a guide to establishing presence in india...a guide to establishing presence in india 2018. 2 doing...
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2 Doing Business in India
ContentsSection Page
Foreword 3
Introduction 5
Countryprofile 6
KeyeconomicindicatorsofIndia 8
Keysectors:Anoverview 11
Politicalandlegalsystem 14
Foreigninvestment 15
Finance 19
Businessentities 23
Labour 25
Accountingandreportingrequirements 27
Directtax 30
Indirecttax 39
TransferpricinginIndia 41
Glossaryofabbreviations 45
Doing Business in India 3
Foreword
WithGDPgrowthof7.1percentandFDIinflowofUSD60bnin2016-17,IndiaisboththefastestgrowingeconomyandthelargestrecipientofFDI,globally.
Overthelastfewyears,thegovernmenthasdeliveredlandmarkstructural reforms which are expected to further propel this growth.ThislistincludestheGoodsandServicesTax(GST),whichintegratesIndiaintoasinglemarketandremovesaspate of complex indirect taxes; a competition among India’s 29statestoimprovetheir‘EaseofDoingBusiness’;the‘Indiastack’,whichleveragesthenewbiometricidentification(Aadhaar)andmobilepenetrationofabillionplusIndiansfordigital financial transactions; and a sudden withdrawal of all high denomination currency notes along with strengthened legislationandenforcementtotacklecorruptionandunaccountedmoney.
Theperiodbetween31March2015and2017sawanumberof reforms coming together within the ambit of financial regulationsinthecountry.TheIndianequivalentof‘SOX’documentationandauditorattestationofcontrols(ICFR),IndianIFRS(IndAS)andmandatoryrotationofexternalauditorsaresomeofthekeyreformsthatwillalignIndia’spracticestothebestintheworld.
There has never been a time in history where so much has happenedinIndia.AtGrantThorntoninIndia,wearedelightedto be at the forefront of helping shape a more vibrant India workingwiththegovernment,theleadersofIndiaInc.,andglobal companies that want to maximise this amazing opportunity.
Vishesh C. ChandiokChiefExecutiveOfficerGrant Thornton India LLP
PrimeMinisterNarendraModiwonalandslidemandateinMay2014−asingleparty government was formed for the first timein30years−onthepromiseofmakingIndiagreatjustlikehehadpreviouslytransformedhishomestate,Gujarat.
Doing Business in India 5
Introduction
ThisisaninterestingtimefortheIndianeconomy.Ratedasoneofthemoststableeconomies,Indiacontinuestoshineamidstglobalgloom.LedbytheModigovernment,anumberofeconomic,financialandinstitutional,reformsincluding the reforms leading to ease of doing business acrossstates,havebeenimplemented.Indiaclaimingthe100thspotinWorldBank’srecentlyreleasedEaseofDoingBusinessrankingsisatestimonytothisfact.Thisalsomarksthebiggestimprovementrecordedamong190countriesintheWorldBank’s‘DoingBusiness2018-Reformingtocreatejobs’report.Strictmonetaryactiontakenbythegovernmenttobringbackunaccountedmoneyintothesystempavesthewayforeconomicgrowthbackedwithdigitisation.Bankingregulationsincludingthemovetoreplacehigh-valuecurrencynoteswithnewhigherdenominationsin2016didcontributetowardsmakingtheeconomymorerobustandcompliant.Thegovernment has also notified the final regulations related to the insolvency resolution process under the Insolvency and BankruptcyCode2016.ThelawaimstoimprovetheeaseofdoingbusinessinIndiabyfacilitatingsmootherandtime-bound settlement of insolvency and faster turnaround of businesses,apartfromcreatingadatabaseofserialdefaulters.
InitiativessuchasMakeinIndiacampaign,improvingtheeaseofdoingbusinessinIndiaandStartupIndia,StandupIndiawillfurtherpavethewayforgrowth.Additionally,thegovernment’sDigitalIndiainitiativeandopeningofbankaccountsformassesviaJanDhanYojnahavebeenawelcomechange.
