Doing business in India 2016 - HSBC Business
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Doing business in India
2016
In association with:
1
Contents
Introduction ................................................................................................................................................................................. 3
– Country profile.................................................................................................................................................................... 4
Legal overview ............................................................................................................................................................................ 5
Conducting business in India .................................................................................................................................................... 10
Tax system ................................................................................................................................................................................ 13
Labour ....................................................................................................................................................................................... 22
Audit .......................................................................................................................................................................................... 25
Trade .......................................................................................................................................................................................... 27
Finance ...................................................................................................................................................................................... 29
Infrastructure ............................................................................................................................................................................. 32
This Guide has been prepared jointly by The Hongkong and Shanghai Banking Corporation Limited, India Incorporated in Hong Kong SAR and Grant Thornton for the
purposes of providing a high-level general overview of the business environment in India for the information of businesses who may be interested in transacting or
investing in India. Any transaction or investment in India, however, should only be undertaken based on professional advice specific to such transaction or investment.
2
Introduction
This guide to doing business in India will provide foreign investors with an insight into the key aspects of
undertaking business and investing in India. The country’s increasingly liberal market, robust growth trajectory
and a strong regulatory and legal system make it especially attractive for overseas investors.
Since the government initiated educated English-speaking • The world’s largest youth
the liberalisation programme in workforce to become a prime population 1
1991, India has developed from a exporter of information technology • Government agencies, with a
closed-door economy to an open services, business outsourcing pro-business attitude, who work
one. Consequently, the country’s services and human resource for closely with the business sector
economy has grown rapidly; in 2015, software services. to promote economic growth
it surpassed China to become the
• An extensive trade network
fastest growing large economy in The new government, led by Prime comprising a number of
the world, as well being the third Minister Narendra Modi, came into regional and bilateral free trade
largest in terms of Purchasing power in May 2014 and announced agreements
Power Parity (PPP), according to the two important decisions that were
World Bank’s estimates. • A very competitive tax regime and
aimed at infusing fresh confidence
comprehensive network of tax
among potential foreign investors. It
Political stability and an open foreign treaties
has notified new relaxed regulations
investment policy have made India a for FDI in the Indian Railways to • A well regulated financial system
prime region for foreign investment, modernise and expand the railway that offers a broad range of
especially in the services, infrastructure. The government services. Businesses can also
telecommunication, construction tap into its developed capital
also increased the FDI cap in the
activities and computer software and markets as an alternative source
defence sector from 26 per cent to
hardware sectors. According to the of financing
49 per cent.
United Nations Conference on Trade • A robust and efficient legal and
and Development (UNCTAD) World judicial system
Alongside a number of other
Investment Prospects Survey 2014 -
government incentives for
16, India is the fourth most attractive While this guide makes reference to
investment in industries such as
destination for foreign direct some of the most common issues
manufacturing and infrastructure,
investment (FDI). Alongside foreign investors might face, it must be
India offers the following
investment, India’s economy is noted that certain industries, such
competitive advantages for
being driven by increasing domestic as the financial services sector,
investors:
demand from a young population and are subject to special regulation
a growing middle class. and therefore companies wishing
• One of the largest consumer
to invest in this area should seek
India’s economy is incredibly markets in the world
legal advice.
diverse, comprising traditional • Abundant skilled manpower,
village farming, modern highly efficient professional The information in this publication is
agriculture, handicrafts, a wide managers and competent current at January 2016.
range of modern industries and professionals in several other
a multitude of services. India fields whose services are available 1
Concise Report on the World Population
has also capitalised on its large at reasonable costs Situation in 2014, United Nations
3
Country profile
Capital City New Delhi
Area 3,300,000 sq. km
Population 1,252,000,000 (approximately)
Language Hindi (official language), English is also widely used
Currency Indian Rupee (INR)
International dialling code +91
National Holidays 2016 26 January – Republic Day*
7 March – Mahashivratri
24 March – Holi
25 March – Good Friday
15 April – Rama Navami
20 April – Mahavir Jayanti
21 May – Buddha Purnima
6 July – Eid al-Fitr
15 August – Independence Day*
18 August – Rakshabandhan
25 August – Krishna Janmashtami
12 September – Eid al-Adha
2 October – Mahatma Gandhi’s Birthday*
11 October – Dussehra
12 October – Murharram
30 October – Diwali
25 November – Guru Nanak Jayanti
13 December – Milad un Nabi or Eid
25 December – Christmas Day
* National holidays
Business and Banking hours Business hours: 09:00 to 18:00
Bank hours: 10:00 to 17:00
Stock exchanges National Stock Exchange (NSE)
Bombay Stock Exchange (BSE)
Political structure Parliamentary democracy
Doing Business rank 2016 130
Ease of Doing Business
Topics 2016 rank 2015 rank Change in rank
Starting a business 155 164 9
Licenses and Permits 183 184 1
Getting Electricity 70 99 29
Registering property 138 138 No change
Financing 42 36 -6
Protecting Investors 8 8 No change
Paying Taxes 157 156 -1
Trading Across Borders 133 133 No change
Enforcing Contracts 178 178 No change
Resolving Insolvency 136 136 No change
Source: World Bank Group (Doing Business)
4
Legal overview
Political and legal system regulations to remove bureaucratic,
India is a secular state and the legal and other structural
largest multi-party democracy in obstructions in order to attract both
the world. The Federal Constitution local and foreign investment.
established the Union Government
in 1950 and it has three distinct India has a well-established,
branches: the legislative, the independent and non-partisan
executive and the judiciary. The judicial system. The Supreme Court
legislative branch is divided into two of India is based in New Delhi
houses: Council of States ‘Rajya and is the highest court of appeal.
