution of power
Or
Undertakings engaged in transmission or distribution of power.
1-4-1993
to
31-3-2003
100
100
1-4-1999
to
31-3-2003
(Note 2)
Note 1: This deduction can be claimed, at the option of the taxpayer, for any
10 consecutive assessment years out of 20 years beginning from the year in which
the undertaking or the enterprise develops and begins to operate infrastructure
facilities.
Note 2: This deduction can be claimed, at the option of the taxpayer, for any 10
consecutive assessment years out of 15 years beginning from the year in which the
undertaking or the enterprise develops and begins to operate infrastructure facilities
or starts providing telecommunication service or develops an industrial park or
generates power or commences transmission or distribution of power.
Type of investment
Certain
Conditions
Percentage of profits exempt

Company
Others
Enterprise engaged in Scientific

research & development
approved by prescribed
authorities.
Approved by
prescribed
authority
after 31-3-2000
and before
1-4-2003
(Note 3)
100
Undertakings engaged in
commercial production of
mineral oil.
Undertakings engaged in
refining of mineral oil.
On or after
1-4-1997
100
100
On or after
1-10-1998
(Note 4)
Note 3: Profits are exempt for a total period of 10 years.

Note 4: Profits are exempt for a total period of 7 years.
70
Annexure 7
COMPLIANCE REQUIREMENTS UNDER INCOME TAX ACT,
1961 FOR FOREIGN ENTERPRISES HAVING OPERATIONS IN
INDIA
An Income-tax registration number known as Permanent Account Number

(PAN) needs to be obtained from the tax authorities. Similarly, a Tax Deduction
Account Number (TAN) is also to be obtained from the tax authorities.
While making certain specified types of payments, tax is to be withheld at the

prescribed rates as under:
Nature of payment
Withholding Tax Rates
Salaries
At the slab rate ranging from 10% to 30%

on gradual income level, plus 2% surcharge
Legal/Professional fees
5% plus 2% surcharge
Rent for properties
20% on payment to corporate payees

and 15% in other cases, plus 2% surcharge
Payment to Contractors/
Sub-contractors
2% plus 2% surcharge thereon
Brokerage/commission
10% plus 2% surcharge
The above requirement of withholding taxes does not apply to individuals and Hindu
Undivided Families.
Taxes withheld are to be deposited into the Indian Government Treasury within
the specific time frame.
Annual returns of taxes withheld as above are to be filed with the tax authorities
within the prescribed time frame as under:
Taxes withheld from
Return in
Form No.
Due dates of filing the Returns
Salary
24
May 31 following end of financial year
Legal & Professional fees
26-K
June 30 following end of financial year
Rent for properties
26-J
Payment to contractors
26-C

71
Annual Return of Income is to be filed with the tax authorities in respect of

taxable income in India. For foreign corporate entities, such return is to be filed
by October 31 following the end of relevant financial year.
The financial statements in respect of Indian operations are to be audited by a

Chartered Accountant when the turnover exceeds Rs.4 million and an audit
report in the prescribed form is to be obtained for filing with the tax authorities.
Non-compliance with this requirements or delay in compliance may attract levy
of penalty.
72
Annexure 8
COUNTRIES WITH WHICH INDIA HAS ENTERED INTO
AGREEMENTS FOR AVOIDANCE OF DOUBLE TAXATION
I.
Comprehensive Agreements
S. No.
Country
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
Australia
Austria
Bangladesh
Belarus
Belgium
Brazil
Bulgaria
Canada
China
Cyprus
Czech Republic
Czechoslovakia
Denmark
Finland
France
Germany
Greece
Hungary
Indonesia
Israel
Italy
Japan
Jordan
Kazakistan
Kenya
Korea
Kyrgyz Republic
Libyan Arab Jamahiriya
Malaysia
Malta
Mauritius
Mongolia
Morocco
S. No.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.
62.
63.
64.
65.
73
Country
Namibia
Nepal
Netherlands
New Zealand
Norway
Oman
Philippines
Poland
Portuguese Republic
Qatar
Romania
Russian Federation
Singapore
South Africa
Spain
Sri Lanka
Sweden
Swiss Confederation
Syrian Arab Republic
Tanzania
Thailand
Trinidad and Tobago
Turkey
Turkmenistan
Union of Soviet Socialistic
Republics
United Arab Emirates
United Arab Republic
United Kingdom
United States of America
Uzbekistan
Vietnam
Zambia
II.
Limited Agreements
S. No.
1.
2.
Country
Nature of income covered
Afghanistan
Belgaria
Income of enterprises operating aircraft

Income derived from the carriage of
Cargo
Shipping business
Merchant shipping
Income from International Air Transport
Income from carriage of cargo on
merchant shipping
Income on the activities of Air Transport
enterprises of the two countries
Duties on estate of deceased persons
3.
4.
5.
6.
7.
8.
9.
10.
11.
Czechoslovakia
Ethiopia
Germany
Iran
Kuwait
Lebanon
Oman
Pakistan
Russian Federation
12.
Saudi Arabia
13.
14.
United Arab Emirates

United Kingdom of
Great Britain
United States of America
Yemen Arab Republic
15.
16.
17.
Yemen (Peoples
Democratic Republic of)

