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Doing businessin India

Suresh Surana & Associates

www.ss-associates.com


DOING BUSINESS IN INDIA

Foreword

Compiled by:

The Indian economy grew by about 7.2% p.a. during 2009-10 despite the challenges on account of slowdown faced by the global economies in the later part of 2008-09. The overall growth of the economy can directly be attributed to its strong fundamentals, renewed momentum in the manufacturing sector, infrastructure sector and growing contribution of the service sector. Increased emphasis has been laid by the policy makers on further integration of the economy with the global markets by laying a road map for implementation of the Goods and Services Tax (GST) and convergence of the financial reporting standards with International Financial Reporting Standards (IFRS).

The Indian Government plans to implement the Direct Taxes Code (DTC) from the fiscal year 2012-13 i.e. 1 April 2012. The basic purpose of the Direct Tax Code is to completely overhaul the complexities of the existing Income Tax Act, 1961 and to make the tax structure simple and also to provide a fair ground for collection and levy of taxes which would be light not only on the individual tax payers, but also corporate houses and also foreign residents.

India is fast becoming the “outsourcing destination of choice” of the world in sectors such as Information Technology, Pharmaceuticals, Banking and Finance, Insurance, Gem and Jewellery, Manufacturing etc. This is mainly due to the ample availability of competent and cost efficient workforce whereby setting up operations in India has become synonymous to efficient and cost effective operations. The growing Indian middle class population has placed India as “The market of the future”. As a result of these factors, many of the leading companies all over the world have already set up operations in India or are planning to do so.

We have compiled this guide to provide an overview of various social, legal, tax and commercial aspects in India, which can have a material impact on decision about doing business in India.

Given the limitations in compiling a booklet of this size, our intention is to offer a broad outline of the areas we feel are relevant to undertake business activities in India.

This guide cannot serve as a substitute for specific legal, tax or accounting advice concerning a business undertaking in India. Therefore, when specific issues occur in practice, it will be necessary to refer to the specific laws and regulations. Suresh Surana & Associates is not responsible for any action taken based on information contained in this guide and any liability arising from any statements or error contained in it.

Suresh Surana & Associates13th Floor, Bakhtawar,229, Nariman Point, Mumbai - 400 021.Tel: (+91-22) 6696 0644 Fax: (+91-22) 6121 4444Email: [email protected]: www.ss-associates.com


Doing businessin India



Economy

Tax Rates at a Glance (Financial Year 2010-11)

Foreign Investments

thØIndia is the 4 largest economy in the world in terms of Gross Domestic Product (GDP) based on Purchasing Power Parity (PPP) method. India's GDP of US$ 1.286 trillion at current prices makes it the twelfth largest economy in the world.

ØIndia witnessed a robust GDP growth in the last decade, averaging between 6-7% per annum and for the Financial Year 2010-11, the GDP growth rate of India is expected to be 8.4%.

ØExports for year ending on 31 March 2009 were US$ 185.3 billion and imports for the year ended on 31 March 2009 stood at US$ 303.7 billion.

ØAccording to the World Fact Book, India is among the world's youngest nations with a median age of 25 years as compared to 43 in Japan and 36 in USA. Of the BRIC—Brazil, Russia, India and China—countries, India is projected to stay the youngest with its working-age population estimated to rise to 70% of the total demographic by 2030, the largest in the world. India will see 70 million new entrants to its workforce over the next 5 years.

ØIndia continues to be the most preferred destination—among 50 top countries—for companies looking to offshore their information technology (IT) and back-office functions, according to global management consultancy, AT Kearney.

ØForeign Direct Investment (FDI) is permitted under automatic route except in certain prohibited activities and in certain activities with sectoral caps.

ØDividends and sale proceeds of shares are freely repatriable subject to payment of applicable taxes.

India - A Business Perspective

Income Tax Rates for Corporates, Firms:

1. Domestic Companies 33.2175% 30.90%

2. Foreign Companies 42.23% 41.20%

3. Partnership Firms 30.90% 30.90%

Income Tax Rates for Individuals, HUF, BOI, AOP

4. As per Income Slabs (INR) 0% to 30.90%

Sr.No. Particulars Income

exceedingRs. 1 crore

Incomeup to

Rs. 1 crore

Rate of Tax


Marine Drive, Mumbai


India - CEOs Speak

Olli-Pekka KallasvuoNokia

“India today is not an emerging economy. It has fully emerged, and it is in full bloom.”

Tom EndersAirbus

“You can't be global without being in India - with its large number of highly skilled, motivated and knowledgeable people.”

Andrew Holland

DSP Merrill Lynch

“I believe that India's growth is on the runway, ready to take off.”

Kensaku KonishiCanon India

“One of the fastest growing economies in the world, India is an excellent country for any company to be in.”

Karl-Heinz FloetherAccenture

"We are delighted and impressed with the growth we have been able to achieve in this country. India is a key node in Accenture's global delivery network.”

Michael DellDell Computers

"India can become a major part of Dell's operations and a major source of the human capital that Dell takes on as a company...and we are looking for further opportunities to take advantage of skilled labour."

International Monetary Fund

"India will be key engine of world economy in next decade"

Mike S. ZafirovskiMotorola Inc.

"Not only are there brilliant engineers here [in India], I've been seeing that the entrepreneurial spirit of the businesses is second to none.”

McKinsey & Co.

"India has an extraordinary talent pool with virtually limitless potential”

Jack WelchGeneral Electric

"A truly global company will be one that uses the intellect and resources of every corner of the world . India is a developed country as far as intellectual capital is concerned. The opening of (offshore) development centres mark a new level of commitment by GE in india."


Hawa Mahal, Jaipur

Contents


Co

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CHAPTER 1 : INDIA A PROFILE

PHYSICAL FEATURESGeography............................................................................................................... 1Climate..................................................................................................................... 1

POPULATION AND SOCIAL PATTERNSPopulation............................................................................................................... 1Language ................................................................................................................ 2Religion.................................................................................................................... 2Education ................................................................................................................ 2

GOVERNMENT AND POLITICAL SYSTEMGovernment Structure......................................................................................... 2

LEGISLATIVE AND LEGAL ENVIRONMENTLegislation .............................................................................................................. 2Legal Environment................................................................................................ 3

INFRASTRUCTURETransport................................................................................................................. 3Communication...................................................................................................... 4



Education ................................................................................................................ 4Medical Services.................................................................................................... 4Housing.................................................................................................................... 4

INTERNATIONAL RELATIONS AND ASSOCIATIONS..................................... 4

CERTAIN KEY INFORMATION FOR VISITORS TO INDIAIndian Currency ..................................................................................................... 5Visitors' Visas......................................................................................................... 5Indian Standard Time ........................................................................................... 5Business Hours ...................................................................................................... 5Public Holidays ...................................................................................................... 6Tourism.................................................................................................................... 6Attire Code.............................................................................................................. 6

FRAMEWORK.......................................................................................................... 8

ECONOMIC TRENDS.............................................................................................. 9

ECONOMIC SECTORS ........................................................................................... 10

REGULATORY ENVIRONMENTInvestor Protection ............................................................................................... 10Price Controls......................................................................................................... 11Registration of Intellectual Property................................................................ 11Competition Policy................................................................................................ 13Environmental Regulation................................................................................... 13

FINANCIAL SECTORBanking System ..................................................................................................... 13Insurance Sector ................................................................................................... 14Capital Market........................................................................................................ 14Stock Exchanges ................................................................................................... 15Specialized Financial Institutions...................................................................... 16Investment Institutions........................................................................................ 16Mutual Funds .......................................................................................................... 16Non Banking Finance Companies ...................................................................... 17Credit Rating Agencies ........................................................................................ 17

INCENTIVES FOR INDUSTRIESConcessional Finance........................................................................................... 17Central Government Investment Study ........................................................... 17State Government Incentives............................................................................. 18

CHAPTER 2 : INDIAN BUSINESS AND INVESTMENT ENVIRONMENT



INCENTIVES FOR EXPORTS................................................................................ 18

ENERGY, MINERALS AND OTHER

NATURAL RESOURCES........................................................................................ 19

FOREIGN TRADE.................................................................................................... 19

OTHER FACTORS

Language ................................................................................................................ 19

Trained Manpower................................................................................................. 19

Low Research and Development Costs............................................................ 20

Financial Reliability............................................................................................... 20

FORMS OF BUSINESS ENTITIES

Companies .............................................................................................................. 22

Branches of Foreign Companies ........................................................................ 23

Liaison Offices ....................................................................................................... 24

Project Office ......................................................................................................... 25

Partnerships ........................................................................................................... 26

Trusts ....................................................................................................................... 26

Limited Liability Partnerships (LLPs)............................................................... 26

SETTING UP A COMPANY

Incorporation of a Company............................................................................... 29

Initial Capital Requirements ............................................................................... 31

Kinds of Shares...................................................................................................... 32

Debentures ............................................................................................................. 33

Public Deposits ...................................................................................................... 33

Directors.................................................................................................................. 33

Managing Director ................................................................................................ 35

Secretary................................................................................................................. 35

STATUTORY REQUIREMENTS FOR COMPANIES

Annual Reports...................................................................................................... 36

Audit Requirements.............................................................................................. 36

Shareholders' Meetings ....................................................................................... 37

Online Filing System............................................................................................. 38

Filing of Documents / Returns ........................................................................... 38

Penalties for non compliance under the Companies Act, 1956 ................. 39

CHAPTER 3 : BUSINESS ENTITIES



SIGNIFICANT COMPANY LAW REGULATIONS

Loans and Guarantees to Companies............................................................... 42

Loans and Guarantees to Directors .................................................................. 42

Disclosure of Interest by Directors.................................................................... 42

Dividends................................................................................................................. 42

Mergers.................................................................................................................... 43

Buy-back of shares ............................................................................................... 43

Audit Committee ................................................................................................... 44

Producer Companies ............................................................................................ 44

Takeovers ................................................................................................................ 44

Corporate Governance......................................................................................... 45

Winding Up.............................................................................................................. 47

BACKGROUND........................................................................................................ 49

LEGISLATIVE PROVISIONS

Mandatory Employee Benefits........................................................................... 49

Workers' Compensation....................................................................................... 53

Industrial Employment Act ................................................................................. 53

Industrial Disputes Act......................................................................................... 53

Equal Remuneration Act...................................................................................... 54

Contract Labour Act............................................................................................. 54

Trade Unions Act ................................................................................................... 54

Health and Safety.................................................................................................. 54

ENGAGEMENT OF FOREIGN NATIONALS........................................................ 56

INTRODUCTION ..................................................................................................... 58

EXCHANGE CONTROL REGULATIONS

Introduction............................................................................................................ 58

Investment in India by a person resident outside India ............................... 59

Prohibition on investments................................................................................. 60

CHAPTER 4 : HUMAN RESOURCES

CHAPTER 5 : FOREIGN INVESTMENT IN INDIA



INVESTMENT UNDER VARIOUS FOREIGN INVESTMENT SCHEMES

Automatic Route of FDI ....................................................................................... 61

Investments in Sectors where 100% FDI Under Automatic

Route is not available........................................................................................... 61

Certain Important Aspects of the FDI Scheme .............................................. 62

Investments by Foreign Institutional Investors (FII) ..................................... 62

Investments by Non Resident Indians (NRI) ................................................... 63

Investments by Venture Capital Fund............................................................... 64

Purchase of Other Securities by FIIs ................................................................ 65

Purchase of Other Securities by NRIs.............................................................. 65

Foreign Investment in Tier I and Tier II instruments

issued by banks in India....................................................................................... 66

Issue of rights / bonus shares to erstwhile

Overseas Corporate Bodies (OCBs) .................................................................. 66

Additional allocation of rights shares by

resident to non-residents .................................................................................... 67

Issue and acquisition of shares after merger or de-merger

or amalgamation of Indian companies............................................................. 67

Issue of shares under Employee Stock Options Scheme to

persons resident outside India........................................................................... 67

Transfer of Securities of Indian Companies by a Person

Resident Outside India......................................................................................... 68

Transfer of Securities of Indian Companies by a Person

Resident in India.................................................................................................... 69

Conversion of ECB/Lumpsum Fees / Royalty /

Import of Capital Goods by SEZ into equity ................................................... 69

Issue of shares by Indian companies ADR / GDR ......................................... 70

Investment in firm or proprietary concern in India....................................... 70

Establishment in India of a Branch or Liaison Office

or Project Office ................................................................................................... 71

EXTERNAL COMMERCIAL BORROWINGS (ECB)

Automatic Route ................................................................................................... 73

Approval Route ...................................................................................................... 76

Time period for realization of Export payments ........................................... 80

Time period for payments towards Import obligation ................................. 80

EXCHANGE CONTROL REGULATIONS FOREIGN TECHNOLOGY

TRANSFER AND ROYALTY PAYMENTS............................................................ 80



ANNEXURE 1

Sectors Prohibited for FDI................................................................................... 81

ANNEXURE 2

Sector specific guidelines for FDI...................................................................... 81

INTRODUCTION ..................................................................................................... 93

INCOME TAX ON CORPORATIONS

General Structure and Scope ............................................................................. 93

Rates of Tax ............................................................................................................ 93

Minimum Alternate Tax........................................................................................ 94

Fringe Benefits Tax ............................................................................................... 94

Dividend Distribution Tax .................................................................................... 94

Taxable Income...................................................................................................... 97

Tax Benefits / Reliefs............................................................................................ 100

Transfer Pricing Regulations .............................................................................. 114

Relief for Tax losses.............................................................................................. 115

Returns and Payment of Taxes .......................................................................... 115

INCOME TAX ON NON-CORPORATES

Residential Status ................................................................................................. 116

Rates of Tax ............................................................................................................ 118

Taxable Income...................................................................................................... 119

Gross Income.......................................................................................................... 119

Capital Gains Tax ................................................................................................... 120

Deductions and Reliefs ........................................................................................ 120

Clubbing of Minor's Income ................................................................................ 121

Relief for Tax losses.............................................................................................. 121

Returns and Payments of Taxes ........................................................................ 121

Presumptive Scheme for Small Businesses .................................................... 121

SPECIAL PROVISIONS FOR COMPUTATION OF

TAXABLE INCOME OF NON-RESIDENTS

Non-residents engaged in Specified Business ............................................... 122

CHAPTER 6 : TAXATION SYSTEM



Income of Non-resident Indians......................................................................... 122

Income of Foreign Institutional Investors........................................................ 123

Income of Offshore Funds................................................................................... 124

WITHHOLDING TAXES.......................................................................................... 124

DOUBLE TAX TREATIES....................................................................................... 124

OTHER ADMINISTRATIVE ASPECTS

Audit Reports ......................................................................................................... 125

Assessment Procedure ........................................................................................ 125

Advance Rulings .................................................................................................... 126

OTHER DIRECT TAXES

Securities Transaction Tax .................................................................................. 126

Wealth Tax............................................................................................................... 127

Gift Tax..................................................................................................................... 127

Estate Duty ............................................................................................................. 127

Interest Tax ............................................................................................................. 127

INDIRECT TAXES

Goods and Services Tax ('GST') ......................................................................... 128

Central Value Added Tax ('CENVAT') ................................................................ 128

Customs Duty......................................................................................................... 128

Service Tax.............................................................................................................. 129

DIRECT TAX CODE ('DTC') ................................................................................... 130

INTERNATIONAL FINANCIAL REPORTING STANDARDS ('IFRS') .............. 131

ANNEXURE I

Double Taxation Avoidance Agreements ('DTAA') Rates ............................. 133

ANNEXURE II

Tax Deduction At Source ('TDS') Rates............................................................ 140


Chapter 1India - A Profile

Golden Temple, Amritsar

DOING BUSINESS IN INDIA 1

CHAPTER 1

INDIA - A PROFILE

1.0 PHYSICAL FEATURES

1.1 Geography

1.2 Climate

2.0 POPULATION AND SOCIAL PATTERNS

2.1 Population

India is situated in the southern Peninsula of the Asian continent and is the seventh largest country in the world, in terms of size. It lies entirely in the northern hemisphere and extends from the snow-covered Himalayan heights in the north to the tropical rain forests of the south. India shares its borders with Afghanistan and Pakistan to the north-west, China, Bhutan and Nepal to the north, and Myanmar and Bangladesh to the east. Sri Lanka lies to south of India and is separated from India by a narrow sea channel formed by the Palk Strait and the Gulf of Mannar.

0 0 0 0India lies between latitudes 8 4’ and 37 6’ north and longitudes 68 7’ and 97 25’

east. It measures about 3,214 kilometers from north to south between its extreme latitudes and 2,933 kilometers from east to west between the extreme longitudes. India covers an area of 3,287,263 square kilometers and has a land frontier of 15,200 kilometers. India has a coastline of 7,516 kilometers.

The main land comprises of four regions: the mountain zone in the north, the plains of the Ganges and the Indus rivers, a small desert region in the west and the southern peninsula which consists of the Deccan plateau, mountains and coastal strips.

India’s climate is mainly tropical monsoon type and is affected by two seasonal winds: the north-east monsoon and the south-west monsoon. A year in India can be conveniently divided into four sessions viz. the winter (January and February), the hot weather summer (March through May), the rainy south-western monsoon (June through September) and the post-monsoon period (October through December), which is known as the north-east monsoon period in the southern Peninsula.

As per the data published for 2001 census, India’s population as on March 2001 was 1028 million (532 million males and 496 million females), making India the second most populated country in the world after China. The population comprises of 300 million people in the middle class bracket, which is a major consumer class in India. The population growth rate was around 2.22% in the 1980s, which decreased marginally to 2.14% in 1990s.


2.2 Language

2.3 Religion

2.4 Education

3.0 GOVERNMENT AND POLITICAL SYSTEM

3.1 Government Structure

4.0 LEGISLATIVE AND LEGAL ENVIRONMENT

4.1 Legislation

India is a land of many languages and dialects. Hindi is the official language of the Indian federation or union, while English is commonly used business language. English language is acceptable for all the legal, commercial and business documentation and communications.

More than 80% of India’s population is Hindus and around 13% are Muslims. The other major religious communities are Christian, Sikh, Buddhist and Jain.

Data published for 2001 census revealed that 64.80% of the total population are literate and consisted of 75.30% men and 53.70% women. Amongst the youth the literacy rate is 82%.

The Indian federation or union is organized into 28 states and 7 union territories with a single and uniform citizenship and a single judiciary. The capital of the Indian government is the state of Delhi.

India is a sovereign, socialist, democratic and secular republic with a parliamentary system of government, which is based on the U.K. parliamentary system. The parliament is headed by the President and consists of two houses - the Lok Sabha (the house of the people) and the Rajya Sabha (the council of states). Although the President is the constitutional head of the government, the real executive power resides with the Council of Ministers, with the Prime Minister as its head. The Council of Ministers is collectively responsible to the Lok Sabha.

The Indian Constitution provides for the independence of other government bodies for certain key areas like the judiciary, the Comptroller and Auditor General, the Public Service Commissions and the Election Commission.

Indian Constitution divides the various responsibilities into three categories: the Union list, the State list and the Concurrent list. Parliament can make laws on subjects in the Union list and the state legislature on subjects in the State list. Both, the parliament and the state legislature can make laws on the subjects included in the Concurrent list. This division helps in regulating the relations between the Union and the States.

DOING BUSINESS IN INDIA2


4.2 Legal Environment

5.0 INFRASTRUCTURE

5.1 Transport

The main sources of law in India are the Constitution statutes, customary laws and

case laws. The country’s constitution provides for a single integrated system of

courts to administer both Union and state laws. The judiciary in India is separated

from the executives.

At the apex of the entire judicial system is the Supreme Court of India, which

consists of the Chief Justice and other judges. The Supreme Court has original,

appellate and advisory jurisdiction and its decisions are binding on all courts within

the territory of India. Each state (or two or more states together) has a High Court, a

Chief Justice of the High Court and other judges who are appointed by the President

in consultation with the Governor of the state. There is a hierarchy of subordinate

courts under the various High Courts, which extend to the local courts, which decide

civil and criminal disputes of petty and local nature.

Internal public transportation in India is fairly well developed. The country is

extensively covered by rail and road networks. This surface transport network is

fairly supplemented by airline routes connecting the major cities.

The Indian Railways, which is the largest public sector undertaking in India, is the

backbone of the Indian Economy. It caters to both freight and passenger traffics and

has a vast network of 6,867 stations spread over route length of about 62,900 kms.

It is Asia’s largest and the world’s second largest railway system under a single

management.

India has the second largest road network in the world with total road length of 3.3

million kms. In 2009, freight traffic on the road is also fairly high and remains almost

exclusively in the private sector.

Inland water transport has not grown appreciably in the country because of poor

port or landing infrastructure. However, the industry is now growing and the

government is ambitiously developing coastal shipping.

India has bilateral air services agreements with over 100 countries. Air India is

India’s official national carrier operating across both domestic and international

routes. In 2007, Indian Airlines the domestic national carrier was merged with Air

India. Indian Airlines also operates on some international routes. Upon the

liberalization of the economy, an open sky policy was announced which has resulted

in a number of private air taxi companies operating on some of the major trunk

routes. Some of the major private air transport companies, operating on domestic

and international routes are Jet Airways, Kingfisher Airlines, Indigo, Spice jet etc.




5.2 Communication

5.3 Education

5.4 Medical Services

5.5 Housing

6.0 INTERNATIONAL RELATIONS AND ASSOCIATIONS

The Indian telephone, telex and facsimile services both within India and to international locations are fair. Total fixed and cellular connections in India was exceeding 494 million as on August 2009 and are expected to cross 500 million mark by 2010. An electronic mail service is also available and is fast catching up in the leading cities. The total number of internet connections in India are exceeding 14 million and the broadband subscribers are about 6 million. The number of internet users is estimated to be around 81 million in India.

Apart from the above services, India has a fairly well developed postal services department. In fact India has the highest number of post offices in any country (155,000 post offices). Major international courier service companies are also well represented in India.

Apart from schools, which provide education in the local language, India has good day schools and boarding schools that offer a high standard of education in English. In addition, special expatriate schools provide education for American, French, German and Japanese children.

Scholarships are available under grants from the Ministry of External Affairs for foreign students from select countries for graduate and postgraduate courses in engineering, technology, management, medicine, pharmacy and general courses.

India has a fairly widespread and reasonably developed network of medical facilities. However, private enterprises and trusts operate a well-developed infrastructure of hospitals and polyclinics in major metropolitan areas and medium-sized towns.

Adequate housing is available in most of the major metropolitan areas and in large and medium-size towns. The rates tend to be higher in areas closer to the central business district and lower in the suburbs. Apartments and houses are usually available for outright purchase or on rent for maximum renewable periods of 60 months. Deposits equivalent to 10 or 15 times a month’s rent are generally required in case of premises to be rented.

India has entered into bilateral agreements with a number of countries and is a member of several international organizations, such as the United Nations, the Commonwealth, the GSTP, UNCTAD, WTO and GATT. India has always taken initiatives to develop friendly relations with its neighbours and has adopted a policy



of non-alignment to promote co-operation amongst all the nations. India has had an active role in the Non-Aligned Movement and is also an active member of the South Asian Association for Regional Cooperation (SAARC). India is a member of Multilateral Investment Guarantee Agency (MIGA). MIGA serves as an insurer of investments made in member countries against stipulated political risks in the host country and also offers assistance in attracting new investment.

Apart from the Indo-EC Joint Commission, India has separate bilateral commissions with Belgium, Cyprus, Finland, France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, Turkey and the United Kingdom.

The Indian monetary unit is the Rupee (Rs. or INR). The Indian central bank viz. Reserve Bank of India (RBI), is the sole authority for issuing currency in India. Currency converting agencies have a reasonably spread network across all major cities, tourist destinations and airports, where all leading currencies can be converted to Indian rupees and vice versa.

From March 1993 the government has permitted a floating exchange rate for the rupee, which is expressed in terms of the US dollar. The exchange rate for the rupee as on 13 May 2010 was US $ 1 = Rs. 44.99 and Euro 1 = Rs 56.98.

Every foreigner entering India is required to possess a passport and visa. Visas (tourist, business or entry) are issued on application to the Indian High Commission. The visas normally expire six months from the date of issue. If the visa allows more than one entry into the country, it must be used for the first time within six months from the issue date.

Indian Standard Time (IST) is five and one-half hours ahead of Greenwich Mean Time.

The normal working week in India is usually Monday through Friday (9.30 a.m. to 5.30 p.m.). However, there are many organizations, which also work half day on Saturdays or work on alternate Saturdays. Sunday is a public holiday. Banking hours are generally between 10 a.m. and 3.00 p.m. on weekdays and 10 a.m. to 1.00 p.m. on all Saturdays, though some of the banks are now offering 24 hours banking. Internet banking and telephone banking is also offered by most of the leading banks.

7.0 CERTAIN KEY INFORMATION FOR VISITORS TO INDIA

7.1 Indian Currency

7.2 Visitors’ Visas

7.3 Indian Standard Time

7.4 Business Hours



7.5 Public Holidays

7.6 Tourism

7.8 Attire Code

The statutory public holidays vary from state to state and number around 20 in a year. Holidays in private sector organizations generally vary from 10 to 15.

There are various historic sites available to visitors. Hundreds of ancient temples and mosques as well as other monuments provide a view not only of India’s past but also its cultural and trade connections with the rest of the world.

There are several wildlife and game sanctuaries, winter sports facilities in the northern region and water sports facilities in beach towns. The states of Maharashtra, Goa, Kerala, Tamil Nadu and Orissa have attractive beaches, which are popular destinations of visiting foreign tourists. Some of the world’s large hotel chains as well as leading time-sharing leisure resort groups have a presence in India.

In an effort to promote tourism in the country, both the Indian Railways and Indian Airlines offer round trip passes to tourists making payment in foreign currency.

Being a tropical country, clothing is often light, including formal office wear. Suits and jackets are common in the cities but are usually restricted to senior corporate executives.


Bombay Stock Exchange, Mumbai

Chapter 2Indian Business AndInvestment Environment


CHAPTER 2

INDIAN BUSINESS ANDINVESTMENT ENVIRONMENT

1.0 FRAMEWORK

India adopted a mixed economy after independence, resulting in the public and private sectors’ co-existence in industrial activity. In the past, the public sector had a dominant role in the economy. However, with the recent liberalization, the trend is clearly towards a larger role for the private sector. The government has restricted fresh public investments to only strategic and essential infrastructure areas. The government is also divesting its equity in public sector enterprises outside these areas.

The majority of business in India has been controlled by state-owned corporations, business families and groups under multinational control. However, this dominance is getting eroded with the entry of technocrats and successful first-generation entrepreneurs. In many substantial private sector companies, the promoters hold a minority stake but are able to retain control because of the widely dispersed holdings. The public financial institutions hold large chunks of equity in many major Indian private sector companies, but their involvement in the management decisions is very limited and neutral. India also has a huge base of closely held small and medium sized businesses, which cater to the local and regional markets.

The Indian government earlier exercised considerable control over the private sector through licensing of the setting up of manufacturing capacities; approval procedures for importing foreign capital, technology, capital goods, and raw materials and allocation procedures for basic raw materials. However, the new policies launched in the 1990s and continued thereafter in the new millennium by the Government are dismantling many of the regulations and restrictions that have previously made business operations in India difficult. Now, the Government has initiated steps for introducing second-generation structural reforms to keep pace with the global environment of competition after removal of trade barriers as per the agreement entered into with World Trade Organization and correct the various distortions in the economy. The emerging economic environment is more competitive, dynamic and inviting to foreign investment and technology. Recently, the Government of India significantly liberalized the foreign direct investment policy for crucial sectors including banks, drugs, pharmaceuticals, construction, arms and ammunitions and certain areas of telecommunication.

The Indian rupee has been made fully convertible on the trade and current account and full convertibility on the capital account has been recommended. This full convertibility will allow free convertibility of Indian financial assets to foreign financial assets and vice versa at market determined rates. In order to create a suitable legal framework for the implementation of full convertibility on capital



account and to liberalize the movement of foreign capital, a new law called the Foreign Exchange Management Act (FEMA) has come into effect from 1 June 2000.

The global economic meltdown and the consequent recession in the developed countries over the past year, has adversely impacted the Indian economy. In 2009-10, the Gross Domestic Product (GDP) is expected to grow at 7.2% which is quite encouraging considering in retrospect the decline in GDP to 6.7% in 2008-09 representing a drop of 2.1% from the average growth rate of 8.8% in the previous five years (2003-04 to 2007-08). Inspite of this, India is likely to remain the second fastest growing major economy. India was able to sustain a respectable growth rate and is expected to bounce back quickly, mainly due to its reliance on domestic demand and largely unaffected banking sector.

The Inflation as measured by the Wholesale Price Index (WPI) for the 2008-09 was 5.9%. A noteworthy development during 2008-09 was a sharp rise in the WPI inflation followed by an equally sharp fall, with the WPI inflation falling to unprecedented level of close to 0% by March 2009. The inflation WPI index for the period April-December 2009 has decreased to 1.6%.

Foreign exchange reserves which had declined to US$ 252 billion as on 31 March

2009 from US$ 309 billion as on 31 March 2008, has increased to US$ 283.5 billion as on 31 December 2009.

The total exports for 2008-09 increased by 13.6% to US$ 185 billion. The total imports for 2008-09 was about US$ 304 billion wherein the growth in imports was 20.47% in 2008-09.

There has been a sharp decline in the Rupee exchange rates during 2008-09, wherein the currency depreciated by over 21% against the US$. The exchange rate as on 15 August 2009 was Rs. 48.79 against 1 US$. However, the rupee has strengthened in the latter period and the exchange rate as on 13 May 2010 was Rs. 44.99 against 1 US$. The fiscal deficit during the period shot up from 5.9% to 6.5% of the GDP.

Indian stock markets experienced a downturn after having experienced a long spell of growth between 2005 to early 2008 which is directly attributable to the current international crisis resulting in an immediate effect of withdrawal of FII Investments.

2.0 ECONOMIC TRENDS

2006-07 2007-08 2008-09

10

12

8

6

4

2

0

GDP Growth Rate

9

6.7

9.8

2009-10

7.2

2006-07 2007-08 2008-09 2009-10

1400

1200

1000

800

600

400

200

0

GDP (US$ Billion)



This resulted in a fall in the Bombay Stock Exchange indices (Sensex) from its closing of 17,578 on 28 February 2008 to a low of 7,697, on 27 October 2008. However, due to improvement in the economic scenario, high sentiments and positive election results and emphasis of government policies on growth, the Sensex has regained some lost ground and reached a level of 16,430 as on 26 February 2010.

Although India was primarily an agricultural country, the service sector is rapidly increasing its share in the economy. The share of agriculture and allied sectors in GDP has declined gradually from 18.9% in 2004-05 to 14.6% in 2009-10, whereas the share of industry has remained the same at about 28% and services has gone up from 53.2% to 57.2%.

The Indian Regulatory policy is driven by three objectives: to promote competition, to protect consumers and investors from restrictive and unfair trade practices, and to maintain the ecological balance and protect the environment. The major governing statutes for trading, commercial and industrial enterprises in the country are the Foreign Exchange Management Act, 1999; the Companies Act, 1956; Competition Act, 2002; Securities and Exchange Board of India, 1992 (SEBI); Regulations for Listed Companies and the Banking Regulation Act, 1949; which governs the operations of banks including foreign banks. Since, the Foreign Exchange Management (FEMA) Act, 1999 regulates foreign investment in India, it has the greatest effect on foreign companies operating in India.

SEBI was constituted as a statutory body under the SEBI Act, with effect from 30 January 1992 to monitor the activities of stock exchanges, merchant bankers, mutual funds, brokers and other intermediaries. All applications for share issues must be vetted by SEBI to ensure that the offer documents disclose the required information. SEBI has also issued guidelines for disclosure and investor protection, monitoring the work of merchant bankers, grading of prospectus, responsibilities of lead managers, number of lead managers in every issue, etc.