Sabha’ and People’s Assembly ‘Lok The High Courts are based in the
Sabha’. The primary function of the respective state capitals, along
Parliament is to pass laws regarding with subsidiary District Courts. All
matters of the Constitution. these courts collectively enforce India’s legal
the rule of law and safeguard the
The country is a union of 29 states fundamental rights of citizens which framework is
and seven union territories, each are guaranteed by the Constitution.
overseen by governments made mainly adopted
up of elected representatives of India’s legal framework is mainly
the public. The central and state adopted from English law, which from English
governments comprise a Council continues to have a significant
of Ministers headed by a Prime influence. Based on the principles law, which
Minister and a Chief Minister, of equality and secularism, Indian
respectively. The Prime Minister laws are aimed at the protection continues
or the Chief Minister is usually the and promotion of business entities,
head of the party, which holds the healthy industrial and social to have a
support of the majority members environment and labour protection.
in the Parliament and the State The official language for court significant
Assembly respectively. Elections proceedings in the High Court and
are usually held for the states, union the Supreme Court is English. influence.
territories and the centre once every
five years. The procedural law of the land
and most of the commercial and
The Central Government is based in corporate laws are modelled on
the National Capital Territory of New English legislation. Furthermore,
Delhi and has exclusive jurisdiction English case law continues to
over all matters of national interest be referred to in Indian court
such as defence, communication, proceedings. The laws governing
banking and currency, international the business environment can
trade and foreign affairs. The be categorised into: labour laws,
state governments have primary corporate laws and other allied laws,
responsibility for matters such as such as those related to taxation and
law and order, education, health and foreign exchange management.
agriculture.
Data protection
India combines features of both There is no specific legislation on
federal and unitary constitutions data protection in India. Provisions
whereby laws can be enacted for data protection can instead
by both central and state be found in privacy rights under
legislatures. Since India’s economic the Constitution, the Information
liberalisation process began in 1991, Technology Act 2000 and the
governments have enacted various Information Technology Rules 2011
5
(IT Rules). There are also a number and necessary for that purpose. The government has proposed to
of sector-specific regulations, eg for This information must not be kept enact a new Privacy Bill which, once
banks, that state that businesses longer than necessary to serve such enacted, will override the provisions
must maintain the confidentiality of purpose. outlined in the Information
personal data. Technology legislation. This
Disclosure legislation recognises an individual’s
The IT rules apply to all individuals The consent of a data subject right to privacy and stipulates that
or businesses located in India must be obtained before the data it cannot be infringed unless one
and cover the handling of the controller can disclose any sensitive of the following circumstances
following categories of sensitive personal information; exceptions applies: protection of India’s
personal data: passwords, financial exist where prior consent has sovereignty or integrity, national
information, physical, physiological been given or if it is necessary for security, prevention of commission
and mental health conditions, sexual compliance with legal action. Data of crime or public order. The Bill
orientation, medical records and controllers can only transfer data if also contains provisions for the
biometric information. The IT rules it is necessary for the fulfilment of a definition of personal and sensitive
do not apply to foreign corporations lawful contract. personal data, the need to inform
or persons located outside of India, consumers before collecting data
or information that is collected from Security requirements and any penalties that will be applied
persons located outside of India. The IT Rules impose a number to non-compliance.
The key obligations and processing of security requirements on data
requirements are as follows: controllers/processors; the security In India, there is no national
controls must comprise sufficient regulatory authority for the
Privacy policy managerial, technical, operational protection of data; consequently,
Data controllers and processors and physical security control there is no requirement for
must produce a privacy policy for measures that are commensurate businesses to register or provide
the handling of personal information with the information assets being notice prior to processing data.
and sensitive personal information. protected within the nature of the
This must be made available on business. Exchange controls
the website of the data controller The Foreign Exchange Management
and include stipulated pieces of Sanctions Act 1999 (FEMA) replaced the
information as set out by the IT Any businesses or individuals Foreign Exchange Regulation Act
Rules. that fail to effectively implement 1973 with a primary objective
and maintain reasonable security of facilitating external trade and
Collection of information practices to protect sensitive payments and for promoting orderly
Data controllers must first obtain the personal information will be liable development and maintenance
consent of the data subject before to pay damages to the affected of the foreign exchange market in
collecting any sensitive personal persons. They may also be liable India.
information; consent must be for a fine of up to INR500,000 or
explicit and not implied. Information imprisonment of up to three years FEMA outlines the following
obtained from a data subject must where there is unlawful disclosure provisions in respect of foreign
be collected for a lawful purpose of personal information. exchange transactions:
6
• Current account transactions: must be provided to the Financial
Indian rupees are fully convertible Intelligence Unit-India (FIU-IND) in
for trade and current account the prescribed form.
purposes. Foreign currency can
also be freely purchased; there These companies must also
are certain specified restrictions furnish details of suspicious
where the Reserve Bank of India’s transactions, whether or not made
permission is required in cash, to the relevant regulator.
• Capital account transactions: Suspicious transactions comprise
typically not permitted unless any transactions that: give rise to a
they are specifically allowed or reasonable ground of suspicion that
prescribed conditions are satisfied it may be involved in the proceeds
of crime, appear to have been made
The exchange rate of the rupee is
mostly market determined. The
in circumstances of unusual or
unjustified complexity, or appear to
Competent
exchange rate management policy
of the government focuses on
have no economic rationale or bona
fide purpose.
authorities, as
smoothening excessive volatilities
on the exchange rate with no fixed Competent authorities, as
designated
target, while allowing the underlying
demand and supply conditions
designated by the Government
of India, can provisionally seize
by the
to determine the exchange rate
movements over a period in an
property believed to be ‘proceeds of
crime’ for up to 180 days. This must Government
orderly manner. To this end, the
Reserve Bank of India closely
be confirmed by an independent
Adjudicating Authority. of India, can
monitors the developments in the
financial markets at home and Any person found guilty of money provisionally
abroad and carefully coordinates
its market operations with suitable
laundering is liable to a prison
sentence of three to seven years seize property
and/or a fine of up to INR500,000.
monetary and regulatory measures.
