Doing Business In India

Doing Business in India Simplified

Paras Kuhad & Associates

Doing Business in India

Simplified

Introduction

The geopolitical changes that have taken place around the world in the last few years and the gradual changes in India’s economic policies have led to a transformation in the bilateral relationship between India and the US which is best reflected in the vastly increased co-operation of the two countries in political, strategic and economic spheres.

Indo-US co-operation in battling terrorism around the world is well established, as is India’s commitment to promote globalization and democracy, to alleviate poverty both at home and abroad and to work closely with the US to contain regionally focused armed tension and promote global peace. Strategic co-operation between the two countries is probably at an all time high with the much debated Indo-US nuclear deal.

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

Reasons that make India an attractive investment destination• India is the world’s largest democracy with a

stable political environment.

• India has an abundant English speaking, educated, skilled human resource base which offers its services at far cheaper rates than that may be found in any other developing or developed country.

• India is world’s leader in global outsourcing with more than 80% of the market.

• India has at this time a young population with roughly 80% of its population below 45 years of age.

• The India market is made more attractive by the fast growing consumer-class that is markedly western in its orientation

• With favourable foreign investment policies, tax incentives and strong economic fundamentals, India offers attractive returns to prospective investors.

India’s Industrial PolicyThe Indian government has removed bureaucratic controls on industry, under its liberalization policy. However, licensing and restrictions still exist in the following sectors:

• Two sectors reserved for public sector viz., Atomic Energy and Railways

• Five Industries in which licensing is compulsory –

Distillation and brewing of alcoholic drinks

Cigars and cigarettes of tobacco

Electronic Aerospace and Defence equipment

Industrial explosives

Hazardous chemicals

• Manufacture of items reserved for Small Scale Sector.

• Proposals attracting locational restrictions

GREAT OPPORTUNITIES FOR US FDI!

Note – The exemption from licensing also applies to all substantial expansion of existing units.

Foreign Investment in IndiaForeign Direct Investment (“FDI”)

India welcomes foreign direct investment in almost all sectors. Foreigners can directly invest in India either by themselves or as a joint venture. Moreover, the investment ceilings in certain sectors are gradually being removed.

Opportunities exist for investing in India in sectors as diverse as tourism and infrastructure, petrochemicals and mining technology and engineering, real estate, biotechnology, bio-informatics and nanotechnology. India is also being seen as the global destination for R&D, engineering design and prototype development and a manufacturing hub for high technology products.

FDI Policy

According to the current policy, FDI is not permitted in the following sectors –

Certain sectors, namely:

• Atomic energy;

• Lottery business/gambling and betting;

• Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture and cultivation of vegetables, mushrooms, etc.)

• Plantations (excluding tea plantation)

• Retail Trading (other than single brand retail)

FDI Policy contd….

There are two routes for FDI in India –

Automatic Route

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

• Where the foreign collaborator has an existing venture/tie-up in India in the same field. There are certain exceptions –

investment by a Venture Capital Fund registered with SEBI;

existing joint venture has less than 3% investment by either party;

FDI Policy contd….

Existing joint venture is defunct or sick

• Proposals falling outside notified sectoral policy/caps or sectors in which FDI is not permitted

FIPB Route (Approval Route)

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

• Decision of the FIPB is normally conveyed within 30 days of submitting the application.

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

Acquisition of Shares

• Acquisitions may be made of an existing Indian company which may be either a private or a public company.

• Acquisition of shares of a public listed company is subject to the guidelines of the Securities Exchange Board of India (SEBI)

• Foreign investors looking at acquiring equity in an existing Indian company through stock acquisitions can do so under the automatic route.

Investment by Foreign Institutional Investors (“FII”)• An FII must be registered with SEBI and must comply

with certain investment limits. They may purchase shares and/or convertible debentures of an Indian company under the Portfolio Investment Scheme.

• The shares/convertible debentures of an Indian company must be purchased through registered brokers on recognized stock exchanges in India.

• FII’s are also permitted to purchase shares/convertible debentures of an Indian company through private placement/arrangement.

• Foreign pension funds, mutual funds, investment trusts, asset management companies, nominee companies and incorporated/institutional portfolio managers or their power of attorney holders may invest In India as FIIs.