The legal framework for protecting the interests of investors is provided by the Companies Act, 1956 and the Securities Contracts (Regulation) Act, 1956. In order to protect the interests of investors in the securities market and to develop the capital market, SEBI was established. SEBI controls the securities market through its detailed guidelines issued to all the players in the securities market. SEBI regulations have rendered insider trading a punishable offence in specified circumstances. The guidelines governing takeovers, public issues, capital adequacy requirements, disclosure norms, etc. are being increasingly streamlined. Investors having grievances have the option of either applying to the Monopolies and Restrictive Trade Practices Commission or writing to the SEBI Investor Grievance Cell and informing the concerned stock exchange. They can also file complaints with various authorities under the Consumer Protection Act, 1986.

3.0 ECONOMIC SECTORS

4.0 REGULATORY ENVIRONMENT

4.1 Investor Protection



4.2 Price Controls

4.3 Registration of Intellectual Property

4.3.1 Trademarks

4.3.2 Patents

Prices of certain essential consumption goods, raw materials and intermediate products are directly regulated by the government. The government amended the Monopolies and Restrictive Trade Practices Act in 1991 to increase protection for consumers. In addition, the Consumer Protection Act, 1986 created quasi-judicial mechanisms at the district, state and national levels to settle consumer grievances. There is, however, a distinct trend towards reduction in pricing and distribution controls, and the government’s policy is to do away with administered prices as far as possible. At present, the new free market has transferred economic power to the more aware and demanding consumer.

India being one of the signatories to Trade Related Aspects of Intellectual Property Rights (TRIPS) under the General Agreement on Tariffs and Trade (GATT) under the World Trade Organization (WTO) it has to comply with the provisions of TRIPS which aims to rationalize the laws of Intellectual Property Rights of all member countries which includes Trademarks, Patents, Industrial Designs, Copyrights, Geographical Indications, etc. In view of the above, India has amended its Intellectual Property Laws (IPR) namely, Trade Marks Act, Industrial Designs Act, Copyrights Act and Patents Act in line with TRIPS Agreement.

The Trade Marks Act 1999, allows registration of marks not only used in connection with goods but also in respect of marks in relation to services. Trademarks once registered will be valid for a period of 10 years and the same can be renewed for successive periods of 10 years thereafter. Registration of trademarks confers on the registered proprietor of the trade mark the exclusive right to use the trademark in relation to its goods / services in respect of which the trademark is registered and to obtain relief in respect of infringement of the trademark by others. Infringement of trademarks is a cognizable and non-bailable offence. However, all infringement of trade marks are not treated as cognizable and non-bailable offence.

The Patents Act, 1970 as amended by the Patents (Amendment) Act, 2002 and Patent (Amendment) Act, 2005 provides for the grant of a patent for any “invention”. Invention means a new product or process involving an inventive step and capable of industrial application. Inventive step means a feature that makes the invention not obvious to a person skilled in the art. Protection under the Patents Act is available for a period of 20 years for every patent.

There is no distinction between Indian nationals and foreign nationals concerning the right to obtain patents. Every international application under the Patents Corporation Treaty for a patent, designating India shall be deemed to be an application under the Patents Act, 1970, provided a corresponding application is filed before the Controller in India. The government has the power to acquire patents for a public purpose. In the said event, the act preserves the patent holder’s right to be compensated adequately.


After expiry of three years from the date of grant of the patent, any person may make a request for grant of licence to work on the patented invention by making an application to the Controller of Patents alleging that reasonable requirements of the public with respect to the patented invention have not been satisfied or the patented invention is not available to the public at a reasonable price.

With a view to fulfill the requirements of any treaty, convention or arrangement between India and any other country, the Patents Act allows the Indian government to declare a country as a “convention country”. India has entered into bilateral arrangements with Canada, Ireland, Australia, New Zealand, Sri Lanka and the United Kingdom to accord their citizens priority in respect of grant of patents and the protection of patent rights and on reciprocal basis similar privileges to Indian Citizens.

In line with TRIPS, the Patents Act, 1970 has been amended by Patent (Amendment) Act, 2002 and Patent (Amendment) Act, 2005. The Amendment provides the period of patent in all cases shall be for a term of 20 years instead of 14 years and 7 years.

The Designs Act, 2000 protects all features of shapes, configurations, patterns or ornaments in a design that appeal to the eye in the finished article. Registration of a design with the Controller General of Patents and Designs confers on the registered proprietor a right to take action against third parties if the design is used fraudulently. The act provides protection to a registered design for 10 years at first instance which can be further renewed for a period of 5 years (altogether for maximum 15 years) and thereafter it becomes public property.

Copyrights vest in authors on the creation of their works and require no registration. If registered, however, registration provides prima facie evidence of a copyright’s validity. Copyright is regulated as per the provisions of The Copyright Act, 1957.

Copyrights subsist in the following classes of work:ØOriginal literary, dramatic, musical and artistic worksØCinematograph filmsØSound recordingØPhotographs.

Copyright also subsists in computer programs (which are defined as “programs recorded on any disc, tape, perforated media or other information storage device that is fed into or located in a computer or computer-based equipment capable of reproducing any information”).

The Copyrights Act, 1957 provides for copyright enforcement. A person whose copyright is infringed may sue for civil relief such as an injunction and damages, and may institute criminal proceedings for infringement in certain cases.

4.3.3 Designs

4.3.4 Copyrights



The Central Government by order may direct that all or any provisions of this Act shall apply to works of other countries. This means that any person who enjoys a copyright in one of the convention countries automatically enjoys a statutory protected copyright in India.

The newly enacted Competition Act, 2002, has constituted the Competition Commission of India (‘CCI’) which is empowered to ensure free and fair competition in the market. The Competition Act aims at preventing practices having adverse effect on competition, to promote and sustain competition in markets, to protect the interest of consumers and to ensure freedom of trade carried on by the other participants in the markets in India. The main purposes of the Competition Act are (a) Prohibition of anti-competitive agreements, (b) Prohibition of abuse of dominant position, and (c) Regulation of combinations.

All proposed industrial units have to obtain environmental clearance from the relevant air and water pollution control boards, which operate under the Ministry of Environment and Forests.

India has a vast network of about 88,408 bank branches that held deposits of about Rs. 38,341 billion as of 31 March 2009.

The Indian central bank is the Reserve Bank of India (RBI) and its primary function is to act as the banker and financial adviser to the government, the commercial banks and some of the other financial institutions. It is the sole authority for the issue of bank notes and the supervisory body for all banking operations in the country. Its other functions include execution of the government’s monetary policy, regulating the money flow in the economy and acting as the custodian of India’s foreign exchange reserves.

The commercial banks may be classified into the following five categories:

i. The State Bank of India and its associate banksii. Other nationalized banksiii. Private sector banksiv. Regional rural banks and v. Foreign banks

The commercial banks transact all types of commercial banking business. They are also allowed to set up (with the prior approval of the RBI) subsidiaries to engage in

4.4 Competition Policy

4.5 Environmental Regulation

5.0 FINANCIAL SECTOR

5.1 Banking System

5.1.1 Reserve Bank of India (RBI)

5.1.2 Commercial Banks



non-banking finance activities viz. merchant banking, equipment leasing etc. The Commercial banks, apart from providing working capital facilities for various sectors of the economy, also provide capital market advisory services, foreign exchange services, investment consultancy and personal banking services.

Regional Rural Banks: The regional rural banks are set up to increase the flow of credit to smaller borrowers in the rural areas. They may be said to be special purpose banks catering primarily to the rural agricultural sector.

Foreign Banks: Most of the major banks from major countries are represented in India through branches, network offices, representative office or agency arrangements. Foreign banks offer a variety of services including foreign-currency loan syndication, foreign exchange risk management and other innovative financial products. Approximately 42 foreign banks operate through the major cities in India.

Private Sector Banks: Private sector banks have gained a strong foothold in the Indian banking scenario in the last decade. The private banks in India offer a wide gamut of banking and financial services.

The primary legislation that deal with insurance business in India are Insurance Act, 1938 and Insurance Regulatory & Development Authority (IRDA) Act, 1999. Government of India has opened up the sector to private participation in recent past. Details of permissible foreign investment in this sector is discussed separately. There are more than 10 companies in life insurance business including government corporation i.e. Life Insurance Corporation of India and almost equal number of companies in non-life insurance business including government corporation i.e. General Insurance Corporation of India.

The Indian capital market is very well-developed, and it provides a very important source of finance to both public and private sector companies. The major developments in the capital market include the following:

ØThe Securities and Exchange Board of India (SEBI) was empowered to oversee the operations of the exchanges, regulate the capital market and protect investors.

ØTrading introduced in derivative based on index and in stock options of the certain companies satisfying certain parameters.

ØTrading in listed company on stock exchanges in dematerialized form has been made mandatory to reduce the settlement cycle to 2 days.

ØThe interest rates on convertible and non-convertible debentures are allowed to be market determined.

ØFree-market pricing of share issues has increased activity on the stock exchanges.

5.2 Insurance Sector

5.3 Capital Market



ØThe concepts of book building and market making have been introduced.

ØUnder the Portfolio Investment Scheme, the RBI has permitted investment in shares and debentures of Indian companies by Non-Resident Indians (NRIs).

ØPortfolio investments are permitted by Foreign Institutional Investors (FIIs).

ØVarious tax incentives have been offered to encourage foreign institutional investment.

ØThe government plans to offer up to 49% equity of many public sector companies to private investors.

ØA new takeover code has been introduced to protect the interests of the small investors and to strengthen the regulatory framework of takeovers.

ØDomestic shares are allowed to be reconverted to American Depository Receipt/ Global Depository Receipt.

India currently has about 30 million shareholders and 23 recognized stock exchanges. These stock exchanges deal in securities issued by the central and state governments, public sector companies and public limited companies. Most activities on the stock exchanges occur in corporate securities. Gilt-edged securities consisting of securities issued by the central, state and other government bodies are also listed on recognized stock exchanges. Bombay Stock Exchange and National Stock Exchange accounts for more than 97% of the total turnover. Foreign Institutional Investors are permitted to also invest in corporate and government debt.

SEBI is the regulatory authority for all the stock exchanges. In order to facilitate stock exchange transactions, India has been modernizing the operations of its stock exchanges by introducing screen based trading. The trading on stock exchange has been made mandatory in dematerialized form for all scrip commencing from April 2002.

SEBI has also laid down eligibility criteria for setting up dedicated stock exchanges for the Small and Medium Enterprises (SME) sector. Apart from fulfilling other criteria, the exchange should have a balance sheet networth of atleast Rs. 1000 million (about US$ 22.23 million).

Bombay Stock Exchange (BSE) is India’s premier stock exchange. It lists over 4,900 companies. BSE has trading terminals in about 300 cities. The market capitalization of the Bombay Stock Exchange in August 2009 was US$ 1.08 trillion. BSE introduced

5.4 Stock Exchanges

5.4.1 Bombay Stock Exchange




trading in derivative based on BSE Sensex from 9 June 2000 and trading in stock options of certain companies from 9 July 2001.

National Stock Exchange (NSE) started operations in 1994 with a view to facilitating transparent trading. The NSE provides nation-wide trading facilities to investors through established network linkages in about 350 cities nationwide. The NSE had 1587 listed companies as on 31 March 2009 with a market capitalization of Rs. 47,019 billion (US$ 950 billion) and average daily volume of Rs. 45 billion (US$ 1.03 billion). The NSE is India’s primary exchange for wholesale debt. NSE introduced trading in derivative based on Nifty Index from 12 June 2000 and trading in stock options of certain companies from 2 July 2001.

There is no statutory requirement for public limited companies in India to have their shares listed on a recognized stock exchange. However, the companies have to be listed if their shares or debentures are offered to the public for subscription by prospectus. Companies have to fulfill the stock exchange requirements in order to have their shares listed. In case the company does not satisfy the prescribed conditions of the stock exchange and is not admitted to the exchange, it has to refund the amounts paid by subscribers.

There are numbers of specialized financial institutions in India at the national as well as the state level. India has an integrated structure of financial institutions known as All India Financial Institutions (AFIs), which provide term finance and other assistance to industries. Some of the most important financial institutions, which play a very instrumental role in India’s development are the Industrial Development Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI) and the Industrial Reconstruction Bank of India (IRBI).

India also has other financial institutions, which are set up for specific purposes. These include the National Bank for Agricultural and Rural Development (NABARD), the Shipping Credit Corporation of India, the National Housing Bank and the Discount and Finance House of India, which is a specialized institution to develop an active secondary market for money market instruments.

Most of the specialised investment institutions in India are in the public sector. These include the Unit Trust of India, the Life Insurance Corporation of India, General Insurance Corporation, mutual funds set up by subsidiaries of the State Bank of India and other nationalised banks and other financial institutions.

Mutual funds play a significant role in the capital market. They are established in the form of trusts under the Indian Trusts Act and are operated by separate asset

5.4.2 National Stock Exchange

5.4.3 Listing Requirements

5.5 Specialized Financial Institutions

5.6 Investment Institutions

5.7 Mutual Funds



management companies. The mutual fund market was dominated by public sector financial institutions and public sector banks till 1993, when the government opened up the sector to private participation. The gross mobilization of resources by all mutual fund schemes during July 2009 was around Rs. 9,288 billion (about US$ 190 billion).

Mutual Funds are now permitted to make investment in short term as well as long term foreign debt securities with highest foreign currency credit rating by accredited / registered credit rating agencies in the countries with fully convertible currencies including government securities of the countries having AAA rating.

The Non Banking Finance Companies (NBFCs) form an integral part of the Indian financial system. They have to conform to the overall framework of the monetary and credit policy of the government. The government has permitted foreign direct investment in NBFCs in merchant banking, underwriting, portfolio management services, investment advisory services, financial consultancy, stock broking, asset management, venture capital, custodial services, factoring, credit rating agencies, leasing and finance and housing finance. Foreign direct investment in the NBFC sector is put on automatic route subject to compliance with guidelines to be issued by Reserve Bank of India.

The credit rating agencies rate corporate debt and equity securities such as debentures, shares and commercial paper. They also rate the credit risk of companies, a factor often used by nationalized banks in evaluating loan applications. Credit ratings have become all the more necessary because it has become mandatory for companies to obtain a credit rating before issuing convertible and non-convertible debentures. The Credit Rating Information Services of India Limited (CRISIL), the first credit rating agency in India was established in January 1988 and the Investment Information and Credit Rating Agency of India (ICRA) was established in March 1991. Credit Analysis and Research Ltd. (CARE) is another leading credit rating agency and was set up in November 1993.

New and existing businesses established in specified backward areas of the country are able to obtain finance for major expansion plans at below normal interest rates. Other benefits may include low commitment fees and extended repayment periods.

Industrial undertakings located in specified backward areas, which are largely the

5.8 Non-Banking Finance Companies

5.9 Credit Rating Agencies

6.0 INCENTIVES FOR INDUSTRIES

6.1 Concessional Finance

6.2 Central Government Investment Subsidy



same as those where concessional finance is available, are eligible for a Central Government subsidy towards the cost of land, buildings, machinery and equipment.

In keeping with a federal structure, many State Governments operate their own incentive programmes to attract industrial investments. Details of incentive packages often vary from one state to another but would broadly include subsidized power, availability of low-cost land, assistance in feasibility studies, tax breaks and exemptions/ deferment of specific duties.

Exporters are eligible for a number of special incentives.

Duty Drawback: Exporters are entitled to drawback import duties and excise duties paid by them on material inputs of products exported at specified rates, depending upon the type of product exported.

Freight Concessions: Freight rate reductions and priority wagon booking facilities are made available on the railways for transport of raw material for export production and finished products for export.

Export Credit Guarantee: This guarantee is provided by the Export Credit Guarantee Corporation at low rates of premium to banks and other financial institutions to enable exporters to obtain better credit facilities.

Advance Licences: These are issued to exporters for import of raw materials for manufacture of finished products, without payment of custom duties. Duty free import of capital goods may also be permitted if the product to be manufactured is for export.

Special Import Licences: These licences for items in the negative list of imports are made available to specified categories of exporters.

Royalty Payment: There is no restriction on the payment of royalty from India and can be remitted without any approval of government or Reserve Bank of India. In addition, a commission on exports can also be paid to agents outside India.

Special Incentives: These are available to units set up in Special Economic Zones (SEZs), Export Processing Zones (EPZs) and 100% Export Oriented Units (EOUs). While EOUs can be set up anywhere in the country, there are designated SEZs and EPZs which provide internationally competitive duty free environment for low cost export production through basic infrastructure facilities like: developed land, standard design factory buildings, roads, power, water supply, drainage, customs clearance and telecommunications. Presently, these units are eligible to credit 100% of their eligible export receipts of foreign exchange to their Exchange Earners’ Foreign Currency (EEFC) account. These tax incentives are discussed in details in chapter on Taxation System.

6.3 State Government Incentives

7.0 INCENTIVES FOR EXPORTS



EOUs/EPZs have to achieve specified value addition norms. Apart from tax holidays, EOUs/EPZs can import capital goods and industrial inputs free of custom duty and are exempt from payment of Central and State sales tax. Supplies by domestic tariff area units to EOUs/EPZs are regarded as deemed exports and are exempt from excise duty.

Special Economic Zones: To create stimulating infrastructure facilities of international standards in export production, Special Economic Zones (SEZ) can now be set up in the private, public, joint sector or by state governments. Certain EPZ have now be been converted into SEZ. Units in SEZ have comparably better incentives from units in EPZ.

Energy is an essential input for economic development and improving the quality of life. The primary source of commercial energy in India is coal, which provides about 63% of India’s commercial requirements. Nuclear and solar energy are developing, but still have a long way to go to be truly accepted in India as a major energy provider.

The government has announced various policies with the intention of reducing the protection of domestic industry. These policies included substantial reduction in import licensing, decanalization of imports and exports, and lowering of tariffs. However, international trade has not been completely freed with the primary aim of avoiding a drain of foreign exchange reserves and to discourage the importing of non-essential and luxury items.

Major commodities exported from India are gems, jewellery, ready-made garments,

machinery, tools, transportation equipment, manufactured metal goods, electronics, software, cotton, leather, drugs, iron ore, marine products and tea. India’s exports amounted to US $ 185 billion during the financial year 2008-09. India’s imports in the 2008-09 financial year were US $ 304 billion.

The government as well as the industry conducts their activities in English, India has the second largest English speaking population after the United States.

India has one of the largest pool of trained, scientific and technical manpower in the world. This manpower is available very cheap when compared to the manpower costs prevailing in developed countries.

8.0 ENERGY, MINERALS AND OTHER NATURAL RESOURCES

9.0 FOREIGN TRADE

10.0 OTHER FACTORS

10.1 Language

10.2 Trained Manpower



10.3 Low Research and Development Costs

10.4 Financial Reliability

Research and development costs in India are generally very low when compared to the costs that would be incurred in any major industrialized countries. In the present scenario, it is possible for the foreign companies to establish 100% foreign-owned research and development (R&D) companies in India, and import the laboratory equipments and other facilities required for R&D. Further to encourage R&D across all sectors of the economy, the Finance Act 2010 introduced by the Finance Ministry of the Government of India has increased weighted deduction on expenditure incurred on approved in-house R&D from 150% to 200%.

Repatriation of capital or dividends for investments made in India is freely allowed. The fiscal deficit which was at 5.9% during the period 2008-09 is envisaged to touch 6.5% of the GDP during 2009-10. Foreign exchange reserves of India which were about US $ 252 billion on 31 March 2009 has increased to US$ 277 billion as on 26 March 2010.

India is a member of the convention of the Multilateral Investment Guarantee Agency, which provides insurance to foreign investors against political risks.


Charminar, Hyderabad

Chapter 3Business Entities


CHAPTER 3

BUSINESS ENTITIES

1.0 FORMS OF BUSINESS ENTITIES

1.1 Companies

The principal forms of business organizations in India, apart from government organizations and sole proprietary concerns are:

i. Companies - public and privateii. Branches of foreign companiesiii. Liaison/Branch/Project offices of foreign companiesiv. Partnershipsv. Trustsvi. Limited Liability Partnerships (LLP)

At present, the legislative provisions governing companies are contained in the Companies Act, 1956.

Companies in India are broadly classified into public sector companies’ viz. with predominant government shareholding and private sector companies’ viz. with predominant private shareholding. Private sector companies may further be classified as public limited companies or private limited companies. Companies can also be classified into companies limited by shares, companies limited by guarantee and unlimited liability companies. However, for business purposes, generally companies limited by shares are used and consequently, the discussion regarding companies in this guide is pertaining to such companies. The shares of public companies may or may not be listed on stock exchanges in India. (e.g. The National Stock Exchange of India Ltd (NSE), Bombay Stock Exchange Ltd (BSE), etc.) The regulatory provisions for private limited companies are less stringent than those relating to public limited companies. Public limited companies whose shares are listed on stock exchanges are subject to the regulations of the Securities and Exchange Board of India (SEBI) and the respective stock exchanges.

Private companies that are subsidiaries of public companies (i.e. where shareholding of Public companies is more than 50%) are however treated at par with public companies.

Shares of public limited companies are freely transferable, whereas it is subject to restrictions in case of private limited companies. However, transfer of shares to non-residents is regulated by Foreign Exchange Management Act, 1999.

The system of depository has been introduced by the Depositories Act and Securities Exchange Board of India (Depository & Participants) Regulations, 1996 which has smoothened the transfer of shares in case of listed companies.



1.2 Regulations

1.3 Branches of Foreign Companies (Branch Office)

The financial reporting environment in India is stringently regulated by the

government, through various regulators and government agencies. There are a

large number of mandatory compliances, the failure of which can lead to penalties

and other more severe consequences.

The Indian legal system is constituted by a framework of various laws and

enactments based on Common Law and include the following acts that contain

provisions and guidelines for the primary functioning of the corporates in India:

ØCompanies Act 1956;

ØChartered Accountants Act 1949;

ØReserve Bank of India Act 1934;

ØIncome Tax Act 1961;

Ø Securities and Exchange Board of India Act 1992;

Ø Securities Contract (Regulation) Act 1956;

Ø Banking Regulation Act 1949;

Ø Insurance Act 1938.

The various regulators that influence financial reporting in India include:

ØMinistry of Corporate Affairs (Regulator for all corporate enterprises);

ØSecurities and Exchange Board of India or SEBI (Regulator for all listed

companies);ØReserve Bank of India or RBI (Regulator for all Banking and Finance

entities);ØInsurance Regulatory and Development Authority or IRDA (Regulator for

all Insurance companies);ØInstitute of Chartered Accountants of India or ICAI (Regulator for

Chartered Accountants and auditors).

Foreign companies engaged in manufacturing and trading activities abroad have

been allowed to set up branch offices in India. Permission for setting up branch

offices is granted by RBI on a case-to-case basis. Application for permission to set up

branches is to be made with the Authorized Dealer Category I bank (AD) along with

the requisite documents, which would then be submitted with the RBI along with

recommendations and suggestions of the AD. The essential parameters considered

by RBI on such an application is the worldwide operating history of the foreign

company, proposed activities in India, profit making track record of the foreign

company in the home country and its net worth. The additional criteria to be

satisfied for eligibility regarding track record and net worth are as under:


* Net worth includes total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name.

Foreign companies engaged in manufacturing and trading activities abroad have been allowed to open branch offices to carry on the following activities in India:

i. To export / import goods.ii. To render professional or consultancy services.iii. To carry out research work, in which the parent company is engaged.iv. To promote technical or financial collaborations between Indian

companies and parent or overseas group company.v. To represent the parent company in India and acting as buying / selling

agent in India.vi. To render services in Information Technology and development of

software in India.vii. To render technical support to the products supplied by parent / group

companies.viii. To act as branch of a foreign airline / shipping company.

Foreign Companies are required to furnish certain specified information and comply with provisions of the Companies Act, 1956 on establishing a place of business in India.

One of the preferred routes for foreign companies to enter the Indian markets is setting up a liaison / representative office. Permission to set up such offices is granted for an initial period of 3 years, which may be extended from time to time.

The essential parameters considered by RBI on such an application is the worldwide operating history of the foreign company, proposed activities in India, profit making track record of the foreign company in the home country and its net worth. The additional criteria to be satisfied for eligibility regarding track record and net worth are as under:

1.4 Liaison / Representative Offices

Sr. Criteria RequirementsNo.

1 Track Record A Profit making track record during the immediately preceding five financial years in the home country of the foreign company proposing to establish BO.

2 Net Worth* Not less than US$ 100,000 or its equivalent

Sr. Criteria RequirementsNo.

1 Track Record A Profit making track record during the immediately preceding three financial years in the home country of the foreign company proposing to establish LO.

2 Net Worth* Not less than US$ 50,000 or its equivalent



* Net worth includes total of paid-up capital and free reserves, less intangible assets as per the latest Audited Balance Sheet or Account Statement certified by a Certified Public Accountant or any Registered Accounts Practitioner by whatever name.

Application for grant of approval is to be made with the Authorized Dealer Category I bank (AD) which would then forward it to the RBI along with suggestions and the requisite documents. RBI may grant approval for setting up a liaison office on receipt of such an application. Some of the criterions which shall be considered by the RBI before granting approval include profit making track record of the foreign company in the home country and its net worth.

Foreign companies are permitted to establish an office or to post a representative in India for carrying on liaison activities, subject to the following conditions:

i. Commission or fee is charged or any other remuneration received by the Indian office of the foreign company for its liaison activities in India.

ii. Except for the liaison work, the office does not undertake any activity of a trading, commercial or industrial nature without the prior permission of the Reserve Bank of India.

iii. All expenses of the Indian office are met exclusively by remittances from abroad through normal banking channels.

iv. No borrowing or lending of any money from / to any person in India without the prior permission of RBI.

v. The Indian office submits an annual statement to the AD and a copy to the Directorate General of Income Tax (International Taxation), New Delhi, giving details of remittances received from abroad, supported by bank certificates, together with a copy of the final accounts of the Indian office certified by a Chartered Accountant.

Liaison offices are permitted to carry out the following activities in India:

i. To represent the parent company / group companies in India.ii. To promote export / import from / to India.iii. To promote technical / financial collaborations between parent / group

companies and companies in India.iv. To act as a communication channel between the parent company and

Indian companies.

Foreign companies having only liaison offices and not engaged in any trading, manufacturing or other commercial activity in India, have to furnish certain mandatory information to the Registrar of Companies in India.

Foreign companies planning to execute specific projects in India can set up temporary project /site offices in India for such purpose. The standard conditions imposed for operating such offices are:

ØThe foreign company has secured from an Indian company a contract to execute a project in India.

1.5 Project Office



ØThe project is funded by inward remittance from abroad; orØThe project is funded by a bilateral or multilateral International Finance

Agency; or ØThe project has been cleared by an appropriate authority; orØA company or entity in India awarding the contract has been granted Term

Loan by a Public Financial Institution or bank in India for the project.ØThe foreign company shall furnish a report to the concerned Regional

Office of the RBI under whose jurisdiction the project office is set up comprising the following details:

Name and address of the Foreign Company;

Particulars of authority awarding the projects/contract;

Total amount of contract;

Address and tenure of Project Office;

Nature of Project Undertaken.

Foreign companies having only project office and not engaged in any trading, manufacturing or other commercial activity in India, have to furnish certain mandatory information to the Registrar of Companies in India.

Partnerships are established by a partnership deed, which is registered with the Registrar of Firms. The Indian Partnership Act, 1932 lays down provisions regarding rights and obligations of partners, retirement and admission of partners, dissolution of firm and related aspects.

Indian laws prohibit partnerships of more than 20 persons from carrying on any business and partnerships of more than 10 persons for carrying on the business of banking.

Trusts are generally established in India for business of mutual fund and for charitable, religious and other non-profitable purposes.

There are special provisions relating to taxation of mutual funds and charitable trusts which provide for tax exemption under specified circumstances.

The concept of LLP is new to India and the Limited Liability Partnership Act, 2008 has permitted setting up of LLPs with effect from 1 April 2009.

Some of the salient features of an LLP are as under:-

ØLLP is a body corporate having a separate legal entity distinct from its members.

ØLLP has a perpetual succession and any change in partners of LLP will not affect the existence, rights or liabilities of the LLP.

•••••

1.6 Partnerships

1.7 Trusts

1.8 Limited Liability Partnerships (LLPs)



ØAny individual, body corporates, including LLPs, a foreign LLPs and Indian as well as foreign companies can be partners in LLPs.

ØLLP shall have at least

two partners

two designated partners who are individuals and at least one ofthem shall be resident in India.

ØIf all the partners of any LLP are bodies corporates or LLPs, they shall nominate their respective individuals to act as designated partners, of whom at least one shall be resident in India.

ØDesignated Partner’s are liable for compliance under the Act and in the event of non-compliance will be liable for the penalties.

ØIn an LLP, there is no upper limit on maximum number of partners unlike an ordinary partnership firm where the maximum number of partners cannot exceed 20.

ØEvery partner of LLP is the agent of the LLP for the purpose of the business of the LLP, but not of other partners.

ØEvery designated partner shall obtain a Designated Partner Identification Number (DPIN) which is similar to Director Identification Number (DIN) as provided under the Companies Act, 1956.

ØAn obligation of the LLP whether arising in contract or otherwise, shall be solely the obligation of the LLP. The liabilities of the LLP shall be met out of the property of the LLP

ØWhile the LLP is a separate legal entity, liable to the full extent of its assets, however, the liability of the partners is limited to their agreed contribution in the LLP which may be of tangible or intangible nature or of both tangible and intangible in nature.

ØNo partner is liable on account of the independent or unauthorized actions of other partners, thus, allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct.

ØRegistering authority of LLP is the Registrar of Companies under the Companies Act, 1956.

ØThe name of an LLP must end with the words “limited liability partnership” or the acronym “LLP”.

ØThe mutual rights and duties of partners of an LLP inter se and those of LLP and its partners shall be governed by an agreement between the partners or between LLP and the partners subject to the provisions of the proposed legislation. In the absence of any such agreement, the same shall be governed by Schedule I to the Act.

ØThe right of a partner to share profits and losses of the LLP are transferable either wholly or in part. The transfer in such a way shall not

•

•



cause the disassociation of the partner or the dissolution and winding up of the LLP. Further, the transfer of right does not, by itself, entitle the transferee or assignee to participate in the management or conduct of the activities of the LLP or access information concerning the transactions of the LLP.

ØThe provisions of the Indian Partnership Act 1932 shall not apply to LLPs.

ØOther entities such as firms, private companies and unlisted public companies can get themselves converted into LLPs. However, an LLP cannot be converted into any other form of business entity. Upon conversion, all property of firm or company shall be transferred to and shall vest in the LLP and the firm or the company shall be deemed to be dissolved and removed from the records of the Registrar of firms or Registrar of Companies as the case may be.

ØThe payment of remuneration and interest to partners is deductible if conditions which are stipulated under the Limited Liability Partnership Act and Income Tax Act are satisfied.

ØLLPs shall be obliged to maintain annual accounts, file a statement of accounts and solvency and annual return with the Registrar of Companies every year and all these documents shall be open for public inspection at the office of the Registrar of Companies.

ØAudit of LLP is mandatory only if annual turnover exceeds Rs. 40 lacs or contribution exceeds Rs. 25 lacs. The Finance Act 2010 has increased the annual turnover limit of Rs. 40 lacs to Rs. 60 lacs, from financial year 2010-11.

ØThe financial year of an LLP has to be compulsorily kept at 31 March.

ØThe Central Government has the powers to investigate the affairs of an LLP.

ØLLP shall by its name, have the power of suing and being sued.

ØLLP can acquire, own, hold, develop or dispose of property both movable and immovable.

ØThe winding up of LLP may be either voluntary or by the Tribunal to be established under the Companies Act, 1956. Till the tribunal is established, the power in this regard shall vest with High Court.

ØCompromise or arrangement including merger and amalgamation can be made between LLP and it creditors and LLP and its partners and between LLPs.

ØForeign LLPs can establish a place of business in India and carry on their business by registering under the Act.