The Financial Intelligence Unit believed to be
Money laundering regulations is the authority responsible for
India has criminalised money receiving, processing, analysing and ‘proceeds of
laundering under the Prevention of disseminating information relating to
Money Laundering Act 2002 and suspect financial transactions. crime’ for up to
the Narcotic Drugs and Psychotropic
Substances Act. India is also a Intellectual Property Rights 180 days.
member of the Financial Action Task As a member of the World Trade
Force on Money Laundering (FATF). Organisation, India recognises the
importance of protecting intellectual
The Prevention of Money property rights (IPR) within its legal
Laundering Act defines money framework. India is also a signatory
laundering as the act of attempting to the following international IP
to indulge or assist another person, agreements: the Paris Convention,
or being actually involved, in the Berne Convention and the
any activity connected with the Patent Cooperation Treaty.
proceeds of crime and projecting it
as untainted property. The Office of the Controller General
of Patents, Designs and Trade
The Act prescribes an obligation Marks (CGPDTM) is responsible
on banking companies, financial for the supervision of the working
institutions and intermediaries for of the Patents Act, the Designs
the verification and maintenance Act and the Trade Marks Act.
of records of the identity of Furthermore, the Copyright Office
all clients and all transactions; is responsible for the supervision of
information on such transactions the Copyright Act.
7
COPYRIGHT
Copyright can protect: literary work, dramatic works, musical works, artistic works, layouts and typographical
arrangements, recordings and broadcasts. Copyright works receive statutory protection automatically once they are
placed in the public domain.
Protection Copyright arises upon the creation or performance of any work that is capable of being copyrighted.
granted
Copyright provides the copyright owner an exclusive right to control the reproduction,
communication, performance and distribution of any copyrighted work in India.
As India is a signatory of the Berne Convention for the Protection of Literary and Artistic Works, any
copyrights arising in India will provide the owner the same rights in all applicable countries.
While registration is not necessary, it helps to prove ownership should any criminal proceedings
arise against infringers. Registration can be made, in person or via a representative, through the
Registrar of Copyrights.
Infringements In the case of infringements, whereby a person reproduces, distributes, displays or performs the
protected work, without a license to do so, the owner of a patent can initiate court proceedings.
A court may then order the payment of damages, permanent injunctions, accounts of undue and
illegal profits earned through infringement, seizure of infringing goods or orders for the destruction
of infringing materials. Infringement is punishable with imprisonment of between six months to
three years or a fine of between INR50,000 and INR200,000.
Duration Protection for literary, musical or artistic work lasts for the life of the author plus 60 years.
Protection for anonymous, pseudonymous and posthumous works lasts for 60 years from the
beginning of the calendar year following the year in which it was first published.
Protection for films, sound recordings, performances etc, lasts for 60 years from the beginning of
the calendar year after which it was first published or performed.
PATENTS
Patents protect inventions which can be applied in an industrial environment. For a patent to be granted, the invention
must be new and not disclosed anywhere in the world, have an inventive step which is not obvious to someone with
experience in the subject and capable of being used in some kind of industry. It cannot fall under any excluded categories
such as scientific theories and mathematical models.
Protection A patent gives its owner the ability to take legal action to stop others from: making a product
granted or using a process which is the subject-matter of the patent, selling anything incorporating the
subject-matter of the patent or inducing third parties into any of the above, without the inventor’s
permission.
Patent applications must be submitted to the Patent Office or its branch offices. India’s patent law
operates under the ‘first to file’ principle – that is, if two people apply for a patent on an identical
invention, the first one to file the application will be awarded the patent.
Infringement Infringing a patent means manufacturing, using, selling or importing patented products or
processes without the owners’ permission.
In the case of an infringement, the owner of a patent can initiate court proceedings against any
person who infringes the patent. They may then receive damages, an account of profits, an
injunction or any other applicable remedies.
Duration Patents are valid for 20 years from the date of filing an application, subject to an annual renewal fee.
8TRADE MARKS
A trade mark must be a sign that is capable of both graphical representation and distinguishing the goods or services
of one undertaking from another. Trade names also constitute a form of trade mark in India, with protection granted
irrespective of existing trade names, for those wishing to trade under their own surname.
Protection Registering a trade mark with the Registrar of Trade Marks confers exclusive rights to use the trade
granted mark and the right to take action against unauthorised users of the trade mark. Registration takes
up to two years.
India also provides rights for an unregistered mark. By using a trade mark, the proprietor obtains
valuable goodwill which can be protected on a common law basis by a passing off action.
Infringement Infringing a trademark comprises the use of an identical or similar trade mark for identical or similar
goods and services, creating a likelihood of confusion for the public.
Furthermore, where a mark has a reputation, infringement may arise from the use of the same or a
similar mark which damages or takes unfair advantage of the registered mark.
In the case of an infringement, the owner of a trade mark can instigate court proceedings against
the infringer. They may then receive damages, an account of profits, an order for delivery and
destruction of infringing goods, an injunction or any other applicable remedies.
Duration 10 years (registration can be renewed for further periods of 10 years, subject to the payment of
renewal fees).
DESIGNS
An industrial design, the external appearance of a product embodied in three dimensional configurations, lines,
colours or a combination of the aforementioned elements, can be protected if it is applied to an article, new and clearly
distinguishable from known designs.
Protection Registering a design gives the owner a property right over the design. Holding a design right
granted provides the owner the exclusive right to:
• Make, import or sell any article to which the design has been applied
• Assign, transfer or license the right to the design
• Prevent third parties from using the design without permission
Registration must be made under the Designs Act to the Controller of Designs.