Thegovernmenthasstartedseveraldevelopmentschemes,which,inthelongerrun,willmakethecountrystrongerandmorestable.Inadditiontothis,thepropertymarket,whichwaslargelyconsideredfragmentedandunorganised,isnowregulatedbytheenactmentoftheRealEstateRegulationAct(popularlyknownasRERA).AllthestateshadtoimplementtherulesundertheRERAby01May2017tomaketheregulationarealityacrossthecountry.Thishasbeensupplementedbyinsolvencyandbankruptcylaws,amendmentintheBenami(aterminHindulawwhichmeans‘made,held,done,ortransactedinthenameofanotherperson’)TransactionsAct,arbitrationandconciliationlaws,andcorporategovernancelaws.
Whilethecountryisnowworkingtowardsthedevelopmentof100smartcities,spreadingfinancialinclusiontoallwillempoweralargesectionofthepopulation.
However,thebiggestmovebythegovernmentisitsenactmentofalegislationtointroduceanationalvalue-addedtax(namedGoodsandServicesTax)witheffectfromJuly2017,replacingthecurrentmultitudeofcentral,stateandlocallevies.TheGSTregime will create a much more integrated and productive economyinthelongerrun.Sofarthereisa50percentriseinthenumberofindirecttaxpayerssincetheintroductionofGST.
Aftertwoquarters,theIndianeconomyissettoshine.TheEconomicSurvey2017-18broughtoutbythegovernmentinJanuary2018forecastsagrowthrateof7to7.5percentfor2018-19.
TheInternationalMonetaryFund(IMF)alsoexpectsIndia’sGDPtogrowmorethan7percentthisyear,makingIndiatheworld’sfastest-growinglargeeconomy.Amidstslowingglobalgrowth,Indiaremainsabrightspotamongemergingeconomies.TheforecastbyIMFfactorsinthewaveofreformsthatthecountryiswitnessing.AscorroboratedbytheWorldEconomicForum’s(WEF)GlobalCompetitivenessIndexfor2017-18,Indiaranked40thonimprovingbusinessenvironmentandinnovation.Followingthecentre’smove,statestooareeyeing significant share of foreign investments demonstrating bothcooperativeandcompetitivefederalism.AllofthistrulyispoisedtounlockthepotentialforgrowthinIndiaandbuildamorevibranteconomy,andweatGrantThorntoninIndiaareallsettogrowingtogetherwithIndia.Wehopethisguidewill support your growth plans of either setting up base or expandinginIndia.Welookforwardtobeingyourgrowthadvisersinthelandofemergingopportunities.
This guide is intended to serve as a primer for companies planningtoentertheIndianmarkettotapsignificantopportunitiesinvarioussectors.Itaimstoprovidebusinessinformationonthecountry’slegal,accountingandtaxationframework.
6 Doing Business in India
Country profile
India has emerged as a key investment destination globally. The U.S. Department of Commerce has identified India as one of the world’s top 10 ‘big emerging markets’.
According to the World Investment Report 2017 published by the UNCTAD, India continues to be among the top 10 countries in terms of FDI inflows globally and the fourth in the developing Asian region.
India’s FDI inflow for the period April-December 2017 remained fairly stable at USD 35.94 bn as compared to USD 35.84 bn in the corresponding period April-December 2016.
India’s FDI inflow in 2016-17 was in excess of USD 60 bn, a new all-time high surpassing the inflows of USD 55.6 bn in 2015-16.
Summary OutlinedbelowarekeyfactsandstatisticsthatmakeIndiaafavourable business destination worldwide:• A growing middle class • An abundant supply of raw material• Anextensiverailandroadnetwork• World’slargestworkingpopulationintheagegroupof25-45
years • LargepoolofskilledEnglish-speakingmanpower• Lower labour cost and hence reduced cost of
manufacturing,especiallyincomparisontonon-Asiancountries
• Geographicallocation,whichmakesIndiaclosertomarketsincludingtheMiddleEast,SouthAsiaandEurope
Main ports of entry: Chennai,JawaharLalNehru,Kandla,Kochi,Mormugao,Kolkata,Mumbai,Paradip,Tuticorin,Ennore,VishakhapatnamandNewMangalore1
Major international airports: Chennai,NewDelhi,Mumbai,Hyderabad,Kolkata,Bengaluru,Goa and Thiruvananthapuram
Doing Business in India 7
Geographical locationIndiaformsanaturalsubcontinentwiththeHimalayanmountainrangetothenorth,andtheIndianOcean,theArabianSeaandtheBayofBengaltothesouth,westandeast,respectively.ThecountryisborderedbyPakistanonthenorthwest,China,BhutanandNepalonthenortheast,andBangladeshandMyanmarontheeast.Nearthecountry’ssoutherntip,acrossthePalkStrait,liesSriLanka.
