3. Govt Influence on Trade

8/8/2019 3. Govt Influence on Trade

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Powerpoint Templates

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International BusinessInternational BusinessGovernment Influence on TradeGovernment Influence on Trade

Jan Surya SharmaJan Surya Sharma

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Foreign Direct InvestmentsForeign Direct Investments


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ProtectionismGovt. restrictions & incentives designed helping the domestic

firms compete with foreign competitors at home & abroad.

Govt. intervene to attain socio-economic, &/orpolitical objectives. Govt. impede the imports flow or encourage the export flow of exports,

by providing direct or indirect subsidies to its domestic firms.

Protectionist measures may lead toProtectionist measures may lead to

retaliation by affected stakeholders.retaliation by affected stakeholders.

ECONOMIC RATIONALESECONOMIC RATIONALES NONECONOMIC RATIONALES NONECONOMIC RATIONALES

Prevent unemploymentPrevent unemployment Maintain essential industriesMaintain essential industries

Protect infant industriesProtect infant industries Deal with unfriendly countriesDeal with unfriendly countries

Promote industrializationPromote industrialization Maintain/extend influence spheresMaintain/extend influence spheres

Improve comparative positionImprove comparative position Preserve national identityPreserve national identity


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Prevent Unemployment:Prevent Unemployment:Limiting imports Increase demand of domestic G&S + local jobs.

May decrease export-related jobs:

a) price increases for components or b) lower incomes abroad.Govts. to carefully balance the costs of higher prices with the costs of unemployment & the displacedproduction that would result from freer trade.

Protect Infant Industries:Protect Infant Industries:Shielding infant industries temporary international competitive

advantage movement along the learning curve

efficiency gains from economies of scale with passage of timeValidity of argument depends on the expected future benefits of an internationally

competitive industry to exceed the costs of the associated protectionist measures.

Industrialization Argument:Develop local industry even though they may not be

internationally competitive

Terms of trade: Quantity of Imports against quantity of Exports

Export-led development encourage economic growth

Many emerging economies use protectionism to spur local industrialization.


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Industrialization argumentIndustrialization argument:: surplus workers increase mfring output than agricultural

output

FDI inflows promote sustainable growth Few Commodities production leads to price instability. demand for and prices of finished goods rise faster than

of raw materials and agricultural commodities

export promotion and import substitution, lead to

sustainable economic development industrialization helps the nation-building process

Improve Relative Competitive Positions:Improve Relative Competitive Positions:

Standard of Living

Efficiencies & Innovations

BOP adjustments

Comparable access, i.e., fairness

Leverage as a bargaining tool

Price-control objectives


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Noneconomic RationalesNoneconomic Rationales

Maintenance of essential industriesMaintenance of essential industriesRestrictions for defense, energy & necessity products self sufficiency

Prevention of shipments to unfriendly countriesPrevention of shipments to unfriendly countries

Maintenance or extension of spheres of influence:Maintenance or extension of spheres of influence:

Preservation of national identityPreservation of national identity


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Instruments of Trade ControlInstruments of Trade Control

Tariffs (also duties) are taxes on traded products.

- exports tariffs - transit tariffs - import tariffs

- specific duty - ad valorem tariff - compound duty

Nontariff barriers (NTBs): quantitative & qualitative barriers of

administrative regulations, policies and procedures that

directly or indirectly impede international trade.

Direct Price Influence: Subsidies, Aid/loans, Customs ValuationQuantity Controls: Quota VERs, Embargo, Buy Local,

Import Export Licenses, Admin delays, Standards


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Powerpoint Templates Page 7

Dealing with Government InterventionDealing with Government Intervention

Moving operations to lower-cost countries

FDIs/FIIs/Collaborations (M&A / Jt. V./Subsidiaries)

Concentrating on market attracting low Intl. competition

Internal innovations for efficiency and/or superior products

Try secure Inter & Intra Government protection


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ROLEOFGOVT.ROLEOFGOVT.