ØSome of the basic taxation aspects applicable to an LLP includes:•The applicable tax rates would be 30.9%•Minimum Alternate Tax (MAT) provisions are not applicable in case of

LLPs



•No Dividend Distribution Tax (currently at an effective rate of 16.61% for FY 2010-11) on profits distributed to the partners of LLP.

•Remuneration receivable by partners of LLP will be taxed in the hands of the partners as “Income from Business & Profession”.

•The benefits of presumptive taxation are not applicable in case of LLPs.

2.0 SETTING UP A COMPANY

2.1 Incorporation of a Company

2.1.1 APPROVAL OF NAME

The steps involved in the incorporation of a company include availing a suitable name for the company, determining the location of the registered office of the company, determining the authorised share capital, drafting the Memorandum of Association and Articles of Association and thereafter submitting the necessary documents and returns to the Registrar of Companies (ROC). The Ministry of Corporate Affairs has introduced MCA-21 e-Governance programme with a view to providing all services relating to ROC offices on-line in e-Governance mode. Accordingly all filings with the ROC including compliances with respect to Incorporation of a Company have to be done electronically duly authenticated by digital signatures of the authorized persons.

A minimum of seven subscribers are required for incorporation of a public limited company (two in case of a private limited company). The procedure of incorporation generally takes 4-6 weeks.

All documents pertaining to incorporation of a company having foreign individuals / foreign companies residing outside India as shareholders shall be certified by an official of the Government to whose custody the original is committed and be duly apostillized/notarized in accordance with Hague Convention.

Companies Act, 1956 governs the operations of a corporate enterprise. First step in incorporation of a company is to seek approval for the proposed name from the Registrar of Companies (‘ROC’) of the State/Union Territory, in which the registered office of the company is proposed to be situated. The promoters of the company have to apply to the Registrar of Companies for availability of the proposed name of the company. The approval is granted subject to conditions namely; the name should not be ambiguous or similar to an existing company, etc. Further, the words ‘Limited’ and ‘Private Limited’ should form the last part of the name of a public or private company respectively. The compliances regarding application of name is to be made electronically through the portal of the Ministry of Corporate Affairs (www.mca.gov.in).

The documents that are to be filed with the ROC for the purposes of incorporation of a company include, along with other forms, the Memorandum of Association (’MoA’) and Articles of Association (‘AoA’). After obtaining approval, the Memorandum and Articles of Association of the proposed company are filed with the Registrar of



Companies for registration. On registration, a Certificate of Incorporation is issued which is conclusive evidence of the company having been incorporated. It usually takes 4–6 weeks to incorporate a company in India.

There is an office of the Registrar of Companies in each Indian State and in some cases, for a group of adjoining States. A company needs to be registered only once with the Registrar in the State based on the location of its registered office and can then do business all across the country.

The MoA sets out the constitution of the company. The MoA of every company should state the following:

ØThe name of the company with ‘Limited’ as the last word of the name in the case of a public company and with ‘Private Limited’ as the last words of the name in the case of a private company;

ØThe State in which the registered office of the company is situated;ØThe main objects to be pursued by the company on its incorporation along

with objects incidental or ancillary to attainment of the main objects;ØOther objects of the company;ØThe liability of its members,ØThe authorised share capital (i.e. the amount of share capital with which

the company is to be registered) and division thereof into shares of a fixed amount.

ØThe minimum paid-up capital.

The objects clause is generally comprehensive in nature but the same can be amended by a special resolution of the shareholders.

There should be at least seven (7) subscribers to the MoA in case of a public company and at least two (2) subscribers to the MoA in case of a private company.

The AoA contain the rules and regulations for managing the internal affairs of the company and achieving the objects set out in the MoA. This document is subordinate to the MoA.

The articles of association set out the internal rules of the company. They contain provisions relating to share capital, the rights of members, procedure for the conduct of various general meetings of members, rights of members at general meetings, constitution of the Board of Directors, powers of Board and other similar matters regarding internal regulations of a company. A company need not register its own individual articles, but may adopt the model articles provided under the Companies Act, 1956.

It is essential for a private company to have its own AoA, whereas there is no such essential requirement for a public company. If a public company does not register its AoA, the standard model of AoA as provided in the Companies Act, 1956 applies.

2.1.2 MOA

2.1.3 AOA



Draft copies of the memorandum, articles and prospectus should be submitted to the stock exchange for approval in case the company wishes to list its shares by offering the same to the members of the public.

The costs associated with incorporation of a company relate to drafting and printing of the Memorandum and Articles of Association, stamp duty and company registration fee which is linked to the quantum of authorised capital.

Registration fees are calculated on a specified scale based on the company’s authorised share capital. The minimum fee of Rs. 4,800 (about US$ 107) applies to companies with authorised share capital up to Rs. 100,000 (about US$ 2,223). The maximum amount of registration fee payable is Rs. 20 million (about US$ 444,543). Stamp duty is payable on the basis of authorised share capital which varies from state to state. (1 US$ = Rs. 44.99)

The Registrar of Companies on being satisfied that all the requirements pertaining to incorporation have been met and the objectives of the company being considered are lawful, issues the Certificate of Incorporation. The Company thereafter comes into existence as a legal person distinct from its members. A private limited company can commence business upon obtaining the Certificate of Incorporation. A public limited company on the other hand has to further obtain a Certificate of Commencement of Business from the Registrar after filing the prospectus / statement in lieu of prospectus before commencing business or exercise any borrowing powers.

Where a company has issued a prospectus inviting the public to subscribe to its shares, the company cannot commence business until the amount of minimum subscription stated therein has been received.

The minimum paid-up capital required for a private limited company is Rs. 100,000 (about US$ 2,223) and for a public limited company is Rs. 500,000 (about US$ 11,114).

The minimum paid up equity capital for a public limited company to get its shares listed on the stock exchange is Rs. 100 million (about US$ 2.22 million), and at least 25% of the issued capital must be offered to the public for subscription. 10% of the issued capital can be offered to the public for subscription in case the size of the offer to the public is Rs. 1 billion (about US$ 22.23 million) or more and the offer is through book building method. However, the minimum equity capital is much lesser for listing on the Over the Counter Exchange of India. For listing on the Bombay Stock Exchange and National Stock Exchange, the minimum paid up equity capital should be Rs. 100 million and the market capitalization of the applicant’s equity shall not be less than Rs. 250 million (about US$ 5.56 million) provided however that the

2.1.4 Registration Fees and Stamp Duty

2.1.5 Certificate of Incorporation

2.2 Initial Capital Requirements



paid up equity capital can be less than Rs. 100 million (about US$ 2.22 million), if the market capitalization of the applicant’s equity is not less than Rs. 1 billion (about US$ 22.23 million). However, in any case the paid up equity capital of the company shall not be less than Rs. 50 million (about US$ 1.11 million). A public limited company cannot make any allotment of shares unless a minimum subscription of 90% of the issue amount has been subscribed. For continuation of listing all listed companies should have non-promoter holding to the extent of 10% of the post issue capital (for an existing company which had in the past offered shares to the extent of 10% pursuant to the relevant regulations) or 25% for a new company.

A public limited company is allowed to have only two classes of share capital viz. equity and preference shares.

2.3.1 Equity shares are further divided into shares with

i. voting rightsii. with different rights as to dividend, voting or otherwise as per the rules

prescribed.

As per the Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001, only such companies fulfilling certain basic criteria are allowed to issue shares with differential voting rights viz., three year track record of distributable profits, non default inter alia in respect of filing of accounts, annual returns, repayment of deposits, redemption of debentures, payment of dividend. Approval of the shareholders for issuing such shares should be obtained at a General Body Meeting of the shareholders and in case of listed companies through system of postal ballot. Such shares, however, can be issued to the extent of 25% of the company’s total issued share capital only. So far as private limited company is concerned, there is no restriction on issue of shares of only two kinds as mentioned above and also there is no restriction of issue of shares with disproportionate rights.

2.3.2 Preference shares, which carry a pre-determined coupon rate for payment of dividend each year can be of different types i.e. Cumulative, Non-cumulative, Convertible and Non-convertible. Only redeemable preference shares can be issued and the maximum period within which shares should be redeemed should not exceed twenty years. Preference shareholders have voting rights only under certain given conditions like non-payment of dividends:

i. in case of cumulative Preference shares, for an aggregate period of not less than two years and

ii. in case of non-cumulative Preference shares, either for a period of two years immediately preceding the commencement of meeting of the shareholders or for an aggregate period of not less than three years.

2.3 Kinds of Shares



On winding up, preference shareholders receive first priority for repayment of capital, with the equity shareholders being entitled to the remaining surplus, if any.

2.3.3 A company may issue shares at a premium, which can be utilized only for specified purposes provided under the Companies Act, 1956.

A company may issue shares at a discount i.e. price less than the par value of shares, subject to the approval of the members of the general body meeting and approval of Company Law Board.

Companies may also issue debentures. A debenture is an acknowledgement of debt given under the common seal of the company. They are normally secured by a charge on the company’s assets, bearing a fixed rate of interest and are redeemable at a future date. Debentures may be wholly or partially convertible into shares at a stated date.

The money raised through debentures forms a part of company’s capital structure though it does not form part of the company’s share capital.

Public limited listed companies are allowed to issue debentures as per the guidelines framed by The Securities and Exchange Board of India (SEBI). SEBI now permits companies to issue convertible or non-convertible debentures. Every listed Company desirous of issuance of debentures must list all debentures with the stock exchange irrespective of the mode of issuance i.e. whether issued on private placement basis or through public/rights issue, and it shall be done through a separate Listing Agreement on Debentures. Some of the important conditions are compulsory credit rating, appointment of Trustees and creation of Debenture Redemption Reserve. Debentures issued by unlisted companies also need to be secured. Listed Companies are now permitted to make a combined offering of Non Convertible Debentures with warrants.

Acceptance of deposits from the public is another major source of raising funds. The Government in consultation with RBI has prescribed the upper limits, the manner and the conditions subject to which, deposits may be invited or accepted by a company from the public/ members of that company. Only a Public Limited Company can raise such public deposits. However, limits are prescribed for acceptance of deposits by companies are 10% and/or 25% of the aggregate of the Company’s paid-up capital and free reserves for Public Companies and 35% of the aggregate of its paid-up capital and free reserves for Government Companies.

A company primarily acts through two (2) agencies, a general body of shareholders and the Board of Directors. The Board of Directors is a managerial body and its accountability to shareholders must be assured.

2.4 Debentures

2.5 Public Deposits

2.6 Directors



The requirements for public and private companies are as follows:

Requirements Public Private

Minimum numbers of subscribers/shareholders/members 7 2Maximum number of subscribers/shareholders/members No limit 50Minimum number of directors 3 2

Therefore even if a foreign company wants to incorporate its 100% subsidiary in India, it will need one other shareholder, which could be another foreign body corporate or foreign resident individual or a Indian resident individual, who would hold at least one share, as a nominee of the foreign company or in his own name. The third option is for the second shareholder to be an Indian resident or Foreign resident individual who could hold one share jointly with the foreign company in order to satisfy the requirement of a minimum of two shareholders. The first arrangement is, however, preferable in case of private companies in order to retain the character of the Indian company as a “pure” private company.

Directors are responsible for the management of the day to day affairs of the company. Unless otherwise required by the company’s articles, directors need not be shareholders. The directors should meet periodically by convening Board Meetings. There should be at least one board meeting in each quarter and four board meetings in a year. Decisions taken are resolved by passing appropriate Board Resolutions. The directors can pass resolution by circulation in certain circumstances without holding a Board Meeting.

In case of every public company (and a private company, which is a subsidiary of a public company) at least two-thirds (2/3) of the total number of directors are liable to retire by rotation (one-third of such directors shall retire at every AGM). The remaining one-third (1/3) directors (non-rotational) may be appointed as provided in the company’s AoA.

In the case of a private company, which is not a subsidiary of a public company, the appointment of directors may be as per the procedure specified in its AoA. Where the AoA do not provide otherwise, the directors are to be appointed in a General meeting. The provisions relating to rotational retirement of directors do not apply in case of a private company, which is not a subsidiary of a public company.

A person cannot be a director in more than 15 public limited companies. Alternate directorships, directorships in private companies which are neither subsidiaries nor holding companies of a public company and directorships in unlimited liability companies) are not considered for the above purpose. Every public limited company should have at least 3 directors, but not more than 12 (unless it has received approval of the Department of Corporate Affairs). On other hand, a private limited company must have at least 2 directors. An alternate director may be appointed by the Board of Directors when a director is expected to remain outside the state in which meetings of the Board are ordinarily held for a continuous period of three months.

Directors can be appointed by the shareholders in the annual general meeting, by the board of directors and also by the central government. Directors may also be



nominated by financial institutions and debenture holders where terms of grant of loan or issue of debentures so provide.

Small shareholders i.e shareholders holding shares of nominal value of Rs. 20,000 (about US$ 445) or less may elect a director to represent the interest of small shareholders.

The day to day management of the company resides with the board of directors, although some of the specified matters require approval of the shareholders.

Only individual can be appointed as a Director of a company. Every individual intending to be appointed as a Director of a company or who is already being appointed as a Director of a company before the commencement of the Companies (Amendment) Act, 2006, must obtain Director Identification Number (DIN) from Ministry of Corporate Affairs, Government of India. Every existing Director to whom DIN has been allotted, shall intimate the DIN within one month from the date of its receipt to the company(s) where he is Director. Every company shall in-turn intimate the DIN to Registrar of Companies with one week of the receipt of intimation from the Director.

The company is managed by the Board of Directors who may delegate any of its powers, except where any transaction requires approval of the Board of Directors under the Companies Act, to any director or managing director. Only individual can be appointed as a Director of a company.

Every public limited company and a private limited company, which is a subsidiary of a public limited company having paid-up capital of Rs. 50 million (about US$ 1.11 million) or more, must have a managing or whole time director or a manager. Appointment and compensation of a managing director do not require approval of the Department of Corporate Affairs if the appointment is made within the guidelines and subject to the remuneration ceiling prescribed. In case of public limited companies, certain limits have been specified for maximum remuneration that can be paid to managing or whole time directors. The total remuneration to all directors shall not exceed 11% of the net profits of the company. There are no restrictions on the appointment and remuneration of managing directors or whole time directors or managers of private limited companies.

Every company with paid-up capital of Rs. 50 million (about US$ 1.11 million) or more must have a full time secretary who should be a member of the Institute of Company Secretaries of India (ICSI), who is responsible for the compliance of company law, SEBI regulations and other allied laws. The companies which are not required to have whole time secretary and are having paid up capital of Rs. 1 million or more (about US$ 22,227) and above and less than Rs. 50 million should file with the Registrar of Companies a certificate from a secretary in whole time practice as to whether the company has complied with all provisions of the Companies Act, 1956.

2.7 Managing Director

2.8 Secretary



3.0. STATUTORY REQUIREMENTS FOR COMPANIES

3.1 Annual Reports

3.2 Audit Requirements

All corporate entities in India irrespective of their size are required to prepare and file audited financial statements in accordance with Accounting Standards (“AS”) issued by the Institute of Chartered Accountants of India (“ICAI”) and their governing statute which may include:

ØCompanies Act for all incorporated entities;ØReserve Bank of India (RBI) Guidelines and Prudential Norms, and the

Banking Regulation Act, for banking companies;ØThe Insurance Act and the Insurance Regulatory and Development

Authority Act for insurance companies;ØElectricity Acts for power companies, etc.;ØListing Agreement entered between the listed Companies and Stock

Exchange with which they are listed.

A set of financial statements in India generally includes:

Øbalance sheet;Øprofit and loss account;Øcash flow statement;Øexplanatory notes to the financial statements and supplementary

schedules.

Financial statements do not, however, include such items as reports by directors, statements by the chairman, discussion and analysis by management and similar items that may be included in a financial or annual report, which all form part of overall financial reporting.

Financial Statements should be presented to the shareholders for their approval in annual general meeting. The board of directors report should also include a Directors Responsibility Statement. Directors’ Responsibility Statement basically aims at highlighting the accountability of Directors in good corporate governance. The financial statements of a holding company should also include a copy of the financial statements of its subsidiary company and a statement showing the holding company’s interest in the subsidiary. Listed public limited companies should circulate the cash flow statements along with annual financial statements among its members.

Every company is required to get its accounts audited under the Companies Act, 1956. The auditor should be a member of the Institute of Chartered Accountants of India (ICAI) holding a Certificate of Practice. There are mandatory audit requirements under certain other laws as well.



In case of certain specified industries, in addition to the regular audits, an audit of

cost accounts is required by a qualified cost accountant who is a member of the

Institute of Cost & Works Accountants of India (ICWAI) holding a certificate of

practice.

Every company must hold an Annual General Meeting (AGM). The time limit

between two AGMs should not exceed 15 months. The matters considered at an AGM

(which are known as ordinary business) normally include:

i. The consideration of the accounts, balance sheet and the reports of the

Board of Directors and auditor.ii. The declaration of dividend.iii. The appointment of directors in place of those retiring by rotation.iv. The appointment of and the fixing of the remuneration of the auditor.

Any other business in the AGM or in case of any other meetings is referred to as

special business.

Every member entitled to vote at the AGM must receive a written notice of the

meeting at least 21 days in advance. (a private company may prescribe shorter time

frame for notice period as per its Articles).

The AGM should be held on or before the earliest of the three relevant dates as

prescribed under:

a. six months from the closure of the financial year;b. 15 months from the previous AGM;c. last day of the next calendar year.

The date of the profit and loss account should not precede six months from the date

of the meeting, however, in the case of first accounts this period of six months can

extend to nine months.

In addition to the statutory meeting (to be held within six months of commencement

of business by a public limited company only) and the AGM, the Companies Act also

provides for extraordinary general meetings (EGMs). The board of directors may call

EGMs at their discretion. The directors must call an EGM, however, on a request from

members with at least 10% of the voting rights.

A simple majority of votes carries an ordinary resolution but special resolutions

must be supported by the votes of at least 75% of the members voting. Special

resolutions are generally those with constitutional significance for the company

such as, a resolution to alter the memorandum of association or articles of

association or the registration of a private company as a public company or vice

versa and reduction of share capital.

3.3 Shareholders Meetings



3.4 Online Filing System

3.4.1 Directors Identification Number (DIN)

3.4.2 Digital Signature Certificate (DSC)

3.5 Filing of Documents / Returns

Ministry of Corporate Affairs (MCA) has vide Notification dated 10/02/2006 amended the Companies (Central Government) General Rules and Forms, 1956, wherein all the forms and returns as mentioned in the notification are required to filed electronically through internet with Registrar of Companies (ROC).

Director Identification Number (DIN) is a unique identification number for an existing director or a person intending to become the director of a proposed company. In the scenario of e-filing, obtaining DIN for every director is a pre-requisite for filing certain company related documents.

A Digital Signature is the electronic signature duly issued by the Certifying Authority that shows the authenticity of the person signing the same. Every user i.e. Director or Authorised Representative of a Foreign Company who is required to sign an e-Form for submission with MCA (i.e. through internet) requires a Digital Signature Certificate.

Every company must file its annual accounts with the Registrar of Companies (‘ROC’) within 60 days from the date of the annual general meeting. (which is required to be held within six months of the financial year end and once in every year) containing the following:

ØDirector’s report;ØAuditor’s report;ØFinancial statements.

Further in addition, listed companies are also required to send copies of the annual report, cash flow report, unaudited quarterly results to the stock exchange also.

Filing of applications, documents, inspections etc. through electronic form

Any applications, balance sheet, prospectus, annual returns, forms, declarations, memorandum or articles of associations, particulars of charges, notices or any communications, intimations, as may be required to be filed or delivered under the Companies Act or any rules made thereunder shall be filed through electronic form and authenticated in such manner as may be specified in the rules. Registrar shall maintain all the applications, documents filed under this Act in the electronic form and registered or authenticated in such manner as may be specified in the rules. Inspection of these documents can be made by any person through electronic form. All fees, charges or other sums shall be paid though the electronic form. Registrar shall register these documents filed or delivered under this Act or rules made thereunder and issue such certificates or perform duties or discharge functions or exercise power under this act or rules made thereunder.



3.6 Penalties for non compliance under the Companies Act, 1956

PenaltyNature of defaultSection

11 C o n t r a v e n t i o n o f t h e p rov i s i o n s re l a t i n g to formation of associations and partnerships exceeding certain number

Every member is liable for penalty which may extend to Rs. 10,000

77A C o n t r a v e n t i o n o f t h e p rov i s i o n s re l a t i n g to purchase of own securities

The company or every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to Rs. 50,000 or with both

80 Contravention of provisions related to issue of redeemable preference shares

The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 10,000

84 Issue of share certificate with fraudulent intention

The company shall be punishable with fine which may extend to Rs. 10,000 and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with a fine which may extend to Rs. 100,000 or with both

142 Not getting registered the charge created on the assets of the company

The company and every officer of the company or other person who is in default shall be punishable with fine which may extend to Rs. 5,000 for every day during which default continues

150 Failure to maintain register of member in the prescribed manner

The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 500 for every day during which the default continues

162 Failure to file annual return within prescribed time in accordance with section 159

The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 500 for every day during which the default continues



168 Default in holding Annual G e n e r a l M e e t i n g i n accordance with section 166

The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 50,000 and in case of a continuing default with a further fine which may extend to Rs. 2,500 for every day during which default continues


211 Fai lure to prepare the f inancial statements in a c c o r d a n c e w i t h t h e requirements of Schedule VI

The person who was responsible for the compliance shall be punishable with imprisonment for a term which may extend to six months or with fine which may extend to Rs. 10,000 or with both

212 Failure to include prescribed particulars of the subsidiaries company along with the financial statements of the parent company


217 Failure to prepare or attach directors report in the prescribed manner


188 Default in circulating any resolution that a member want to put at general meetings

Every officer of the company who is in default shall be punishable with fine which may extend to Rs. 50,000

205A If the unpaid dividend is not transferred to special account within the prescribed time

The company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 5,000 for every day during which the failure continues

209 Failure to maintain books of account in the prescribed manner


210 Failure to lay accounts before annual general meetings




233B Failure to get cost accounts audited

The company shall be liable to be punished with fine which may extend to Rs. 5000 and every officer of the company who is in default shall be l i a b l e t o b e p u n i s h e d w i t h imprisonment for a term which may extend to three years or with fine which may extend to Rs. 50,000 or with both

266A Failure to make application for a l l o t m e n t o f D i r e c t o r Identification Number.

Punishment may extend to Rs. 5,000 and where contravention is continuing further fine of Rs. 5,000 for every day a f te r t h e f i rs t d u r i n g w h i c h contravention continues.

266C Obtaining more than one D i re c to r I d e n t i f i ca t i o n Number by same individual



266D Failure to intimate Director Identification Number to concerned Companies


266E Failure to intimate Director Identification Number to Registrar of Companies


295 Loan, etc, to director in contravention of section 295

Every person who is knowingly a party to the contravention shal l be punishable either with fine which may extend to Rs. 50,000 or with simple imprisonment for a term which may extend to six months

372A Inter-corporate loans and investments exceeding the limit prescribed

The company and every officer of the company who is in default shall be punishable with imprisonment which may extend to two years or with fine which may extend to Rs. 50,000



4.0 SIGNIFICANT COMPANY LAW REGULATIONS

4.1 Loans and Guarantees to Companies

4.2 Loans and Guarantees to Directors

4.3 Disclosure of Interest by Directors

4.4 Dividends

The Directors of Public Companies can make investment, give loan and guarantees to other body corporates up to 60% of its paid up capital and free reserves or 100% of its free reserves whichever is higher. If the above limit is exceeded then the approval of the shareholders at a general body meeting by way of special resolution is required. In case any term loan taken from any financial institution is outstanding and there is a default in repayment of loan installments in that event for making investment, giving loan and guarantees prior approval of the financial institution should be obtained. The above restrictions are however not applicable to insurance companies, banking companies, financial institutions, investment in subsidiary companies and private companies.

No public company can without the prior approval of the Department of Corporate Affairs give any loan to, or any guarantee or provide any security in connection with a loan made by any other person to or to any other person by a director of the lending company or its holding company, his relatives and associated enterprises.

Every director of the company who is any way directly or indirectly concerned or interested in a contract or proposed contract to be entered into by or on behalf of the company should disclose his concern or interest at a meeting of the Board of Directors.

A general notice at a meeting of the Board at the end of each financial year stating that he is a director or a member of such body corporate and as such is deemed to be interested in case of any contract which may be entered into by the company after the date of the said notice is also a sufficient disclosure of interest.

A company must pay dividends only out of its undistributed profits after providing for depreciation on fixed assets and after minimum transfers to reserves, in the manner prescribed in the Companies Act, 1956 and in rules applicable to the declaration of dividends. The Board of directors recommend the declaration of dividends based on which the shareholders decide the rate of dividends to be declared. For Financial Year 2009-10, a tax of 16.995% is payable on the amount of profits to be distributed as dividends in addition to the corporate tax by the company. Simultaneously, dividends have been exempted from tax in the hands of the recipients. The Finance Act 2010 has reduced surcharge from 10% to 7.5%, accordingly the effective rate of dividend distribution tax would reduce from 16.995% to 16.60875% for Financial Year 2010-11.

The dividends declared must be paid within 30 days of the general meeting and the unpaid amount, if any, needs to be transferred to a separate bank account.



4.5 Mergers

4.6 Buy-Back of Shares

The trend towards globalization has increased the intensity of mergers, in a bid to create more focused, competitive, viable large players in each industry. The recent liberalization of the earlier state controlled, sluggish Indian economy has made mergers necessary and acceptable.

The basic regulations covering mergers are governed by the Companies Act, 1956 while the procedural aspects are covered by the Company Court Rules, 1959.

In India, most mergers involve the transfer of undertaking of an existing company or several existing companies to another existing company of which all the members of the transferor company or companies become or have the right to become the members and the subsequent dissolution of the transferor company or companies. However, it is also possible to effect amalgamations by transfer of undertaking of two or more existing companies to a new company formed to takeover the same, of which all the members of the transferor companies become or have the right to become members and the subsequent dissolution of the transferor companies. The merger is effected only after obtaining confirmation from the shareholders, creditors, and the High Courts of the respective states of the companies. The power of sanctioning mergers has been transferred from the High Court to the National Company Law Tribunal (NCLT). NCLT will be an exclusive body dealing in matters pertaining to mergers, liquidation, rehabilitation of sick companies and other corporate matters previously handled by the Company Law Board. However, NCLT is yet to be constituted and on its constitution it will be in a position to dispose of matters pertaining to corporate restructuring, in a far more efficient manner in comparison to High Courts, since it will be an exclusive body dealing with the said matters.

Further, the Listing Agreement has been amended in order to safeguard the interest of the shareholders, whereby the listed company as well as unlisted company which are getting merged shall be required to appoint an independent merchant bankers for giving a fairness opinion on the valuation done by valuers for the company and unlisted company.

The Companies can buy-back their own shares or other specified securities from their free reserves, share premium account or proceeds of any issue made specifically for buy-back purpose upto a limit of 25% of the total paid up capital and free reserves. However, the buy-back of equity shares in any financial year shall not exceed 25% of its total paid-up equity capital and free reserves in that financial year. The buy-back of shares should be authorised by a special resolution passed in general meeting of the company. In case the buy-back is or less than 10% of the total paid up equity capital and free reserves then the buy-back can be by means of a resolution of the Board of Directors. In case of listed companies, the buy back is regulated by the regulations framed by Securities Exchange Board of India (SEBI), through SEBI (Buy-Back of Securities) Regulations, 1998 which provides for detailed and stringent disclosure norms. In case of unlisted companies, the buy-back is regulated by Department of Company Affairs through Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules, 1999. The said rules, similar to the SEBI Rules provide for detailed disclosure norms.



4.7 Audit Committees

4.8 Producer Companies

4.9 Takeovers

For better corporate governance constitution of an audit committee in case public companies (listed and unlisted) having paid-up capital of not less than Rs. 50 million (US$ 1.11 million) has been prescribed. Audit Committee should consist of not less than three directors and such number of other directors as the Board may determine. Two-thirds of the total number of the members of the committee should be directors, other than managing or whole-time director. The recommendations of the Audit Committee on any matter relating to financial management including the audit report, are binding on the Board of Directors. In case the Board of Directors do not accept the recommendation of the Audit Committee, it shall record the reasons thereof and communicate such reasons to the shareholders.

A new concept has been introduced in the Companies Act, 1956 enabling incorporation of co-operative societies as producer companies and conversion of existing cooperatives into companies, on optional basis.

The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997, popularly known as the Takeover Code, contains the guidelines to be followed by the acquirers of controlling stakes in a listed company. The key features of the Takeover Code are:

ØAny person, who along with persons acting in concert, acquires 15% or more of the equity shares of a listed company, is required to make an open offer to the public shareholders to acquire at least 20% more equity shares.

ØThe price at which the open offer is made has to be the highest of:

The negotiated price at which the 15% block has been purchased.

The price paid by the acquirer or persons acting in concert with him for acquisition, if any, including by way of allotment in a public or rights or preferential issue during the twenty-six week period prior to the date of public announcement, which ever is higher.

The price computed on the basis of the average of the weekly high and low of the closing prices of the shares of the target company as quoted on the stock exchange where the shares of the company are most frequently traded during the twenty-six weeks or the average of the daily high and low of the closing prices of the shares as quoted on the stock exchange where the shares of the company are most frequently traded during the two weeks preceding the date of public announcement, whichever is higher:

ØAn open offer is also required in cases where the acquisition leads to change of control over the target company, irrespective of the quantum of stake acquired. This provision also gets triggered in case of indirect acquisitions, ie where there is change of control over an Indian company

•

•

•



pursuant to a global transaction involving the holding company of the target company.

ØCertain types of acquisitions, such as sale of shares amongst promoters, inter-se are exempt from application of the Takeover Code. Promoters may also use the “creeping acquisition” route to acquire up to 5% shares in any financial year (ending on 31 March) till they reach 75%. Even promoters have to make an open offer in case their shareholding pursuant to a creeping acquisition exceeds 75%.

ØWhile ensuring compliance with the Takeover Code, the requirements of the listing agreement also have to be kept in mind, ie the public shareholding (non-promoter shareholding) should not go below 25% or 10% as provided in listing agreement. If it does, then the promoters have to take steps to increase the public holding to the minimum level within six months either through fresh issue of shares or sale of part stake by promoters. Companies who are not able to comply with this requirement have to seek de-listing of their shares.

ØA listed company seeking to de-list can do so after the public holding falls below 25% or 10% as provided in listing agreement. SEBI has mandated that if a promoter plans to buy out equity in a bid to de-list the company, it must use the reverse book-building process that will permit the shareholders (institutional and retail) to discover the exit price.

ØPromoters are defined as any person or persons who are directly or indirectly in control of the company or any person or persons named as “promoters” in the offer document or in the shareholding pattern disclosed by the company to the exchanges.

ØA promoter or every person forming part of the promoter group of any company shall, disclose details of shares of that company pledged by him, if any, to that company. The company shall disclose the information received as above from a promoter or promoter group to all the stock exchanges, on which the shares of company are listed, within seven working days of the receipt thereof, if, during any quarter ending of any year either aggregate number of such shares exceeds twenty five thousand; or one per cent of total shareholding or voting rights of the company, whichever is lower.

The Companies Act and the listing agreement executed between the company and the stock exchange contain several requirements relating to corporate governance. The main requirements are:

ØAt least 50% of the board of director should be non-executive.

ØOne third of the board or one half should be of independent directors depending upon the position of the chairman.

ØAll fees/compensation, if any paid to non-executive directors, including independent directors is required to be fixed by the board and approved by the shareholders.

5.0 Corporate Governance




ØThe meetings of the board are required to be held at least four times a year, with a maximum time gap of four months.

ØA director shall not be a member in more than 10 committees or act as Chairman of more than 5 committees across all companies in which he is a director. Furthermore it should be a mandatory annual requirement for every director to inform the company about the committee positions he occupies in other companies and notify changes as and when they take place.