Indiahasalandfrontierofover15,000kilometres,stretchingfromtheHimalayasinthenorthtothePalkStraitsinthesouth,andfromtheArabianSeaintheWesttotheBayofBengalintheeast.Ithasalongcoastlinespanningover7,000kilometres.The climate varies from tropical in the south to temperate in the north.
Population and standard of livingIndia is the second most populated country in the world withapopulationof1.324bn(WorldBank,2016estimates).Accordingtothe2011populationcensus,thereare35citiesinIndiawithapopulationofmorethanamillion,withMumbai,DelhiandKolkatahavingapopulationover10million.Around70percentofthecountry’spopulationresidesinruralandsemi-ruralareas.OneofthemainreasonsthatIndiaisconsideredasanattractive,high-growthmarketisitslargepoolofuntappedanduppermiddleclasspopulation.Also,the standard of living in metropolitan cities of the country is comparabletothebestinotherdevelopingnations.
Asperestimates,250mnpeoplearesettojoinIndia’sworkforceby2030.Withasignificantchunkofpopulationshiftingintotheworkingagegroup,thereisacorrespondingincreaseindisposableincomeandconsumptiondemand.Infact,itisestimatedthatIndiawillhave247,800newmillionairesby2025.
DiversityIndiaisrichinhistory,culture,religionanddiversity.Thereare22officiallyrecognisedlanguagesspokeninIndiaacrossits29statesand7unionterritories.Indiaissecularthroughitsconstitutionwithpeoplefromallfaithsresidinghere,includingHindus,Muslims,Sikhs,Christians,BuddhistsandJains.
EducationThe education system in India is considered as one of the best globally.Thesystemcomprisespublicandprivateschools,universitiesandotherinstitutionsforhigherlearning(MBA,PhD,MScetc.).Theseinstitutionsarecommittedtoimpartexcellentacademicandvocationaltraining,andencourageparticipationinsportsandotherextra-curricularactivities.ThecurrentliteracyrateinIndiastandsat74.04percent.The country offers quality education comparable to global standardsinthefieldsoffinance,consulting,literature,computerengineering&programming,science&technology,medicine,dentistryandbusinessmanagementandadministration.TheIndianInstitutesofTechnology(IITs)andIndianInstitutesofManagement(IIMs)arerecognisedworld-overaspremierhighereducationalinstitutions.
CurrencyTheIndianRupee(INR)istheofficialcurrencyoftheRepublicofIndia.TheReserveBankofIndia(RBI)isthenationalandsolecurrency-issuingauthorityinthecountry.Theexchangerateoftherupeeismainlymarketdetermined.TheRBItakesakeeninterestinthefinancialmarketsofthecountryandothercountriesgloballytodeterminesuitablemonetary,regulatoryandothermeasures.ThecurrentRBIreferencerateforINRtoUSD1is66.76(04May2018).
Key economic statisticsIndia’s economic policies are designed to attract significant capitalinflowsinthecountryonasustainedbasis,andencouragetechnologicalcollaborationwithforeignfirms.Policyinitiativestakenoverthepastfewyearshaveresultedin significant inflow of foreign investment in all areas of the economy,exceptthepublicsector.
Sources: WorldBank,indexmundi.com,Ministryofcommerceandindustry,PIB,India
1MinistryofShipping:http://shipping.gov.in/writereaddata/l892s/27963559-Perspectiveplans.pdf
India is a union of states with a parliamentary system of government Statistics (2016)
Population 1.324bn
Area 3.29mnsquarekilometres
GDP(current) USD2,263.79bn
GDP – per capita USD1,709.39
Exports(April2017-March2018) USD302.84bn
Imports(April2017-March2018) USD459.67bn
Literacy rate 74.04%(Census2011)
Life expectancy 68.35years
Urbanpopulation 33%
Local currency Indianrupee(INR)
8 Doing Business in India
Key economic indicators of IndiaGDP and key fiscal indicators• Atarateof7.1percent,Indiawasoneofthefastestgrowing
largeeconomiesgloballyin2016-17.Thegrowthhasbeensupportedbythecontributionofkeysectorsincludingagriculture,manufacturingandfinancialservices.However,falteringprivateinvestment,weakcapitalgoodsgrowthandlowerexportswereaconcern.TheGDPgrewby7.4percentand7.6percentin2014-15and2015-16,respectively.