Stability Socio-economic & Political

Positive Institution Building

Maintaining Democratic set-up

Create Efficiency & Dynamism

Maintain Flexibility

Provide Social welfare & security


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Taxes & Tariffs payments

Timely & correct info. on business & performance

Facilitate Govt. on policies making & its implementation

Facilitate and support for infrastructure development

Maintain corporate Governance Social responsibility &ethical concerns

Help maintain & support employment & growth in theeconomy

Business Responsibility Towards Govt.Business Responsibility Towards Govt.


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Govt. Responsibilities towards BusinessGovt. Responsibilities towards Business

Establish, formulate Maintain law & order

Facilitate businesses on fiscal & monetary aspects Simplify rules & regulations to facilitate business activities

Provide necessary infrastructure for smooth functioning &business growth

Help maintain & support healthy Competition

Provide R&D + techno-commercial support activities to businessto attain more competencies for competitive advantage

Support maintain Corporate Governance Social responsibility &Ethical concerns

M

aintain & support balanced growth & employment opportunitiesin the economy through its different policy

Maintain socio-economic & political stability.

Assist in rational & optimal utilization of resources.

Maintain necessary inputs & incentives critical for businessdevelopment.


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IndiaIndia Attractive Business DestinationAttractive Business Destination

- Economic reform in Indian economy from 1991

- Strong, fast-growing, vibrant economy which israpidly integrating with the global economy

Largest democracy with a stable political environment.

Abundant low cost educated, skilled HR base

Leader in global BPO/KPO with 80% world market.

Young population with over 65% below 45 years.

Fast growing consumer-class Favorable foreign investment policies, tax incentives &

strong economic fundamentals, India offers attractivereturns to prospective investors


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Indias Industrial PolicyIndias Industrial PolicyReduced bureaucratic controls under its liberalization policy,

however, licensing & restrictions still exist in following sectors: Two sectors reserved for public sector viz.,

Atomic Energy & Railways

Five Industries in which licensing is compulsory

Distillation & brewing of alcoholic drinks Cigars & cigarettes of tobacco

Electronic Aerospace & Defense equipment

Industrial explosives

Hazardous chemicals

Manufacture of items reserved forMSME Sector

Proposals attracting locational restrictions


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Foreign InvestmentsForeign InvestmentsFDI: Any form of investment that earns interest in enterprises

which function outside of the domestic territory of the Investor.

FPI: Form of investment through acquisition of financial assets

(includes stocks, bonds, deposits & currencies) with no enough

significance for management control in foreign country.

Reasons for FDI:

- Cost ofTransportation - Liability of Foreignness

Benefits of FDI:

- Access to superior technology - Increases competitiveness

- Increases Domestic Investment - Bridges FOREX gaps

Negative Effects:

- Monopoly - Crowding out & employment - Profit Outflow

- Corruption - Technology dependence - National security


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Selection of FDI destinations :

- Factor Conditions - Inputs Conditions- Logistics Conditions - Market Conditions

- Govt. Policy(Barriers/Facilitation/Environment)

Selection & Types ofFDISelection & Types ofFDI

Types of FDI:

Direction Based: -Inward - Outward

Activity Based: - Horizontal - Vertical (backward/ forward)

Objective Based: - Resource -Market - Efficiency

Entry Mode Basis: - M&A - Greenfields - Jt. Venture

Sector Basis : - Industrial - Non-IndustrialStrategic Mode: Export Platforms - Domestic Substitution


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India welcomes FDI in almost all sectors.

Foreigners can directly invest themselves or as a joint venture.Investment ceilings in certain sectors are gradually being removed.Opportunities exist for investing in sectors such as:

Tourism & Infrastructure, .Petrochemicals & Mining,Technology & Engineering,Real estate,Biotechnology, Bio-informatics & Nano- technology.Global destination for R&D, Engineering design &

prototype development & High technology products.

