Doing Business in India Simplified

Paras Kuhad & Associates
Doing Business in India Simplified

Introduction
The geopolitical changes that have taken place around the world in the last few years and the gradual changes in India s economic policies have led to a transformation in the bilateral relationship between India and the US which is best reflected in the vastly increased cooperation of the two countries in political, strategic and economic spheres. Indo-US co-operation in battling terrorism around the world is well established, as is India s commitment to promote globalization and democracy, to alleviate poverty both at home and abroad and to work closely with the US to contain regionally focused armed tension and promote global peace. Strategic co-operation between the two countries is probably at an all time high with the much debated Indo-US nuclear deal.

In the economic sphere, waves of economic reform that swept through the Indian economy from 1991 onwards brought a sea change in the economy as well as the global perception of it. India started being perceived as an attractive destination for investments. The India story comes for an interesting telling and at this point the world is witnessing a strong, fast-growing and vibrant Indian economy, which is rapidly integrating with the global economy.

India is world s leader in global outsourcing with more than 80% of the market.Reasons that make India an attractive investment destination India is the world s largest democracy with a stable political environment. . educated. skilled human resource base which offers its services at far cheaper rates than that may be found in any other developing or developed country. India has an abundant English speaking. India has at this time a young population with roughly 80% of its population below 45 years of age.

The India market is made more attractive by the fast growing consumer-class that is markedly western in its orientation With favourable foreign investment policies. tax incentives and strong economic fundamentals. . India offers attractive returns to prospective investors.

Atomic Energy and Railways Five Industries in which licensing is compulsory  Distillation and brewing of alcoholic drinks  Cigars and cigarettes of tobacco  Electronic Aerospace and Defence equipment  Industrial explosives  Hazardous chemicals . However.India s Industrial Policy The Indian government has removed bureaucratic controls on industry. under its liberalization policy.. licensing and restrictions still exist in the following sectors: Two sectors reserved for public sector viz.

Manufacture of items reserved for Small Scale Sector. Proposals attracting locational restrictions GREAT OPPORTUNITIES FOR US FDI! Note The exemption from licensing also applies to all substantial expansion of existing units. .

biotechnology. Opportunities exist for investing in India in sectors as diverse as tourism and infrastructure. bio-informatics and nanotechnology. Foreigners can directly invest in India either by themselves or as a joint venture. . petrochemicals and mining technology and engineering. Moreover. real estate. engineering design and prototype development and a manufacturing hub for high technology products.Foreign Investment in India Foreign Direct Investment ( FDI ) India welcomes foreign direct investment in almost all sectors. India is also being seen as the global destination for R&D. the investment ceilings in certain sectors are gradually being removed.

FDI is not permitted in the following sectors Certain sectors. etc. horticulture.FDI Policy According to the current policy. pisciculture and cultivation of vegetables.) Plantations (excluding tea plantation) Retail Trading (other than single brand retail) . mushrooms. animal husbandry. Agriculture (excluding floriculture. seed development. namely: Atomic energy. Lottery business/gambling and betting.

FDI Policy contd . There are two routes for FDI in India Automatic Route FDI is permitted under the automatic route for all items/activities except the followingWhere the foreign collaborator has an existing venture/tie-up in India in the same field. . There are certain exceptions  investment by a Venture Capital Fund registered with SEBI.  existing joint venture has less than 3% investment by either party.

Decision of the FIPB is normally conveyed within 30 days of submitting the application.FDI Policy contd . where the project does not qualify for automatic approval. The proposal for foreign investment is decided on a caseto-case basis depending upon the merits of the case and in accordance with the prescribed sectoral policy.  Existing joint venture is defunct or sick Proposals falling outside notified sectoral policy/caps or sectors in which FDI is not permitted FIPB Route (Approval Route) In all other cases of foreign investment. as given above. . prior approval is required from FIPB.