Infringement A design right is infringed by an unauthorised person making an article exactly or substantially
similar to the protected design or by making a design document for the purpose of making
unauthorised copies.
Remedies that may be available for infringement include damages or statutory damages
recoverable as contract debt or injunctions.
Duration Once obtained, a design right is protected for a period of 10 years from the date of filing of the
application. It can then be extended for five years from the expiry of original period.
9Conducting business
in India
Any foreign investor wishing to company is a legal entity with only Capital requirement
conduct business in India can one member who is an Indian citizen There are no minimum capital
choose one of the following forms: and resident in India. requirements for companies in India.
• Limited company (public, private To incorporate a company, an Constitution
or one person) identification number and a digital The Memorandum and Articles of
• Limited Liability Partnership firms signature for each proposed director Association must be submitted to
(LLP) must be obtained. The promoters/ the Registrar of Companies upon
applicant of the company must the registration of a company.
• Partnership firms
then apply to the Registrar of
• Liaison office The Memorandum of Association
Companies for the availability of the
• Branch office proposed name. will include:
• Project office
After obtaining approval, the • The company’s name
Companies incorporated in India Memorandum and Articles of • Location of the company’s
are regulated by the Companies Act Association of the proposed registered office
2013 of India. company are filed with the Registrar • Object clauses
of Companies for registration, not
• Liability of the members if the
The most common business form more than 60 days following the company is limited
for foreign investors has been the name approval. A fee must be paid
Limited Liability Company (LLC), • The amount of authorised capital
when submitting these documents;
which can be public or private. that has been registered with the
the size of the fee depends on
Generally, private LLCs are most Registrar of Companies
the authorised share capital of
popular as they provide greater the company. On registration, a
operational freedom and less The Articles of Association will
Certificate of Incorporation is issued
stringent regulatory requirements. generally comprise an outline of
which is conclusive evidence of the
the rules and regulations that will
company having been incorporated.
Company govern the internal management
Under the present policy, all of the affairs of a company and the
Subsequent to receiving the
companies in India have to be conduct of its business.
Certificate of Incorporation, public
incorporated under the Companies
limited companies have to obtain
Act 2013. Any company Management structure
a certificate of commencement In India, a company is managed
incorporated in India is treated as
of business. Consequently, a by the Board of Directors. Except
an Indian resident for all Indian
public limited company cannot where a transaction requires
regulations.
commence business until the approval from the Board of
amount of subscription stated in Directors under the Companies
Formation
A company can be incorporated as the Memorandum and Articles of Act, management powers may
a private company, a public company Association has been received by be conferred to any director or
or a one person company. Private the company. managing director. There is a
companies cannot issue an invitation requirement for every company now
to the public to subscribe for shares The costs associated with to have an Indian resident director.
or debentures of the company. incorporation of a company
Private companies can have comprise the cost of drafting and Indian company law stipulates that
between two and 200 shareholders printing of the Memorandum and a full time company secretary must
but must have a minimum of two Articles of Association, stamp be appointed, where the paid up
directors out of which at least one duty, registration and filing fees, capital of a company exceeds the
has to be an Indian-resident director. in addition to professional fees of prescribed limit, (presently INR50
Public companies must have a advisors who assist in the process. million).
minimum of seven shareholders With the introduction of mandatory
and a minimum of three directors e-filing procedures, it usually takes Filing requirements
out of which at least one has to be four to six weeks to incorporate a Every company established in India
a resident director. A one person company in India. must comply with the reporting
10provisions found in the Companies Formation Filing requirements
Act 2013 of India. This includes filing To set up an LLP, at least two An LLP is obliged to maintain
annual returns, audited accounts, tax partners are required, with at annual accounts reflecting a true
returns and board and shareholder least two partners promoted as and fair view of its state of affairs. A
resolutions. Furthermore, any designated partners. At least statement of accounts and solvency
companies receiving foreign one of the designated partners must be filed by every LLP with
investment must report the details should be a resident of India. the Registrar of Companies every
of this (inward remittance as well year. The accounts of LLPs shall
Where one of the partners is a
as allotment of shares to the foreign also be audited, subject to any
company, the corporation must
investor) to the Reserve Bank of class of LLPs being exempted from
nominate an individual to act as a
India. Companies whose securities this requirement by the central
designated partner. The partners
are listed on a stock exchange government.
in India have additional periodic enjoy limited liability up to their
disclosure obligations; these are in agreed contribution. Identification Partnership firms
line with their listing agreements numbers for all proposed directors A partnership is an association of
with the relevant stock exchange. and the digital signature for all two or more natural persons for the
the designation partners must be purpose of undertaking a business
Limited Liability Partnership obtained. Following this, an online activity for profit. Each partner of a
A limited liability partnership entity application for incorporation must partnership has unlimited liability.
is a hybrid form of business, be submitted no later than 60 days
comprising the features of a following the name approval. This Under the present FDI policy of
company, such as being a separate must be submitted alongside: proof the Government of India, and the
legal entity having perpetual of address of the registered office Foreign Exchange Management
succession, with the benefits of of the LLP, details of the individual Act (FEMA), foreign investment in
organisational flexibility associated partnership firms is not permitted,
partners, total monetary value of
with a partnership. with the exception of investment
the contribution in the LLP by all
by non-resident Indian (NRI)
partners and the LLP agreement.
