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Free Guide for Foreign Companies Doing Business in India, Investing in India,
Outsourcing to India, Trading with India
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FDI in India
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sends more students to the U.S. A. colleges than any other country in the world (In 2007, over
84,000 Indian students enrolled in the U.S. A.)
has the world's second largest pharmaceutical industry after China
has a middle class estimated at 300 million out of a total population of 1 billion
with its large base of English speaking skilled human resource, it is most sought after destination
for business process outsourcing, Knowledge processing etc.
is the second largest English-speaking scientific, technical and executive manpower in the world
produces more than 900 movies a year - significantly more than the USA
has become increasingly attractive to foreign investors in various sectors
its low costs and huge, English-speaking, workforce have made it popular with multinationals for
work including manufacturing and call centers.
provides many tax exemptions to companies set up in Special Economic Zone
provides many tax incentives available to IT companies, business process outsourcing and KPO
companies
has a stable political system based on parliamentary democracy
has a common law legal system with English as a court language
is emerging as a major market and investment destination.
India is the largest country in South Asia and the seventh largest in the world. China, Nepal and Bhutan
are the neighboring countries in the north, Bangladesh and Burma in the east and Pakistan and
Afghanistan in the west. In the south the country tapers off into the Indian Ocean. India is the second
most populous country in the world, with over one billion people. India is the largest democracy in the
world. English is extensively used for business and is understood almost all over India. The Indian Rupee
(International symbol is INR) is the countrys currency. India is committed to a free economy after having
an economy controlled by licensing until 1991. India has become a member of the WTO and is
disbanding quantitative restrictions on imports.
1. NIP brings about a streamlining of procedures, deregulation, de-licensing, a vastly expanded role
for the private sector and an open policy towards foreign investment and technology.
2. Foreign investors are allowed to hold more than 50% equity ownership in most of the sectors, and
100% percent equity ownership in some sectors.
3. Foreign Institutional Investors ("FII's) from reputable institutions (like pension funds, mutual funds)
may participate in the Indian capital markets.
4. Joint ventures with trading companies and imports of secondhand plants and machinery are
allowed.
5. Monopoly and restrictive trade practice restraints (i.e., antitrust laws) have been eased.
6. Customs duties have been slashed considerably; duty-free imports are allowed in some cases.
7. The rupee is completely convertible; 100% of foreign exchange earnings can be converted at free
market rates.
8. Export policies have been liberalized.
9. The Foreign Exchange Regulation Act has been amended to encourage foreign investments in
India.
10.
A tax holiday is available for a period of 5 continuous years in the first 8 years of
establishing exporting units.
11.
A tax holiday for up to 5 to 8 years is available and 100% equity participation is allowed
for the power projects in India.
12.
Concessions in tax regime are available for foreign investors in high-tech areas.
Rates
Revenue accruing to foreign companies (including royalty and technical services fees) from providing
services concerning the exploration or production of petroleum or natural gas is subject to a maximum tax
on a deemed profit of 10% of gross revenue.
Foreign companies engaged in the execution of turnkey power project contracts approved by the
government and financed by international programs are subject to a maximum tax on a deemed profit of
10% of gross revenue.
The corporate income tax effective rate for domestic companies is 35% while the profits of branches in
India of foreign companies are taxed at 45%. Companies incorporated in India even with 100% foreign
ownership, are considered domestic companies under the Indian laws. For more details check our
Tax Rates page
Non-Export Incentives
India offers a wide range of concessions to investors to provide incentives for economic and industrial
growth and development. India's tax rates may not be one of the lowest in the world, but a careful tax
planning keeping in mind the tax holidays and the following general tax incentives reduce the taxes
considerably:
No corporate taxes are levied for a period of five years for projects set up for domestic power generation
and transmission and also for projects in Electric Hardware Technology Park Schemes.
Deduction of preliminary and preoperative expenses incurred in setting up a project
Complete tax exemption on profits from exports of goods
Full or partial exemption of foreign exchange earnings on construction projects, hotel and tourism related
services, royalties, commission, etc.
Liberal depreciation allowances
Deduction of capital research and development expenditures
New industrial undertakings may deduct 25% of their gross total income for eight years
There are six EPZ's or free trade zones located in different parts of the country. These zones are
designed to provide internationally competitive infrastructure facilities and duty-free and low cost
environment. Various monetary and non-monetary incentives are granted which include import duty
exemption, complete tax holiday, decentralized "single window clearance," etc.
Twenty-five percent of goods manufactured in EPZ's are permitted to be sold in the domestic market. No
excise duty is payable on such items and customs duties on imported components is 50% of normal
rates. Major exporters are allowed to operate bank accounts abroad to facilitate trade. Companies that
sell in the domestic market as well as international markets may deduct export earnings from their tax
liabilities.
