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Doing Business in India
Contractor, Nayak & KishnadwalaChartered Accountants, Mumbai, India
Tel. +91-22-6623 0600Fax. + 91 -22- 2261 5814
e mail [email protected]
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Reasons for Doing Business in India
Large & Fast Growing Market
Global Outsourcing of Services
Political Stability
IPR Protection
Large Educated Workforce
Lower Costs
Business & Policy Environment
Tax Breaks & Subsidies
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FDI Equity Inflows –Top Investing Countries
Rank Country Cumulative Inflows
(April 2000 to Nov 2010)
USD Million
% of total value
1 Mauritius 52,398 42%
2 Singapore 11,557 9%
3 U.S.A. 9,204 7%
4 U.K. 6,269 5%
5 Netherlands 5,289 4%
6 Japan 4,631 4%
7 Germany 2,903 2%
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FDI Equity Inflows –Top SectorsRank Sector Cumulative Inflows (April 2000
to November 2010)
USD Million
% of total value
1 Services (Fin & Non-Fin) 26,197 21%
2 Computer Software & Hardware
10,446 8%
3 Telecommunications 10,023 8%
4 Housing & Real Estate 9,356 8%
5 Construction activities 8,887 7%
6 Power 5,611 5%
7 Automobile 5,129 4%
8 Metallurgical industry 4,090 3%
9 Petroleum & Natural Gas 3,195 3%
10 Chemicals 2,767 2%
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Establishment of Business
Applicable Laws governing Establishment of Business
Options for foreign companies/citizens
Applicable taxes
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Applicable Laws
Industrial Policy of Government of India
Foreign Exchange Management Act, 1999 (FEMA)
Companies Act, 1956
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Options for foreign companies/citizens
Liaison Office
Branch
Investment in Subsidiary company/joint venture/other company
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Applicable taxes
Central Income Tax [including Tax Deduction at Source
(TDS, i.e. withholding tax), dividend distribution tax & fringe benefit tax] & Wealth Tax
Excise Duty
Service Tax
Customs Duty
State VAT
Profession Tax
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Industrial Policy
GoI New Industrial Policy of 1991
Industrial Licensing, Foreign Investment, Foreign Technology Agreements, Public Sector Policy
Prohibited sectors, Sectors permitted under Automatic Route, Sectoral caps
Governed by Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India (website: www.dipp.nic.in )
Secretariat of Industrial Approvals (SIA)/ Foreign Investment Promotion Board (FIPB) for cases not covered by Automatic Route
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Foreign Exchange Management Act (FEMA)
Exchange Control Regulations
Administered by Reserve Bank of India (RBI) –website www.rbi.org.in
Current Account convertibility with few restrictions
Capital Account controls with few permitted types of transactions
Liaison offices & branches of foreign companies, foreign direct investment in Indian companies
Foreign citizens (other than persons of Indian origin) not permitted to acquire shares on Indian stock exchanges
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Setting up a Company
Incorporation process takes 20-30 days
Cost of incorporation of a company
About Rs.50,000 for authorised capital of Rs.100,000
About Rs.75,000 for authorised capital of Rs.1,000,000
Public limited company or private limited company
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Setting up a Company…
Public limited company requirements: Minimum capital of Rs.500,000 At least 7 shareholders At least 3 directors
Private limited company requirements: Minimum capital of Rs.100,000 At least 2 shareholders, and not exceeding 50 At least 2 directors Restrictions in articles re no. of shareholders,
transfer of shares, invitation to subscribe to shares/debentures & acceptance of deposits.
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Companies Act Requirements
All companies liable to get accounts audited To file annual return and audited accounts
electronically To maintain minutes of shareholders and directors
meetings To have whole time company secretary if capital
exceeds Rs. 50,000,000 Secretarial audit if capital between Rs. 2,000,000 &
Rs. 50,000,000 Restrictions for public limited companies regarding
managerial remuneration, inter corporate loans and investments
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Liaison Office
Governed by FEMA and Companies Act Prior Approval of RBI under FEMA Subsequent registration with Registrar of Companies
(RoC) Not permitted to carry on any income earning activity
in India Only deposits by way of inward remittance permitted
in bank account To file annual audited accounts of liaison office with
RBI & RoC Not liable to income tax (except TDS)
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Liaison Office….