ØThe board is required to lay down a code of conduct for all board members and senior management of the company and the annual report is required to contain a declaration of its compliances duly signed by CEO.

ØThe Board of Directors should set up two mandatory committees to be called Audit Committee and Shareholders Grievance Committee.

ØAudit committee is required to be set up with minimum three directors as members and two thirds of the members of audit committee should be independent directors and chairman of the audit committee is necessarily required to be an independent director. The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries.

ØThe audit committee should meet at least four times in a year and not more than four months should elapse between two meetings. Broad term of reference has been set out for the working of the audit committee.

ØAt least one independent director on the Board of Directors of the holding company is required to be director on the board of directors of a material non listed Indian subsidiary company.

ØA summary of transactions with related parties in the ordinary course of business is required to be placed periodically before the audit committee.

ØWhere in the preparation of financial statements, a treatment different from that prescribed in an Accounting Standard has been followed, the fact shall be disclosed in the financial statements, together with the management’s explanation as to why it believes such alternative treatment is more representative of the true and fair view.

ØThe company is required to lay down risk assessment and minimization procedures.

ØRemuneration paid to directors and all other pecuniary relationship of director with the company is required to be disclosed in the corporate governance section of the annual report.

ØCorporate governance section has to include a section of management perception and analysis of the threats, opportunities, risks, concerns, outlook, etc.

ØA board committee under the chairmanship of a non-executive director shall be formed to specifically look into the redressal of shareholder and investors complaints like transfer of shares, non-receipt of balance sheet,



non-receipt of declared dividends etc. This Committee shall be designated as ‘Shareholders/Investors Grievance Committee’.

ØThe CEO i.e the Managing Director or Manager appointed in terms of the Companies Act, Chief Finance Officer has to certify that they have reviewed financial statements and these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading and these statements present a true and fair view of the company’s affairs and are in compliance with the existing accounting standards, applicable laws and regulation.

ØThe company has to obtain a certificate from either the auditors or practicing company secretaries regarding compliances of conditions of corporate governance as stipulated in the listing agreements and annex the same to the director’s report which is sent annually to all the shareholders. The same shall also be filed with the stock exchange along with the annual report filed by the company.

ØThe company shall submit a quarterly compliance report on corporate governance to the stock exchanges within 15 days from the close of the quarter.

Companies registered under the Companies Act, 1956 can be dissolved in the following manner:

ØWinding up;

ØBeing declared a defunct company.

A company may be wound up in the following manner:

ØVoluntarily (by the shareholders/ by the creditors) by passing a specialresolution and with the approval of High Court;

ØVoluntarily by the High Court.

Winding up is a means by which a company is dissolved and its assets are realised and applied to payment of its debts. Once the debts are satisfied, the balance amount is paid back to the members in proportion to their contribution to the capital of the company.

In case the ROC is of the view that a company is not carrying on business or is not in operation, he may strike off the company’s name from the ROC, only after providing the company with an opportunity to be heard.

Where a body corporate incorporated outside India (which has been carrying on business in India) ceases to carry on business in India, it may be wound up as an unregistered company.

5.1 Winding Up


Kathakali- An Indian Dance Form

Chapter 4Human Resources


CHAPTER 4

HUMAN RESOURCES

1.0 BACKGROUND

2.0 LEGISLATIVE PROVISIONS

2.1 Mandatory Employee Benefits

The working population of India consists of three categories: organized work force, unorganized work force and self-employed individuals. The organized sector accounts for only one-tenth of India’s labour force but earns one-fourth of the nation’s total wages and income.

India’s pool of trained workers, one of the largest in the world includes scientists, computer software and electronics professionals, finance professionals, accountants, advertising and marketing experts. The government encourages new investment in regions with high unemployment and setting up of small-scale units.

The state or central governments are empowered to fix minimum wages based on the cost-of living index for employees working in scheduled employment. The government may appoint inspectors to ensure that the provisions of the act are observed. However, India continues to be very cheap source of labour.

The laws governing labour in India are very complex in nature and favour the employees. Employers are required to provide most employees with a written statement of the terms and conditions of their employment. The statement must have details about salary, hours of work, disciplinary rules and complaint procedures, the notice period for termination, holidays, the provident fund, pensions, gratuities and other employee related details. Violation of labour law is viewed with strictness and severe punishment is imposed on errant employers if violations are observed.

By law, employees are entitled to a minimum period of notice of termination, which varies according to the terms of employment. Legislation protects employees from unfair dismissal.

The labour law reforms including closure of a factory employing less than 300 workmen without any legal hassles are on the anvil.

Certain mandatory employee benefits required to be made by an employer in India (including social security schemes) are as follows, please note that the regulations are applicable to all employees employed in India:



ApplicabilityOther details- likecost to employerWhat is it?

Employeebenefit

Provident fund (PF)

It is a social security program introduced by the government, where- e m p l oye rs a re

required to deduct contributions at a specif ied rate* from the salary p aya b l e to a n employee.

- In addition, the employer must c o n t r i b u t e a n amount equal* to the employee’s contribution,

- The aggregate amount is then deposited in a fund called Provident Fund.

* currently 12% of wages

ØApplicable to every b u s i n e s s organization in India employing 20 or more persons in t h e s c h e d u l e d Industry .

ØM a n d a to r y fo r employees earning monthly wages l e s s e r t h a n Rs. 6,500 (US$ 145).

ØThe current rate of interest on PF deposits is 8.5%

ØThe Fund primarily aims at providing income to the e m p l o y e e , o n his/her retirement and there are some restr ict ions on withdrawal

ØL i m i t e d withdrawals from the fund is allowed f o r h o u s i n g , medical expenses etc.

ØWithdrawals are also permitted on r e s i g n a t i o n , termination and retirement.

ØC o s t t o t h e employer is 12% of the wages, which is g e n e r a l l y negotiated as cost to company.

Gratuity Employees who have rendered continuous service of not less than 5 years are entitled to Gratuity at the time of retirement / r e s i g n a t i o n / superannuat ion / death / disablement.

ØApplicable to every b u s i n e s s organization in India employing 10 or more persons.

ØP a y a b l e u p o n terminat ion to e m p l o y e e c o m p l e t i n g 5 y e a r s o f c o n t i n u o u s service.

ØIf termination is due to death or d i s a b l e m e n t , c o m p l e t i o n o f continuous period of 5 year shall not be necessary

ØGratuity has to be paid at the rate of 15 days wages for each completed year of service s u b j e c t t o a maximum of Rs. 35 0 , 0 0 0 ( U S $ 7 , 7 8 0 ) . T h e maximum ceiling of Rs. 350,000 is increased to Rs. 10,00,000 (US$ 22,227) w.e.f. 24 May 2010



Employeebenefit

Employees’ State Insurance

ØI t p r o v i d e s w o r k e r s w i t h medical relief, sick pay, matern i ty b e n e f i t s a n d compensation for e m p l o y m e n t injuries, including e m p l o y m e n t related fatalities.

ØContributions by the employer and the employee are p a i d t o t h e Employee State Insurance Scheme.

ØApplicable to every b u s i n e s s organization in I n d i a ( n o n -seasonal)

ØMandatory only for employees earning monthly wages lesser than Rs. 15,000 (US $ 333).

Ø15 days wages are calculated as [15 / 26 * (wages of last m o n t h o f employment)]

ØEmployee can be entitled to better terms of gratuity.

ØThe employer and e m p l o y e e a r e r e q u i r e d t o contribute 4.75% a n d 1 . 7 5 % respectively of the wages

ØC o s t t o t h e employer is 4.75% of the wages

Bonus Annual payment of a lump-sum bonus to employees, which is l i n k e d t o t h e e m p l o y e r ’ s profitability.

ØApplicable to every b u s i n e s s organization in India employing 2 0 o r m o r e persons .

ØMandatory only for employees earning monthly salary or wages lesser than Rs. 10,000 (US$ 223).

ØEmployers must pay a bonus of 6 0 % o f t h e allocable surplus, which is calculated after deducting a r e t u r n o n investment from profits after tax, limited to 20% of a n e m p l oye e ’s salary.

ØT h e a c t a l s o provides for a minimum bonus of 8 . 3 3 % o f a n employee’s salary, which is payable e v e n i f t h e employer is in losses.

ØThe bonus must be paid within eight months after the c l o s e o f t h e accounting year.





Employeebenefit

D e p o s i t L i n k e d Insurance Scheme

Add i t iona l soc ia l security in the form of life insurance to the f a m i l y o f t h e deceased employee ( m e m b e r o f t h e scheme). The scheme is linked with amount of accumulation in the p r o v i d e n t f u n d account

Appl icable to a l l establishments to which Employees’ Provident scheme applies.

ØThe cost to the employer can very from 8.33% of the salary to 20 % of salary

Employee does not contribute anything, but the employer contributes 0.5% of the total wages.

Maternity Benefit

A welfare legislation t o r e g u l a t e t h e e m p l o y m e n t o f women in certain establishments for certain period before and after Child birth, miscarriage and to provide maternity benefit.

A p p l i c a b l e t o factories covered under the Factories Act , 1948 , m ine, plantation, and also t o S h o p s & Establishments in which ten or more w o r k e r s a r e employed, but do not apply to any factory or estab l i shment to which the provisions of Employee state Insurance Act, 1948 apply

ØMaternity benefit at the rate of the average daily wage for the period of the employees’ actual absence i m m e d i a t e l y proceeding the day of her delivery and for the six weeks immediately following that day.

ØI n c a s e o f miscarriage, leave w i th wages a t t h e r a t e o f maternity benefit for a period of six weeks immediately following the day of her miscarriage.

ØI n c a s e o f t u b e c t o m y operation, leave w i th wages a t t h e r a t e o f maternity benefit for a period of two weeks immediately f o l l o w i n g t h e t u b e c t o m y operation.



The term wages is defined differently for calculation of above benefits.

The Workmen’s Compensation Act, 1923 provides workers with a convenient and easy method to claim compensation for personal injury from an employment related accident.

The object of the Industrial Employment (Standing orders) Act, 1946 is to require the employers in industrial establishments formally to define conditions of employment of workman under them. 'Standing order' means the rules of conduct for workmen employed in industrial establishment relating to matters like attendance, leave, misconduct, etc enumerated in the schedule of the Act. It applies to every industrial establishment wherein one hundred or more workmen (in Maharashtra it is fifty workmen by virtue of a state amendment) are employed on any day of the preceding twelve months. The standing orders are to be certified by a certifying officer appointed under the Act. The rules provide for model standing orders.

Industrial Disputes Act, 1947 is aimed to resolve or reduce the difference between employers and the workmen with a view to bring industrial peace and thereby increasing industrial production in the country. Matters related to change of service conditions, retrenchment, lay off and closures of industrial units are regulated under this Act.

2.2 Workers’ Compensation

2.3 Industrial Employment (Standing orders) Act, 1946

2.4 Industrial Disputes Act, 1947


Employeebenefit

The Minimum Wages Act, 1948 provides minimum wages to employees in certain employments in order t o p r e v e n t t h e exploitation of the unorganized labour.

A p p l i c a b l e t o employees employed as casual, daily rated, t e m p o r a r y o r permanent working in t h e i n d u s t r i e s s p e c i f i e d i n t h e schedule to the Act. Many states in India have included Shops a n d C o m m e r c i a l establishment in the schedule and as such the Act is applicable to shops and commercial establishments

The employers have t o e n s u r e t h e compliance of the M i n i m u m w a g e s notifications issued b y t h e s t a t e government from time to time.

Minimum Wages



2.5 The Equal Remuneration Act, 1976

2.6 The Contract Labour (Regulation and Abolition )Act, 1970

2.7 Trade Unions Act , 1926

2.8 Health and Safety

The equal remuneration Act provides for payment of equal remuneration to men and women workers for the same work or work of a similar nature and for the prevention of discrimination on the ground of sex against women in the matter of employment.

The Contract labour (Regulation and Abolition) Act, 1970 is aimed to regulate the employment of contract labour in certain establishment and provides for its abolition in certain circumstances. The Act mandates registration of principal employer and the contractor who are covered under the Act. However the Act is not applicable to establishments performing works only of an intermittent or casual nature.

The Trade Unions Act provides for registration of Trade unions and to confer on the registered trade unions certain protection and privileges.

Employers have a legal duty to take reasonable care of their employees. An employee who is injured at work may be able to claim compensation for the employer’s negligence.

Generally regulations relating to working conditions in commercial establishments as per the relevant state legislations cover the following aspects

ØDaily and weekly hours of work

ØHolidays in a week

ØOpening and closing hours for women

ØIntervals for meal etc.

ØMinimum leave days

ØWages for overtime work

The Factories Act, 1948 specifically covers the health and safety of workers. The main objectives of the act are to regulate the working conditions in factories and to ensure that employers meet basic minimum requirements of health, safety and welfare for factory workers. In addition, the act regulates working hours, leave, holidays, overtime, and the employment of women and children.

Some of the key working condition requirements as per the Factories Act, 1948 are as follows



2.8.1 Cleanliness

2.8.2 Disposal of wastes and effluents

2.8.3 Ventilation and temperature

2.8.4 Artificial humidification

2.8.5 Over crowding

2.8.6 Lighting

2.8.7 Drinking water

ØDaily removal of dirt.ØFloor to be washed once a week.

ØEffective drainage of the effluents.

ØRepainting of the factory walls once in five years.

ØIf painted in the washable paints, repaint once in three years & washed

once in six months.ØCheck relevant washing rules according to the paint used.

ØRegister of these dates to be maintained.

ØThe company shall make effective arrangements for the treatment of

wastes and effluents resulting from the manufacturing process.

ØThe company should maintain the prescribed measuring instruments

and records.ØIf dust or fume given off due to manufacturing activities, effective

measures to be taken to prevent inhalation and accumulation in workroom.

ØMethods and tests for determining the humidity of the air to be carried

out and recorded.ØWater from public supply/drinking water/purified water.

ØNo room in any factory shall be overcrowded to an extent injurious to the

health of the workers employed therein.Ø14.2 cubic meters per workman employed in each workroom is the space

specified under the act.

ØIn all places of works passage sufficient lighting is required.

ØWindows/skylights shall be kept clean on inner and outer sides.

ØAll points drinking water points shall be marked.



The Factories Act safeguards against the use and handling of hazardous substances. Employers have a duty to provide a clean and safe working environment. In addition, they must ensure that any member of the public who might be affected by their working practices is similarly protected.

Indian firms / companies may engage the services of foreign nationals (including non-resident persons of Indian nationality / origin) without prior approval of Reserve Bank of India. If the period of engagement of the foreign national is upto 3 months, then the concerned foreign national can hold any valid visa i.e. employment, business, tourist, etc. However, if the period of engagement exceeds three months then the concerned foreign national should hold employment visa only.

Foreign national can remit abroad income earned from employment subject to deduction of applicable withholding tax thereon. The foreign nationals who are resident but not permanently resident in India can avail facility of recurring remittance for family maintenance, etc. of their net salary (i.e., after deduction of contribution to provident funds and taxes payable).

All foreigners including foreigners of Indian origin visiting India on long term (more than 180 days) vide Employment Visa will be required to get themselves registered with the appropriate Foreigner’s Regional Registration Office (FRRO) within 14 days of arrival in India, irrespective of the duration of their stay.

3.0 ENGAGEMENT OF FOREIGN NATIONALS


Chapter 5Foreign Investment In India

Gateway of India, Mumbai


CHAPTER 5

FOREIGN INVESTMENT IN INDIA

1.0 INTRODUCTION

2.0 EXCHANGE CONTROL REGULATIONS – FOREIGN INVESTMENTS

2.1 Introduction

1.1 The liberalization process started in India in 1991 and second-generation reform ststarted in the first decade of 21 century has virtually opened out Indian economy

for foreign investment in all the sectors, barring few sensitive sectors. The liberalization process has thrown open opportunities for inbound investment (foreign companies investing in India) as well as outbound investment (Indian companies investing out of India) in almost every field of business from the consumer durables sector to core infrastructure sector. The World Bank has appreciated the Indian liberalization reforms in one of its Annual Report stating “India is moving rapidly towards closer integration with the global economy and the reform process, which has been brought about in such a short time, represents an irreversible movement towards a vibrant economy.” In this process of liberalization, India has taken various measures like de-licensing, permitting foreign institutions to invest in shares and securities under portfolio investment, current account convertibility, liberalizing exchange control regulations, drastically reducing the rates of customs duty and direct taxes, permitting Indian companies to list on foreign stock exchanges and set up overseas operations, permitting resident Indians to buy shares and securities listed abroad etc.

1.2 Accordingly, Foreign Investment in India is still regulated among other legislations, by the Exchange Control Regulations although under new regulations, the focus has been shifted on managing foreign exchange instead of regulating the same. In this note, we have restricted our discussion on Foreign Investments in India.

In India, till 31 May 2000, exchange control transactions were regulated by Foreign Exchange Regulation Act, 1973 (‘FERA’). FERA has been repealed by the Foreign Exchange Management Act, 1999 (‘FEMA’), which has come into force with effect from 1 June 2000. The provisions under FEMA are liberal compared to provisions under FERA. The analysis of FEMA provisions contained herein is updated as on 30 April 2010.



2.2 Investment in India by a person resident outside India / Eligibility for investing in India

2.2.1 A person resident outside India (other than a citizen of Pakistan) or an entity incorporated outside India, (other than an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy of the Government of India. A person who is a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India under the FDI Scheme, with prior approval of FIPB.

NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in shares and convertible debentures of Indian companies under FDI Scheme on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

2.2.2 Overseas Corporate Body (OCB) means a company, partnership firm, society and other corporate body owned directly or indirectly to the extent of at least 60% by Non-Resident Indians and includes overseas trust in which not less than 60% beneficial interest is held by Non-resident Indians, directly or indirectly, but irrevocably. OCBs have been de-recognised as a class of investors in India with effect from 16 September 2003. Erstwhile OCBs which are incorporated outside India and are not under adverse notice of Reserve Bank can make fresh investments under the FDI scheme as incorporated non-resident entities, with the prior approval of Government of India if the investment is through Government Route; and with the prior approval of Reserve Bank if the investment is through Automatic Route.

Foreign Investments

Foreign DirectInvestments

AutomaticRoute

Govt.Route

Foreign PortfolioInvestments

Other Investments(G-sec, NCDs etc.)

Foreign VentureCapital

investments

Investment on non-repatriable

basis

PersonsResident

Outside India

Flls FllsNRIs,PIO

NRIs,PIO

SEBI regd.FVCIs

VCF,IVCUs

NRIs,PIO

Foreign Investment in India-Schematic Representation:


2.3 Prohibition on investments

2.4 Investment under Foreign Direct Investment (‘FDI’) Scheme

2.3.1 Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities:

i. Business of chit fund, orii. Nidhi Company , oriii. Agricultural or plantation activities oriv. Real estate business, or construction of farm housesv. Trading in Transferable Development Rights (TDRs).

“Real Estate Business” mentioned above, does not include development of townships, construction of residential/commercial premises, roads or bridges educational institutions, recreational facilities, city and regional level infrastructure, townships.

It is further clarified that partnership firms /proprietorship concerns having investments as per FEMA regulations are not allowed to engage in print Media sector.

2.3.2 In addition to the above, investment in the form of FDI is also prohibited in certain sectors such as:

a. Retail Trading (except single brand product retailing)b. Atomic Energyc. Lottery Businessd. Gambling and Bettinge. Business of chit fundf. Nidhi companyg. Trading in Transferable Development Rights(TDRs)h. Activities / sectors not opened to private sector investmenti. Agriculture (excluding Floriculture, Horticulture, Development of seeds,

Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations).

j. Manufacture of Cigars, Cheroots, Cigarillos & Cigarettes, of Tobacco or of Tobacco substitutes.

The sectors which are prohibited are annexed vide Annexure-1

Entry routes for investments in India

Foreign investment is freely permitted in almost all sectors. Under Foreign Direct Investments (FDI) Scheme, investments can be made by non-residents in the shares / convertible debentures of an Indian Company, under two routes; Automatic Route and Approval / Government Route. Under the Automatic Route, the foreign investor or the Indian company does not require any approval from the Reserve Bank or Government of India for the investment. Under the Approval / Government Route, prior approval of the Government of India, Ministry of Finance, Foreign Investment Promotion Board (FIPB) is required. Entry route for non-resident investors in India as well as sector specific investment limits in India are given in Annexure -2.



2.4.1 Automatic route of FDI

2.4.2 Investments in sectors where 100% FDI under automatic route is not available

The Government of India has substantially expanded the scope of foreign investment under the Automatic Route to include all items/ activities, except certain items, for investment under FDI. FDI up to 100 % is allowed under the automatic route from foreign/NRI investor without prior approval in most of the sectors including the services sector. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or RBI.

An Indian company receiving investments from outside India for issuing shares / convertible debentures / preference shares under the FDI scheme, should report the details of the amount of consideration to the RBI within 30 days from the date of receipt of inward remittances.

Foreign investment coming as fully convertible preference shares would be treated as part of share capital. This would be included in calculating foreign equity for purposes of sectoral caps on foreign equity, where such caps have been prescribed.

Foreign investment coming as any other type of preference shares {non- convertible, optionally convertible or partially convertible) would be considered as debt and shall require conforming to External Commercial Borrowings (ECB) guidelines / ECB caps.

i. The RBI’s Automatic Route is not available for Foreign investment in Indian Company which is engaged in any activity, or in manufacturing of item included in is given in the Annexure 1 of this note. An Indian company which is not engaged in the activity or manufacture of items listed in Annexure 1 is permitted to issue shares or convertible debentures to a person resident outside India upto the extent specified in Annexure 2 on repatriation basis, subject to compliance with the provisions of the Industrial Policy and Procedures, provided –

a. The issuer company does not require an industrial license;

b. The shares/ convertible debentures are not being issued for acquiring existing shares of any Indian company;

c. If the person resident outside India to whom the shares are being issued proposes to be a collaborator or proposes to acquire the entire shareholding of a new Indian company, he should have obtained Central Government’s approval if he had any previous investment/ collaboration/ tie up in India (according to press note number 1 (2005 series) dated 12 January 2005 previous means prior to 13 January 2005) in the same field in which the Indian company issuing the shares is engaged. This restriction is not applicable for issue of shares of an Indian company engaged in Information Technology sector or in the mining sector.



ii. Subject to compliance with the provisions, an Indian company which proposes to undertake activities included in Annexure 2 is permitted to issue shares / convertible debentures to persons resident outside India out of fresh capital issued for financing expansion programme for carrying on such activities.

i. Price of shares issued by Indian Company to persons resident outside India under the FDI Scheme, shall be on the basis of SEBI guidelines in case of Companies listed on any recognized stock exchange in India. In case of companies not listed on any recognized stock exchange in India, valuation of shares has to be done on fair valuation basis by a Registered Category - I Merchant Banker or a Chartered Accountant as per Discounted Cash Flow method.

ii. The rate of dividend on preference shares issued by an Indian company to a person resident outside India should not exceed 300 basis points over the Prime Lending Rate of State Bank of India prevailing as on the date of the Board meeting of the company in which issue of such shares is recommended.

iii. Indian companies which are eligible to issue shares to persons resident outside India under the FDI Scheme will be allowed to retain the share subscription amount in a foreign currency account with the prior approval of RBI.

iv. It is worth noting that there are no separate schemes for Non-Resident Indians (‘NRIs’) for direct investment in India on repatriation basis. NRIs are now on par with any other foreign investor and they may invest in the shares/ fully convertible debentures issued by an Indian company under the FDI Scheme.

Foreign Institutional Investors (FIIs) registered with SEBI and Non-resident Indians (NRIs) are eligible to purchase shares and convertible debentures issued by Indian companies under the Portfolio Investment Scheme (PIS).

Reserve Bank has given general permission to SEBI registered FIIs / sub-accounts to invest under the PIS.

Shareholding

i. Total shareholding of each FII/sub-account under this Scheme shall not exceed 10 % of the total paid up capital or 10 % of the paid up value of each series of convertible debentures issued by the Indian company.

2.4.3 Certain important aspects of the FDI scheme

2.5 Foreign Portfolio Investments

2.5.1 Investment by FIIs under Portfolio Investment Scheme (PLS)



ii. Total holdings of all FIIs/sub-accounts put together shall not exceed 24 % of the paid-up capital or paid-up value of each series of convertible debentures. This limit of 24 % can be increased to the sectoral cap / statutory limit, as applicable to the Indian company concerned, by passing a resolution of its Board of Directors followed by a special resolution to that effect by its General Body.

iii. A domestic asset management company or portfolio manager, who is registered with SEBI as an FII for managing the fund of a sub-account can make investments under the Scheme on behalf of a. a person resident outside India who is a citizen of a foreign state,

or b. a body corporate registered outside India;

Provided such investment is made out of funds raised or collected or brought from outside through normal banking channel. Investments by such entities shall not exceed 5 % of the total paid-up equity capital or 5 % of the paid-up value of each series of convertible debentures issued by an Indian company, and shall also not exceed the overall ceiling specified for FIIs.

SEBI registered FIIs have been permitted to purchase shares / convertible debentures of an Indian company through offer/private placement, subject to the ceilings prescribed, i.e. individual FII/sub account - 10% and all FIIs/sub-accounts put together - 24% of the paid-up capital of the Indian company and to the sectoral limits, as applicable. Indian company is permitted to issue such shares provided that:

i. in the case of public offer, the price of shares to be issued is not less than the price at which shares are issued to residents; and

ii. in the case of issue by private placement, the price is not less than the price arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile Controller of Capital Issues, as applicable. Purchases can also be made of PCDs / FCDs/ Right Renunciations / Warrants / Units of Domestic Mutual Fund Schemes.

i. NRIs are allowed to invest in shares of listed Indian companies in recognized Stock Exchanges under the PIS. NRIs can invest through designated ADs, on repatriation and non-repatriation basis under PIS route up to 5% of the paid up capital / paid up value of each series of debentures of listed Indian companies. The aggregate paid-up value of shares / convertible debentures purchased by all NRIs cannot exceed 10% of the paid-up capital of the company / paid-up value of each series of debentures of the company. The aggregate ceiling of 10% can be raised to 24%, if the General Body of the Indian company passes a special resolution to that effect.

2.5.2 Investments by Non –Resident Indians (NRIs)



ii. The NRI investor has to take delivery of the shares purchased and give delivery of shares sold. Short Selling is not permitted.

iii. Payment for purchase of shares and/or debentures on repatriation basis has to be made by way of inward remittance of foreign exchange through normal banking channels or out of funds held in NRE/FCNR account maintained in India. If the shares are purchased on non-repatriation basis, the NRIs can also utilise their funds in NRO account in addition to the above.

iv. Shares purchased by NRIs on the stock exchange under PIS cannot be transferred by way of sale under private arrangement or by way of gift to a person resident in India or outside India without prior approval of RBI.

v. NRIs are allowed to invest in Exchange Traded Derivative Contracts approved by SEBI from time to time out of Rupee funds held in India on non-repatriation basis subject to the limits prescribed by SEBI.

When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which is 2 % below the applicable limit (for companies with paid-up capital of Rs. 1000 crores and above, the trigger limit is 0.5% below the applicable limit), Reserve Bank will issue a notice to all designated branches of AD Category - I banks cautioning that any further purchases of shares of the particular Indian company will require prior approval of Reserve Bank. Reserve Bank gives case-by-case approvals to FIIs for purchase of shares of companies included in the Caution List. This is done on a first-come-first-served basis.

Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap / statutory limit, Reserve Bank puts the company on the Ban List. Once a company is placed on the Ban List, no FII or NRI can purchase the shares of the company under the Portfolio Investment Scheme.

i. A SEBI registered Foreign Venture Capital Investor (FVCI) with specific approval from RBI under FEMA Regulations can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a Scheme floated by such IVCFs subject to the condition that the VCF should also be registered with SEBI.

An IVCU is defined as a company incorporated in India whose shares are not listed on a recognized stock exchange in India and which is not engaged in an activity under the negative list specified by SEBI.

A VCF is defined as a fund established in the form of a trust, a company including a body corporate and registered under the Securities and Exchange Board of India (Venture Capital Fund) Regulations, 1996 which has a dedicated pool of capita raised in a manner specified under the said

2.6 Investment by Venture Capital Fund



Regulations and which invests in Venture Capital Undertakings in accordance with the said Regulations.

ii. FVCIs can purchase equity / equity linked instruments / debt / debt instruments, debentures of an IVCU or of a VCF through initial public offer or private placement in units of schemes / funds set up by a VCF. At the time of granting approval, RBI permits the FVCI to open a foreign currency account or rupee account with a designated branch of an AD Category – I bank.

iii. The purchase / sale of shares, debentures and units can be at a price that is mutually acceptable to the buyer and the seller.

iv. AD Category – I banks can offer forward cover to FVCIs to the extent of total inward remittance. In case the FVCI has made any remittance by liquidating some investments, original cost of the investments has to be deducted from the eligible cover to arrive at the actual cover that can be offered.

Foreign Institutional Investors (FIIs) can buy Government securities / treasury bills, listed non-convertible debentures / bonds issued by Indian companies and units of domestic mutual funds either directly from the issuer of such securities or through a registered stock broker on a recognized stock exchange in India. Purchase of debt instruments by FIIs are subject to limits notified by SEBI.

i. On non-repatriation basis

a. NRIs can purchase shares / convertible debentures issued by an Indian company on non-repatriation basis without any limit. Amount of consideration for such purchase shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE / FCNR / NRO account maintained with the AD Category - I bank.

b. NRI can also, without any limit, purchase on non-repatriation basis dated Government securities, treasury bills, units of domestic mutual funds, units of Money Market Mutual Funds. Government of India has notified that NRIs are not permitted to make Investments in Small Savings Schemes including PPF. In case of investment on non-repatriation basis, the sale proceeds shall be credited to NRO account. The amount invested under the scheme and the capital appreciation thereon will not be allowed to be repatriated abroad.

2.7 Purchase of other securities by FIIs

2.8 Purchase of other securities by NRIs



ii. On repatriation basis

An NRI can purchase on repatriation basis, without limit, Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds; bonds issued by a public sector undertaking (PSU) in India and shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions stipulated in the notice inviting bids.

FIIs registered with SEBI and NRIs have been permitted to subscribe to the Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital instruments (eligible for inclusion as upper Tier II capital), issued by banks in India and denominated in Indian Rupees, subject to the following conditions:

i. Investment by all FIIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 49 % of each issue, and investment by individual FII should not exceed the limit of 10 % of each issue.

ii. Investments by all NRIs in Rupee denominated Perpetual Debt instruments (Tier I) should not exceed an aggregate ceiling of 24 % of each issue and investments by a single NRI should not exceed 5 percent of the issue.

iii. Investment by FIIs in Rupee denominated Debt capital instruments (Tier II) shall be outside the limits stipulated by SEBI for FII investment in corporate debt instruments.

iv. Investment by NRIs in Rupee denominated Debt Capital instruments (Tier II) shall be in accordance with the extant policy for investment by NRIs in other debt instruments.

FEMA provisions allow Indian companies to freely issue Rights / Bonus shares to existing non-resident shareholders, subject to adherence to sectoral cap, if any. However, such issue of bonus/rights shares have to be in accordance with other laws/statutes like the Companies Act, 1956, SEBI (Disclosure and Investor Protection) Guidelines (in case of listed companies), etc. The price of shares offered on rights basis by the Indian company to non-resident shareholders shall not be lower than the price at which such shares are offered to resident shareholders.

OCBs have been de-recognised as a class of investors with effect from 16 September 2003. Therefore, companies desiring to issue rights shares to such erstwhile OCBs will have to take specific prior permission from the Reserve Bank. As such,

2.9 Foreign Investment in Tier I and Tier II instruments issued by banks in India

2.10 Issue of rights / bonus shares to erstwhile Overseas Corporate Bodies (OCBs)



entitlement of rights shares is not automatically available to OCBs. However, bonus shares can be issued to erstwhile OCBs without RBI approval.