FDI & IndiaFDI & India


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FDI PolicyFDI PolicyEffective from 01.10.2010 Dept. of Ind. Policy & PromotionEffective from 01.10.2010 Dept. of Ind. Policy & Promotion

Current policy does not permitted FDI in Certain sectors:

Atomic energy

Lottery business/gambling and betting;

Agriculture (excluding floriculture, horticulture, seeddevelopment, animal husbandry, pisciculture and cultivation of

vegetables, mushrooms, etc.)

Plantations (excluding tea plantation)

Retail Trading (other than single brand retail)

Entities into which FDI can be made:

In an Indian company

In Partnership Firm/Proprietary concern (except agriculture &print media)

FDI in Trust: other than Venture Capital Funds not allowed

FDI in resident identity other than above not allowed


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FDI PolicyFDI Policy contdcontd..

There are two routes for FDI in India

1) Automatic Route 2) Approval RouteAutomaticAutomatic RouteRoute

FDI is permitted under the automatic route for allitems/activities except the following-

Where the foreign collaborator has an existingventure/tie-up in India in the same field.

There are certain exceptions

investment by a Venture Capital Fund registeredwith SEBI;

existing joint venture has less than 3% investmentby either party;

Existing joint venture is defunct or sick


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FDI PolicyFDI Policy contdcontd..

Proposals falling outside notified sectoral policy/capsor sectors in which FDI is not permitted

FIPBFIPB RouteRoute (Approval(Approval Route)Route)

In all other cases of foreign investment, where theproject does not qualify for automatic approval, asgiven above, prior approval is required from FIPB.

Decision of the FIPB is normally conveyed within

30 days of submitting the application. The proposal for foreign investment is decided on a

case-to-case basis depending upon the merits ofthe case and in accordance with the prescribed

sectoral policy.


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Acquisition ofSharesAcquisition ofShares

Acquisitions may be made of an existing Indiancompany which may be either a private or a publiccompany.

Acquisition of shares of a public listed company is

subject to the guidelines of the Securities ExchangeBoard of India (SEBI)

Foreign investors looking at acquiring equity in anexisting Indian company through stock acquisitions

can do so under the automatic route.


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Investment byForeign Institutional Investors (FIIs)Investment byForeign Institutional Investors (FIIs)

An FII must be registered with SEBI and must comply with

certain investment limits. They may purchase shares

and/or convertible debentures of an Indian company under

the Portfolio Investment Scheme.

The shares/convertible debentures of an Indian company

must be purchased through registered brokers on

recognized stock exchanges in India. FIIs are also permitted to purchase shares/convertible

debentures of an Indian company through private

placement/arrangement.

Foreign pension funds, mutual funds, investment trusts,asset management companies, nominee companies and

incorporated/institutional portfolio managers or their

power of attorney holders may invest In India as FIIs.


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Foreign Technology TransferForeign Technology Transfer

Under Press Note 8, foreign technology agreement/

collaboration policy all payments towards royalties, lump-sumpfees for transfer of technology and payments for the use of

trademarks or brand names are allowed without any restrictions

subject to FEMA(current account transactions) Rules 2000.

No approvals are required in respect to all those foreign

technology agreements which involve:

a lump sum payment ofup to USD 2 million

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

exports, subject to a total payment of 8% on sales, without

any restriction on the duration of royalty payments.Note - It is permissible for an Indian Company to issue equity

shares against lumpsum fee and royalty in convertible

foreign currency


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GlobalDepositoryReceipts (GDRs)/ AmericanGlobalDepositoryReceipts (GDRs)/ American

DepositoryReceipts (ADRs)/Foreign CurrencyDepositoryReceipts (ADRs)/Foreign Currency

Convertible Bonds FCCBs)Convertible Bonds FCCBs)

Indian companies listed on the stock exchange are allowed to raisecapital through GDRs/ADRs/FCCBs subject to FEMA rules.