Foreign investors can invest in an individuals or Personas of Indian
LLP with the prior approval of the Origin (PIO), which is allowed on a
Following the approval of
government in sectors where 100 non-repatriation basis.
per cent foreign direct investment is incorporation, the LLP agreement,
allowed. as signed by all partners on all Branch office
pages, and a notice of appointment A branch office (BO) may be
An LLP is not subject to the of the designated partners should established in India with the primary
mandatory requirements applicable be submitted within 30 days. The aims of increasing the foreign
to a company with regards to the fee for incorporation depends on the company’s customer base, bringing
provision of depreciation. contribution in the LLP. the company’s product closer to the
11customers or making the distribution Form FNC must be supplied with Liaison office
and marketing of its goods and the following documents, which A liaison office (LO) is a suitable
services easier and more effective. should be notarised in the country business form for foreign investors
of registration and attested by the that do not have any intention to
The RBI does not permit a BO Indian embassy: undertake commercial activities in
to undertake any manufacturing India and only wish to represent the
activity in India unless the BO is head office. The role of such offices
• Memorandum and Articles of
located within a Special Economic is limited to collecting information
Association
Zone (SEZ). The range of activities to about the possible market and
• Bankers’ report from the providing information regarding
be undertaken by a BO is also very
applicant’s banker in the host the company to prospective Indian
restricted and permission has to be
country of registration showing customers. The LO acts as a
obtained from the RBI each time
any new activity is to be undertaken. the number of years the applicant communication channel between
Branch offices can be set up to has had banking relations with the parent company overseas and its
undertake the following activities: that bank present and prospective customers
• Latest audited financial in India. The liaison office cannot
undertake any business activities
• Export/import of goods statements
nor earn any income in India.
• Rendering professional or • Copy of Power of Attorney
consultancy services supported by the board resolution A foreign company that wishes
• Carrying out research work in to the authorised signatory or to set up a liaison office in India
which the parent company is the responsible person for the must obtain prior approval from the
engaged operations of the office in India Reserve Bank of India. The setup
• Promoting technical or financial • A ‘Comfort Letter’ if the entity of a liaison office follows the same
collaborations between Indian does not fulfil additional criteria procedure as that of a branch office;
companies and a parent or of Minimum Track Record and forms FNC and e-form FC -1 must
overseas group company be submitted.
net worth
• Representing the parent company Project office
in India and acting as a buying/ Following the approval from the
Foreign companies that wish to
selling agent in India RBI, the branch office must register
execute specific projects in India
• Rendering services in information with the Registrar of Companies are permitted to set up temporary
technology and development of as a foreign company in India. The project offices. A project office can
software in India following information must be be opened without prior approval
• Rendering technical support to the submitted in the e-form FC 1: from the RBI, providing it meets
products supplied by parent/group certain conditions. In some cases
companies • Details of directors and secretaries specific approval from the RBI may
of the foreign company be sought to set up a project office
• Foreign airline/shipping company
• Address of the principal office of if it does not meet the prescribed
the company and the principal eligibility criteria for automatic route.
A foreign company that wishes to The foreign entity needs to provide
set up a branch office in India must place of business in India
a report to the jurisdictional regional
obtain prior approval from the RBI. • Power of Attorney or board office of the RBI outlining the
The foreign company must submit resolution, granting necessary particulars of the project/contract.
an application, in a prescribed form powers to the Indian head of the Once the project execution is
(Form FNC), to the designated branch office complete, as per the terms of the
AD category 1 bank for onward contract awarded, the project office
• Original version (if not in English)
transmission to the RBI. This must must be closed.
and translated version of
provide details about the foreign
Certificate of Incorporation and
company, proposed interests Other forms of business
Memorandum and Articles of
and activities in India, reasons for Foreign investors can also set up a
Association
wanting to open a branch office and joint venture with Indian partners.
any foreign exchange implications • Evidence of setting up This may be suitable in sectors
for such matters. Applications are the operations in India, ie which have restrictions or caps on
considered on a case-to-case basis, copy of lease deed, copy foreign ownership (such as defence,
with permission usually granted in of bank statement, copy of multi brand retail, banking and
two to four weeks. employment letter insurance).
12Tax system
India has a well-developed tax system which has Turnover (INR)
undergone radical change in line with the country’s
Up to 10 More than More than
liberation process. The power to levy taxes is distributed
million 10 million 100 million
among the three tiers of government: union government,
but less
state governments and local bodies.
than 100
million
Taxes levied by the union government:
Resident 30.9 % 33.063% 34.608%
• Income tax company (30% plus (30% plus (30% plus
• Customs duties education surcharge surcharge
cess of of 5% plus of 12% plus
• Central excise 3%) education education
• Service tax cess of cess of 3%)
3%)
Taxes levied by the state governments: Non-resident 41.2% 42.024% 43.26%
company (40% plus (40% plus (40% plus
• Sales tax/VAT
education surcharge surcharge
• State excise cess of of 2% plus of 5% plus
• Land revenue 3%) education education
cess of cess of 3%)
Taxes levied by local bodies: 3%)
• Duty on properties
• Octroi Corporate tax rate for companies having total turnover/
gross receipts not exceeding INR50 million in Financial
• Tax on markets
Year 2014-15 will be 29 per cent for the financial year
• Tax/User charges for utilities 2016-17. Further domestic companies set up after 1 March
2016 and not claiming any tax incentives will be subject to
Corporate Income Tax (CIT) corporate tax rate of 25 per cent subject to fulfilment of
Scope certain conditions.
Corporate income tax is chargeable on taxable income
computed in accordance with the provisions of the Income India provides relief for double taxation under a number of
Tax Act 1961 hereinafter referred to as ‘Income-tax Act’. double taxation avoidance agreements (DTAAs). India has
All businesses are required to follow a uniform financial entered into DTAAs with more than 90 countries, including
year from 1 April to March 31 for tax purposes, irrespective the USA, UK, Japan, France and Germany. In the case of
of the financial year followed for accounting purposes. countries with which India has double taxation avoidance
Income earned during the financial year is liable to income agreements in place, beneficial provisions of said DTAA
tax in the next year, called the ‘assessment year’. shall prevail over the provisions of domestic law.