• AccordingtoFirstAdvanceEstimatesprovidedbyCSO,thegrowthinGDPduring2017-18isestimatedat6.5percentascomparedtothegrowthrateof7.1percentin2016-17.
• ThefiscaldeficitofthecountryuptoFebruary2018stoodatUSD109.87bn.In2016-17,thefiscaldeficitofthecountrystoodatUSD82.14bn.
• TherevenuedeficitofthecountryuptoFebruary2018stoodatUSD80.50bn.
External factor and per capita national income• Exportsduring2017-18wereatUSD302.84bn,registeringa
growthof9.78percentascomparedto2016-17.• India is the third largest economy in the world in terms of
purchasingpowerparity(Source:InternationalMonetaryFund).• Importsduring2017-18wereatUSD459.67bnregisteringa
growthof19.59percentascomparedto2016-17.• AccordingtoFirstAdvanceEstimatesprovidedbytheCSO,in
realterm(at2011-12prices)during2017-18,thepercapitaincomeislikelytoattainalevelofINR86,660ascomparedtoINR82,269fortheyear2016-17.Thegrowthrateinpercapitaincomeisestimatedat5.3percentduring2017-18,asagainst5.7percentinthepreviousyear.
Growth rates in GDP at factor cost
Source:CSO
7.1%GDP growth in2016-17
19.59%increase in imports in2018
6.9%
7.4%
7.6%
7.1%
0.0% 2.0% 4.0% 6.0% 8.0%
2013-14
2014-15
2015-16
2016-17
Doing Business in India 9
Money and credit• AsrecordedinFebruary2018,thegrossbankcreditforFY
2017-18stoodatINR73,737bn(USD1,131.98bn).(Source:RBI)
• ThegrossfixedcapitalformationaveragedUSD82.14bnduringtheperiod2001-17.Inthefourthquarterof2017,itreachedanall-timehighofINR10,519.30bn(USD161.49bn).(Source:MinistryofStatisticsandProgrammeImplementation)
• India’scurrentaccountdeficitstoodat2percentoftheGDPinthethirdquarterof2017-18ascomparedto1.4percentoftheGDPinthesameperiodayearago.(Source:RBI)
• ExternaldebtinIndiaincreasedtoUSD485.8bninthefirstquarteroftheyear2017-18,recordinganincreaseofUSD13.96bnoveritslevelatend-March2017.(Source:RBI)
• IndianforeignreservetouchedUSD424.36bnason30March2018.TheForeignCurrencyAssets(FCAs),whichformamajorityofthecountry’sforeignexchangereserves,stoodatUSD399.12bn,whilegoldreservesstoodatUSD21.61bn.(Source:RBI)
• Indiabecametheninthlargest(accordingtoWorldInvestmentReport,2017)recipientofFDIin2016intheworld,grossingUSD55.46bnfollowingaseriesofreformsbythegovernment,ascomparedtoUSD44bnin2015.(Source:WorldInvestmentReport2016bytheUnitedNationsConferenceforTradeandDevelopment)
• PMModi’sdemonetisationdrivecontinuestopushelectronictransactions.Goingforward,thiswillalsospurthegrowthoffintechcompanies.
Source:OfficeoftheEconomicAdvisor,GovernmentofIndia;DepartmentOfIndustrialPolicy&Promotion(DIPP)
9thlargest recipient ofFDIin2016globally
112.5
113.9
109.7
111.6116
160.0
165.0
170.0
175.0
180.0
185.0
190.0
2013-14 2014-15 2015-16 2016-17 Mar-18
Wholesale Price Index: Base year 2011-12 Key fiscal indicators (per cent of GDP)
4.7
4.13.9
3.5
3.23.12.9 2.8
2.11.9
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
2013-14 2014-15 2015-16 2016-17 (RE) 2017-18 (BE)
Key fiscal indicators (per cent of GDP)
Series 1 Series 2
Doing Business in India 11
Key sectors: An overview
Thegovernment’sMakeinIndiacampaignhasputmanufacturingattheforefront.Thesectorencompassesanumberofsub-sectorssuchasmetalsandmining,industrialmanufacturing,chemicals,engineering,telecomandautomotive,amongothers.Itisexpectedthatmanufacturingwillcontributesignificantlytothecountry’sgrowthinthecomingdecade.