Exporters and other foreign exchange earners have been permitted to retain 25% of their foreign
exchange earnings in foreign currency. For 100% Export Oriented Units and units in Export Processing
Zones, Electronic Hardware Technology Parks, retention up to 50% is allowed.
Other incentives include:
See also Tax Rates in India | Withholding Tax Rates For Foreign Companies Doing
Business In India Under The Tax Treaties
See also Tax Rates in India | Withholding Tax Rates For Foreign Companies Doing
Business In India Under The Tax Treaties
Transfer of technology agreements must be subject to the laws of India. These agreements can be
subject to arbitration under the rules of international institutions like the International Chamber of
Commerce (the "ICC"). Arbitration can take place in India or abroad. India is a party to the 1958 New York
Convention on Enforcement of Arbitration Awards. Foreign awards are, therefore, enforceable in India.
Under Indian law, upon termination of the transfer of technology agreement after its 7-10 year period, the
technology is deemed to be perpetually licensed to the Indian party for use in India. Special rules apply to
the transfer of technology to Indian government companies.
Litigation in India
India is a common law country. Most of the courts use English as the court language.
There is single hierarchy of courts in India with the Supreme Court of India at the top.
See also Arbitration in India | Litigation in India | Dispute Resolution in India |
International Commercial Arbitration | UNCITRAL Model Law on International
Arbitration
The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment
proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks.
An application to the Reserve Bank of India in the form FC (RBI) is required. The application can be made
either by the Indian party or the foreign party. Existing companies having foreign equity holding and
desiring to increase it to 74% can also obtain automatic approval if they are in priority areas. Besides the
37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up
international trading companies engaged primarily in export activities.
Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity
and areas outside the high priority list are open to investment, but government approval is required. For
these greater equity investments or for areas of investment outside of high priority an application in the
form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6
weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries,
electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's").
For major investment proposals or for those that do not fit within the existing policy parameters, there is
the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the
Prime Minister and can provide single-window clearance to proposals in their totality without being
restricted by any predetermined parameters.
Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal
washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including
exploration, producing, refining and marketing of petroleum products has now been opened to foreign
participation. The Government had recently allowed foreign investment up to 51% in mining for
commercial purposes and up to 49% in telecommunication sector. The government is also examining a
proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for
import of capital goods. In view of the country's improved balance of payments position, this requirement
may be eliminated.
Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a
prospective joint venture partner should be supplemented with proper due diligence. Once a partner is
selected generally a memorandum of understanding or a letter of intent is signed by the parties
highlighting the basis of the future joint venture agreement. Before signing the joint venture agreement,
the terms should be thoroughly discussed to avoid any misunderstanding at a later stage. Negotiations
require an understanding of the cultural and legal background of the parties. See also Joint Ventures
in India | Joint Venture Agreements | Outsourcing Agreements | Outsourcing to
India | Formation of Subsidiary in India | Starting a Business in India | Opening
Branch in India | Incorporating company in India | Procedure for Formation of
Company in India
Besides incorporation there are many other formalities in establishing a business in India.
The following chart contains typical formalities including incorporating a private limited company in
India.
Procedure Number
Duration (days)
Filing the proposed name of company for approval to the Registrar of Companies (ROC); Get the
Memorandum and Articles of Association vetted by the ROC and printed 1
7
Make an application to the Superintendent of Stamps or an authorized bank requesting for stamping of
the Memorandum of Association and Articles of Association.
2
1
Present the required documents along with the registration fee to the Registrar of Companies to get the
certificate of incorporation
3
9
Obtain a company seal 4
Visit the UTI Investors Services Limited to obtain a Permanent Account Number 5
Obtain a Tax Account Number for income taxes deducted at source from the Assessing Office in the
Income Tax Department
6
7*
Register under Shops and Establishment Act
2*
Register for value added tax (VAT) before the Sales Tax Officer of the ward in which the company is
located 8
12*
Register for Profession tax
2*
2*
1*
Filing for Government Approval before RBI/FIPB for Foreigners and NRI's12
Totals: 12
15*
35
A new law to allow "Limited Liability Partnership" (LLP) in India is expected to be introduced in the
Parliament of India.
_____****_____
A public company is defined as a company which is not a private company. The following conditions
apply only to a public company:
A public company is not authorized to start business upon the grant of the certificate of incorporation.
In order to be eligible to commence business as a corporation, it must obtain another document called
"trading certificate".
It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting
business.
It must hold statutory meetings and obtain government approval for the appointment of the
management.
There are several other provisions contained in the Companies Act 1956 which are applicable only to
public companies and should be consulted.
Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up branch
offices in India for the purposes of export/import of goods, rendering professional or consultancies
services, R&D, promoting technical or financial collaborations, representing the parent company, acting
as buying/selling agents, rendering services in IT and development of software, rendering technical
support to the products supplied by the parent/group companies, foreign airline/shipping companies.