Income derived from International Air
Transport
Income derived from International Air
Transport
74
Annexure 9
WITHHOLDING TAX RATES UNDER VARIOUS DOUBLE
TAXATION AVOIDANCE AGREEMENTS SIGNED BY INDIA
Fees for Technical/
Included services
Country
Interest
Royalty
Australia
15%
10% in case of use

of industrial, scientific,
commercial
equipment; 15% in
other cases
No specific provision.
However, it could be
covered under Royalty
Austria !!
10%
10%
10%
Bangladesh
10%
10%
No specific provision
Belarus
10%
15%
15%
Belgium
10% in case
10% #
of interest
payable to
banks; 15%
in other cases
10% #
Brazil
15%
25% in case of
trademarks; 15%
in other cases
Bulgaria
15%*
15% if it relates to
copyrights of
literary, artistic or
scientific work;
20% in other cases
20%
Canada
15%*
10% in case of
use of industrial,
scientific,
commercial
equipment;
10% in case of use of

industrial, scientific,
commercial equipment;
in other 20
In other cases 20%

upto April 1, 2003;
15% thereafter
In other cases 20%

upto April 1,2003;
15% thereafter
75
Country
Interest
Royalty
Fees for Technical/

Included services
China
10%
10%
10%
Cyprus
10%
15%
10%
Czech
Republic
10%
10%
10%
Denmark
10% in case
20%
of interest
payable to
banks; 15%
in other cases
20%
Finland
10% +
10% + in case of use of

industrial, scientific,
10% + in case of
use of industrial,
scientific, commercial
equipment;
In other case 20% +

In other cases 20% +
upto December 31,
upto December 31,
2001; 15% + thereafter 2001; 15% + thereafter
France
10% #
10% #
10% #
Germany
10%*
10%
10%
Greece
(income is
taxable only
in source
country)
20%
20%**
Hungary
15%*
20%**
20%
Indonesia
10%
15%
Israel
10% #
10% #
10% #
Italy
15%+
20%
20%
Japan
10%+
20%
in case of
interest
payable to
banks; 15%
in other cases
20%
76
Country
Interest
Royalty
Fees for Technical/

Included services
Jordan
10%
20%
20%
Kazakistan
10% #
10% #
10% #
Kenya
15% +
20% +
No specific
provision
Korea
(South)
10%* in case
of interest
payable to
banks; 15%*
in other
cases
15%
15%
Libya
20%
20%**
Malaysia
20% +
20%** +
Malta
10%
15%
10% in case of technical

fees; 15% in case of
fees for included
services
Mauritius
NIL + in case 15%+

payable to
banks; 20% in
other cases
Mangolia
15%*
15%
15%
Morocco
10%
10%
10%
Namibia
10%
10%
10%
Nepal
10% in case
15%
of interest
payable to
banks; 15% in
other cases
Netherlands
10% #
10% #
10% #
10%
10%
New Zealand 10%
77
Country
Interest
Royalty
Fees for Technical/

Included services
Norway
15%
20%**
10% #+
Oman
10%
15%
15%
Philippines
10%/15%
15%
Poland
15%*
22.5%
22.5%
Portuguese
10%
10%
10%
Qatar
10%
10%
10%
Romania
15%*
22.5%
22.5%
Russian
Federation
10% with
effect from
April 1,1999
10% with
effect from
April 1, 1999
10% with
effect from
April 1, 1999
Singapore
10% in case
of interest
payable to
banks or
financial
institution or
insurance
company;
15% in other
cases
10% in case of use

15% in other cases
10% in case of use

15% in other cases
South Africa
10%
10%
10%
Spain
15%
10% #
10% #
Sri Lanka
10%
10%
Sweden
10% #*
10% #
10% #
Swiss
Federation
10%
10%
10%
Syria
7.5%
10% +
Tanzania
12.5% +
20% +
20% in case of
managerial, technical or
consultancy fees
Thailand
10%+in case
of interest
15%+
78
Royalty
Fees for Technical/

Included services
15%
15%
Turkmenistan 10%
10%
10%
United Arab
Emirates
5% in case
of interest
payable to
banks or
financial
institution;
12.5% in
other cases
10%
United Arab
Republic
20%
20%**
(taxable only in
source country)
United
Kingdom
10%* in case 10% in case of

of interest
use of industrial,
payable to
banks; 15%*
equipment;
in other cases
In other cases
20% up to March 31,
1999; 15% thereafter
10% in case of use of

industrial, scientific
10%* in case
10% in case
Country
Interest
payable to
financial
institution or
insurance
company;
25% in other
cases
Turkey
United
10%* in case
of interest
payable to
banks or
financial
institution;
15%* in
other cases
10% in case
79
In other cases 20%

upto March 31, 1999;
15% thereafter
Country
Interest
Royalty
Fees for Technical/

Included services
States of
America
of interest
payable to
banks or
financial
institution or
insurance
company;
15%* in
other cases
of use of industrial,
equipment;
15% in other cases
of use of industrial,
equipment;
15% in other cases
Uzbekistan
15%
15%
15%
Vietnam
10%
10%
10%
Zambia
10% +
10% +
Most Favoured Nation clause applicable.
Interest attributable to financing of exports and imports is subject to NIL or lower

withholding tax rates.
**
For agreements entered into before June 1, 1997, the applicable rate will be
30% of the gross amount.
Beneficial ownership not necessary.
Applicable only if, shareholding constitutes at least 10% of capital stock of the
company; else taxable only in the state of alienators residence.
!!
Effective in India from April 1, 2002.
Notes:
Interest, Royalty and Fees for Technical/Included Services arising in connection
with a PE would be taxable as Business profits.
In most of the Tax Treaties, NIL or lower withholding tax rates are applicable for
interest paid to Government/Specified bodies and Central/Apex Banks.
80

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