Resident corporations are taxed on their worldwide Further, India also provides relief from double taxation
income whilst non-resident companies are taxed only on relief unilaterally where no DTAA has been entered.
income derived from India. For the purpose of taxation, Such unilateral relief is provided on the basis of a formula
a company is resident if it is formed and registered as prescribed under the Income Tax Act.
an Indian company under the Companies Act or if its
place of effective management (PoEM) is in India. PoEM Taxable income
has is defined as the place where key management and Taxable income is based on the audited financial
commercial decisions that are necessary for the conduct statements of the company. Income is computed from
of the business of an entity as a whole are made. The gross income, following the adjustment for allowable
CIT rate for a company for financial year 2016 – 17 is expenses incurred in the production of income, capital
determined by the following residency factors: allowances and incentives.
13The sources of income subject to Income Computation and new plant or machinery being
tax include: Disclosure Standards (‘ICDS’) used for less than 180 days, the
The Central Government has balance 50 per cent of additional
• Profits and gains of business or announced ICDS which are required deprecation would be allowed in the
professions to be followed by an assessee subsequent year.
• Capital gains following mercantile system of
accounting for the purpose of Administration
• Dividends and interest
computation of income chargeable All taxpayers are required to obtain
• Rents, royalties and premiums to income-tax under head ’Profit a tax registration number which
and gains of business and is called the Permanent Account
Expenses incurred wholly and profession’ and ‘Income from other Number (PAN). The application is
exclusively for business purposes sources’. The ICDS are effective submitted using Form 49A (49AA in
are deductible from taxable income. from 1 April 2015. case of foreign citizens) on or before
Normally, capital expenditure/ 31 May of the assessment year for
loss is not allowed as a deduction Depreciation which the income is assessable to
unless otherwise specified, eg Depreciation for tax purposes tax. This number is to be quoted
depreciation, expenditure relating to is normally calculated using the on all tax returns, correspondence
scientific research and development declining balance method (written with the tax authorities and on all
etc. Furthermore, expenditure down value method) at varying rates documents relating to prescribed
incurred on corporate social depending on the nature of assets. categories of transactions. Further,
responsibility activities has been All similar type of assets eligible as per provisions of the Income Tax
specifically disallowed. for the same rate of depreciation Act, a higher rate of TDS (at 20 per
are placed together in a block and cent) is prescribed in case a person
Deductibility of expenses is depreciation is charged on the value (‘deductee’) receiving any sum
further subject to compliance with of the block. Rates typically vary (on which tax is deductible) fails to
withholding tax provisions such as from 10 to 60 per cent although furnish PAN to the payer (‘deductor’)
amounts of specified kinds paid to special rates apply to certain assets of such sum.
residents (eg salary, interest, royalty, such as energy-saving devices or
technical service fees, commission, water pollution-control equipment. Furthermore, every person
rent etc) or payment of interest, responsible for withholding tax in
royalties, technical service fees or Depreciation is available for a full accordance with the provisions
any other chargeable amounts paid year, irrespective of the actual period of the Income Tax Act is required
to non-residents1. of use of the asset. However, in to make an application for a
the year of acquisition, depreciation withholding tax registration number
The following are some of the is allowed at half the normal which is called as Tax Deduction
other important deductions that rates, if the asset is used for less Account Number (TAN). The
are available to arrive at the taxable than 180 days in that year. No application is to be submitted using
business income: depreciation is available in the year Form 49B, within one month from
of sale of the asset. Depreciation on the end of the month in which tax is
• Certain preliminary expenses over intangible assets such as know-how, deducted.
a five-year period commencing patents, copyrights, trademarks,
from the year in which the licences, franchises or other similar All companies must file CIT returns
business commences business or commercial rights, is by 30 September or 30 November
also available. of the assessment year, depending
• Capital expenditure on scientific
on whether they undertake
research related to the business of
In addition to the above, additional international transactions, which are
the taxpayer depreciation at the rate of 20 per subject to transfer pricing provisions.
• 200 per cent of the amount cent (over and above normal
of expenditure incurred by depreciation) is available for new Advance tax payments must be
companies engaged in the Plant and Machinery (other than made on 15 June, 15 September,
business of manufacture or ships and aircrafts) upon fulfilment 15 December and 15 March of
production of certain specified of prescribed conditions. Further, the financial year. Non-payment of
article or thing on in-house in cases where only 50 per cent advance tax will make companies
research and development depreciation has been claimed in liable to a levy of interest. These
facilities the first year on account of the payments will then be off-set
14against the amount stated in the Losses taxpayers who receive specified
annual tax return. Any outstanding Business losses, other than those profit-linked tax incentives. AMT
tax must be paid on or before the from speculation business, can is payable at 18.5 per cent (plus
date of filing the return. be off-set against income from all applicable surcharge and cess)
sources in the current taxation year. on the amount of income before
Capital gains Any losses outstanding may be giving effect to the specified
Under the Income Tax Act, capital carried forward and off-set against tax incentives. AMT credit can
gains are subject to special tax rates. profits arising in the subsequent be carried forward for ten years
This tax rate will depend on whether eight years. Unabsorbed following the year in which the
the capital asset transferred is a depreciation is permitted to be credit arises.
short-term or long-term capital carried forward for an unlimited
asset; short-term assets are assets period. Losses can only be carried Dividend Distribution Tax (DDT)
held for not more than 36 months forward if the income tax return is Dividends distributed by an Indian
immediately before the date of filed by the due date. company are exempt from taxation
transfer. In the case of listed shares, in the hands of the shareholders.