Branch offices could be established with the approval of the government of India and may remit outside
India profit of the branch, subject to RBI guidelines after payment of applicable Indian taxes.
A Liaison Office could be established with the approval of the government of India. The role of Liaison
Office is limited to collection of information, promotion of exports/imports and facilitate
technical/financial collaborations.
Project Office
Foreign companies planning to execute specific projects in India can set up a temporary project/site
offices in India for carrying out activities only relating to that project. The Government of India has now
granted general permission to foreign entities to establish project offices subject to specified conditions.
Note: Foreign investors are required to seek governmental approval before investing in India. Some
approvals are automatic, though application is required for those approvals. Special Permission could be
obtained to invest over and above the regular percentage allowed. See our FDI in India Sector wise
Guide for more information on various conditions of investing in India. See the Procedure for Formation
of Company in India. Also visit the Joint Ventures in India
Taxable Income
Over
Tax Rate
Not Over
Rs. 160,000 1
Rs. 160,001
Rs. 300,000
10%
Rs. 300,001
Rs. 500,000
20%
Rs. 500,001
above
30% 2
1. Rs. 190,000 for women and Rs. 240,000 for seniors. 2. An education cess of 3% is applicable. 3. (a)
Tax exemption on interest in Non-Resident (external) Account and on interest payable by a scheduled
bank to Non-Resident Indians (NRI's). (b) Tax exemption on the interest payable by a scheduled bank
to a non-resident or a person who is not ordinarily resident on deposits in foreign currency where the
acceptance of such deposits by the bank is approved by the RBI. .
Tax Rate
Domestic Corporations / Private
Limited Companies
30%
33.99% 1
30%
33.99% 1
30%
30.9% 2
1. A surcharge of 10% of the income tax is levied, if the taxable income exceeds Rs. 1 million.
Educational cess is also added. 2. An Educational Cess is added to the basic tax rates. Surcharge is not
applicable to LLP. Unlike LLP's in the USA where they are pass-through entities for tax purposes, in
case of LLP's in India, they are partially pass-through entities for tax paurposes. In India tax an LLP is
required to pay income tax on 40% of its income; since an LLP is allowed to pay the balance of 60% as
renumerations to it partners. Partners of an LLP are required to pay tax on the amount paid to them.
Besides, LLP's are not required to pay dividend distribution tax or Minimum Alternate Tax (MAT).
Dividends
20%
15% 1
Interest Income
20%
15% 2
Royalties
30%
20% 2
Technical Services
30%
20% 2
Other income
55%
55%
1. Inter-corporate rates where there is minimum holding. There tax rates are applicable under the
India USA Tax Treaty. For other countries the tax rates are different under the tax treaties between
India and other countries, including Australia, Austria, Bangladesh, Belgium, Brazil, Belarus, Bulgaria,
Canada, China, Cyprus, Czechoslovakia, Denmark, Finland, France, Germany, Greece, Hungary,
Indonesia, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, Libya, Malta, Malaysia, Mauritius, Mongolia,
Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland , Qatar , Romania,
Singapore, South Africa , South Korea , Spain , Sri Lanka , Sweden, Switzerland, Syria, Tanzania,
Thailand, Trinidad & Tobago, Turkmenistan, Turkey , U.A.E. , U.A.R., U.K., U.S.A., Russian Federation,
Uzbekistan, Vietnam and Zambia
2. 10% or 15% in some cases.
3. Withholding tax is charged on estimated income, as approved by the tax authorities.
4. There are other favorable tax rates under various tax treaties between India and other countries..
Wealth Tax
Net Taxable Wealth
Over
Tax Rate
Not Over
Rs.1,500,000
Rs.1,500,000
above
1%
Wealth tax is levied on non-productive assets whose value exceeds Rs.1.5 million. Productive assets like
shares, debentures, bank deposits and investments in mutual funds are exempt from wealth tax. The
non-productive assets include residential houses, jewelry, bullion, motor cars, aircraft, urban land, etc.
Foreign nationals are exempt from wealth tax on non-Indian assets. In arriving at the net taxable
wealth, any debt incurred in acquiring specified assets is deductible.
Gift Tax
Net Taxable Gift
Over
Tax Rate
Not Over
Rs.30,000
Rs.30,000
above
30%
Gifts to dependent relatives at the time of marriage are exempt upto Rs.100,000. Foreign nationals
are exempt from gift tax on non-Indian assets.
.123485309 .
Taxable percentage
20%
6.8%
Telephone bills
20%
6.8%
100%
33.99%
From April 1, 2007 , Employees Stock Option Plan (ESOP) or Sweat Equity
has also been brought within ambit of fringe benefit tax. Section
115WB(1)(d) specifies that any ESOP will attract Fringe Benefit Tax, and the
benefit is equal to the difference between the price paid and the fair market
value of the share, as determined by the Board. Tax is levied on the date of
vesting of such options. "Fair Market Value" is not yet defined by the Income
Tax Department.