Permitted activities – Representing parent company/group companies in
India
Promoting export/import from/to India
Promoting technical/financial collaborations between parent/group companies and companies in India
Acting as communication channel between the parent company and Indian companies
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Branch Office
Governed by FEMA and Companies Act Prior Approval of RBI under FEMA Subsequent registration with Registrar of
Companies (RoC) Can earn income in India To file annual audited accounts of office with RBI
& RoC Liable to all taxes in India Income tax at 40% plus surcharge (effectively
42.23%) Transfer pricing provisions applicable
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Branch Office – Permitted Activities
Export/import of goods Rendering professional or consultancy services Carrying out research, in which parent co engaged Promoting technical/financial collaborations between
parent/group companies and companies in India Representing parent company in India and acting as
buying/selling agent in India Rendering services in Information Technology and
development of software in India Rendering technical support to products supplied by
parent/group companies Foreign airline/shipping company
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Investment in Indian Company
Investment in shares of an Indian company
Either by direct subscription or by purchase of existing shares
Either under Automatic Route or with prior permission of FIPB
Subject to sectoral caps and prohibited sectors
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Investment in Indian Companies- Prohibited sectors Retail Trading (except single brand)
Atomic Energy
Lottery Business
Gambling & Betting
Real estate business or construction
Business of Chit Fund
Nidhi Company
Trading in TDRs
Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture, cultivation of vegetables & mushrooms under controlled conditions, services related to agro and allied sectors) and Plantations (other than tea plantations)
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Investment in Indian Companies - Sectoral Caps
Scheduled Air Transport – 49% (100% for NRIs)
Non-Scheduled Air Transport – 74% (100% for NRIs)
Ground Handling – 74% (100% for NRIs)
Banking – 74% (FDI + FII and within this FII cannot exceed 49%)
Insurance - 26%
Telecommunications – 49%
NBFC activities – permitted list of 18 with minimum capitalization norms
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Some Sectors for which Automatic Route not available Petroleum sector (except refining), LNG/Gas pipelines Commodity Exchange Infrastructure Companies in Securities Market Credit Information companies Investment companies in infrastructure & services Defence & Strategic Industries Atomic Minerals Print Media Broadcasting Satellite Postal Services Courier Services Establishment & Operation of Satellite Development of Integrated Township Tea Sector Asset Reconstruction Companies
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Sectors under Automatic Route with no sectoral caps
All others, including Software
BPO/KPO
Drugs & Pharmaceuticals
Advertising
Roads, Highways, Ports, Harbours
Shipping
Power
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Certain Restrictions under Different Statutes/Policies
Professional Services – Statutes governing each profession
Print Media – Information & Broadcasting Ministry Guidelines
Investment in SEZ and Free Trade Warehousing –subject to Special Economic Zones Act, 2005 and Foreign Trade Policy
Satellite – Department of Space/ISRO
Petroleum & Natural Gas – Ministry of Petroleum & Natural Gas
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Some Sector Specific Issues -Trading
Single Brand Retail Trading permitted under FIPB route
Test Marketing permitted under FIPB route Franchise?
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Some Sector Specific Issues -Real Estate Development
Subject to
minimum development area – 10 hectares for serviced housing plots, 50,000 sq.mtrs. for construction
minimum capitalization norms – US $ 5 million for JVs, US $ 10 million for WOS – funds to be brought in within six months of commencement of Company’s business
time period for completion – 50% within 5 years from receipt of statutory approvals
lock-in period for funds – 3 years from completion of minimum capitalisation
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Taxation – Income Tax
Scope of Taxation
For residents & domestic companies, worldwide income
For non-residents – income accruing, arising or received in India, or deemed to accrue or arise or be received in India
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Income Tax – Rates of Tax
Domestic Companies – 30% plus surcharge (effectively 33.2175%)
Foreign Companies – 40% plus surcharge (effectively 42.23%)
Dividend Distribution tax – 15% plus surcharge (effectively 16.995%)
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Withholding Tax Rates for Payments to Foreign Companies
Nature of Payment Rate
Interest on Foreign Currency Loan 21.115%
Royalties & Fees for Technical Services
10.5575%
Dividends Nil
Short Term Capital Gains 15.83625%
Long Term Capital Gains 21.115%
Other Income 42.23%
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Other tax provisions
No provisions for group consolidated returns No controlled foreign corporation rules No thin capitalization rules Deemed Dividend in respect of loans to shareholders Rates of Depreciation prescribed on written down
value basis No carry backward of losses Carry forward of losses for 8 years Minimum Alternate Tax at 18% of book profits Authority for Advance Rulings for non-residents
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Some Tax Holidays
New Software Technology Park Units & Export Oriented Units – 100% of export profits till 31st March 2012
New Units in Special Economic Zones – 100% of profits for first 5 years, 50% of profits for next 5 asst. years – for the next 5 year, up to 50% of the amount transferred to SEZ Reinvestment Reserve account.