Foreign investment through GDRs/ADRs/FCCBs is also treated

as FDI.

Issue of GDRs/ADRs does not require any prior approvals exceptwhere the FDI after such issue would exceed the sectoral caps, inwhich case prior approval of FIPB would be required.

Issue of FCCBs upto USD 500 million also does not require anyprior approvals


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Preference sharesPreference shares

Indian companies can mobilize foreign investment

through issue of preference shares for financing their

projects/industries.

Issue of preference shares is permissible only as

rupee denominated instruments. All preference shares have to redeemed out of

accumulated profits/ fresh capital within a period of 20

years as per Indian Company Law.

Preference shares, carrying a conversion option, mustcomply with sectoral caps on foreign equity. If the

preference shares do not have conversion option, they

fall outside the FDI cap.


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Exchange ControlRegulations of IndiaExchange ControlRegulations 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 transactionsand capital account transactions.

The Indian rupee is fully convertible for currentaccount transactions, subject to a negative list oftransactions that are prohibited/ require prior approval.

The exchange control laws and regulations for

residents apply to foreign invested companies as well.


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Repatriation of CapitalRepatriation of Capital

Foreign capital invested in India is

generally repatriable, along with capital

appreciation, if any, after the payment oftaxes due on them, provided the

investment was on repatriation basis.


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Laws Governing Business in IndiaLaws Governing Business in India

The Companies Act, 1956

Arbitration and Reconciliation Act, 1996

The Competition Act, 2002

The Foreign Exchange Management Act, 1999

Income Tax Act, 1961

Central Sales Tax, 1956

Central Excise Act, 1944

Information Technology Act, 2000

Copyright Act, 1957

Trademarks Act, 1999

Geographical Indications of Goods Act, 1999

Indian Patents Act, 1970

Designs Act, 2000

Industrial Disputes Act, 1947

Workmen Compensation Act, 1956

Employees Provident Fund Miscellaneous Provisions Act, 1952

Consumer Protection Act, 1956


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ImportantRegulatory Authorities forImportantRegulatory Authorities for

InvestmentInvestment 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)


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TaxRegime of IndiaTaxRegime of India

Direct Tax

Corporate Tax Domestic Company 33.66%

Foreign Company 41.82%

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

Money Market Mutual Fund 25%

Minimum Alternate Tax

Capital Gains

Securities Transaction Tax Taxation of know how fees in the hands of Foreign

Companies Royalties/Technical fees payable tonon-residents are taxed on net basis.


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TaxTax ContdContd

Fringe Benefit Tax (FBT)

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

2007)

Banking Cash Transactions Tax 0.1% toapply for withdrawals over INR 50,000

Double Tax Avoidance Agreements (DTAAs)

OtherDirect Tax Wealth Tax

Important concept Transfer pricing and

determination of arms length price (ALP)


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Indirect TaxIndirect Tax Customs Duty

CENVAT (Excise Duty)

Sales Tax

Value Added Tax

S

erviceT

ax Octroi Duty/Entry Tax

Stamp Duty

R&D Cess

Works Contract Tax Turnover Tax

Purchase Tax

Secondary and Higher Education Cess


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Growth Sectors of economy for foreignGrowth Sectors of economy for foreign

investmentinvestment

IT and ITES India is worlds leader in global outsourcing with

more than 80% of the market share.

Electronic Hardware Technology Park (EHTP)

and Software Technology Park (STP) schemes.

Undertakings setup in EHTP/STP are eligible for

deduction of 100% export profits till March 31,

2009 100% FDI permitted without any prior approvals.


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SpecialSpecialEconomicEconomicZones (SEZs)Zones (SEZs)

SEZ Act and the rules framed thereunder have been

notified with effect from February 2006. An SEZ is an export oriented duty free enclave, which is

deemed to be outside the customs territory of India.

22 operational SEZs in India and over 200 SEZs are invarious stages of approval and development.