Foreign Technology Transfer

Foreign technology induction is encouraged by the Government both through FDI and through foreign technology collaboration agreements.

No approvals are required in respect to all those foreign technology agreements which involve:

– a lump sum payment of up to USD 2 million

– royalty payable up to 5% on net domestic sales and 8% on exports, subject to a total payment of 8% on sales, without any restriction on the duration of royalty payments.

Note - It is permissible for an Indian Company to issue equity shares against lumpsum fee and royalty in convertible foreign currency

Global Depository Receipts (GDRs)/ American Depository Receipts (ADRs)/ Foreign Currency Convertible Bonds (FCCBs)

• Indian companies listed on the stock exchange are allowed to raise capital through GDRs/ADRs/FCCBs.

• Foreign investment through GDRs/ADRs/FCCBs is also treated as FDI.

• Issue of GDRs/ADRs does not require any prior approvals except where the FDI after such issue would exceed the sectoral caps, in which case prior approval of FIPB would be required.

• Issue of FCCBs upto USD 500 million also does not require any prior approvals

Preference shares

• Indian companies can mobilize foreign investment through issue of preference shares for financing their projects/industries.

• Issue of preference shares is permissible only as rupee denominated instruments.

• All preference shares have to redeemed out of accumulated profits/ fresh capital within a period of 20 years as per Indian Company Law.

• Preference shares, carrying a conversion option, must comply with sectoral caps on foreign equity. If the preference shares do not have conversion option, they fall outside the FDI cap.

Exchange Control Regulations of India

• Exchange control is regulated under the Foreign Exchange Management Act, 1999 (“FEMA”)

• Foreign exchange transactions have been divided into two broad categories – current account transactions and capital account transactions.

• The Indian rupee is fully convertible for current account transactions, subject to a negative list of transactions that are prohibited/ require prior approval.

• The exchange control laws and regulations for residents apply to foreign invested companies as well.

Repatriation of Capital

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

Laws Governing Business in India

• The Companies Act, 1956

• Arbitration and Reconciliation Act, 1996

• The Competition Act, 2002

• The Foreign Exchange Management Act, 1999

• Income Tax Act, 1961

• Central Sales Tax, 1956

• Central Excise Act, 1944

• Information Technology Act, 2000

• Copyright Act, 1957

• Trademarks Act, 1999

Laws Contd…

• Geographical Indications of Goods Act, 1999

• Indian Patents Act, 1970

• Designs Act, 2000

• Industrial Disputes Act, 1947

• Workmen Compensation Act, 1956

• Employees Provident Fund Miscellaneous Provisions Act, 1952

• Consumer Protection Act, 1956

Important Regulatory Authorities for Foreign Investment• Secretariat for Industrial Assistance (SIA)

• Foreign Investment Promotion Board (FIPB)

• The Foreign Investment Implementation Authority (FIIA)

• Reserve Bank of India (RBI)

• Registrar of Companies (RoC)

• Securities and Exchange Board of India (SEBI)

• Central Board of Excise and Customs (CBEC)

• Central Board of Direct Taxes (CBDT)

• Authority for Advance Rulings (AAR)

• Investment Commission (IC)

Growth Sectors of economy for

foreign investment– IT and ITES

• India is world’s leader in global outsourcing with more than 80% of the market share.

• Electronic Hardware Technology Park (EHTP) and Software Technology Park (STP) schemes.

• Undertakings setup in EHTP/STP are eligible for deduction of 100% export profits till March 31, 2009

• 100% FDI permitted without any prior approvals.

Special Economic Zones (SEZ’s)

• SEZ Act and the rules framed thereunder have been notified with effect from February 2006.

• An SEZ is an export oriented duty free enclave, which is deemed to be outside the customs territory of India.

• 22 operational SEZ’s in India and over 200 SEZ’s are in various stages of approval and development.

• 100% tax deduction for 10 years for SEZ developer.

• Exemption from dividend distribution tax for SEZ developer.

• Exemption of Sales Tax on purchases from Domestic Tariff Area for both developer and a SEZ unit.

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

SEZ Contd….

• No minimum export obligation.