Minimum Alternate Tax (MAT) The company distributing the
listed securities or units of an
Companies are subject to a dividends is liable to pay DDT of
equity-oriented fund or zero coupon
presumptive tax (MAT) on the 15 per cent. The rate mentioned
bonds, the short-term holding period
profits shown in their financial above is exclusive of the applicable
is not more than 12 months. Capital
statements (book profits), where surcharge at 12 per cent, education
gain from short-term capital assets
the income tax liability determined cess and secondary and higher
is taxed at the normal corporate tax
under the normal tax provisions is education cess at two per cent and
rates for resident and non-resident
less than 18.5 per cent of its book one per cent, respectively. Further,
companies (except for capital
profits. MAT is levied at 18.5 per DDT is required to be calculated on
gain from short term listed equity
cent, plus the applicable surcharges the gross-up amount including such
shares and units of equity-oriented and cess. DDT.
funds charged to the Securities
Transaction Tax, which are taxed at Tax credit for the difference Additionally, to avoid the double
15 per cent). between MAT and tax under normal taxation of dividends received from
provisions is allowed against tax subsidiary companies on which
All other capital assets will be liability in the ten years following, DDT has been paid, the dividends
considered as long-term capital where tax becomes payable under received can be reduced from the
assets and taxed as follows: normal provisions of the Act. total amount of dividends liable to
DDT, provided certain conditions are
• Long-term listed equity shares There was a debate on the met.
and units of equity-oriented funds applicability of MAT on foreign
charged to Securities Transaction companies. In a recent amendment, The tax on distributed profits is
Tax - exempt income accruing to all foreign payable within 14 days from the
• Other long-term listed securities companies from capital gains date of declaration, distribution or
10 per cent resulting from transactions in payment of any dividend, whichever
securities, interest, royalty or fees is the earliest.
• Other long-term unlisted
for technical services chargeable to
securities transferred by a
tax at a rate lower than the rate of Any dividend received from a foreign
non-resident or a foreign company
MAT (ie 18.5 per cent), have been company is taxable in the hands of
– 10 per cent
exempt from MAT liability. Further, shareholders at their effective tax
• Other long-term capital assets the Central Board of Direct Taxes rates. However, an exception exists
20 per cent (‘CBDT’) has come up with a circular in the case of dividends received by
whereby the above exemption has an Indian company from a foreign
Groups also been provided for past years to subsidiary company (in which the
India does not provide for the foreign companies. Indian company holds 26 per cent
consolidation of income or common or more equity). In such cases, the
assessment of groups of companies Alternate Minimum Tax (AMT) dividend received is taxable at a
for tax purposes. Each company AMT is a modified version of MAT concessional rate of 15 per cent
is subject to an individual tax which is applicable to limited liability (as against the corporate tax rate of
assessment. partnerships and certain other 30 per cent).
15Withholding tax Transfer pricing
Under Indian tax law, a tax payer is required to withhold India’s transfer pricing regulations (’TP Regulations’ or
tax on certain specified payments. There are certain ‘TPR’ or ‘Indian TPR’) generally adopted the revised
exceptions (in form of category of recipient) and thresholds Organisation for Economic Co-operation and Development
(in form of monetary limit of payments) prescribed for (OECD) transfer pricing guidelines, although key
withholding of taxes. differences exist.
The withholding tax rates for domestic payments are as The TP Regulations follow the ‘arm’s length principle’
follows: in determining the price of international transactions
between related parties in a gamut of cross-border
Type of payment Rate (%) dealings. The ambit of TPR is also extended to certain
‘specified domestic transactions’.
Dividends –– NIL (if DDT has been
paid) The Indian TPR states that income arising from
–– 10 (in case of resident transactions between associated enterprises (AEs) should
shareholder be computed with regards to the arm’s length price (ALP).
Interest 10 It has been clarified that the allowance for any expense or
interest arising from an international transaction/specified
Various specified 5 domestic transaction shall also be determined with
commissions regards to the ALP.
Payments to contractors –– 1 (for payments to
individuals and Hindu In order to align the Indian TPR with global standards, use
undivided family) of multiple year data and range concept has also been
notified for determining the ALP of a transaction. As per
–– 2 (for payment made to the new rules, where more than one ALP is determined
others) by the most appropriate method either range concept
Rent –– 2 (for equipment rental) or Arithmetic Mean (AM) would be used, depending on
–– 10 (for other payments) the method selected and the number of comparable data
points.
Professional and technical 10
service fees The following methods are specified as acceptable for
Royalties 10 determining the arm’s-length price:
Payments of 10 • Comparable uncontrolled price method
compensation to residents
for the compulsory • Resale price method
acquisition of certain • Cost-plus method
immovable property • Profit split method
Payments for the 1 • Transactional net margin method
acquisition of immoveable • Any other method that takes into account the price that
property has been charged or paid or would have been charged
or paid, in the same or a similar uncontrolled transaction,
Buy-back tax with or between non-associated enterprises, under
The buy-back of unlisted shares by an Indian company is similar circumstances, considering all the relevant facts
subject to a tax of 23.072 per cent (includes a surcharge of
12 per cent and a cess of three per cent). The tax is liable The Indian TPR provides no priority of selection/application
on the difference between the price at which the shares of methods.
are bought back and the consideration received by the
company for the issuance of shares. The burden of demonstrating the arm’s length nature
of the international transactions lies with the taxpayer.