Existing non-resident shareholders are allowed to apply for issue of additional shares / convertible debentures / preference shares over and above their rights share entitlements. The investee company can allot the additional rights shares out of unsubscribed portion, subject to the condition that the overall issue of shares to nonresidents in the total paid-up capital of the company does not exceed the sectoral cap.

Mergers and amalgamations of companies in India are usually governed by an order issued by a competent Court on the basis of the Scheme submitted by the companies undergoing merger/amalgamation. Once the scheme of merger or amalgamation of two or more Indian companies has been approved by a Court in India, the transferee company or new company is allowed to issue shares to the shareholders of the transferor company resident outside India subject to the conditions that :

i. The percentage of shareholding of persons resident outside India in the transferee or new company does not exceed the sectoral cap.

ii. The transferor company or the transferee or the new company is not engaged in activities which are prohibited in terms of FDI policy

2.13.1 Listed Indian companies are allowed to issue shares under the Employees Stock Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly owned subsidiary abroad who are resident outside India, other than to the citizens of Pakistan. Citizens of Bangladesh can invest with the prior approval of FIPB. Shares under ESOPs can be issued directly or through a Trust subject to the condition that:

i. The scheme has been drawn in terms of relevant regulations issued by the Securities and Exchange Board of India; and

ii. The face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5 % of the paid-up capital of the issuing company.

2.13.2 Unlisted companies have to follow the provisions of the Companies Act, 1956. The

2.11 Additional allocation of rights shares by resident to non-residents

2.12 Issue and acquisition of shares after merger or de-merger or amalgamation of Indian companies

2.13 Issue of shares under Employee Stock Options Scheme to persons resident outside India



Indian company can issue ESOPs to employees who are resident outside India, other than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh with the prior FIPB approval. The issuing company is required to report the details of such issues to the concerned Regional Office of the Reserve Bank, within 30 days from the date of issue of shares.

Foreign investors can also invest in Indian companies by purchasing / acquiring existing shares from Indian shareholders or from other non-resident shareholders. General permission has been granted to non-residents / NRIs for acquisition of shares by way of transfer subject to the following:-

i. A person resident outside India (Other than NRI and OCB) may transfer by way of sale or gift the shares or convertible debentures to any person resident outside India (including NRIs).

ii. NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or convertible debentures held by them to another NRI.

In both the above cases, if the transferee has previous venture or tie-up in India through investment / technical collaboration/trade mark agreement in the same field in which the Indian company, whose shares are being transferred, is engaged, he has to obtain prior permission of SIA/FIPB to acquire the shares. This restriction is, however, not applicable to the transfer of shares for investments to be made by Venture Capital Funds registered with SEBI; or where in the existing joint venture investment by either of the parties is less than 3%; or where the existing joint venture / collaboration is defunct or sick or for transfer of shares of an Indian company engaged in Information Technology sector or in the mining sector.

iii. A person resident outside India can transfer any security to a person resident in India by way of gift.

iv. A person resident outside India can sell the shares and convertible debentures of an Indian company on a recognized Stock Exchange in India through a registered broker.

v. A person resident in India can transfer by way of sale, shares / convertible debentures (including transfer of subscriber’s shares), of an Indian company in sectors other than financial service sector (i.e. Banks, NBFC, Insurance, ARCs and infrastructure companies in the securities market viz. Stock Exchanges, Clearing Corporations and Depositories) under private arrangement to a person resident outside India, subject to the prescribed guidelines.

vi. General permission is also available for transfer of shares / convertible debentures, by way of sale under private arrangement by a person resident outside India to a person resident in India, subject to the prescribed guidelines.

2.14 Transfer of shares and convertible debentures of an Indian company by a person resident outside India



vii. The above General Permission also covers transfer by a resident to a non-resident of shares / convertible debentures of an Indian company, engaged in an activity earlier covered under the Government Route but now falling under Automatic Route of RBI, as well as transfer of shares by a non-resident to an Indian company under buy-back and / or capital reduction scheme of the company. However, this General Permission is not available for transfer of shares / debentures of an entity engaged in any activity in the financial service sector (i.e. Banks, NBFCs, ARCs, Insurance and infrastructure providers in the securities market such as Stock Exchanges, Clearing Corporations, etc.).

i. A person resident in India who proposes to transfer to a person resident outside India (not being erstwhile OCBs) any security by way of gift, shall make an application to the RBI in the prescribed form.

ii. Transfer of existing shares/convertible debentures of an Indian company other than private sector bank, non-banking financial company (NBFC) and insurance company, by a resident to a non-resident not being erstwhile OCBs, by way of sale, can be effected, subject to the specified sectoral limits, without prior approval of Government and RBI subject to the following:

a. such company is not engaged in rendering any financial services i.e. service rendered by banking and non-banking companies regulated by RBI, insurance companies regulated by Insurance Regulatory and Development Authority (IRDA) other companies regulated by any other financial regulator;

b. the transfer does not fall within the purview of the provisions of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997; and

c. that the concerned parties adhere to pricing guidelines, documentation and reporting requirements specified by RBI.

2.16.1 An Indian company have been granted general permission for conversion of External Commercial Borrowings (ECB) into shares/preference shares, subject to the following conditions and reporting requirements -

i. The activity of the company is covered under the Automatic Route for FDI or the company has obtained Government approval for foreign equity in the company.

2.15 Transfer of shares/convertible debentures by a person resident in India

2.16 Conversion of ECB / Lumpsum Fee/Royalty/ Import of capital goods by SEZs into Equity



ii. The foreign equity after conversion of ECB into equity is within the sectoral cap, if any,

iii. Pricing of shares is as per SEBI regulations or erstwhile CCI guidelines in the case of listed or unlisted companies respectively.

iv. Compliance with the requirements prescribed under any other statute and regulation in force.

2.16.2 The conversion facility is available for ECBs availed under the Automatic or Approval Route. This would also be applicable to ECBs, due for payment or not, as well as secured / unsecured loans availed from non-resident collaborators. General permission is also available for issue of shares/preference shares against lump-sum technical know-how fee, royalty, under automatic route or SIA / FIPB route, subject to pricing guidelines of SEBI/CCI and compliance with applicable tax laws.

2.16.3 Units in Special Economic Zones (SEZs) are permitted to issue equity shares to non-residents against import of capital goods subject to the valuation done by a Committee consisting of Development Commissioner and the appropriate Customs officials.

2.17.1 Depositary Receipts (DRs) are negotiable securities issued outside India by a Depository Bank, on behalf of an Indian company, which represent the local Rupee denominated equity shares of the company held as deposit by a Custodian bank in India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg, etc. DRs listed and traded in the US markets are known as American Depository Receipts (ADRs) and those listed and traded elsewhere are known as Global Depository Receipts (GDRs). In the Indian context, DRs are treated as FDI.

2.17.2 Indian companies can raise foreign currency resources abroad through the issue of ADRs/GDRs, in accordance with the Scheme for issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Government of India thereunder from time to time.

A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India can invest by way of contribution to the capital of a firm or a proprietary concern in India on non-repatriation basis provided

i. Amount is invested by inward remittance or out of NRE / FCNR / NRO account maintained with Authorised Dealers / Authorised banks.

ii. The firm or proprietary concern is not engaged in any agricultural/plantation or real estate business (i.e. dealing in land and immovable property with a view to earning profit or earning income there from) or print media sector.

2.17 Issue of shares by Indian companies - ADR/GDR

2.18 Investment in firm or proprietary concern in India



iii. Amount invested shall not be eligible for repatriation outside India.

Companies incorporated outside India, desirous of opening a Liaison/Branch Office in India may apply to the Authorized Dealer-Category I Bank subject to the conditions prescribed by Reserve Bank of India.

i. Representing in India the parent company/group companies.ii. Promoting export import from/to India.iii. Promoting technical/financial collaborations between parent/group

companies and companies in India.iv. Acting as a communication channel between the parent company and

Indian companies

i. Export/Import of goods.ii. Rendering professional or consultancy services.iii. Carrying out research work, in areas in which the parent company is

engaged.iv. Promoting technical or financial collaborations between Indian companies

and parent or overseas group company.v. Representing the parent company in India and acting as buying/selling

agent in India.vi. Rendering services in Information Technology and development of

software in India.vii. Rendering technical support to the products supplied by parent/group

companies.

i. Retail trading activities of any nature is not allowed for a Branch Office in India.

ii. A Branch Office is not allowed to carry out manufacturing, processing activities in India, directly or indirectly.

iii. Branch Offices are permitted to acquire property for their own use and to carry out the permitted /incidental activities but not for leasing or renting out the property. However, entities from Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China are not allowed to acquire immovable property in India even for a Branch Office. These entities are allowed to lease such property for a period not exceeding five years.

iv. Entities from Nepal are allowed to establish only Liaison Offices in India.v. Profits earned by the Branch Offices are freely remittable from India,

subject to payment of applicable taxes.

2.19 Establishment in India of a branch or Liaison office or project offices in India

2.19.1 Activities permitted in India to liaison office

2.19.2 Activities permitted in India to Branch office of a Foreign Company

2.19.3 Other key points regarding Branch office



vi. Branch Offices have to submit Annual Activity Certificates from Chartered Accountants to the Authorized Dealer - Category 1 bank.

i. RBI has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:

a. such units are functioning in those sectors where 100 % FDI is permitted;

b. such units comply with part XI of the Companies Act (Section 592 to 602);

c. such units function on a stand-alone basis.

ii. In the event of winding-up of business and for remittance of winding up proceeds, the branch shall approach an AD Category – I bank with the documents prescribed .

Foreign Banks do not require approval under FEMA, if such Bank has obtained necessary approval under the provisions of the Banking Regulation Act, 1949 from the Reserve Bank.

Reserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract from an Indian company to execute a project in India, and

i. the project is funded directly by inward remittance from abroad; or

ii. the project is funded by a bilateral or multilateral International Financing Agency; or

iii. the project has been cleared by an appropriate authority; or

iv. a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

However, if the above criteria are not met, the foreign entity has to approach the Reserve Bank for approval.

Remittance of profit by a branch or remittance of surplus after completion of the project by the project office will be allowed by the authorised dealer on submission of documents specified in the regulation issued by RBI.

2.19.4 Branch Office in Special Economic Zones (SEZs)

2.19.5 Branches of banks

2.19.6 Project Offices

2.19.7 Remittance of profit



3.0 EXTERNAL COMMERCIAL BORROWINGS (ECB)

3.1 Automatic Route

3.1.1 Eligible Borrowers

3.1.2 Recognized lenders

3.1.3 ECB Amount and Maturity

External Commercial Borrowings (ECB) refer to commercial loans in the form of bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating rate notes and fixed rate bonds availed from non-resident lenders with minimum average maturity of 3 years.

ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route.

i. Corporates (registered under the Companies Act except financial intermediaries such as banks, financial institutions, housing finance companies and NBFCs) are eligible to raise ECB.

ii. Units in Special Economic Zones (SEZ) are allowed to raise ECB for their own requirement. However, they cannot transfer or on-lend ECB funds to sister concerns or any unit in the Domestic Tariff Area.

Individuals, Trusts and Non-Profit making Organizations are not eligible to raise ECB.

ECB can raise from internationally recognized sources such as

i. international banks;ii. international capital markets; iii. multilateral financial institutions (such as IFC, ADB, CDC, etc.); iv. export credit agencies; v. suppliers of equipment; vi. foreign collaborators and; vii. foreign equity holders (other than erstwhile OCBs).

“foreign equity holder” to be eligible as “recognized lender” under the automatic route would require minimum holding of equity in the borrower company as set out below:

i. For ECB up to US$ 5 million - minimum equity of 25 % held directly by the lender,

ii. For ECB more than US$ 5 million - minimum equity of 25 % held directly by the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB not exceeding four times the direct foreign equity holding).

i. The maximum amount of ECB which can be raised by a corporate is US$ 500 million or equivalent during a financial year.



ii. ECB up to US$ 20 million or equivalent in a financial year with minimum average maturity of three years .

iii. ECB above US$ 20 million and up to US$ 500 million or equivalent with a minimum average maturity of five years.

iv. ECB up to US$ 20 million can have call/put option provided the minimum average maturity of three years is complied with before exercising call/put option.

v. ECB up to US$ 100 million per financial year has been permitted to the corporates in the Hotels, Hospitals and Software sectors, for foreign currency and / or Rupee capital expenditure for permissible end-use. However, the proceeds of the ECBs should not be used for acquisition of land.

ECBs in excess of US$ 100 million for Rupee expenditure should have a minimum average maturity period of 7 years. The requirement of minimum average maturity period of 7 years for ECB more than US$ 100 million for Rupee capital expenditure by the borrowers in the infrastructure sector has been dispensed with.

Average Maturity Period All-in-cost Ceilings over 6 month LIBOR

Three years and up to five years 300 basis points

More than five years 500 basis points

i. Investment e.g., import of capital goods (as classified by DGFT in the Foreign Trade Policy), by new or existing production units, in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India.

Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport, (vi) industrial parks, and (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining.

ii. Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

iii. Payment for obtaining license/permit for 3G Spectrum.

Utilization of ECB proceeds is not permitted :

i. for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate,

ii. in real estate sector, iii. for working capital, general corporate purpose and repayment of existing

Rupee loans.

3.1.4 All-in-cost

3.1.5 End-use

3.1.6 End-uses not permitted



3.1.7 Guarantees

3.1.8 Security

3.1.9 Parking of ECB proceeds

3.1.10 Prepayment

3.1.11 Refinancing of an existing ECB

3.1.12 Debt Servicing

3.1.13 Procedure

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, Financial Institutions and Non-Banking Financial Companies (NBFCs) relating to ECB is not permitted.

The choice of security to be provided to the lender/supplier is left to the borrower. However, creation of charge over immoveable assets and financial securities, such as shares, in favour of the overseas lender is subject to FEMA Regulations as amended from time to time.

Borrowers are permitted to either keep ECB proceeds abroad or to remit these funds to India, pending utilization for permissible end-uses. ECB proceeds parked overseas can be invested in the following liquid assets (a)deposits or Certificate of Deposit or other products offered by banks rated not less than AA(-) by Standard and Poor/Fitch IBCA or Aa3 by Moody’s; (b)deposits with overseas branch of an Authorised Dealer in India; and (c)Treasury bills and other monetary instruments of one year maturity having minimum rating as indicated above. The funds should be invested in such a way that the investments can be liquidated as and when funds are required by the borrower in India.

ECB funds may also be remitted to India for credit to the borrowers’ Rupee accounts with AD Category - I banks in India, pending utilization for permissible end-uses.

Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior approval of RBI subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

The existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.

The designated Authorised Dealer (AD bank) has the general permission to make remittances of installments of principal, interest and other charges in conformity with ECB guidelines issued by Government / Reserve Bank of India from time to time.

Borrowers may enter into loan agreement complying with ECB guidelines with recognized lender for raising ECB under Automatic Route without prior approval of RBI. The borrower must obtain a Loan Registration Number (LRN) from the Reserve Bank of India before drawing down the ECB.



3.2 Approval Route

3.2.1 Eligible Borrowers

3.2.2 Recognized Lenders

3.2.3 Amount and Maturity

3.2.4 All-in-cost ceilings

i. Special Purpose Vehicles, or any other entity notified by the Reserve Bank, set up to finance infrastructure companies / projects exclusively, will be treated as Financial Institutions and ECB by such entities will be considered under the Approval Route.

ii. SEZ developers can avail of ECBs for providing infrastructure facilities within SEZ, as defined in the extant ECB policy, viz. (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport (vi) industrial parks (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, refining and exploration. However, ECB will not be permissible for development of integrated township and commercial real estate within SEZ.

iii. Corporates which have violated the extant ECB policy and are under investigation by Reserve Bank and / or Directorate of Enforcement, are allowed to avail ECB only under the Approval route.

iv. Cases falling outside the purview of the automatic route limits and more than maturity period indicated.

i. Borrowers can raise ECB from internationally recognized sources suchasa. international banks, b. international capital markets, c. multilateral financial institutions (such as IFC, ADB, CDC etc.), d. export credit agencies, e. suppliers’ of equipment, f. foreign collaborators, and g. foreign equity holders (other than erstwhile OCBs).

ii. From ‘foreign equity holder’ where the minimum paid up equity held directly by the foreign equity lender is 25 % but ECBs: equity ratio exceeds 4:1 (i.e. the amount of the proposed ECB exceeds four times the direct foreign equity holding).

Corporates can avail of ECB of an additional amount of US$ 250 million with average maturity of more than 10 years under the approval route, over and above the existing limit of US$ 500 million under the automatic route, during a financial year. Other ECB criteria, such as end-use, recognized lender, etc. need to be complied with. Prepayment and call/put options, however, would not be permissible for such ECB up to a period of 10 years.

All-in-cost includes rate of interest, other fees and expenses in foreign currency



except commitment fee, pre-payment fee, and fees payable in Indian Rupees. Moreover, the payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost.The current all-in-cost ceilings are as under :

The following ceilings are valid till reviewed:

Average Maturity Period All-in-cost Ceilings over 6 month LIBOR*

Three years and up to five years 300 basis points

More than five years 500 basis points

* for the respective currency of borrowing or applicable benchmark.

RBI has now decided to dispense with the requirement of all-in-cost ceilings on ECB until 31 December 2009. Accordingly, eligible borrowers, proposing to avail of ECB beyond the permissible all-in-cost ceilings specified above may approach the Reserve Bank under the Approval Route. RBI has reinstated the all - in-costs ceiling under the approval route.

i. Investment [such as import of capital goods (as classified by DGFT in the

Foreign Trade Pol icy) , implementat ion of new projects, modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME) and infrastructure sector - in India. Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects) and (viii) mining, exploration and refining.

ii. Overseas direct investment in Joint Ventures (JV)/Wholly Owned Subsidiaries (WOS) subject to the existing guidelines on Indian Direct Investment in JV/WOS abroad.

iii. Import of capital goods by corporates in the service sector, viz., hotels, hospitals and software companies.

iv. Development of integrated township permissible to corporate engaged in development of integrated township. Integrated township includes 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 forms an integrated part of township’s development. The minimum area to be developed should be 100 acres for which norms and standards are to be followed as per local bye-laws / rules. In the absence of such bye-laws/rules, a minimum of two thousand dwelling units for about ten thousand population will need to be developed. This permission is available up to 31 December 2009.

3.2.5 End Use



3.2.6 End Use not permitted

3.2.7 Guarantee

3.2.8 Creation of charge on immovable assets

3.2.9 Prepayment

3.2.10 Refinancing of existing ECB

3.3 ECB under the erstwhile US$ 5 Million Scheme

i. Utilization of ECB proceeds is not permitted for on-lending or investment in capital market or acquiring a company (or a part thereof) in India by a corporate except specified banks and financial institutions .

ii. Utilization of ECB proceeds is not permitted in real estate excluding development of integrated township

iii. Utilization of ECB proceeds is not permitted for working capital, general corporate purpose and repayment of existing Rupee loans.

Issuance of guarantee, standby letter of credit, letter of undertaking or letter of comfort by banks, financial institutions and NBFCs relating to ECB is not normally permitted. Applications for providing guarantee/standby letter of credit or letter of comfort by banks, financial institutions relating to ECB in the case of SME will be considered on merit subject to prudential norms.

With a view to facilitating capacity expansion and technological upgradation in Indian Textile industry, issue of guarantees, standby letters of credit, letters of undertaking and letters of comfort by banks in respect of ECB by textile companies for modernization or expansion of textile units will be considered under the Approval Route subject to prudential norms.

The ‘no objection’ for creation of charge on immovable assets may be conveyed under FEMA, 1999 either in favour of the lender or the security trustee, subject to the prescribed conditions.

i. Prepayment of ECB up to US$ 500 million may be allowed by the AD bank without prior approval of Reserve Bank subject to compliance with the stipulated minimum average maturity period as applicable to the loan.

ii. Pre-payment of ECB for amounts exceeding US$ 500 million would be considered by the Reserve Bank under the Approval Route.

Existing ECB may be refinanced by raising a fresh ECB subject to the condition that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the original ECB is maintained.

Designated AD banks are permitted to approve elongation of repayment period for loans raised under the erstwhile US$ 5 Million Scheme, provided there is a consent



letter from the overseas lender for such reschedulement without any additional cost. Such approval with existing and revised repayment schedule along with the Loan Key/Loan Registration Number should be initially communicated to the Chief General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India, Central Office, ECB Division, Mumbai within seven days of approval and subsequently in ECB - 2.

Trade Credits’ (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports in to India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports in to India arranged by the importer from a bank or financial institution outside India for maturity of less than 3 years. It may be noted that buyers’ credit and suppliers’ credit for 3 years and above come under the category of ECB governed by ECB guidelines.

AD banks are permitted to approve trade credits for imports into India up to US$ 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the Directorate General of Foreign Trade (DGFT) with a maturity period up to one year (from the date of shipment). For import of capital goods as classified by DGFT, AD banks may approve trade credits up to US$ 20 million per import transaction with a maturity period of more than 1 year and less than 3 years. No roll-over/extension will be permitted beyond the permissible period. AD banks shall not approve trade credit exceeding US$ 20 million per import transaction.

The current all-in-cost ceilings are as under:

Maturity period All-in-cost ceilings over 6 months LIBOR*

Up to three years 200bps

* for the respective currency of credit or applicable benchmark.

The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.

AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to US$ 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold) and up to three years for import of capital goods, subject to prudential guidelines

3.4 Trade Credits for imports into India

3.4.1 Amount and Maturity

3.4.2 All-in-cost ceilings

3.4.3 Guarantee




issued by Reserve Bank from time to time. The period of such Letters of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned from the date of shipment.

The present period of realization and repatriation of the amount to India of export value of goods or software exported is 12 months.

However, no specific time period for realization and repatriation of the amount to India of export value of goods or software exported by a unit situated in Special Economic Zone (SEZ) has been specified. In case of exports made to warehouses, established outside India, as soon as it is realized or in any case within 15 months from the date of shipment of goods.

Remittances of payments against imports should be generally completed not later than 6 months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance.

A foreign investment is now no longer linked with the technical assistance. As such, now, it is possible for foreign investor to either do equity investment or enter into technology transfer agreement. It is also possible to do foreign investment as well as technical collaboration. Technology transfer can take place in many forms and methods. It comprises of various species of intellectual property like copy right, patents, trade marks, designs, know how etc. Technology transfer agreement may involve a one-time payment of fees or it may involve longer-term arrangements with periodic royalty payments.

The remittance under technical agreements is a current account transaction and as such is freely remittable.

The Government of India permits the payments for royalty, lump sum fee for transfer of technology and payments for use of trademark/brand name on the automatic route i.e. without any approval of the Government of India. In other words, there shall be no restriction on limits of royalty payments from India and can be remitted without any approval of Government or Reserve Bank of India

However, all such payments will be subject to Foreign Exchange Management (Current Account Transactions) Rules, 2000 as amended from time to time. A suitable post-reporting system for technology transfer/ collaborations and use of trade mark/ brand name will be notified by the Government separately soon.

3.5 Time period for realization of Export payments

3.6 Time period for payment towards Import obligations

4.0 EXCHANGE CONTROL REGULATIONS - FOREIGN TECHNOLOGY TRANSFER AND ROYALTY PAYMENTS



ANNEXURE - 1

Sectors prohibited for FDI

ANNEXURE - 2

SECTOR SPECIFIC GUIDELINES FOR FOREIGN DIRECT INVESTMENT

i. Retail Trading (except single brand product retailing) ii. Atomic Energy;iii. Lottery Business;iv. Gambling and Betting;v. Business of chit fund; vi. Nidhi Company; vii. Trading in Transferable Development Rights (TDRs);viii. Activities/sector not opened to private sector investment; ix. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal

Husbandary, Pisciculture and cultivation of vegetables, mushrooms etc. under

controlled conditions and services related to agro and allied sectors) and

Plantations (Other than Tea Plantations);x. Real estate business, or construction of farm houses.

FDI in manufacturing of 'cigars, cheroots, cigarillos and cigarettes, of tobacco or of

tobacco substitutes' has been prohibited vide Press Note 2 of 2010.

In the following sectors/activities, FDI up to the limit indicated below is allowed subject to

other conditions as indicated. In Sectors/Activities not listed below, FDI is permitted up to

100% on the automatic route subject to Sectoral rules/ regulations applicable.

Sr.No.

Sector/Activity Remarks FDI Cap /

EquityEntryRoute

Automatic100%F l o r i c u l t u r e , H o r t i c u l t u r e , Development of Seeds, An imal Husbandry, P isc iculture, Aqua-culture and Cultivation o f V e g e t a b l e s & M u s h r o o m s u n d e r controlled conditions and services related to agro and allied sectors.

NB: Besides the above, FDI is not allowed in any other agricultural sector/activity

1. ---

I AGRICULTURE


Sr.No.


EquityEntryRoute

FIPB100%Tea Sector, including tea plantationNB: Besides the above, FDI is not allowed in any other plantation sector/activity

2. Subject to divestment of 26% equity in favour of Indian partner/Indian public within 5 years and prior a p p r o v a l o f S t a t e Government concerned in case of any change in future land use.

II INDUSTRY

II A MINING

Automatic100%M i n i n g c o v e r i n g exploration and mining of diamonds & precious stones; gold, silver and minerals.

3. Subject to Mines & Minerals (Development & Regulation) Act, 1957.(www.mines.nic.in) Press Note 18 (1998) and Press Note 1 (2005) are not applicable for setting up 100% owned subsidiaries in so far as the mining sector is concerned, subject to a d e c l a ra t i o n f r o m t h e applicant that he has no existing joint venture for the same area and /or the particular mineral.

Automatic100%Coal & Lignite mining for captive consumption by power projects, and iron & steel, cement production and other e l i g i b l e a c t i v i t i e s permitted under the C o a l M i n e s (Nationalization) Act, 1973.

4. Subject to provisions of Coal Mines (Nationalization) Act, 1973www.coal.nic.in

FIPB100%Mining and mineral separation of titanium bearing minerals and ores, its value addition a n d i n t e g r a t e d activities.

NB: FDI will not be allowed in mining of “ p r e s c r i b e d substances” listed in

5. S u b j e c t t o S e c t o r a l regulations and the Mines and Minerals (Development & Regulation) Act, 1957 and the following conditions-i. value addition facilities are set up within India along with transfer of technology;ii. disposal of tailing during the mineral separation shall be carried out in accordance



Sr.No.


EquityEntryRoute

Government of India notification No. S.O. 61(E) dated 18.1.2006 i s s u e d b y t h e Department of Atomic Energy.

with regulations framed by t h e A t o m i c E n e r g y Regulatory Board such Atomic Energy (Radiation Protection) Rules 2004 and the Atomic Energy (Safe Disposal of Radioactive Wastes) Rules 1987.

II B MANUFACTURING

Automatic100%Alcohol-Distillation & Brewing

6. Sub ject to l i cense by appropriate authority

FIPB26%Defence production9. Subject to licensing under Industries (Development & Regulation) Act, 1951 and g u i d e l i n e s o n F D I i n product ion of arms & ammunition.

FIPBNilCigars & Cigarettes-Manufacture

7. FDI in manufacturing of 'cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes' has been prohibited vide Press Note 2 of 2010.

Automatic100%Coffee & Rubber Processing & warehousing

8.

Automatic100%Hazardous chemicals, viz., hydrocyanic acid & its derivatives; phosgene & its derivatives; & isocyanates & diisocyantes of hydrocarbon.

10. Subject to industrial license u n d e r t h e I n d u s t r i e s (Development & Regulation) Act, 1951 and other Sectoral regulations.

Automatic100%Industrial explosives-Manufacture

11. Subject to industrial license u n d e r I n d u s t r i e s (Development & Regulation) Act, 1951 and regulations under Explosives Act, 1898

Automatic100%Drugs & Pharmaceuticals including those involving use of recombinant DNA technology

12. ---



Sr.No.


EquityEntryRoute

Automatic100%Power including generation (except Atomic energy); transmission, distribution and Power Trading.

13. Subject to provisions of the E l e c t r i c i ty A c t , 2 0 0 3 (www.powermin.nic.in)

II C POWER

III SERVICES

14. CIVIL AVIATION SECTOR

i. Airports-

ii. Air Transport Services including Domestic Scheduled Passenger Airlines; Non-Schedules Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane Services

Automatic100%Greenfield projectsa. S u b j e c t t o S e c t o r a l regulations notified by Ministry of Civil Aviation (www civilaviation.nic. in)

FIPB beyond

74%

100%Existing projectsb. S u b j e c t t o S e c t o r a l regulations notified by Ministry of Civil Aviation (www.civilaviation.nic.in)

AutomaticScheduled Air TransportServices/ Domestic Scheduled Passenger Airline

a. Subject to no direct or indirect participation by foreign airlines and Sectoral regulations.(www.civilaviations.nic.in)

FIPB beyond

74%

74%-FDI; 100% for NRI Investment.

49%-FDI; 100% for NRI Investment.

Non-Scheduled Air Transport Service/ Non-Scheduled airlines, Chartered airlines, and Cargo airlines

b. Subject to no direct or indirect participation by foreign airlines in Non-Scheduled and Chartered airlines. Foreign airlines are allowed to participate in the e q u i t y o f c o m p a n i e s operating Cargo airlines. Also s u b j e c t t o S e c t o r a l regulations.(www.civilaviations.nic.in)

Automatic100%Helicopter Services/Seaplane services requiring DGCA approval

c. Foreign airlines are allowed to participate in the equity of c o m p a n i e s o p e r a t i n g Helicopter and seaplane airlines. Also subject to S e c t o r a l r e g u l a t i o n s . (www.civilaviations.nic.in)



Sr.No.


EquityEntryRoute

iii. Other services under Civil Aviation Sector

Automatic74%-FDI 100% for NRI

Invst.

G r o u n d H a n d l i n g Services

a. S u b j e c t t o S e c t o ra l regulations and security clearance.

W h e re a ny i n d i v i d u a l investment exceeds 10% of the equity, provisions of S e c t i o n 3 ( 3 ) ( f ) o f S e c u r i t i z a t i o n a n d Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 should be complied with. (www.finmin.nic.in)

Automatic100%Maintenance and Repair organizations; flying training institutes; and technical training institutions

b.

FIPB49%(only FDI)

Asset Reconstruction Companies

15.

Subject to guidelines for sett ing up branches / subsidiaries of foreign b a n ks i s s u e d by R B I . (www.rbi.org.in)

Automatic74%(FDI+FII)

Within this limit, Fll

investment not to

exceed 49%

Banking -Private sector

16.

17. Broadcasting

Su b j e c t to G u i d e l i n es notified by Ministry of Information & Broadcasting. (www.mib.nic.in)

FIPBFDI + FII investment up to 20%

FM Radioa.

Subject to Cable Television N etwo r k Ru l es ( 1 9 94 ) Notified by Ministry of Information & Broadcasting. (www.mib.nic.in)

FIPB49%(FDI + FII)

Cable networkb.

Subject to guidelines issued by Ministry of Information & Broadcasting.(www.mib.nic.in)

FIPB49% (FDI+FII).

Within this limit, FDI

component not to exceed

20%

Direct-To-Homec.

Automatic

under approval

route

49% FDI

up to 74 %

Headend-In-the-sky (HITS) Broadcasting service

d.



Sr.No.


EquityEntryRoute

FIPB49%(FDI + FII)

Setting up hardware facilities such as up-linking, HUB, etc

e. Subject to Up-linking Policy notified by Ministry of Information & Broadcasting. (www.mib.nic.in)

FIPB26%FDI+FII

Up-linking a News & Current Affairs TV Channel

f. Subject to guidelines issued by Ministry of Information & Broadcasting. (www.mib.nic.in)

FIPB100%Up-linking a Non-news & Current Affairs TV Channel

g. Subject to guidelines issued by Ministry of Information & Broadcasting. (www.mib.nic.in)

FIPB49% (FDI+FII)

FDI-26% FII-23%

Commodity Exchanges18. FI I purchases shal l be restricted to secondary market only. Subject to regulations specified by concerned Regulators.