Acquisition of Shares Acquisitions may be made of an existing Indian company which may be either a private or a public company. Acquisition of shares of a public listed company is subject to the guidelines of the Securities Exchange Board of India (SEBI) Foreign investors looking at acquiring equity in an existing Indian company through stock acquisitions can do so under the automatic route. .

asset management companies. nominee companies and incorporated/institutional portfolio managers or their power of attorney holders may invest In India as FIIs. mutual funds.Investment by Foreign Institutional Investors ( FII ) An FII must be registered with SEBI and must comply with certain investment limits. Foreign pension funds. investment trusts. The shares/convertible debentures of an Indian company must be purchased through registered brokers on recognized stock exchanges in India. They may purchase shares and/or convertible debentures of an Indian company under the Portfolio Investment Scheme. . FII s are also permitted to purchase shares/convertible debentures of an Indian company through private placement/arrangement.

Foreign Technology Transfer Foreign technology induction is encouraged by the Government both through FDI and through foreign technology collaboration agreements.It is permissible for an Indian Company to issue equity shares against lumpsum fee and royalty in convertible foreign currency . No approvals are required in respect to all those foreign technology agreements which involve: a lump sum payment of up to USD 2 million royalty payable up to 5% on net domestic sales and 8% on exports. Note . subject to a total payment of 8% on sales. without any restriction on the duration of royalty payments.

Foreign investment through GDRs/ADRs/FCCBs is also treated as FDI. Issue of FCCBs upto USD 500 million also does not require any prior approvals .Global Depository Receipts (GDRs)/ American Depository Receipts (ADRs)/ Foreign Currency Convertible Bonds (FCCBs) Indian companies listed on the stock exchange are allowed to raise capital through GDRs/ADRs/FCCBs. in which case prior approval of FIPB would be required. Issue of GDRs/ADRs does not require any prior approvals except where the FDI after such issue would exceed the sectoral caps.

If the preference shares do not have conversion option. Issue of preference shares is permissible only as rupee denominated instruments. Preference shares. All preference shares have to redeemed out of accumulated profits/ fresh capital within a period of 20 years as per Indian Company Law. carrying a conversion option. they fall outside the FDI cap. must comply with sectoral caps on foreign equity. .Preference shares Indian companies can mobilize foreign investment through issue of preference shares for financing their projects/industries.

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

after the payment of taxes due on them. if any. provided the investment was on repatriation basis. .Repatriation of Capital Foreign capital invested in India is generally repatriable. along with capital appreciation.

1996 The Competition Act. 1956 Central Excise Act. 2002 The Foreign Exchange Management Act. 1944 Information Technology Act. 1999 Income Tax Act.Laws Governing Business in India The Companies Act. 1999 . 2000 Copyright Act. 1961 Central Sales Tax. 1957 Trademarks Act. 1956 Arbitration and Reconciliation Act.

1970 Designs Act. 1999 Indian Patents Act.Laws Contd Geographical Indications of Goods Act. 1956 . 2000 Industrial Disputes Act. 1947 Workmen Compensation Act. 1956 Employees Provident Fund Miscellaneous Provisions Act. 1952 Consumer Protection Act.

Important Regulatory Authorities for Foreign Investment Secretariat for Industrial Assistance (SIA) Foreign Investment Promotion Board (FIPB) The Foreign Investment Implementation Authority (FIIA) Reserve Bank of India (RBI) Registrar of Companies (RoC) Securities and Exchange Board of India (SEBI) Central Board of Excise and Customs (CBEC) Central Board of Direct Taxes (CBDT) Authority for Advance Rulings (AAR) Investment Commission (IC) .

Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) schemes. .Growth Sectors of economy for foreign investment IT and ITES India is world s leader in global outsourcing with more than 80% of the market share. Undertakings setup in EHTP/STP are eligible for deduction of 100% export profits till March 31. 2009 100% FDI permitted without any prior approvals.

which is deemed to be outside the customs territory of India. . An SEZ is an export oriented duty free enclave. 22 operational SEZ s in India and over 200 SEZ s are in various stages of approval and development. Exemption from Service Tax for both developer and a SEZ unit. Exemption from dividend distribution tax for SEZ developer.Special Economic Zones (SEZ s) SEZ Act and the rules framed thereunder have been notified with effect from February 2006. 100% tax deduction for 10 years for SEZ developer. Exemption of Sales Tax on purchases from Domestic Tariff Area for both developer and a SEZ unit.