Companies will be liable to a number of onerous penalties
16if they are non-compliant with the Research and development (R&D)
obligations and documentation activities:
requirements under transfer pricing
regulation. • 200 per cent weighted
deduction on in-house scientific
At present, transfer pricing is a R&D expenditure (not being
highly litigated area; however, there expenditure in the nature of cost
are methods to resolve the litigation. of any land or building)
Dispute Resolution Panels (DRPs) • 125 per cent weighted deduction
are set up with a view to achieve in respect of payments made
speedy and efficient disposal of for outsourced R&D activities
transfer pricing cases at the lower
level. Companies can also apply to
to approved Indian companies
which have scientific R&D as their An SEZ is a
the tax authorities for an Advance main object
Pricing Arrangement (APA) for
the upfront determination of the
• 100 per cent deduction on capital specifically
arm’s length price and pricing
methodology in relation to an
expenditure (other than land)
on scientific R&D related to delineated duty
international transaction.
the business carried on by the
company free enclave
Safe harbour rules also exist; ‘safe
harbour’ is defined as circumstances
Manufacturing companies: deemed to
in which the income tax authorities
shall accept the transfer price
• 100 per cent deduction of be a foreign
business profits available for
declared by the taxpayer. These
rules are presently applicable only
10 consecutive tax years to any territory for
business manufacturing and
on notified international transactions
and notified domestic companies.
producing any article or a thing, purposes
located in North Eastern States
These rules are optional and can be
opted into for a period not exceeding of India provided the undertaking of trade
commences manufacturing by 31
five years.
March 2017 and carries on any operations,
eligible business
Thin capitalisation rules
As present, there are no thin duties and
Special Economic Zones (SEZs)
capitalisation rules in India.
An SEZ is a specifically delineated
duty free enclave deemed to be
tariffs.
Controlled foreign companies
a foreign territory for purposes of
(CFC)
trade operations, duties and tariffs.
There is no controlled foreign
The deductions available include:
company legislation in place in India.
• SEZ developer – 100 per cent
Tax incentives
deduction of business profits and
The Union Finance Minister, Arun
gains derived from developing and
Jaitley in his 2015 Budget speech
maintaining a SEZ
had indicated that the rate of
corporate tax will be reduced from • Entrepreneur – for profits and
30 per cent to 25 per cent over gains derived by its unit set up in
the next four years along with any SEZ from export of articles or
the corresponding phasing out of things or from services as under:
exemptions and deductions. In line –– 100 per cent deduction of
with this announcement, Central export profits for the first five
Board of Direct Taxes (CBDT) tax years
has laid down a draft roadmap –– 50 per cent deduction of export
for phasing out various incentive profits for the next five tax
deductions under the Income years
Tax Act. –– Up to 50 per cent deduction of
17export profits for the next five Location based incentive Personal income tax (PIT)
tax years (subject to transfer of A tax incentive equal to 15 per cent Personal income tax is levied on
profits to special reserve) of the actual cost of a new asset the income earned by individuals
for an assessee who sets up a and is administered by the Central
Business specific incentives for manufacturing undertaking in the Government. Any person that
capital expenditure State of Andhra Pradesh or Bihar accrues or derives income from
• Allowance of 15 per cent or Telangana or West Bengal is India is subject to personal income
deduction² to manufacturing available if the following conditions tax. Income is assessed on a current
companies for investment are satisfied: year basis and individuals must
exceeding certain limits and made comply with the self-assessment
during a specified time period • Undertaking is set up on or after scheme. The year of assessment
• 150 per cent deduction on capital 1 April 2015 runs from 1 April to 31 March.
expenditure available for the • New asset is acquired and
following specified businesses: Individuals liable to Indian tax
installed during the period
Both resident individuals and
–– Setting up and operating a cold beginning on 1 April 2015 to
non-resident individuals are subject
chain facility 1 April 2020
to tax on their income. Resident
–– Setting up and operating a
individuals are subject to tax on
warehousing facility for storage Further, such new manufacturing
their global income. Individuals
of agriculture produce undertakings are entitled to are resident in India for the year of
–– Building and operating a hospital additional depreciation at the rate assessment if they fulfil either of the
with at least 100 beds for of 35 per cent against 20 per cent following conditions:
patients allowed currently.
–– Developing and building a
• They are present in India for at
housing project under specific Anti-avoidance measures least 182 days of the relevant
schemes The Indian Government introduced financial year
–– Production of fertiliser certain anti-avoidance measures
–– Laying and operating a • During the four years preceding,
to discourage transactions with
cross-country natural gas or they were present in India for a
persons/companies that are
crude or petroleum oil pipeline total of 365 days or more, and
located in a country that does
network for distribution, at least 60 days in the relevant
not exchange information with tax year
including storage facilities being
India. These measures enable
an integral part of such network
the government to designate a ‘Not ordinarily’ resident individuals
–– Building and operating,
certain country or jurisdiction are subject to tax on any income
anywhere in India, a hotel of
as a ‘notified jurisdictional area’. derived or accrued in India
two-stars or above as classified
Transactions that occur between during the relevant financial
by the Central Government
a taxpayer and a party located in year. Individuals are deemed
–– Setting up and operating an
a notified jurisdictional area could non-ordinarily resident if they fulfil
inland container depot or a
be subject to a higher withholding either of the following conditions:
container freight station notified
or approved under the Customs tax, a taxability of receipts or a
Act 1962 non-deduction of expenses. The • They have been a non-resident
–– Bee-keeping and production of Central Government has notified during nine out of the 10 tax years
honey and beeswax Cyprus as a ‘notified jurisdictional preceding the relevant tax year
–– Setting up and operating a area’. The General Anti-avoidance • They have been in India for no
warehousing facility for storage Rules (GAAR), which will become more than 729 days during the
of sugar effective in assessment year seven tax years preceding the
–– Laying and operating a slurry 2018-19, are designed to deal relevant tax year
pipeline for the transportation of with aggressive tax planning. Tax
iron ore authorities will be provided with Any individuals who are not
–– Setting up and operating the discretion to invalidate any residents of India during the
a semi-conductor wafer arrangement that is shown to be in relevant tax years are classified as a
fabrication manufacturing place for the purpose of avoiding non-resident. They are subject to tax
unit notified by the Board tax. The GAAR rules do not apply on income derived in India during
in accordance with such to arrangements with an aggregate the relevant year but tax relief under
guidelines as may be prescribed tax benefit below INR30 million. a double tax treaty may be available.
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