Automatic100%C o n s t r u c t i o n Development projects, i n c l u d i n g h o u s i n g , commercial premises, resorts, educational i n s t i t u t i o n s , recreational facilities, c i t y a n d r e g i o n a l level infrastructure, townships.

Note : FDI is not allowed in Real Estate Business

19. Subject to conditions notified vide Press Note 2 (2005 Series) including:a. Minimum capitalization of

US$ 10 million for wholly owned subsidiaries and US$ 5 million for joint venture. The funds would have to be brought within six months of c o m m e n c e m e n t o f business of the Company.

b. Minimum area to be developed under each project- 10 hectares in case of development of serviced housing plots; and built-up area of 50,000 sq. mts. in case of construction development project; and any of the above in case of a combination project.Note 1: For investment by NRIs, the conditions mentioned in Press Note 2 / 2005 are not applicable.Note 2: For investment in S E Z s , H o t e l s & Hospitals, conditions mentioned in Press Note 2 ( 20 0 5 ) a re n o t applicable



Sr.No.


EquityEntryRoute

FIPB100%Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Office Act, 1898.

20. Subject to existing laws and exclusion of activity relating to distribution of letters, which is exclusively reserved for the State. www.indiapost.gov.in

FIPB49% (FDI+FII)FDI-26%FII-23%

Infrastructure companies in securities markets namely, stock exchanges, Depositories and Clearing corporations

21. FI I purchases shal l be restricted to secondary m a r k e t . S u b j e c t t o regulations specified by concerned Regulators.

FIPB49 % (FDI+FII)

Within this limit, FII

investment not to exceed

24%

Credit Information Companies (CIC)

22. Foreign Investment in CIC will b e s u b j e c t t o C r e d i t Information Companies (Regulation) Act, 2005. Subject to regulat ions specified by concerned Regulations

Automatic100%Industrial Parks both setting up and in established Industrial Parks

23. Conditions in Press Note 2(2005) appl icable for construction development projects would not apply provided the Industrial Parks meet w i th the under -mentioned conditions-

i. it would comprise of a minimum of 10 units and no single unit shall occupy more than 50% of the allocable area;

ii The minimum percentage of the area to be allocated for industrial activity shall not be less than 66% of the total allocable area.

Automatic26%Insurance24. Subject to licensing by the Insurance Regulatory & Development Authority www.irda.nic.in



Sr.No.


EquityEntryRoute

FIPB100%Investing companies in infrastructure /services sector (except telecom sector)

25. 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.

Automatic100% Subject to:

a. Minimum capitalization norms for fund based NBFCs - US$ 0.5 million to be brought upfront for FDI up to 51%; US$ 5 million to be brought upfront for FDI above 51% and up to 75%; and US$ 50 million out of which US$ 7.5 million to be brought upfront and the balance in 24 months for FDI beyond 75% and up to 100%.

b. Minimum capitalization norms for non-fund based NBFC activities- US$ 0.5 million.

c. Foreign investors can set u p 1 0 0 % o p e ra t i n g subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities subject to bringing in US$ 50 million without any restriction on number of operating subsidiaries w i t h o u t b r i n g i n g additional capital.

Non Banking Finance Companies 26.

i Merchant Banking

Ii Underwriting

iii PortfolioManagement Services

iv InvestmentAdvisory Services

v Financial Consultancy

vi Stock Broking

vii Asset Management

viii Venture Capital

ix Custodial Services

x Factoring

xi Credit Rating Agencies

xii Leasing & Finance

xiii Housing Finance

xiv Forex Broking



Sr.No.


EquityEntryRoute

xv Credit card Business

xvi Money changing business

xvii Micro credit

xviii Rural credit

d. Joint venture operating NBFC’s that have 75% or less than 75% foreign investment will also be a l l o w e d t o s e t u p s u b s i d i a r i e s f o r undertaking other NBFC activities subject to the s u b s i d i a r i e s a l s o co m p l y i n g w i t h t h e app l i cab le m in imum capital inflow

e. Compliance with the guidelines of the RBI.

27. Petroleum & Natural Gas sector

FIPB (in case of PSUs) Automatic (in case of private companies)

49% in case of PSUs 100% in case of Private companies

Refininga. Subject to Sectoral policy www.petroleum.nic.in and no divestment or dilution of domestic equity in the existing PSUs.

Automatic100%Other than Refining and including market study and formulation; investment/financing; setting up infra-structure for marketing in Petroleum & Natural Gas sector.

b. S u b j e c t t o S e c t o r a l re g u l a t i o n s i ss u e d by Ministry of Petroleum & Natural Gas www.petroleum.nic.in

FIPB26%Publishing of newspaper and periodicals dealing with news and current affairs

a. Subject to Guidelines notified by Ministry of Information & Broadcasting. www.mib.nic.in

Print Media28.

FIPB100%Publishing of scientific magazines/specialty journals/periodicals

b. Subject to guidelines issued by Ministry of Information & Broadcasting. www.mib.nic.in



Sr.No.


EquityEntryRoute

Automaticup to 49%.

FIPBbeyond49%.

74%ISP with gateways, radio-paging, end-to- end bandwidth.

b. Subject to licensing and security requirements notified by the Dept. of Telecommunications. www.dotindia.com

Automaticup to 49%.

FIPB beyond 49%.

100%(a) ISP without gateway, (b) infrastructure provider providing dark fibre, right of way, duct space, tower (Category I);(c) electronic mail and voice mail

c. Subject to the condition that such companies shall divest 26% of their equity in favour of Indian public in 5 years, if these companies are listed in other parts of the world. Also subject to licensing and security requirements, where required. www.dotindia.com

Automatic100%Manufacture of telecom equipments

d.

Automatic100%Wholesale/cash & carry trading

a.

S u b j e c t t o s e c t o r a l requirementswww.dotindia.com

Trading30.

FIPB100%Trading for exportsb.

FIPB100%Trading of items sourced from small scale sector

c.

Telecommunications29.

Automatic up to 49%.

FIPB beyond 49%.

74%(IncludingFDI, FII, NRI, FCCBs, ADRs,

GDRs, convertible preference shares, and proportion-ate foreign equity in

Indian promoters/Investing Company)

Basic and cellular, Unified Access Services, National/International Long Distance, V-Sat, Public Mobile Radio Trunked Services (PMRTS), Global Mobile Personal Communications Services (GMPCS) and other value added telecom services

a. Subject to guidelines notified in the Press Note 3(2007 Series) dated April 19, 2007



Sr.No.


EquityEntryRoute

FIPB51%Single Brand product retailing

e. Subject to guidelines for FDI in trading issued by Department of Industrial Policy & Promotion vide Press Note 3 (2006 Series) dated 10 February 2006.

Note: All the above sector/activities are governed by the respective Press Notes/Releases issued by the Government of India from time to time and are subject to change.

FIPB74%Satellites -Establishment and operation

31. S u b j e c t t o S e c t o r a l g u i d e l i n e s i s s u e d b y Department of Space/ISROwww.isro.org

Automatic100%S p e c i a l E c o n o m i c Zones and Free Trade Warehousing Zones covering setting up of these Zones and setting up units in the Zones

32. Subject to Special Economic Zones Act, 2005 and the Foreign Trade Policy.www.sezindia.nic.in

Automatic100%D r u g s a n d P h a r m a c e u t i c a l s i n c l u d i n g t h o s e involving recombinant DNA technology

33.

FIPB100%Test marketing of such items for which a company has approval for manufacture

d. Subject to the condition that the test marketing approval wil l be for a period of two years and Investment in setting up manufacturing facilities commences simultaneously with test marketing.



India Gate, New Delhi

Chapter 6Taxation System


CHAPTER 6

TAXATION SYSTEM

1.0 INTRODUCTION

2.0 INCOME TAX ON CORPORATIONS

2.1 General Structure and Scope

2.2 Rates of Tax

The Income-tax Act, 1961 contains the law relating to Indian income tax and The Wealth Tax Act, 1957 contains the law relating to taxation of certain specified wealth (assets). Revisions in the tax rates and other duties are made through the annual Finance Act or through specific amendments. The tax administrators are not authorised to make changes in the tax legislation but are empowered by the statutes to make rules to carry out the provisions of law. The Ministry of Finance (Department of Revenue) through the Central Board of Direct Taxes (CBDT), an apex tax authority, implements and administers direct tax laws in India.

The companies are classified into ‘domestic companies’ and ‘foreign companies’ for tax purposes. The term ‘domestic company’ means an Indian company or any other company, which in respect of its income liable to tax under the Income-tax Act, has made the prescribed arrangement for the declaration and payment within India of the dividends (including dividends on preference shares) payable out of such income. The term ‘foreign company’ means a company, which is not a domestic company.

A company is treated as ‘resident’ in India in any financial year, if:i. it is an Indian company i.e. a company formed and registered in India under the

Companies Act, 1956 orii. during that year, the control and management of its affairs is situated wholly

in India.

In view of the above, an Indian company is always an Indian resident. Consequently, an Indian company that is wholly owned by a foreign entity and managed from India by foreign individuals or companies is also considered as a resident Indian company. A foreign company is treated as resident only if it is wholly controlled and managed from India during the relevant financial year.

2.2.1 The rates of tax for financial years 2009-10 & 2010-11 are inclusive of surcharge and education cess as applicable thereon, as such the tax rates given herein below are the effective tax rates.

2.2.2 The corporate tax year is the year ending 31 March and income of the same is taxed in the assessment year commencing on the succeeding 1 April. The rates of tax for the assessment year 2010-11 (financial year 2009-10) and for the assessment year 2011-12 (financial year 2010-11) in respect of taxable income (other than long term capital gains) are:



Entity

Effective Tax RatesCompanies having

total incomeabove Rs. 1,00,00,000

Companies havingtotal income

up to Rs. 1,00,00,000

Domestic Company

Financial year 2009-10


Foreign Company



33.99%

33.22%

42.23%

42.23%

30.90%

30.90%

41.20%

41.20%

2.2.3 Minimum Alternate Tax (MAT)

2.2.4 Fringe Benefit Tax (FBT)

2.2.5 Dividend Distribution Tax (DDT)

For the Financial year 2010-11 if the income-tax payable as computed under the provisions of the Income Tax Act is less than a certain specified percentage of the book profits as referred in the table below, a special tax is levied on certain companies known as the Minimum Alternate Tax (MAT). The applicable rates of MAT for FY 2009-10 & FY 2010-11 are as below:

MAT is not applicable to non-corporate entities. MAT paid can be set-off in any of the subsequent 10 assessment years against the normal tax liability in excess of MAT payable under section 115JB of the Act. Export oriented units, units set up in Free Trade Zones / Software Technology Parks and Electronic Hardware Technology Parks are also liable to MAT from the financial year 2007-08. However, under section 10AA of the Income Tax Act, units set-up in Special Economic Zone (SEZ) are not liable to pay MAT. Further under section 115JB, from 1 April 2005, SEZ developers are also exempted from the payment of MAT.

Fringe Benefit Tax has been abolished from 1 April 2009.

DDT is a tax payable on the dividend declared, distributed or paid. Dividends paid by an Indian company are currently exempt from income tax in the hands of the recipient shareholders. However, for FY 2009-10 the company paying the dividends is required to pay DDT on the amount of dividends, at the rate of 16.995%. An exemption from this tax has been granted in case of dividends distributed on or

Entity

Effective Tax RatesCompanies having

total incomeabove Rs. 1,00,00,000

Companies havingtotal income

up to Rs. 1,00,00,000

Domestic Company



Foreign Company



16.995%

19.9305%

15.836%

19.0035%

15.45%

18.54%

15.45%

18.54%



* Chargeable on net basis at normal tax rate specified for corporates above if royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by a non-resident (not being a company) or a foreign company with Government or the Indian concern after 31 March 2003 where such non-resident or a foreign company carries on a business in India through a permanent establishment situated therein or performs professional services from a fixed place of profession situated therein and the right, property or contract in respect of which the royalties or fees for technical services are paid is effectively connected with such permanent establishment or fixed place of business as the case may be.

* * Effective in respect of royalty or fees for technical services under agreements entered into on or after 1 June 2005. The rate of 20% (Plus surcharge as applicable) would apply in respect of agreement entered into between 1 June 1997 and 1 June 2005 (30% (Plus surcharge as applicable) for agreement entered into prior to 1 June 1997). The effective rates as per the table above shall be same in respect of financial year 2010-11.

*** Domestic companies are liable to pay additional DDT on the amount of dividend distributed, paid or declared.

after 1 April 2006 out of current income of Special Economic Zone (SEZ) developers. Specified mutual funds are also liable to dividend distribution tax at specified rates. For the financial year 2010-11, the DDT rate in case of a domestic company is 16.60875%.

In case a domestic company declares, distributes or pays dividend whether out of current or accumulated profits, deduction will be available from the amount of any dividend received by it from its subsidiary. The subsidiary, however, is required to pay DDT on such dividend.

2.2.6 Income of a foreign company or non-resident (not being a company) from royalty, technical fees, dividends, interest and income from units is taxed at the following rates (in the absence of lower rates under Double Taxation Avoidance Agreement):

Type of Income

% of Gross Amount in case of payment to foreign company more than Rs . 1,00,00,000 during the FY

% o f G r o s s Amount in case of payment to foreign company less than Rs. 1,00,00,000 during the FY

Royalty and fees for technical services payable under an agreement approved by the Government of India or in accordance with new Industrial Policy *

10.558%** 10.30%**

Dividends Nil *** Nil ***

Interest on monies borrowed in foreign currency

21.115% 20.60%

Income from units of notified Mutual Fund purchased in foreign currency

Nil **** Nil ****



**** Mutual funds, other than equity oriented funds, are liable to DDT on the amount of dividend distributed, paid or declared.

2.2.7 Capital gain may arise on transfer of a capital asset. The expression “capital asset” means property of any kind. There are certain properties, which are excluded from the definition of the capital assets such as stock in trade, personal effects (except specified art works, jewellery, archaeological collections, drawings, paintings, sculptures or any work of art), agricultural land and certain other investments.

There are two types of capital assets-long term capital assets and short-term capital assets. “Short term capital asset” means a capital asset held by an assessee for not more than 36 months, immediately prior to its date of transfer. In other words, if an assessee holds a capital asset for more than 36 months, then it is known as “long term capital asset”. However, in case of shares in a company or listed securities or units of notified mutual funds if they are held for more than 12 months immediately prior to the date of their transfer then such assets shall be classified as long-term capital assets. The gain arising on transfer of “Long term capital asset” is called Long Term Capital Gain and gain arising on transfer of “Short term capital asset” is called “Short Term Capital Gain”. Long-term capital gain is generally taxable at lower rates as compared to short-term capital gain.

Short-term capital gains are taxed at normal tax rates, except as stated in the below paragraph.

2.2.8 The long-term capital gains, after indexation of cost (indexation available only to residents), are subject to tax at the rate of 20% (plus surcharge plus education cess). However, in the case of listed shares, listed securities and listed/unlisted units of mutual funds on which securities transaction tax is not payable, tax payable on long term capital gains computed without indexation of cost shall not exceed 10% (plus surcharge plus education cess).

Long-term capital gains arising from transfer on or after 1 October 2004 of equity shares of a company on a recognized stock exchange in India or a unit of an equity oriented scheme of a specified mutual fund are exempt from tax provided that sale of such shares or units are chargeable to Securities Transaction Tax (discussed separately).

The gains in respect of depreciable assets shall be taxed as short-term capital gain.

Short term capital gain arising from transfer of shares of a company on a recognized stock exchange in India or a unit of an equity oriented scheme of a specified mutual fund are taxable at 15% (plus surcharge plus education cess) provided that sale of such shares or units are chargeable to Securities Transaction Tax. Other short-term capital gains are chargeable at normal income tax rates plus surcharge and education cess at applicable rates.



2.3 Taxable Income

2.3.1 Income from House Property

An Indian company is taxed on income accruing or arising either in or outside India and on income deemed to accrue or arise in India. The term ‘India’ to mean the territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed and subsoil underlying such waters, Continental shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 and the air space above its territory and territorial waters. A non-resident company is taxed only on income accruing or arising in India or income which is deemed to accrue or arise in India. Actual receipt of income in India is taxable in either of the cases. Income from foreign branches is taxable in India. Double taxation of foreign income of either of the entities is avoided by means of double taxation treaties which also provide for tax relief in the appropriate situation. Income of a subsidiary company is taxed separately as an independent entity.

The following categories of income are deemed to accrue or arise in India for which taxpayers in all categories (including companies) are liable to Indian tax:

ØAll income accruing or arising, whether directly or indirectly, through or from any business connection, property, asset or source of income in India or through the transfer of a capital asset situated in India.

ØIncome by way of interest payable by the government or in respect of any debt incurred, or monies loaned and used for the purposes of a business or a profession carried on in India.

ØIncome by way of royalty payable by the government or in respect of any right, property or information used or services utilized for the purposes of a business or profession carried on in India except lump-sum payments for computer software supplied with a computer or computer-based equipment.

ØIncome by way of fees payable in respect of technical services by the government or utilized in a business or profession carried on in India.

Taxation on income other than agricultural income is the province of the Central Government. Taxation of agricultural income is determined by the states and different rates are levied on such income by different states.

In order to compute the income of the company, first one has to ascertain the gross total income under each head (ignoring the incomes which are exempted from the tax) viz. rental income of property, income from business or profession, capital gains and income from other sources such as interest, dividend etc. Then the admissible deductions viz. donations, income from new industrial undertakings, income from small-scale industries, export profits of units set up in special economic zones, etc. have to be made to arrive at the taxable income.

The annual value of property, consisting of any buildings or lands appurtenant thereto, of which the assessee is owner, is chargeable to tax. If, however, a house property is occupied by the assessee for the purpose of his business or profession, carried on by him, annual value of such property is not chargeable to tax.Assessee is allowed statutory deduction at the rate of 30% of such net annual value of the property irrespective of the actual amount spent. In addition to above, deduction is allowed for interest paid on borrowed capital. However, the amount of



interest deductible is restricted to Rs. 1,50,000 (Rs. 30,000 in respect of specified cases) in case of self-occupied residential house.

Net profit as shown in Profit and Loss account prepared in accordance with the provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956 is the starting point for computing taxable income. Net profit as above is to be increased by the expenditure disallowable and is to be reduced by the expenditure allowable as per the provisions of the Income-tax Act.

Capital gains on corporate entities are taxed at the rates specified in Rates of Tax section above. Capital gains are calculated by deducting the cost of acquisition, the cost of any improvement to the asset and transfer expenditure from the consideration received on transfer.

Cost of Acquisition

In case of a capital asset acquired before 1 April 1981 the cost of acquisition may be taken as the fair market value of the asset as on 1 April 1981. In case of long-term capital gains the indexed cost of acquisition and the indexed cost of improvement would be deductible from the value of consideration for determining taxable capital gains earned by residents.

Capital gains earned by non-residents on transfer of shares in or debentures of an Indian company will be computed by converting the cost of acquisition, improvement, or other expenses incurred on transfer and the sale price into the same foreign currency as was initially utilized in the purchase of the shares or debentures and reconverting the capital gain so determined in foreign currency to Indian currency. In such a case, the benefit of indexation is not available to the non-residents.

Long-term capital gains arising from transfer of equity shares of a company on a recognized stock exchange in India or a unit of an equity oriented scheme of a specified mutual fund are exempt from tax provided that sale of such shares or units are chargeable to Securities Transaction Tax.

Short term capital gain arising from transfer of equity shares of a company on a recognized stock exchange in India or a unit of an equity oriented scheme of a specified mutual fund are taxable at 15% (plus surcharge plus education cess) provided that sale of such shares or units are chargeable to Securities Transaction Tax.Gains arising on transfer of capital assets by a company are exempt from tax under the following circumstances

i. transfer by a parent company to a wholly owned Indian subsidiary company;

ii. transfer by a wholly owned subsidiary company to its Indian holding company;

2.3.2 Income from Business or Profession

2.3.3 Capital Gains



iii. transfer, in a scheme of amalgamation, by an amalgamating company to the amalgamated company if the latter is an Indian company;

iv. distribution by a company of its assets to its shareholders in a liquidation;

v. transfer, in a scheme of amalgamation of shares held in an Indian company by the amalgamating foreign company, to the amalgamated foreign company if;

a. at least 25% of the shareholders of the amalgamating foreign company remain shareholders of the amalgamated foreign company; and

b. such transfer does not attract tax on capital gains in the country in which the amalgamating company is incorporated.

vi. any transfer, in a demerger, of a capital asset by the demerged company to the resulting company, if the resulting company is an Indian company;

vii. Any transfer in a demerger, of a capital asset, being a share or shares held in an Indian company, if the resulting company is an Indian company, by the demerged foreign company to the resulting foreign company, if-

a. the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resulting foreign company; and

b. such transfer does not attract tax on capital gains in the country, in which the demerged foreign company is incorporated;

viii. any transfer or issue of shares by the resulting company, in a scheme of demerger to the shareholders of the demerged company if the transfer or issue is made in consideration of demerger of the undertaking; and

ix. transfer of capital assets or intangible assets by a partnership firm to a company or by a sole proprietary concern to a company, in the event of succession of business subject to fulfillment of specified conditions.

x. any transfer of a capital asset or intangible asset by a private company or unlisted public company (hereinafter in this clause referred to as the company) to a limited liability partnership or any transfer of a share or shares held in the company by a shareholder as a result of conversion of the company into a limited liability partnership subject to the fulfilment of specified conditions.

However, in cases (i) and (ii), if the transferee company converts such capital assets into stock in trade or if the holding company or its nominees cease to hold the whole of the share capital of the subsidiary company within eight years from the date of such transfer, the capital gains exempted on the transfer will be taxed as income of the year of transfer.

A source of income, which does not specifically fall under any one of the other heads of income, is to be computed and brought to charge under this head of income.

2.3.4 Income from Other Sources



PeriodDetails of Exemption / DeductionSection Quantumof Deduction

2.4 Tax Relief

2.4.1 Tax Benefits

In order to encourage industrial growth and development, the Government of India offers several tax incentives to industrial units and foreign exchange earners in the country. These incentives reduce the tax incidence substantially and are subject to fulfillment of specified conditions.

The Income Tax Act, 1961 provides for far reaching tax holidays and other tax incentives for businesses. We have enumerated, in brief, the significant tax holidays and incentives available to businesses along with the nature of deductions, eligibility criteria, quantum of deduction and period for which the deductions are available. The tax holidays and incentives are subject to fulfillment of specified conditions and those are available to enterprises engaged in certain specified activities. The below table has been updated to cover the amendments as per the Finance Act 2010 ('The Act') which shall be effective from financial year 2010-11. These are summarized below:

10A /10B

First 10 years uptofinancial year2010-11.

First 5 yearsNext 2 yearsNext 3 years*

100%

100%50%50%

ØFor newly established undertakings in Free Trade Zones or 100% Export Oriented Undertakings.

ØFor any eligible undertaking set up in a Special Economic Zone ('SEZ') after 1 April 2002 but before 31 March 2005.

ØExemption is available for profits from export of certain articles or things or computer software, manufactured or produced by an eligible undertaking.

ØThe term 'computer software' includes notified 'information technology enabled services'.

ØThe benefit is available to units engaged in cutting and polishing of precious and semi-precious stones.

ØThe export proceeds must be realized within specified time.

ØNo deduction under these sections will be allowed unless the assessee files the return of income within prescribed time limit.

ØThe unit availing these deductions will be subject to MAT @19.93% [(tax rate 18% plus surcharge 7.5%) plus education cess 3% thereon] (having book profit exceeding Rs. 1,00,00,000) or 18.54% (in other cases).

ØThe tax holiday available under sections 10A/10B to units in STPI, EHTP, FTZ and EOU will be available upto 31 March 2011. The Act has not extended such tax holidays beyond 31 March 2011.



* The deduction is allowed only on creation of a specified reserve, which is utilized for specified purposes.

10AA First 5 yearsNext 5 yearsNext 5 years+

100%50%50%

ØFor any new eligible unit set up in a Special Economic Zone ('SEZ') on or after 1 April 2005.

ØExemption is available to the entrepreneur as referred to in Section (2j) of SEZ Act, 2005 for profits derived from export of a r t i c l e s o r t h i n g s o r s e r v i ce s , manufactured, or produced or provided any services by an eligible unit.

ØThere is no restriction on realisation of the export proceeds within a particular time frame for the purpose of claiming the deduction.

ØThe profits and gains derived from on-site development of computer software (including services for development of software) outside India shall be deemed to be the profits and gains derived from the export of computer software outside India.

ØThe term manufacturing includes processing such as cutting, polishing and as such cutting, polishing of precious and semi-precious stones can be entitled to this exemption.

ØAs per amendment made by Finance (No.2) Act, 2009, the deduction under this section is to be computed in the same proportion, which the export turnover of the eligible unit bears with the total turnover of the said unit with effect from FY 2009-10. Now as per the Act, the benefit will be available to the assessee i n t h e s a i d p ro p o r t i o n , w i t h retrospective effect from FY 2005-06.

ØThe benefit under this section will be available if :

the unit is not formed by splitting upor reconstruction of a businessalready in existence subject tocertain exceptions.the unit is not formed by transfer ofmachinery and plant previously usedfor any purpose to the new businesssubject to certain exceptions.

+ The deduction is allowed only on creation of a specified reserve, which is required to be utilized for specified purposes.

•

•





Expenditure on Scientific ResearchØWhere any capital expenditure (other than expenditure on land and building)

is incurred on scientific research related to the business carried on by the assessee, 100% of such expenditure can be claimed as deduction.

ØWhere any expenditure (other than expenditure on cost of land and building), on in-house research and development facility, as approved by the prescribed authority, incurred by the assessee, engaged in the business of manufacture or production of article or thing except those specified in the Eleventh Schedule the deduction shall be one and one-half times (150%) of the expenditure incurred up to 31 March 2012. The Act increased the deduction from 150% to 200%.

ØWhere amount is paid to a scientific research association, which has its object of undertaking scientific research or to a university, college or other institution to be used for scientific research, the deduction shall be one and one-fourth times (125%) of the amount paid provided that such association, university, college or institution is approved by the Central Government. Similar deduction is available for amount paid to approved university, college or other institution to be used for research in social science or statistical

35/35(2AB)

Additional DepreciationØGeneral rate of depreciation for plant and machinery is 15% from FY 2005-

2006.ØAdditional depreciation of 20% is allowed for new plant and machinery

acquired and installed after 31 March 2005. Additional Depreciation is available only in the year in which such machinery is first put to use.

ØCommercial vehicles acquired on or after 1 January 2009 but before 1 October 2009 and put to use before 1 October 2009 will be eligible for depreciation @ 50%.

32

Eligibility Criteria, Quantum and Period of DeductionSection

Tea / Rubber/ Coffee development allowance ØDeduction is available to assessee

engaged in the business of growing and manufacturing tea, coffee or rubber in India.

ØDeduction equal to an amount deposited in a special account with the National Bank for Agriculture and Rural Development ('NABARD') or any Deposit Account opened by the assessee and approved by the Tea Board or Coffee Board or Rubber Board from the profits is allowed.

ØThe amount has to be deposited within specified period from the end of the financial year or before furnishing the return of income, whichever is earlier.

ØThe amount has to be utilised by the assessee for specified purposes.

33AB NA Upto 40% of profits

or amount deposited in special account,

whichever is less


Expenditure on specified businessesØAny expenditure of capital nature incurred, wholly and exclusively, during the

year for specified business. ØSpecified business has been defined to mean the business of setting up and

operating of cold chain facilities for storage or transportation of agricultural produce, dairy products and other related items. It would also include the business of warehousing for storing agricultural produce and the business of laying and operating a cross-country natural gas or crude or petroleum oil pipeline network for distribution, including storage facilities being an integral part of such network subject to fulfillment of specified conditions.

ØThe Act has extended the benefit of specified business to cover the following businesses:1. To include the business of building and operating a new hotel of two star or

above category anywhere in India which starts functioning after 1 April 2010.

2. Business in the nature of building and operating, anywhere in India, a new hospital with atleast 100 beds of patients.

3. Business in the nature of developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or a State Government, as the case may be, and which is notified by the Board in this behalf in accordance with the guidelines as may be prescribed.

Ø100% deduction is allowed in respect of any capital expenditure incurred (other than expenditure incurred on the acquisition of any land or goodwill or financial instrument), during the year by the specified business subject to the specified provisions contained in this section.

ØThe assessee shall not be allowed any deduction in respect of the specified business under the provisions of chapter VI A for the same or any other assessment year. No deduction in respect of the expenditure in respect of which deduction has been claimed shall be allowed to the assessee under any other provisions of the IT Act.

ØThe benefits shall be availableIn a case where the business relates to laying and operating a crosscountry natural gas pipeline network for distribution, if such businesscommences its operations on or after 1 April 2007 and

l

35AD


research. Vide Notifications, certain institutions have been approved in the category of 'other institution' subject to fulfillment of certain conditions. Section 35(1)(iii) has been amended to include an approved research association which has as its object of undertaking research in social science or statistical research.

ØWhere the amount paid by a person to a company to be used for scientific research, provided that the company complies with the specified conditions, the weighted deduction shall be one and one-forth times (125%). The Act increased the deduction from 125% to 175%. A company approved under the provisions of the said section wil l not be entit led to claim weighted deduction of 125% under section 35(2AB). However, deduction to the extent of 100% of the sum spent as revenue expenditure on scientific research, which is available under section 35(1)(ii) will continue to be allowed.

ØThe Act has replaced the word 'research association' for the word 'scientific research association' in section 35(1).




Long-term capital gains shall be exempt from tax, if an assessee invests, within a period of 6 months from the date of transfer of a long-term capital asset, the capital gains in the specified assets. The specified asset must be held for a period of 3 years from the date of its acquisition. This exemption is restricted to investment in specified assets viz. bonds issued by National Highway Authority of India and the Rural Electrification Corporation Ltd. The investment is restricted up to Rs. 50,00,000 per assessee per financial year for investment made on or after 1 April 2007.

54EC

Dividend referred to in section 115-O shall not be included in the total income of assessee.

10(34)

Capital gains arising on transfer of plant, machinery, land, building or any rights in land / building effected in course of or in consequence of the shifting of an industrial undertaking situated in an urban area to any Special Economic Zone, shall be exempt to the extent of the amount of capital gains utilized within a period of 1 year before or 3 years after the date of transfer of the above assets, for purchase of new plant and machinery, land and building and for shifting expenses, subject to specified conditions.

54GA

Any expenditure incurred by way of payment of any sum to employee in connection with his voluntary retirement is eligible for amortization over 5 years, subject to specified conditions. In case of conversion of private company or unlisted public company to a LLP, unabsorbed expenditure incurred under voluntary retirement scheme by the private company or unlisted public company will be amortized for the remaining period.

35DDA

Capital gains arising on transfer of plant, machinery, land, building or any rights in land / building effected in course of or in consequence of the shifting of an industrial undertaking situated in an urban area to any area (other than an urban area), shall be exempt to the extent of the amount of capital gains utilized within a period of 1 year before or 3 years after the date of transfer of the above assets, for purchase of new plant and machinery, land and building and for shifting expenses, subject to specified conditions.

54G


The undertaking or enterprise engaged in developing or developing and operating or developing, operating and maintaining a SEZ will not be liable to pay DDT on dividend declared, distributed and paid, out of current income, on or after 1 April 2005.

115O (6)

The provisions of the section 115 JB will not apply to income accruing or arising on or after 1 April 2005 from a business carried on, or services rendered, by an entrepreneur or a Developer, in a unit or SEZ.

115JB (6)

Capital gain arising from transfer of long term capital asset being an equity share in a company or a unit of an equity oriented fund, on which securities transaction tax is charged, is exempt from tax. However, this exemption is not available for computation of MAT.

10(38)

lIn any other case, if such business commences its operation on or after 1 April 2009.


Nature of activity and location Type oforganization

Quantum ofexemption

Number ofyears

Sr.No.