• A 100% permitted under the automatic route for SEZ development.

• 15 year corporate tax exemption on export profits to a SEZ unit.

• Branches of foreign companies in SEZ’s are eligible to undertake manufacturing activities.

Biotechnology and Bioinformatics

• 100% FDI permitted without prior approval.

• 100% pass through tax incentive to VCFs and FVCIs

• One main reason for growth – implementation of product patent regime in India in accordance TRIPS.

Nanotechnology• 100% FDI permitted without prior approval.

• 100% pass through tax incentive to VCFs and FVCIs

Manufacturing• What is needed? Globalization in Indian

manufacturing capabilities by creation of dynamic manufacturing hubs in India.

• India is also being seen as the global destination for R&D, engineering design and prototype development and a manufacturing hub for high technology products.

• expansion in core sectors in India such as –

– Steel

– Chemicals and petrochemicals

– Consumer durables

– IT hardware and telecom

– Transportation

Retail Trading

• Single brand product retailing permitted under FDI policy.

• Multi brands are expected to get permission soon.

• Retails giants like WalMart, Tesco etc are making foray in India.

• 50% FDI allowed in retail trading (Single Brand)

• Fashion lines worldwide looking to enter India market

Tourism

• India is fast emerging as one of the most enticing destinations for the global leisure traveler.

• The tourism sector in India is expected to grow at 8 per cent per annum, in real terms, between 2007 and 2016.

• As travelers surge into India, the demand for rooms, across segments, has skyrocketed. Hotels in the luxury and business traveler segment are recording nearly 100 per cent occupancy, spiraling tariffs, and a strain on capacity and manpower.

Tourism contd…

The present government’s major policy initiatives include:

• Liberalization in aviation sector

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

• Rationalization in tax rates in the hospitality sector

• Tourist friendly visa regime

• Immigration services

• Procedural changes in making available land for construction of hotels

• Allowing setting up of Guest Houses

Tourism Contd….

• 100% FDI is allowed in Tourism in India

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

• Tourism related industries also include travel agencies, tour operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment amusement, sport and health units for tourists and convention/seminar units and organisations.

Tourism Contd….

Outbound Tourism

• With the rise in living standards, India has become an impressive source for outbound tourist traffic.

• Thomas Cook, Cox & Kings India Limited, Star Luxury Cruises, Queen Mary II Cruise Liners etc have launched full fledged operation in India

• The introduction of package tours to all five continents by various travel agencies/companies has become very popular over the past few years.

Other growth sectors

• Energy

• Infrastructure

• Non- Banking Financial Services

• Banking

• Real Estate

• Media/Broadcasting

• Telecommunication

Forms of enterprises in India

• Joint Venture Company

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

•  Wholly Owned Subsidiary Company

Foreign companies can set up wholly-owned subsidiary in the form of a private limited company in sectors where 100% foreign direct investment is permitted under the FDI policy.

Forms of enterprises contd…

• Branch Office

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

Forms of enterprises contd…

Liaison Office

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

Project Office

• Foreign companies planning to execute specific projects in India can set up a project office for this purpose. Conditions laid down by RBI need to be fulfilled. The foreign entity only has to furnish a report to the RBI giving the particulars of the project/contract.

Tax Regime of India

Direct Tax

• Corporate Tax – Domestic Company – 33.66%

Foreign Company – 41.82%

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

Money Market Mutual Fund – 25%

• Minimum Alternate Tax

• Capital Gains

• Securities Transaction Tax

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

Tax Contd…

• Fringe Benefit Tax (FBT)

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

• Banking Cash Transactions Tax – 0.1% to apply for withdrawals over INR 50,000

• Double Tax Avoidance Agreements (DTAAs)

• Other Direct Tax – Wealth Tax

• Important concept – Transfer pricing and determination of arms length price (“ALP”)

Indirect Tax

• Customs Duty

• CENVAT (Excise Duty)

• Sales Tax

• Value Added Tax

• Service Tax

• Octroi Duty/Entry Tax

• Stamp Duty

• R&D Cess

• Works Contract Tax

Indirect Tax Contd…

• Turnover Tax

• Purchase Tax

• Secondary and Higher Education Cess

Thank You