Infrastructure Companies – 100% of profits for any 10 consecutive years out of first 20 years
Power Generation, Transmission & Distribution units -100% of profits for any 10 consecutive years out of first 15 years
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Double Taxation Avoidance Agreements
Override domestic tax law, to the extent that treaty more beneficial to taxpayer
Comprehensive Treaties with 79 countries
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Double Taxation Avoidance Agreements – Some Treaties
Country Interest Royalty FTS
Belgium 15 10 10
Cyprus 10 15 10
Denmark 15 20 20
France 10 10 10
Germany 10 10 10
Italy 15 20 20
Ireland 10 10 10
Malta 10 15 10
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Double Taxation Avoidance Agreements – Some Treaties
Country Interest Royalty FTS
Netherlands 10 10 10
Norway 15 10 10
Portugal 10 10 10
Spain 15 10/20 20
Sweden 10 10 10
Switzerland 10 10 10
United Kingdom 15 10/15 15
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Transfer Pricing
Applicable to transactions between related entities, at least one of which is a non-resident
5 recognised methods for ALP determination Comparable Uncontrolled Price Resale Price Method Cost Plus Method Profit Split Method Transactional Net Margin Method
No safe harbour rules Transfer Pricing Audit Scrutiny of transactions exceeding Rs.150,000,000 in
a year
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Income Tax Procedures
Payment of advance tax
Filing of tax returns
Assessment by Assessing Officer
Appeals to Commissioner (Appeals)
Appeals to Income Tax Appellate Tribunal
Appeals to High Court
Reference to Supreme Court
Website www.incometaxindia.gov.in
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Excise Duty
Duty payable by manufacturer on manufacture of goods
To be paid at time of removal from factory Normally payable on selling price – generally
recovered from customer Normal rate of 10% plus education cess
(effectively 10.30%) Cenvat Credit available for excise duty paid
on inputs & service tax paid on input services Website www.cbec.gov.in
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Service Tax
Payable by service provider on provision of specified services
Most services taxable, other than medical services Payable on value of services at 10% plus education
cess (effectively 10.30%) – generally recovered from customer
Payable by service recipient on import of services Export of services exempt Cenvat Credit available for excise duty paid on inputs
& service tax paid on input services Website www.servicetax.gov.in
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Customs Duty
Payable on import of goods into India
Payable on clearance of goods from port/airport
Normal Customs Duty rate of 10% plus education cess (effectively 10.30%)
Additional Duty to match Excise Duty rates
Special Additional Duty at 4% of value
Website www.cbec.gov.in
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VAT
Payable on sale of goods
Payable on sale price, including excise duty
Lease and works contracts deemed to be sales
Normal rate of 12.5%
Set off available for VAT paid on purchases
Central Sales Tax on inter-state transfers
No VAT on purchases during course of import or on exports
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Cultural Aspects of Doing Business in India
Land of different cultures – people from North India more aggressive, from South India more conservative, from West India more businesslike
Both strongly held traditional values and emerging modern business practices prevalent
Greet with a handshake or namaste
Always use formal titles (Mr., Dr., Sir, Madam ) when greeting for first time
Punctuality – be prepared for delays in appointments, particularly in Government offices
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Cultural Aspects of Doing Business in India ….
Most Indians are reluctant to say no directly - try and understand the message behind the words
Get to know your counterpart as a person and gain his trust
Be willing to share a cup of tea/coffee and indulge in small talk before getting down to the main business
Do not be offended at personal questions
Do not be too aggressive or forceful or confrontationist – try and use reasoned logic after understanding the other person’s problem
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Thank You!