ØUndertaking set up in any part of India for the generation or generation and distribution, of power, which has commenced operations during 1 April 1993 to 31 March 2011.

ØU n d e r t a k i n g w h i c h s t a r t s transmission or distribution by l a y i n g a n e t wo r k o f n ew transmission or distribution lines between 1 April 1999 and 31 March 2011.

ØUndertaking which undertakes substantial renovation and modernization of the existing network of transmission or distribution lines between 1 April 2004 and 31 March 2011.

i.(b) All 100% Any 10 consecutive years out of first 15 years

Indian Company

100% Any 10 consecutive years out of first 15 years

Others 100% 25%

First 5 yearsNext 5 years

Company 100%30%


Co-operativeSociety

100% 25%


ØIndustrial undertaking located in notified industrially backward states.

ØManufacturing or producing any articles or things or operating cold s t o r a g e p l a n t w h i c h h a s commenced operations during 1 April 1993 to 31 March 2004 (31 March 2012 for state of Jammu and Kashmir).

ØIndustrial undertaking deriving profit from the business of setting up and operating cold chain facility for agricultural produce which has begun to operate such facility on or after 1 April 1999 but before 31 March 2004.

ØA negative list is provided to specify the commodities, which should not be manufactured or produced by such undertakings.

ØThe deduction of 100% of the profits hitherto available under Section 80IB for a period of ten assessment years to notified industries set up in North-Eastern Region, will be available under Section 80IC only, from FY 2003-04.

Deductions of Profits derived by Newly Established Industrial Undertakings / Infrastructure Projects / Facilities / Developers of SEZs / Banking units, etc.

80 IA / 80 IB / 80 IC / 80 IAB / 80 ID/ 80 IE / 80 LA

i.(a)





Quantum ofexemption

Number ofyears

Sr.No.

ii. Company 30% First 10 years

Co-operative Society

25% First 12 years

Others 25% First 10 years

Industrial undertaking other than (i) above, manufacturing or producing articles or things (except specified low priority items) or operating cold storage plant which has commenced its operations during 1 April 1991 to 31 March 1995. However, a small scale industrial undertaking manufacturing and producing any article or thing and c o m m e n c i n g m a n u f a c t u r i n g operations or operating cold storage

plant from 1April 1995 to 31 March 2002 is eligible.

Undertaking owned by Indian Company (formed before 30 N ove m b e r 20 0 5 ) s e t u p fo r reconstruction or revival of a power generating unit, which has commenced operations in power before 31 March 2011.

i.(c) 100% Any 10 consecutive years out of first 15 years

Indian Company

Industrial undertaking located in industrially backward districts of categories A and B notified by Central Government, manufacturing or producing articles or things (except specified low priority items) or to operate its cold storage plant or plants which has commenced operations during 1 October 1994 to 31 March 2004.

i.(d)

100%30%


Company

100%25%

100%25%




Others

Company 100%30%



100% 25%


Others 100% 25%


The renovation / modernization should result into increase in plant and machinery by at least 50% of the book value of such plant and machinery as on 1 April 2004.

A. Set up in category 'A' districts for allthe assesses:

B. Set up in category 'B’ districts for allthe assesses:



Quantum ofexemption

Number ofyears

Sr.No.

Enterpr ise be ing company or consortium of companies registeredin India or any authority or board or a corporation or any other body established or constituted under any Central or state Act, for carrying on business of (i) developing or (ii) operating and maintaining or (i i i) developing, operating and maintaining of a new infrastructure facility like road including toll road, bridge, rail system, highway project, water supply project, water treatment system, irrigation project, sanitation and sewage system or solid waste management system, airport, port, inland waterways and inland ports, commencing its operations on or after 1 April 1995. For navigational channel in the sea, the benefit will be available from 1 April 2007.

iii. Company / any other body established or constituted under any Central or State Act

100%

For 10 consecutive years out of first 15 years(20 for road, bridge, rail system, highway project, water supply project, water treatment system, irrigation project, sanitation and sewerage system or solid waste management system)

Approved Hotel located in hilly or rural area or place of pilgrimage, which has started functioning during 1 April 1990 to 31 March 1994 or during 1 April 1997 to 31 March 2001.

iv. Indian company with a minimum paid up capital of Rs. 5,00,000

50%

First 10 years

Hotel located in any place other than a hilly or rural area or place of pilgrimage which has started functioning during 1 April 1991 to 31 March 1995 or during

1 April 1997 to 31 March 2001. Section 80 IB(7)(b)

v. Indian company with a minimum paid up capital of Rs. 5,00,000

30%

First 10 years

(However, for both (iv) & (v), hotel located at a place within the municipal jurisdiction of four metro cities of Kolkata, Chennai, Delhi and Mumbai are not eligible if they start functioning during 1 April 1997 to 31 March 2001)

Any company registered in India with its main object being scientific and industrial research and development which is for the time being approved by the Department of Scientific and Industrial Research at any time after 31 March 2000 but before 1 April 2007.

vi. Company 100%

For first 10 years (5 years if approved before 1 April 1999).





Quantum ofexemption

Number ofyears

Sr.No.

Any assessee being developer of a SEZ notified by the Central Government after 1 April 2005.

ix. All 100%

10 years out of first 15 years

Any undertaking, which begins commercial production of mineral oil in any part of India on or after 1 April 1997 and for refining of mineral oil on or after 1 October 1998 but not later than 31 March 2012 subject to certain conditions. The tax holiday is also available in respect of profits arising from the commercial production of natural gas from blocks which are licensed under the VIII Round of bidding for award of exploration contracts under the New E x p l o ra t i o n L i ce n c i n g Po l i c y announced by the Government of India and IV Round for the Coal Bed Methane and begins commercial production of natural gas on or after 1 April 2009.

x. All 100%

First 7 years

Any undertaking which begins to develop or develops and operates or maintains and operates an industrial park or SEZ notified by the Central Government which has commenced operations during 1 April 1997 to 31

#March 2009 . # - As per amendments by The Special Economic Zones Act 2005, the exemption will not be available for SEZs notified after 1 April 2005. Exemption will now be available under a new section 80 IAB.

10 years out of first 15 assessment years

viii. All 100%

ØAny undertaking which starts providing tele-communication services, whether basic or cellular, including radio paging, domestic satellite service or network of trunking, broadband network and internet services on or after 1 April 1995 but before 31 March 2005.

ØThe restrictions on transfer of old p l a n t a n d m a c h i n e r y a n d reconstruction of business are made applicable to the telecom sector with effect from 1 April 2004.

vii. All 100% 30%

First 5 years Next 5 years

The above 10 years shall be consecutive assessment years out of first 15 years.

xi. All 100% Not applicableØAny undertaking engaged in developing and building housing projects approved by a local authority before 31 March 2008



Quantum ofexemption

Number ofyears

Sr.No.

ØIn case of projects approved on or after 1 April 2004, it should be completed within 4 years from the end of the financial year in which it is approved.

ØIn case of projects approved on or after 1 April 2005, it should be completed within 5 years from the end of the financial year in which it is approved. This amendment will take effect from AY 2010-11.

ØIn other cases it should be completed before 31 March 2008.

ØThe deduction is allowed subject to fulfillment of various other conditions like minimum area of the land, maximum built-up area of residential and commercial units etc.

ØIn case of multiple approvals from the local authority, the date of first approval will be considered for the calculation of time limit of completion.

ØWith retrospective effect from financial year 2000-01, nothing contained in the said sub-section shall apply to any undertaking which executes the housing project as a works contract awarded by any person (including Central or State Government).

ØThe above deduction is subject to condition that not more than one residential unit is allotted to any person not being an individual and in a case where a residential unit in the housing project is allotted to a person being an individual, no other residential unit in such housing project is allotted to any of the following persons

i. the spouse or minor children of such individual,

ii. the HUF in which such individual is the karta,

iii. any person representing such individual, the spouse or the minor chi ldren of such individual or the HUF in which such individual is the karta.





Quantum ofexemption

Number ofyears

Sr.No.

ØAn undertaking deriving profit from the integrated business of h a n d l i n g , s t o r a g e a n d transportation of food grains subject to such business beginning its operations on or after 1 April 2001.

ØThe benefit is extended to undertakings engaged in the b u s i n e s s o f p r o c e s s i n g , preservation and packaging of fruits and vegetables with effect from 1 April 2004.

ØFurther, the benefit is extended to the undertakings engaged in the business of meat and meat products or poultry or marine or dairy products which begin to operate such business after 1 April 2009.

xii Company 100% 30%


Others 100% 25%


Any undertaking engaged in the business of building, owning and operating a multiplex theater located at any place other than a place within the municipal jurisdiction of four metro cities i.e., Kolkata, Chennai, Delhi and Mumbai and constructed at any time during the period of 1 April 2002 to 31 March 2005.

xiii. All 50% First 5 years

Any undertaking engaged in the business of building, owning and operating a convention center constructed at any time during the period of 1 April 2002 to 31 March 2005.

xiv All 50%

First 5 years

ØAny undertaking engaged in the business of operat ing and maintaining a hospital in a rural area.

ØThe undertaking shall be eligible for the deduction if such hospital is constructed in accordance with the local regulations in force, and has at least 100 beds for patients.

ØThe hospital should be constructed during the period beginning on 1 October 2004 and ending on31 March 2008.

ØThe deduction is also available to hospitals located anywhere in India other than excluded areas viz. areas comprising the urban

xv. All 100%

First 5 years



Quantum ofexemption

Number ofyears

Sr.No.

All 100%

First 10 years

Others 100%25%


agglomerat ions of Greater Mumbai, Delhi, Kolkata, Chennai, Hyderabad , Banga lore and Ahmedabad, the districts of Faridabad, Gurgaon, Ghaziabad, Gautam Budh Nagar, Gandhinagar and the city of Secunderabad.

ØThe said tax benefit is available to a hospital, which is constructed and has started or starts functioning at any time during the period beginning 1 April 2008 and ending on 31 March 2013.

New undertakings and enterprises, which begins to manufacture or produce any article or commences any operation specified or undertakes substantial expansion of existing undertakings and enterprises located in the states of ØI f l o ca te d i n S i k k i m , t h e

undertaking, which begins to manufacture or produce any ar t ic le or commences any o p e r a t i o n o r u n d e r t a k e s substantial expansion during the per iod beg inn ing f rom 23 December 2002 to 31 March 2007.

ØIf located in Himachal Pradesh and Uttaranchal, the undertaking, which begins to manufacture or produce or undertakes substantial expansion during the period beginning from 7 January 2003 to 31 March 2012.

ØIf located in North Eastern States*, the undertaking, which begins to manufacture or produce or undertakes substantial expansion during the period beginning from 24 December 1997 to 31 March 2007.

ØList of articles and products entitled / not entitled for such deduction have been prescribed.

* - States of Assam, Tripura, Meghalaya, Mizoram, Nagaland, Manipur and Arunachal Pradesh

xvi

All 100%

First 10 years

Company 100%30%






Quantum ofexemption

Number ofyears

Sr.No.

ØOffshore banking unit in SEZ. ØFrom the business referred to in

section 6(1) of the Banking Regulation Act, 1949.

ØFrom any unit of the International Financial Services Center from approved business.

xviii Scheduled Bank or any bank incor-porated by or under the law of a country outside India. Or a unit of an International Financial Services Center.

100% First 5 years (beginning with the year in which prescribed permissions are obtained)

50% Next 5 years

Any undertaking engaged in business of convention centers or hotels in specified area of the National Capital Territory subject to fulfillment of certain conditions. The said deduction has been extended to new two star, three star or four star hotels located in specified districts having UNESCO-declared 'World Heritage Sites'. Such hotels are required to be constructed and start functioning at any time during the period beginning 1 April 2008 and ending on 31 March 2013.

xix All 100% First 5 years

New undertakings and enterprises, which begins to manufacture or produce any eligible article or thing or provide any services or undertakes substantial expansion or carry on any eligible business in any of the Northern Eastern states beginning from 1 April 2007 to 31 March 2017.The eligible business for this purpose a re h ote l (n ot b e l ow 2 s ta r category),adventure and leisure sports including ropeways, providing medical and health services in the nature of nursing home with a minimum capacity of 25 beds; running an old-age home; operating vocational training institute for hotel management, catering and fo o d c ra f t , e n t re p re n e u rs h i p development, nursing and para-medical, civil aviation related training, fashion designing and industrial t ra in ing ; runn ing informat ion technology related training centre; manufactur ing of informat ion technology hardware; and bio-technology.

xvii All 100% First 10 years



Significant Conditions for Eligibility for Deduction under section 80IA / 80IB / 80IAB / 80IC / 80ID / 80IE / 80LA

ØAn eligible industrial undertaking is one, which fulfils all of the following conditions

i. It manufactures or produces any article or thing other than any non-priority article or thing (as specified in the Eleventh Schedule) or operates one or more cold storage plant or plants in any part of India. However, restriction regarding manufacture of non-priority article specified in eleventh schedule is not applicable to small-scale industrial undertakings and industrial undertakings located in backward states.

ii. It employs (a) 10 or more workers in a manufacturing process carried on with the aid of power or (b) 20 or more workers in a manufacturing process carried on without the aid of power.

iii. It is not formed by splitting up, or reconstruction, of a business already in existence or by transfer to a new business of machinery previously used for any purpose (except under certain circumstances).

ØThe profits and gains of an eligible business for the purpose of determining the quantum of deduction under this section for the assessment year is to be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the assessment year for which the deduction is to be made.

ØAn eligible enterprise engaged in development, operation and maintenance of any infrastructure facility should have entered into an agreement with the Central Government / State Government / local authority / other statutory body for developing or operating and maintaining or developing, operating and maintaining a new infrastructure facility.

ØThe exemption is also available to profits and gains derived from ships and approved hotels subject to fulfillment of certain conditions. In the case of a hotel, a significant condition is that the business of the hotel should be owned and carried on by a company registered in India with a paid up capital of Rs. 5,00,000 or more.

ØFor the enterprise, where housing or other activities are an integral part of the highway project, then the exemption is available to profits and gains derived from such project subject to condition that the profit has been transferred to a special reserve account and the same is actually utilized for the highway project excluding housing and other activities before the expiry of three years following the year in which such amount was transferred to the reserve account and the amount remaining unutilized shall be chargeable to tax as income of the year in which transfer to reserve account took place.

ØWhere any amount of profits and gains of an industrial undertaking or of a hotel in the case of an assessee is claimed and allowed under this section for any assessment year, deduction to the extent of such profits and gains shall not be allowed under any other provision of the Act and shall in no case exceed the profits and gains of the undertaking or hotel as the case may be.

ØAny undertaking claiming deduction under this section must furnish a report of audit in the prescribed form duly signed and verified by an accountant.



ØNo deduction under 80IA, 80IB, 80IAB, 80IC, 80ID, 80IE will be allowed unless the assessee files return of income within the due date specified under section 139(1).

ØWith retrospective effect from FY 2002-03

Deduction in respect of profits and gains shall not be allowed under any provisions of section 10A or section 10AA or section 10B or section 10BA of the IT Act or under any provisions of Chapter VIA under the heading "C.-Deductions in respect of certain incomes" in any assessment year, if a deduction in respect of same amount is claimed and allowed under the various provisions referred above in such assessment year;The aggregate of the deductions under the various provisions referred above, shall not exceed the profits and gains of the undertaking or unit or enterprise or eligible business, as the case may be;No deductions under the various provisions referred above, shall be allowed if the deduction has not been claimed in the return of income.

ØWith retrospective effect from FY 2008-09, the transfer price of goods and services between the undertaking or unit or enterprise or eligible business and any other undertaking or unit or enterprise or business of the assessee shall be determined at the market value of such goods or services as on the date of transfer.

ØAs per Finance Act 2010, no deduction, claimed and allowed in respect of any of the specified business referred to in 35AD(8)(c) for any AY, shall be allowed under chapter VI A under the heading 'C-Deduction in respect of certain income' for the same or any other AY.

•

•

•

2.4.2 Tonnage tax on shipping companies

2.5 Transfer Pricing Regulations

Indian shipping companies are taxed on a presumptive basis. Tax is levied on the notional income of the shipping company arising from the operation of ships at normal corporate tax rates. The notional income is determined in a prescribed manner on the basis of the tonnage of the ship. Tax is payable even in the case of loss. The scheme is applicable to the shipping companies that are incorporated under the Indian Companies Act (with its effective place of management in India) with at least one ship with minimum tonnage of 15 tonnes and holding a valid certificate under the Merchant Shipping Act, 1959. Shipping companies have an option to opt for the scheme or for taxation under normal income-tax provisions. Once the scheme has been opted for, it would apply for a mandatory period of ten years and other income-tax provisions would not apply.

The Finance Act, 2001 (effective from 1 April 2001) has inserted new sections 92 to 92F in the Income-tax Act, 1961 to facilitate determination of the proper taxation methodology of the international transactions between ‘associated enterprises’ having regard to arm’s length principles. As per the transfer pricing regulations, it is required that any income arising from an international transaction is to be computed at the arm’s length price. It is also provided that to arrive at such income,


the deductible expenses or interest is also to be computed at the arm’s length price. Further, it is provided that when any allocation or apportionment of or any contribution to any cost or expenses between two or more associated enterprises, in international transaction, is required, in connection with a benefit, service or facility provided by one or more enterprise, then the same is to be determined at arm’s length price.

Arm’s length price means a price that would be obtainable had the transaction taken place between independent parties in uncontrolled conditions. The methods prescribed for computing arm’s length price in transfer pricing regulations are as follows:i. Comparable uncontrolled price method;ii. Resale price method;iii. Cost plus method;iv. Profit split method;v. Transactional net margin method.

Further, transfer pricing regulations provide for the record keeping regarding international transactions with associated enterprises and obtaining of certificate from the Chartered Accountant. The penalties for non-disclosure of the international transactions could be 2% of the transaction value apart from penalties for concealment which range from 100% to 300% of the tax sought to be evaded.

Business loss incurred in a tax year and not adjusted against other income can be carried forward for 8 years, and set off against future business profit provided the income tax return for the year of loss is filed timely. Losses from a speculation business (as defined) can be set off only against gains from speculation business for a maximum of four years. For private companies, a 51% continuity of ownership test must also be satisfied. Carry back of losses is not permitted. Further, the benefit of carry forward of losses and unabsorbed depreciation is allowed in cases of amalgamation of a company owing an ‘industrial undertaking’ or a ship, with another company or an amalgamation of a banking company with a banking institution sanctioned and bought into force by the central government under the Banking Regulation Act.

Unabsorbed depreciation can be carried forward indefinitely and can be set off against any income under any head of subsequent years. Short-term capital loss also can be carried forward for eight years, and set off against future capital gains only. However, long-term capital gain can be set-off only against long-term capital gain.

The companies are liable to submit their tax returns of the relevant financial year (i.e. year ending 31 March) on or before the immediately succeeding 30 September.

2.6 Relief for Tax Losses

2.7 Returns and Payment of Taxes




Tax is payable in advance on income, including capital gains, if the tax computed as payable for any year is Rs. 10,000/- or more. Advance tax is payable on specified dates during the financial year in the manner set out below. The advance tax payable is determined by estimating the total income (including capital gains) for the year. Tax is to be calculated at the rates applicable for the financial year and is to be reduced by the amount of withholding tax deductible or collectible in terms of any provision of the Act. While shortfalls or excess payments, consequent upon errors in estimation, may be adjusted in subsequent installments, shortfalls vis-à-vis specified percentages would attract interest. All taxes must be paid before filing return of income.

The due dates for payment of advance tax and the amounts payable are:

Due Date Amount Payable

On or before 15 June Not less than 15% of advance tax

On or before 15 September Not less than 45% of advance taxless earlier installment

On or before 15 December Not less than 75% of advance tax less earlierinstallments

On or before 15 March Whole of advance tax less earlier installments

In case of non-payment of specified percentages of advance tax by specified dates, interest @ 1% per month or part thereof is payable on the shortfall.

The unpaid balance of tax is payable before filing the return of income with interest thereon @ 1% per month. Further, interest @ 1% per month or part thereof is payable on such balance tax, if the return is not filed within the specified time.

Individuals are classified into ‘residents’, ‘non-residents’ and ‘residents but not ordinarily residents’. The gamut of income subject to tax is dependent on the residential status irrespective of the nationality of the individual. The residential status of an individual can be determined using the chart given on the next page

3.0 INCOME TAX ON NON-CORPORATES

3.1 Residential Status

3.1.1 Individuals


IDENTIFYING THE RESIDENTIAL STATUS OF AN INDIVIDUAL

Individual

StayIn India for 182 days or more in a financial year; or

In India for 60* days or more in a financial year and 365 days or more in preceding 4 years

Ø

Ø

Ø

Ø

Has been a non-resident in India in 9 out of 10 preceding years ; or

Has been in India for 729 days or lesser in the preceding 7 years

No Yes

ROR RNOR

No

NR

Yes

Resident

* 182 days for an individual who leaves India as a member of the crew of an Indian Ship or for the purposes of employment outside India.




3.1.2 Other Non-corporate Entities

3.2 Rates of Tax

There are certain other non-corporate entities recognized by the Income-tax law viz partnerships, trusts, Hindu Undivided Families (HUFs) etc. These entities are treated as ‘resident’ in India in any financial year, unless the control and management of their affairs are situated wholly outside India, during the year. Limited Liability Partnership (LLP) is introduced as a form of entity and has been accorded the same tax treatment as a general partnership firm.

Income-tax rates for individuals and HUFs regardless of their residential status are as follows

For 2010-11

Tax Rates*Income Slabs(Rs.)

Nil0 - 1,60,000#

10.30% of income exceedingRs. 1,60,000

1,60,001# - 5,00,000

Rs. 35,020 plus 20.60% of income exceedingRs. 5,00,000

5,00,001 - 8,00,000


8,00,001 and above

For 2009-10

Tax Rates*Income Slabs(Rs.)

Nil0 - 1,60,000#

10.30% of income exceedingRs. 1,60,000

1,60,001# - 3,00,000


3,00,001 - 5,00,000


5,00,001 and above

* The tax rates are inclusive of education cess of 3%.

# In case of a resident woman below 65 years of age at any time during the previous year, the basic exemption income slab is Rs. 1,90,000 for FY 2009-10 and in case of a resident individual of the age of 65 years or more (senior citizen) at any time during the previous year, the basic exemption income slab is Rs. 2,40,000 for FY 2009-10. The tax for other slabs will change accordingly.


3.2.1 Tax incidence

The incidence of income tax for individuals, women and senior citizens, for FY 2010-11, having different income levels can be exemplified as follows

Income (Rs.) Tax Liability (Rs.)

Individuals* Women Senior Citizens

1,60,000 - - -1,90,000 3,090 - -2,40,000 8,240 5,150 -3,00,000 14,420 11,330 6,1804,00,000 24,720 21,630 16,4805,00,000 35,020 31,930 26,780

* The tax incidence for HUFs, AOPs and BOIs will be same as that of individuals.

The provisions relating to determination of taxable income are as follows:

i. Residents are liable to tax on their worldwide income.

ii. Non-residents are liable to tax on income, which accrues or arises or is deemed to accrue or arise in India as well as income, which is received or deemed to be received in India.

iii. ‘Resident but not ordinarily resident’ persons are liable to tax on income specified in (b) above and income derived from a business controlled from or profession set up in India.

iv. As per the Finance Act 2010, in respect of income earned by non-residents in the form of interest, royalty and fees for technical services, such income shall be deemed to accrue or arise in India whether or not, the non-resident has a residence or place of business or business connection in India or whether the services are rendered in India or not.

An individual’s gross income includes salary, income from house property, profits and gains of business or profession, capital gains and income from other sources.

Any sum of money received on or after 1 September 2004 exceeding Rs. 50,000 (about US$ 1,111)* in a financial year without consideration by an individual or Hindu Undivided Families shall be included in the total income of such individual or Hindu Undivided Family. The purview of the provision has been extended with effect from 1 October 2009 to include any sum of money as well as specified properties. The term property includes immovable properties, shares and securities, jewellery, drawings, painting, sculptures, archaeological collections and any other work of art. As per

3.3 Taxable Income

3.4 Gross Income

3.4.1 Gift received liable to income tax




the Finance Act 2010, 'bullion' is included within the meaning of property.

Further included within its ambit are transactions undertaken in respect of shares of closely held company either for inadequate consideration or without consideration where the recipient is a firm or a closely held company.

However, the following gifts shall continue to be excluded:

i. Received from Relatives as defined in the explanation to the above provisions in the Income-tax Act.

ii. Received on the occasion of marriage of the individual.

iii. Received under a will or by an inheritance or in contemplation of death of the payer.

iv. Received from any local authority as defined in the Explanation to clause (20) of section 10 or from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to clause (23C) of section 10.

v. Received from any trust or institution registered under section 12AA.

The provisions relating to computation of capital gains tax applicable to corporate entities are equally applicable to non-corporate entities. In addition to that following exemptions are available.

Long term Capital Gains - Exemptions

Individuals and Hindu undivided families are also entitled to claim exemption from long-term capital gains under the following circumstances in accordance with the relevant provisions:

i. Reinvestment of long term capital gain arising from sale of residential house for acquisition of another residential house.

ii. Reinvestment of sale proceeds arising from sale of a capital asset (other than a residential house) for acquisition of a residential house subject to fulfillment of certain conditions.

iii. Reinvestment of capital gain arising from sale of a capital asset for investment in specified bonds.

iv. Reinvestment of long term capital gains arising from sale of listed securities or unit of a mutual fund for investment in equity shares forming part of an eligible issue of capital.

Donations within limits, to approved charities qualify for deduction of 100% or 50%.

3.5 Capital Gains Tax

3.6 Deductions and Reliefs


The reliefs available to corporate entities discussed above are generally available to non-corporate entities unless specifically excluded.

For the financial year 2009-10, individuals and HUFs are entitled to deduction in respect of certain specified savings/investments/expenditure.

Income of minor children, other than income earned through personal endeavours is generally attributable to the parent that has the higher income for tax purposes. However, income of a minor child suffering from a prescribed disability is not aggregated but is taxable separately.

The provisions relating to carry forward of losses and depreciation applicable to corporate are equally applicable to non-corporate entities.

The due dates for furnishing of tax returns in case of non corporate entities are as follows

3.6.1 Deductions/ Tax Relief

3.7 Clubbing of Minor’s Income

3.8 Relief for Tax Losses

3.9 Returns and Payments of Taxes

In a case where the accounts of the assessee are required to be audited or report of an accountant is required to be submitted under specified provisions

30 September

In other cases

The due dates for payment of advance tax are as follows

The employer at his option can submit return of income to his employer in accordance with the notified scheme and such employer shall furnish all return of income received on or before due date in such form as may be prescribed in the scheme.

The method of computation of advance tax is discussed in the earlier part of this chapter.

A new presumptive taxation scheme has been introduced with effect from financial

year 2010-11 for any business having a maximum turnover / gross receipts up to

3.10 Presumptive tax scheme for small businesses

31 July

Due Date Amount Payable

On or before 15 September Not less than 30% of advance tax

On or before 15 December Not less than 60% of advance tax lessearlier installment

On or before 15 March Whole of advance tax less earlierinstallment




Rs. 40,00,000. The scheme is applicable to individuals, HUFs, Partnership firms

excluding LLPs. The presumptive rate of tax is prescribed at 8% of turnover / gross

receipts. The assessee opting for the above scheme shall be exempted from

payment of advance tax and maintaining books of accounts. An assessee with

turnover up to Rs . 40,00,000 (about US$ 88,909), who shows an income below the

presumptive rate prescribed under these provisions, will, in case his total income

exceeds the taxable limit, be required to maintain books of accounts and also get

them audited. The Finance Act 2010 increased the turnover / gross receipt limit for

a p p l i c a b i l i t y o f t h e p r e s u m p t i v e t a x a t i o n s c h e m e f r o m

Rs. 40,00,000 to Rs. 60,00,000 (about US$ 133,363) from the financial year 2010-11.

Taxable income of non-resident individuals and foreign companies is computed at a

flat rate varying from 5% to 10% of the amount paid or payable (whether in or

outside India) or an amount received or deemed to be received in India by or on

behalf of the taxpayer on account of the following:

ØBusiness of Exploration for Mineral Oils

ØBusiness of Operations of Aircraft

ØShipping Business

ØBusiness of Civil Construction for Turnkey Power Projects

Income from prospecting for Mineral Oils is, subject to certain conditions, eligible

for special allowances in addition to permissible deductions available under the Act.

Interest income on specified securities / bonds is exempt from tax in case of non-

residents.

Non-Resident Indians (NRIs) have been offered a separate concessional tax of 20%

(10% for long term capital gains) plus surcharge at applicable rates in respect of

investment income. Also, specific provision is there in the Income-tax Act to

safeguard interest of non-residents against devaluation of rupee in computing

capital gains from the specified assets acquired out of convertible foreign

exchange. However, the benefit of cost inflation index is not available to NRIs.

4.0 SPECIAL PROVISIONS FOR COMPUTATION OF

TAXABLE INCOME OF NON-RESIDENTS

4.1 Non-residents Engaged in Specified Business

4.2 Others

4.3 Income of Non Resident Indians


4.4 Income of Foreign Institutional Investors

The taxation of FIIs is governed by Section 115AD of the Income tax Act, 1961 (‘the Act’). The significant provisions of this section are discussed below. The tax rates discussed below are exclusive of surcharge and cess.

4.4.1 Interest earned by a registered FII or sub-account from its investments in debt securities of Indian companies will be taxed at the rate of 20%.

4.4.2 The tax on dividend income is nil. However, the company declaring dividend is liable to pay Dividend Distribution Tax (‘DDT’) @ 18% (plus surcharge and cess).

4.4.3 Long-term capital gains earned by registered FII or sub-account from sale of listed debt securities of Indian Companies would be taxed at the rate of 10% and short-term capital gain would be taxed at the rate of 30% in terms of section 115AD of the Act.

4.4.4 Long-term capital gains earned by registered FII or sub-account from sale of listed equity or a unit of an equity oriented fund would be exempt from tax and short-term capital gain would be taxed at the rate of 15%, provided that such transaction is chargeable to Securities Transaction Tax (STT).

4.4.5 To summarize, Registered FIIs / sub accounts registered with the SEBI are subject to tax, as per beneficial regime, as under

Particulars

Tax Rates Excluding Surcharge and Cess(Refer Note 1)

Dividend Interest

On Long Term Capital Gains (Refer Note 2)

On Short Term Capital Gains(Refer Note 2)

On Other Income ***

Listed Securities*

Unlisted Securities

0% 20%

0%

10%**

15%**

30%**

40% for corporates 30% for other entities

* - Tax benefits for capital gains are available only if such transaction is chargeable to STT.

** - Nil if an FII is registered in Mauritius and is a tax resident of Mauritius, as per the Double Taxation Avoidance Agreement (DTAA) entered into between India and Mauritius. The Capital Gain provisions may need to be analysed based on the treaty between India and the country of residence of FII/sub-accounts.

***- Nil if the income of an FII is not taxable in India under a tax treaty and if that FII does not have a Permanent Establishment (PE) in India.

Notes –

1. Surcharge and education cess as discussed in para on Rates of Tax will be applicable.

2. Capital gains earned by an FII are not subject to withholding tax in India.




4.5 Income of Offshore Funds

5.0 WITHHOLDING TAXES

6.0 DOUBLE TAX TREATIES

Income of approved offshore funds from units of specified mutual funds and long term capital gains on their transfer are taxed @ 10% plus surcharge at applicable rates if the units are purchased in foreign currency.

Every person, other than an individual and Hindu Undivided Family whose turnover is below Rs. 40,00,000 in case of business entities and Rs. 10,00,000 in case of profession, making certain specified payments including, interest, rent, fees for professional and technical services rendered, brokerage and commission, contract payments is required to deduct tax at source (TDS) at prescribed rates. From salary payment, every person is required to deduct tax at source. In the case of non-residents, tax is required to be withheld as per the provisions of income-tax law as modified by applicable double tax treaty provisions.