100% tax deduction for 10 years forSEZ developer.

Exemption from dividend distribution tax forSEZdeveloper.

Exemption ofSales Tax on purchases from Domestic TariffA

rea for both developer and aS

EZ unit. Exemption from Service Tax for both developer and a SEZ

unit.


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SEZ Contd.

No minimum export obligation. A 100% permitted under the automatic

route forSEZ development.

15 year corporate tax exemption onexport profits to a SEZ unit.

Branches of foreign companies in SEZsare eligible to undertake manufacturing

activities.


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Biotechnology and BioinformaticsBiotechnology and Bioinformatics

100% FDI permitted without prior

approval.

100% pass through tax incentive to VCFs

and FVCIs

One main reason for growth implementation of product patent regime

in India in accordance TRIPS.

Nanotechnology

100% FDI permitted without prior approval.

100% pass through tax incentive to VCFs and FVCIs


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Retail TradingRetail Trading

Single brand product retailing permitted underFDI policy.

Multi brands are expected to get permissionsoon.

Retails giants like WalMart, Tesco etc aremaking foray in India.

50% FDI allowed in retail trading (Single Brand)

Fashion lines worldwide looking to enter India

market


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TourismTourism

India is fast emerging as one of the most

enticing destinations for the global leisuretraveler.

The tourism sector in India is expected to growat 8 per cent per annum, in real terms, between2007 and 2016.

As travelers surge into India, the demand forrooms, across segments, has skyrocketed.Hotels in the luxury and business travelersegment are recording nearly 100 per cent

occupancy, spiraling tariffs, and a strain oncapacity and manpower.


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Powerpoint Templates Page 387-38

TourismTourism contdcontd

The present governments major policy

initiatives include: Liberalization in aviation sector

Pricing policy for aviation turbine fuel whichinfluences internal air fares

Rationalization in tax rates in the hospitalitysector

Tourist friendly visa regime

Immigration services

Procedural changes in making available landfor construction of hotels

Allowing setting up o f Guest Houses


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TourismTourism ContdContd.. 100% FDI is allowed in Tourism in India

100% FD

I is also allowed in hotels, whichincludes restraints, beach resorts and othertourist complexes providing accommodationand/or catering and food facilities to tourists.

Tourism related industries also include: travel agencies,

tour operating agencies,

units providing facilities for cultural, adventureand wild life experience to tourists,

surface, air and water transport facilities totourists,

leisure, entertainment amusement, sport andhealth units for tourists and

convention/seminarunits and organizations.


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TourismTourism ContdContd..

Outbound Tourism

With the rise in living standards, India hasbecome an impressive source for outboundtourist traffic.

Thomas Cook, Cox & Kings India Limited, StarLuxury Cruises, Queen Mary II Cruise Liners etchave launched full fledged operation in India

The introduction of package tours to all five

continents by various travel agencies/companieshas become very popular over the past few years.


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Other growth sectorsOther growth sectors

Energy Infrastructure

Non- Banking Financial Services

Banking Real Estate

Media/Broadcasting

Telecommunication


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Forms of enterprisesForms of enterprises contdcontd

Branch Office

A Branch Office is basically an extended arm of theforeign company and can undertake export/import ofgoods, consultancy, research, coordination with localbuyers and sellers and provide technical support for

products sold in India, development of software andoperations related to airline/shipping business.However, a Branch Office is not allowed toundertake manufacturing activities except researchwork in which the parent company is engaged. Priorapproval ofReserve bank of India is required to setup a Branch office.


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Forms of enterprisesForms of enterprises contdcontdLiaison Office

The role of such offices is limited to collecting

information about the possible market and providing

information about the company and its products to

prospective Indian customers. A liaison office is not

allowed to undertake any business activity other than

liaison activities in India, and therefore cannot earn anyincome in India.

Project Office

Foreign companies planning to execute specificprojects 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.


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3. Govt Influence on Trade

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