. 15 year corporate tax exemption on export profits to a SEZ unit. Branches of foreign companies in SEZ s are eligible to undertake manufacturing activities. No minimum export obligation.SEZ Contd . A 100% permitted under the automatic route for SEZ development.

100% pass through tax incentive to VCFs and FVCIs One main reason for growth implementation of product patent regime in India in accordance TRIPS. Nanotechnology 100% FDI permitted without prior approval. 100% pass through tax incentive to VCFs and FVCIs .Biotechnology and Bioinformatics 100% FDI permitted without prior approval.

engineering design and prototype development and a manufacturing hub for high technology products.Manufacturing What is needed? Globalization in Indian manufacturing capabilities by creation of dynamic manufacturing hubs in India. expansion in core sectors in India such as Steel Chemicals and petrochemicals Consumer durables IT hardware and telecom Transportation . India is also being seen as the global destination for R&D.

Multi brands are expected to get permission soon. Retails giants like WalMart.Retail Trading Single brand product retailing permitted under FDI policy. Tesco etc are making foray in India. 50% FDI allowed in retail trading (Single Brand) Fashion lines worldwide looking to enter India market .

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

Tourism contd The present government s major policy initiatives include: Liberalization in aviation sector Pricing policy for aviation turbine fuel which influences internal air fares Rationalization in tax rates in the hospitality sector Tourist friendly visa regime Immigration services Procedural changes in making available land for construction of hotels Allowing setting up of Guest Houses .

surface. sport and health units for tourists and convention/seminar units and organisations.Tourism Contd . entertainment amusement. tour operating agencies. adventure and wild life experience to tourists. . beach resorts and other tourist complexes providing accommodation and/or catering and food facilities to tourists. 100% FDI is allowed in Tourism in India 100% FDI is also allowed in hotels. Tourism related industries also include travel agencies. air and water transport facilities to tourists. leisure. units providing facilities for cultural. which includes restraints.

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

Other growth sectors Energy Infrastructure Non.Banking Financial Services Banking Real Estate Media/Broadcasting Telecommunication .

Forms of enterprises in India ‡ Joint Venture Company Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners. ‡ Wholly Owned Subsidiary Company Foreign companies can set up wholly-owned subsidiary in the form of a private limited company in sectors where 100% foreign direct investment is permitted under the FDI policy. A joint venture is also the preferred route for foreign investors who wish to invest in any sector where 100% foreign direct investment is not permitted. .

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

Project Office Foreign companies planning to execute specific projects in India can set up a project office for this purpose. Conditions laid down by RBI need to be fulfilled. . The foreign entity only has to furnish a report to the RBI giving the particulars of the project/contract. and therefore cannot earn any income in India.Forms of enterprises contd Liaison Office The role of such offices is limited to collecting information about the possible market and providing information about the company and its products to prospective Indian customers.A liaison office is not allowed to undertake any business activity other than liaison activities in India.

82% 16. Apr 1. 2007) 25% Money Market Mutual Fund Minimum Alternate Tax Capital Gains Securities Transaction Tax Taxation of know how fees in the hands of Foreign Companies Royalties/Technical fees payable to nonresidents are taxed on net basis.f. .e.995% (w.Tax Regime of India Direct Tax Corporate Tax Domestic Company Foreign Company Dividend Tax Company 33.66% 41.

Apr 1.Tax Contd Fringe Benefit Tax (FBT) .000 0.1% to apply for Double Tax Avoidance Agreements (DTAAs) Other Direct Tax Wealth Tax Important concept Transfer pricing and determination of arms length price ( ALP ) .e. 2007) Banking Cash Transactions Tax withdrawals over INR 50.f.ESOPs brought under FBT (w.

Indirect Tax Customs Duty CENVAT (Excise Duty) Sales Tax Value Added Tax Service Tax Octroi Duty/Entry Tax Stamp Duty R&D Cess Works Contract Tax .

Indirect Tax Contd Turnover Tax Purchase Tax Secondary and Higher Education Cess .