T h e F i n a n c e A c t , 2 0 1 0 i n c r e a s e d t h e t u r n o v e r l i m i t f r o m Rs. 40,00,000 to Rs. 60,00,000 in case of business entities and Rs. 10,00,000 to Rs. 15,00,000 in case of professions, which is applicable from financial year 2010-11.

Withholding taxes are normally payable within seven days of the end of the month in which the tax is deducted / collected. However, tax on salary is payable within seven days of payment of salary.

The person responsible for deducting tax at source is required to file annual return of TDS before the specified dates. The non-filing of annual return of TDS or failure to issue certificate within the prescribed period will attract penalty as specified in the Act.

In case the income of a non-resident is not chargeable to tax in India or is taxable at rates lower than that prescribed for withholding taxes, an application can be made to the tax authorities for permission to deduct withholding taxes at a lower rate than those prescribed under the Act.

The domestic rate of Tax Deduction at Source (TDS) for financial year 2010-11 as per by the Finance Act 2010 is as per Annexure II.

The Government of India has entered into comprehensive Double Tax Avoidance Agreements (DTAA) with about 78 countries to avoid double taxation of income. Certain other limited agreements are entered into by India to avoid double taxation of income only from shipping and air transport.

For countries with no DTAAs with India, a unilateral tax credit for tax paid in foreign countries is available under Indian domestic law to a resident tax payer. This relief is by way of deduction from the Indian income tax of a sum which is calculated on the double taxed income at the lower of Indian rate of tax or the rate of tax of the other country where tax has been paid. The list of the countries with which India has


entered into Double Tax Treaties and the rates applicable under the treaties is given in Annexure I.

7.1.1 In addition to get the accounts audited, as per Companies Act for corporate entities, all entities are required to get their accounts audited for tax purposes in case of following:

i. A person carrying on business, if total sales, turnover or gross receipt in business for the accounting year or years relevant to the assessment year exceed or exceeds Rs. 40,00,000 (about US$ 88,909).

ii. A person carrying on profession, if his gross receipts in profession for an accounting year or years relevant to any of the assessment year exceeds Rs. 10,00,000 (about US$ 22,227).

The tax audit reports in cases referred above are to be obtained and filed with the Income-tax authorities within a specified due date for filing return of income.

However, with respect to the financial ear 2010-11, the Finance Act, 2010 increased t h e t u r n ove r / g ro s s re c e i p t l i m i t f ro m R s . 4 0,0 0,0 0 0 to Rs. 60,00,000 (about US$ 133,363) in case of business entities and in respect of a person carrying on profession from Rs. 10,00,000 to Rs. 15,00,000 (about US$ 33,341).

7.1.2 For claiming deductions from certain export incomes, it is compulsory to obtain audit reports with effect to the same. One of the conditions for claiming exemption on export profits is that within specified period from the close of the accounting year, exchange earnings must be remitted to India.

For claiming deductions by newly established industrial undertakings / infrastructure projects, such entities are required to obtain specific audit report relevant for deduction.

As per the provision of the Income-tax Act, the assessee has to self assess his income and pay taxes accordingly and file proof of payment of tax along with the return of income. If any interest is due for deferment of advance tax or non payment of advance tax or for late filing of return of income then the same also has to be paid with the self-assessment tax. Concealment of income and furnishing of inaccurate particulars may result in imposition of penalty of upto 3 times the tax sought to be evaded.

The assessing officer may select the return of income for scrutiny in which case an assessment order is passed. In cases where the returns of income are not selected for scrutiny, intimation is sent after adjusting the apparent errors, omissions and mathematical errors. An appeal may be preferred if the assessee does not agree with the assessment made. Special provisions apply for rectification of mistakes, revision of orders and income escaping assessment.

7.0 OTHER ADMINISTRATIVE ASPECTS

7.1 Audit Reports

7.2 Assessment Procedure




7.3 Advance Rulings

8.0 OTHER DIRECT TAXES

8.1 Securities Transaction Tax (STT)

The Indian government has constituted an “Authority for Advance Ruling”. Non-resident taxpayers can obtain rulings in advance from the said authority on questions of law or fact, in relation to a transaction undertaken or proposed. A time limit of six months has been provided for the pronouncement of an advance ruling. The advance ruling once pronounced is binding on the applicant and on the income tax authorities in respect of the specific transaction for which advance ruling was sought. The advance ruling is not appealable.

From 1 October 1998, the concept of advance ruling is extended to a resident in India falling within such class or category of persons as the Central government may by notification in the Official Gazette, specify in this behalf. The authority shall give a decision in relation to an assessment which is pending before any income-tax authority, or the Tribunal in case of resident applicant. The decision shall include the decision on question of law or fact arising out of the orders of assessment in respect of which application has been made by resident applicant.

STT shall apply to taxable securities transactions entered into on or after 1 October 2004 entered into through recognized stock exchanges in India. The taxable securities transaction shall attract STT with effect from 1 June 2006 at the rates specified below

3. a. Sale of an option in securities

b. Sale of an option in securities, where option isexercised

c. Sale of futures in securities

4. Sale of units of an equity oriented fund to the mutual fund

Seller

Purchaser

Seller

Seller

0.017% on option premium0.125% onthe settle-mentprice0.017%

0.25%

Type of transactions Payable by buyer / seller

STT rate

1. Delivery based on purchase of an equity share in a company or a unit of an equity oriented fund, entered in a recognized stock exchange

Both buyer & seller

0.125%

2. Non-delivery based on sale of an equity share in a company or a unit of an equity oriented fund entered in a recognized stock exchange

Seller 0.025%

Sr.No.

“Taxable securities transaction” means a transaction of (a) purchase or sale of an equity share in a company or a derivative or a unit of an equity oriented fund,



entered into in a recognized stock exchange; or (b) sale of a unit of an equity oriented fund of specified mutual fund. The value of taxable securities transaction shall be:

i. the aggregate of the strike price and the option premium, in case of taxable securities transaction relating to derivative being “option in securities”;

ii. the price at which “futures” is traded, in case of taxable securities transaction relating to derivative being “futures”; and

iii. the price at which securities are purchased or sold, in case of any other taxable securities transaction.

Every recognized stock exchange shall collect the securities transaction tax from every person being a purchaser or a seller who enters into a taxable securities transaction in that stock exchange.

Wealth-tax in India under the Wealth-tax Act is payable each year on the taxable wealth and depends upon residential status and on citizenship.

Taxable wealth includes residential house (other than residential house let out for a minimum period of 300 days during the year) and farm houses, motor cars, jewellery, bullion, yachts, aircrafts, urban land, cash exceeding specified limits as reduced by debts owed and incurred in relation to such assets.

However, exemption is available to individuals and HUFs for one house or part of a house or plot of a land comprising an area of five hundred square meters or less.

A resident Indian citizen pays tax on his global wealth. If he is a “resident but not ordinarily resident” or a non-resident or a foreign citizen, then his Indian wealth is charged to tax at normal rates and foreign wealth is totally exempt.

Wealth-tax in case of individual and companies for the financial year 2009-10 will be charged @ 1% of the net taxable wealth exceeding Rs. 30,00,000.

The due dates for filing wealth-tax returns are same as for filing Income-tax returns.

Gift tax has been abolished with effect from 1 October 1998.

Estate duty has been abolished since 16 March 1985.

Interest-tax has been abolished with effect from 1 April 2000.

8.2 Wealth Tax

8.3 Gift Tax

8.4 Estate Duty

8.5 Interest Tax



9.0 INDIRECT TAXES

9.1 Goods and Services Tax ('GST')

9.2 Central Value Added Tax ('CENVAT')

9.3 Customs Duty

Excise duty is levied, mainly on an ad valorem basis, on the manufacture of excisable goods within India, and is payable by the manufacturer. For the purpose of levying excise duty, manufacture has been interpreted to mean any process, which brings into existence a new commodity having a distinct name, character, use and marketability.

Peak rate of excise duty is 10% (plus applicable Education Cess and Higher Secondary Education Cess) on most of the items. CENVAT credit is allowed against CENVAT payable in respect of certain inputs and capital goods purchased. The assessee is required to maintain prescribed records for availing of CENVAT credit.

Excise duty is levied on specified goods with reference to maximum retail price. The provision for cost auditing of accounts is provided in CENVAT Law in case of misuse of CENVAT credit scheme.

Customs duty at varying rates is charged on goods imported into India. The general peak rate of customs duty has been reduced to 10%.

Further, countervailing customs duty is levied which is equivalent to the excise duty which would have been chargeable had the item been manufactured in India. In respect of such countervailing duty paid, equivalent CENVAT credit is available in

Goods and Services Tax is a comprehensive indirect tax operating on the principle of tax on economic value addition involved in the provision of economic activities consisting both goods and services. After the introduction and successful implementation of Value Added Tax (VAT), introduction of Goods and Services Tax (GST) would further be a logical step towards reforming the existing Indirect tax structures governed by various regulations.

The proposed GST model would be a dual model and the charge of GST would consist of two components namely CGST (levied by the Centre) and SGST (levied by the states). GST would subsume several central taxes namely Central Excise duty, Additional Excise duty, Service Tax, Additional Customs Duty, Special Additional duty of Customs, etc and also several state taxes namely Vat / Sales tax, Entertainment Tax, Luxury tax etc.

The Finance Minister in his budget 2010 speech has proposed to implement Goods and Services Tax with effect from 1 April 2011 Post implementation of the GST, it will be a significant step towards a comprehensive indirect tax reforms in India.


certain cases. The customs duties are generally chargeable on ad valorem basis i.e. based on value of imported goods.

In addition to the above, additional duty of customs not exceeding 4% is also levied in order to counter balance various internal taxes like sales tax/value added tax and to provide a level playing field to indigenous goods which have to bear these taxes.

The Central Government can also impose anti-dumping duty if manufacturers from abroad export goods in India at very low prices compared to prices in their domestic market.

Service tax @ 10.30% (service tax @ 10% plus education cess @ 2% and secondary and higher education cess @1% thereon) is levied on more than 100 specified services. Some of the specified services are advertising agency, consulting engineers, architects, management and business consultants, real estate agents and consultants, construction services, intellectual property services, business auxiliary/support services, renting of immovable property etc.

The Government has prescribed Export of Services Rules, 2005. The Rules provides that any taxable service may be exported without payment of service tax i.e. it grants exemption from levy of service tax on “export of services”. For determination of “export of service”, the specified taxable services in force have been categorized in three categories, which provides for certain conditions in order for the services to be treated as export of services.

Services received (in India) by a person situated in India from a person outside India is liable to service tax as “import of services”. Further, for the said purpose, it is provided that the service recipient shall be deemed to be the service provider and shall comply with all the service tax regulations. The Government has also prescribed Taxation of Services (Provided from Outside India and Received in India) Rules, 2006". The Rules provide for criteria for the determination of taxable service received in India. Similar to the Export of Service Rules, 2005, for determination of “import of service”, the specified taxable services in force have been categorised in three categories, which provides for certain conditions in order for the services to be treated as import of services.

The CENVAT Credit Rules, 2004 provide for a mechanism for allowing inter-sectoral credit between goods and services. Specified input service tax paid is made eligible for credit against service tax chargeable on output services and excise duty leviable

9.4 Service Tax

9.4.1 Ambit of Service Tax

9.4.2 Export of services

9.4.3 Import of Services

9.4.4 CENVAT Credit Rules, 2004




on goods manufactured and vice versa. Further, education cess (including secondary and higher education cess) paid on input services is available as credit for payment of education cess (including secondary and higher education cess) on output services.

Credit in respect of capital goods is allowed at the rate of 50% in the financial year of receipt of capital goods in premises of output service provider and 50% in the subsequent financial year. Credit is not allowed on input services used in providing exempted services.

The Export of Services Rules, 2005 provides for rebate of service tax paid on taxable service or service tax or duty paid on input services or inputs, as the case may be, used in providing taxable service, subject to specified conditions or limitations.

Further, the Cenvat Credit Rules 2004, also provide for claiming refund of unutilized Cenvat Credit used for providing output services, which are exported as per the Export of Services Rules, 2005.

Small service providers whose aggregate value of taxable services provided during the preceding financial year does not exceed Rs. 10,00,000 have been given an option to claim exemption from service tax up to an aggregate value of taxable services of Rs. 10,00,000 in a financial year, subject to certain conditions as prescribed. Benefit of this exemption scheme is not available wherever service tax is payable by a person other than the service provider or the taxable services are provided by a person under a brand name or trade name, whether registered or not, of another person. Threshold limit for obtaining service tax registration is Rs. 9,00,000.

The Finance Minister of India presented the Direct Taxes Code Bill 2010, in Lok Sabha on 30 August 2010. The purpose of introducing DTC Bill, which is proposed to be effective from 1 April 2012, is to completely overhaul the existing complexities of the Income Tax Act, 1961. DTC would eventually replace the present Income-tax Act, 1961 (“IT Act”) and the Wealth-tax Act, 1957 (“WT Act”) and would consolidate both the Acts. The present IT Act, is about 50 years old and it was high time to replace it in view of innumerable amendments to it over a period of time. The primary thrust of DTC is on certainty and continuity and DTC in its present structure has chosen the path of stable reforms rather than indulging in path breaking radical reforms.

Initially, the Draft DTC along with the Discussion Paper was released by Ministry of Finance on 12 August, 2009 for public comments. In response to the same, a number of valuable inputs on the proposals outlined in the draft DTC were received from a large number of various organizations and individuals. The Ministry of Finance

9.4.5 Rebate/Refund for input services and inputs used in providing taxable services

9.4.6 Threshold Limits

10.0 DIRECT TAX CODE ('DTC')



examined and identified the major issues in response to the comments received from the Public and most of the concerns were addressed in the Revised Discussion Paper on the DTC issued on 15 June 2010 for the purpose of final discussion. Based on the additional suggestions and responses from the general public, the final DTC Bill was framed and placed before the Parliament.

11.0 INTERNATIONAL F INANCIAL REPORTING STANDARD ('IFRS')

India has set a roadmap for convergence with International Financial Reporting Standards (IFRS) commencing from 1 April, 2011. The convergence with IFRS standards is set to change the landscape for financial reporting in India.

With the growth of Indian Economy and increasing integration with the global economies, Indian corporates are raising capital globally. Under the circumstances, it would be imperative for Indian corporates to adopt IFRS for their financial reporting. The Core Group of Ministry of Corporate Affairs (MCA) has recommended convergence to IFRS in a phased manner from 1 April, 2011, the roadmap of which is as below:

- Phase I (opening balance sheet as at 1 April 2011)*1. Companies which are part of BSE Sensex 30 and NSE Nifty 50;2. Companies whose shares or other securities are listed outside

India;3. Companies whether listed or not, having net worth of more than

Rs. 1,000 crores.

- Phase II (opening balance sheet as at 1 April 2013)*Companies not covered in Phase 1 and having net worth exceeding Rs. 500 crores.

- Phase III (opening balance sheet as at 1 April 2014)*Listed companies not covered in earlier phases.

*If the financial year of a company commences at a date other than 1 April, then it shall prepare its opening balance sheet at the commencement of immediately following financial year.

The above would not be applicable in case of banking and insurance companies and separate road map would be prepared for them.


Brihanmumbai Municipal Corporation Headquarters, Mumbai

Annexure IDouble Taxation AvoidanceAgreements (’DTAA’) Rates


ANNEXURE I:DOUBLE TAXATION AVOIDANCE AGREEMENTS

('DTAA') RATES

List of countries with which India has entered into Double Tax Treaties

1. Armenia 10% 10% [Note 4] 10% 10%

2. Australia 15% 15% Note 5 NoSeparateProvision

3. Austria 10% 10% [Note 4] 10% 10%

4. Bangladesh 10% / 15% 10% [Note 4] 10% No 10% tax on dividends if at least 10% of separate the capital is owned by company; in provision other cases 15%.

5. Belarus 10% / 15% 10% [Note 4] 15% 15% 10% tax on dividends if at least 25% of the capital is owned by company; in other cases 15%.

6. Belgium 15% 15% / 10% 10% 10% Interest taxable at 10% if recipient is bank; in other cases 15%.

7. Botswana 7.5% / 10% 10% [Note 4] 10% 10% 7.5% tax on dividends if at least 25% of the capital is owned by company; in other cases 10%.

8. Brazil 15% 15% [Note 4] 15% No 15% tax on dividends if paid to a(25% for separate company; otherwise as per local tax

trademark) provision laws.

9. Bulgaria 15% 15% [Note 4] 15% / 20% 20% 15% tax on royalties if relating to copyrights of literary, artistic or s c i e n t i f i c w o r k s , o t h e r t h a n cinematograph films or films or tapes u se d fo r ra d i o o r te l ev i s i o n broadcasting; in any other case 20%.

10. Canada 15% / 25% 15% [Note 4] Note 5 Note 5 15% tax on dividends if at least 10% of the capital is owned by company; in any other cases 25%.

11. China 10% 10% [Note 4] 10% 10%

12. Cyprus 10% / 15% 10% [Note 4] 15% 15% 10% tax on dividends if at least 10% of the capital is owned by company; in other cases 15%.

Sr.No.

Country Dividend[Note 1]

Interest Royalty Fees forTechnicalService('FTS')

Remarks

Tax rate Tax rate Tax rateTax rate


Sr.No.



Remarks


13. Czech Republic 10% 10% [Note 4] 10% 10%

14. Denmark 15% / 25% 15% / 10% 20% 20% 1. 15% tax on dividends if at least [Note 4] 25% of the capital is owned by

company; in any other cases 25%.2. Interest taxable at 10% if recipient

is bank; in other cases 15%.

15. Finland 15% 10% [Note 4] 10% / 15% Note 5 In case royalty is paid for industrial,[Note 6] commercial or scientific equipment

then 10%; in other cases 15%.

16. France 10% 10% [Note 4] 10% 10%

17. Germany 10% 10% [Note 4] 10% 10%

18. Greece Taxable as per domestic laws No Source country has right to tax.separateprovision

19. Hungary 10% 10% [Note 4] 10% 10%

20. Indonesia 10% / 15% 10% [Note 4] 15% No 10% tax on dividends if at least 25% ofseparate the capital is owned by company; inprovision other cases 15%.

21. Ireland 10% 10% [Note 4] 10% 10%

22. Iceland 10% 10% [Note 4] 10% 10%

23. Israel 10% 10% [Note 4] 10% 10%

24. Italy 15% / 25% 15% [Note 4] 20% 20% 15% tax on dividends if at least 10% of the capital is owned by company; in any other cases 25%.

25. Japan 10% 10% [Note 4] 10% 10%

26. Jordan 10% 10% [Note 4] 20% 20%

27. Kazakhstan 10% 10% [Note 4] 10% 10%

28. Kenya 15% 15% [Note 4] 20% No 17.5% tax in case of management andseparate professional fees.provision

for FTS

29. Korea 15% / 20%. 15% / 10% 15% 15% 1. 15% tax on dividends if at least [Note 4] 20% of the capital is owned by

company; in any other cases 20%.2. Interest taxable at 10% if recipient




Sr.No.



Remarks


30. Kuwait 10% 10% [Note 4] 10% 10%

31. Kyrgyz Republic 10% 10% [Note 4] 15% 15%

32. Libya Taxable as per domestic laws No Source country has right to tax.SeparateProvision

33. Luxembourg 10% 10% [Note 4] 10% 10%

34. Malaysia 10% 10% [Note 4] 10% 10%

35. Malta 10% / 15% 10% [Note 4] 15% 10% 10% tax on dividends if at least 25% of the capital is owned by company; in other cases 15%.

36. Mauritius 5% / 15% Taxable as per 15% No 5% tax on dividends if at least 10% of domestic laws separate the capital is owned by company; in

[Note 4] provision other cases 15%.

37. Mongolia 15% 15% [Note 4] 15% 15%

38. Montenegro 5% / 15% 10% [Note 4] 10% 10% 5% tax on dividends if at least 25% of the capital is owned by company (other than a partnership); in other cases 15%.

39. Morocco 10% 10% [Note 4] 10% 10%

40. Myanmar 5% 10% [Note 4] 10% Noseparateprovision

41. Namibia 10% 10% [Note 4] 10% 10%

42. Nepal 10% / 15% 15% / 10% 15% No 1. 10% tax on dividends if at least [Note 4] separate 10% of the capital is owned by

provision company; in other cases 15%.2. Interest taxable at 10%, if recipient


43. Netherlands 10% 10% [Note 4] 10% 10%

44. New Zealand 15% 10% [Note 4] 10% 10%

45. Norway 15% / 25% 15% [Note 4] 10% 10% 15% tax on dividends if at least 25% of the capital is owned by company; in any other cases 25%.

46. Oman 10% / 12.5% 10% [Note 4] 15% 15% 10% tax on dividends if at least 10% of the capital is owned by company; in any other cases 12.5%.



47. Philippines 15% / 20% 15% / 10% 15% No 1. 15% tax on dividends if at least 10%[Note 4] separate of the capital is owned by company;

provision in any other cases 20%.2. Interest taxable at 10% if recipient

is insurance company or similarfinancial institution and also in caseof p u b l i c i ss u es of b o n d s ,debentures etc.; in other cases 15%.

3. Royalty taxable @ 15% if it ispayable in pursuance of anycollaboration agreement approvedby the Government of India. Norates prescribed in other cases.

48. Poland 15% 15% [Note 4] 22.5% 22.5%

49. Portuguese 10% / 15% 10% [Note 4] 10% 10% 10% tax on dividends if at least 25% ofRepublic the capital is owned by company; in

other cases 15%.

50. Qatar 5% / 10% 10% [Note 4] 10% 10% 5% tax on dividends if at least 10% of the capital is owned by company; in any other cases 10%.

51. Romania 15% / 20% 15% [Note 4] 22.5% 22.5% 15% tax on dividends if at least 25% of the capital is owned by company; in any other cases 20%.

52. Russian Federation 10% 10% [Note 4] 10% 10%

53. Saudi Arabia 5% 10% [Note 4] 10% No separateprovision

54. Serbia 5% / 15% 10% [Note 4] 10% 10% 5% tax on dividends if at least 25% of the capital is owned by company; in other cases 15%.

55. Singapore 10% / 15% 10% / 15% 10% 10% 1. 10% tax on dividends if at least [Note 4] 25% of the capital is owned by

company; in other cases 15%.2. Interest taxable at 10% if recipient

is bank, insurance company orsimilar financial institution; in othercases 15%.

56. Slovenia 5% / 15% 10% [Note 4] 10% 10% 5% tax on dividends if at least 10% of the capital is owned by company; in other cases 15%.

Sr.No.



Remarks




57. South Africa 10% 10% [Note 4] 10% 10%

58. Spain 15% 15% [Note 4] 20% / 10% 20% 10% tax on royalties if paid for industrial, commercial or scientific equipment; in any other case 20%.

59. Sri Lanka 15% 10% [Note 4] 10% NoSeparateProvision

60. Sudan 10% 10% [Note 4] 10% 10%

61. Sweden 10% 10% [Note 4] 10% 10%

62. Swiss 10% 10% [Note 4] 10% 10%Confederation

63. Syria 5% / 10% 10% [Note 4] 10% No 5% tax on dividends if at least 10% ofseparate the capital is owned by companyprovision (other than a partnership); in other

cases 10%.

64. Tanzania 10% / 15% 12.5% 20% No 10% tax on dividends if at least 10% of[Note 4] separate the capital is owned by company; in

provision other cases 15%.

65. Thailand 15% / 20% 25% / 10% 15% No 1. 15% tax on dividends if at least 10%[Note 4] separate of the capital is owned by company;

provision 20% if company paying dividend isengaged in industrial under tak ingor company owns 25% of thecompany paying the dividend.

2. Interest taxable at 10% if recipientis insurance company or similarfinancial institution; in other cases25%.

66. Trinidad and 10% 10% [Note 4] 10% 10%Tobago

67. Turkey 15% 10% / 15% 15% 15% Interest taxable at 10% if recipient is[Note 4] bank, insurance company or similar

financial institution; in other cases 15%.

68. Turkmenistan 10% 10% [Note 4] 10% 10%

69. Tajikistan 5% / 10% 10% [Note 4] 10% No 5% tax on dividends if at least 25% ofseparate the capital is owned by company; in provision other cases 10%.

Sr.No.



Remarks




Sr.No.



Remarks


70. Uganda 10% 10% [Note 4] 10% 10%

71. Ukraine 10% / 15% 10% [Note 4] 10% 10% 10% tax on dividends if at least 25% of the capital is owned by company; in other cases 15%.

72. United Arab 10% 12.5% / 5% 10% No Interest taxable at 5% if recipient is Emirates separate bank or similar financial institution; in

provision other cases 12.5%.

73. United Arab For rate of tax and basis of taxation, No Source country has right to tax.Republic (Egypt) refer to DTAA provision separate

provision

74. United Kingdom 15% 15% / 10% Note 5 Note 5 Interest taxable at 10% if recipient is[Note 4] bank; in other cases 15%.

75. United States of 15% / 25% 10%/15% Note 5 Note 5 1. 15% tax on dividends if at least 10%America of the capital is owned by company;

in any other cases 25%.2. Interest taxable at 10% if recipient

is bona fide bank or financialinstitution, in other cases 15%.

3. Fees for Technical Services havebeen referred as 'Fees for IncludedServices'.

76. Uzbekistan 15% 15% [Note 4] 15% 15%

77. Vietnam 10% 10% [Note 4] 10% 10%

78. Zambia 5% / 15% 10% [Note 4] 10% No 5% tax on dividends if at least 25% ofseparate the capital is owned by company; inprovision other cases 15%.

Notes

1. As per section 115-O of the Income Tax Act, 1961, subject to certain exceptions, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to Dividend Distribution Tax @ 16.60875%. In such cases, dividend distributed (which is subject to DDT) is not subject to any withholding tax. The rates mentioned in the Table are limited to dividend other than the dividend declared, distributed or paid by Indian companies (such as deemed dividend etc.).

2. Unless otherwise provided in 'Remarks' Column, both States have right to tax.



3. In case of Agreements made after 1 June 2005, the rate of tax under the IT Act on Royalty and/or Fees for Technical Services receivable by a non-resident is reduced to 10% (plus Surcharge and Education Cess) by the Finance Act, 2005. As per section 90(2) of the IT Act, rate as per the provisions of DTAA or the IT Act, whichever is beneficial, shall apply.

4. Interest earned by the Government and certain institutions like the Reserve Bank of India or Central Bank of other State is exempt from taxation in the country of source.

5. In case of Royalties, rate of tax is 15% (for first 5 years of the agreement- 20% in case of payer other than government or specified institution and 15% in case of government or specified institution); 10% for equipment rentals and for services ancillary or subsidiary thereto.

6. The Government of India has agreed to revise the DTAA with Finland vide press release no. 402/92/2006-MC (03 of 2010), dated 15 January 2010; however the same has not been notified till date. As per the proposed revision to DTAA, the rate of tax on Dividend, Royalties and Fees for technical services has been reduced from 15% to 10%.

7. The aforesaid chart is updated till 26 February 2010.




The domestic rates of TDS for financial year 2010-11 as per the Finance Act 2010 are as under

Sr.No. Nature of Payment Section

ExistingFrom

1 July 2010

Rate atwhich tax tobe deducted

(%)

1 Salary 192 As per slab rates prescribed for women, senior citizens and other individuals

Note-82 Interest other than interest 194A Payment in excess of Rs.5,000p.a. 10 Note-9on securities

3 Winning from lottery or 194B Payment in excess Payment in excess 30crossword puzzle or of Rs. 5,000 of Rs. 10,000card game or other game

4 Winnings from horse race 194BB Payment in excess Payment in excess 30of Rs. 2,500 of Rs. 5,000

5 Payments to 194C Payment in excess of Payment in excess of 1 (2 for Note-9Contractors Rs. 20,000 per Rs. 30,000 per companies

contract or contract or and firms)Rs. 50,000 p.a. Rs. 75,000 p.a.

in aggregate in aggregate

6 Insurance Commission 194D Payment in excess Payment in excess 10of Rs. 5,000 of Rs. 20,000

7 Commission or 194H Payment in excess Payment in excess 10 Note-9Brokerage of Rs. 2,500 p.a of Rs. 5,000 p.a

8a Rent of Land / Building / 194I Payment in excess Payment in excess 10 Note-9Furniture of Rs. 1,20,000 p.a of Rs. 1,80,000 p.a

8b Rent of Plant, Machinery or 194I Payment in excess Payment in excess 2 Note-9Equipment of Rs. 1,20,000 p.a of Rs. 1,80,000 p.a

9 Fees for Professional & 194J Payment in excess Payment in excess 10Technical Services / of Rs. 20,000 p.a of Rs. 30,000 p.a

Note-9Royalty

Threshold For Deduction

ANNEXURE II:TAX DEDUCTION AT SOURCE ('TDS') RATES

Notes

1. Time of deduction of tax: Except in case of salary (wherein tax is to be deducted at the time of payment), tax is to be deducted at the time of payment or credit, whichever is earlier.



2. Time of deposit of tax: In all other cases, except in case of salary, where amount is credited to the account of the payee as on the date up to which accounts of the payer are made, the tax is required to be deposited with the Government within 2 months from the month in which the income is credited. In all other cases, the tax is required to be deposited within 7 days from the end of the month in which deduction is made.

3. TDS return: Person deducting the tax is required to file quarterly statements for the quarter ending on 30 June, 30 September, 31 December and 31 March in each financial year, in Form 26Q ( Form 24Q for Salary) along with Form 27A, on or before 15 July, 15 October, 15 January and 15 June respectively.

4. Certificate for tax deduction in case of non-salary payments: TDS certificate in Form 16A is required to be issued within 1 month from the end of the month during which the credit has been given or the sums have been paid (except in case of Insurance commission where Form 16A is to be issued by 30 April). However, if amount is credited by a person to the payee's account as on the date up to which accounts of such persons are made, then such certificate may be issued within a week after expiry of 2 months from the month in which the amount is credited.

5. Issue of TDS certificates: Where more than 1 certificate is required to be furnished to a payee during the financial year and if the payee desires, a consolidated certificate covering all the deductions during the financial year can be issued within 1 month from the close of that financial year.

6. Certificate for tax deduction in case of salary payments : TDS certificate in Form 16 (Form 16AA in case salary does not exceed Rs. 1,50,000 before deductions under Section 16) is required to be issued by 30 April.

7. Higher TDS rate of 20% for not furnishing correct PAN: In case the payee is not able to furnish the PAN to the payer, tax shall be deducted at higher of the rate specified in the relevant provisions of the Act or at the rate or rates in force or at the rate of 20% w.e.f. 1 April 2010.

8. Under section 194A, the threshold limit is Rs. 10,000 where the payer is a banking company or a co-operative society engaged in banking business, or in case of deposits with post office under a scheme notified by Central Government. Further, tax is not to be deducted if the payee furnishes to the payer a declaration in writing in duplicate in Form No.15G or 15H, as the case may be.

9. In the case of an individual or HUF or AOP or BOI, who are liable to tax audit under section 44AB during the financial year immediately preceding the financial year in which sum is credited or paid, shall be liable to deduct tax under section 194A, 194C, 194H, 194I and 194J, as the case may be.

10. Above rates are not applicable in case of payments made to foreign companies and non-residents.


India Offices

New Delhi-NCR

Bengaluru (Bangalore)

The aim of this publication is to provide general information about doing business in India and every effort has been made to ensure the contents are accurate and current. However, tax rates, legislation and economic conditions referred to in this publication are only accurate at time of writing. Information in this publication is in no way intended to replace or supersede independent or other professional advice.

© Suresh Surana & Associates, 2010

T: (+91-22) 6696 0644 /6121 4444 F: (+91-22) 2820 5685E: [email protected] www.ss-associates.com

Offices: Mumbai, New Delhi-NCR, Chennai, Kolkata, Bengaluru, Surat, Ahmedabad and Gandhidham.

For further information please contact:

Suresh Surana & AssociatesHead Office: 13th Floor, Bakhtawar, 229, Nariman Point, Mumbai - 400 021.