India is the seventh largest producer of automobiles in the worldandthefourthlargestmarketbyvolume.Thesectorcontributes7.1percenttotheGDPandemploys19mnpeople.Around31percentofsmallcarssoldgloballyaremanufacturedinIndia.Indiaistheworld’slargestmotorcyclemanufacturer.Thetwo-wheelerssegmentcontributes81per
centmarketshareandleadsthemarketonaccountofhugedomesticdemandfromtheyouthandthemiddleclassbuyer.Thus,theautomotivesectoranditsmanufacturingremainsastrongsectorofgrowthforthecountry.
India is also a prominent auto exporter and fifth largest manufacturer of commercial vehicles and the second largest manufactureroftwo-wheelersworldwide.Theexpandingeconomic activity has started to have an impact on the commercialvehiclesegment.Itisexpectedtoregisteradouble-digitgrowthinthenextoneyear.SomeofthekeyforeignplayersareSuzuki,Honda,Nissan,Piaggio,Volkswagen,Renault,Hyundai,GeneralMotors,BMW,FordandToyota.
TheoverallIndianhealthcaremarketiswortharoundUSD100bnandisexpectedtogrowtoUSD280bnby2020,ataCAGRof22.9percent.Healthcaredelivery,whichincludeshospitals,nursinghomesanddiagnosticscentres,andpharmaceuticals,constitutes65percentoftheoverallmarket.ThehealthcareInformationTechnology(IT)market,whichisvaluedatUSD1bncurrently,isexpectedtogrow1.5timesby2020.
TheIndianmedicaltourismindustry,currentlypeggedatUSD3bnperannum,withtouristarrivalsestimatedat230,000,isexpectedtoreachUSD6bnby2018,withthenumberofmedicaltouristssettodoubleoverthenextfouryears.HospitalsanddiagnosticcentresattractedFDIworthUSD3.59bnbetweenApril2000andMarch2016,accordingto data released by the Department of Industrial Policy & Promotion(DIPP).India’suniversalhealthplanthataimstoofferguaranteed benefits to a sixth of the world’s population will cost anestimatedINR1.6tn(USD23.72bn)overthenextfouryears.
TheIndianpharmaceuticalindustryisestimatedtobeUSD30bn,growingataCAGRof16.5percentduringthelastfiveyears(FY2011-16).Indiacontinuestobeamongthelargest producers and exporters of generic drug formulations intheworld,accountingforaround20percentoftotalglobalgenericdrugexports.However,exports,particularlytoregulatedmarkets,havebeenaffectedonaccountofthecontinualUSFDAalertsonIndianmanufacturingstandardsand
facilitiesandtheUSaloneaccountsforabout40percentofIndia’sdrugexports.Theextensionofpricingcontrolonmoreand more essential drugs is also discouraging multinational companiesfromintroducingpatenteddrugsinIndia.However,effortsarebeingtakentopromotelocalmanufacturingandreducing dependence on imports of API from China through thenewbulkdrugpolicytobeinitiated,andthestrongMakeinIndiapushinthesector.
ThemedicaltechnologysectorwasvaluedatUSD6.3bnin2013atendconsumerpricesandisgrowingat10-12percentperyear.Currently,theIndianmedicaldevicesindustryrepresentsjustover1.3percentoftheglobalmedicaldevicemarket.TheIndianmedicaldevicesindustryconsistsofsmallandmediumcompaniesprimarilyfocusingtheirR&Deffortsand manufacturing capabilities on affordable medical devices such as disposables and medical suppliers – which come underlowpriced,highvolumemarketsegments.Requirementsofhighendmedicalequipment–nearly75percent−aremetbyimports.Thecountry’sMakeInIndiainitiativeisbeingimplementedthrougha‘policypush’toencouragelocalmanufacturing and shift from an import dependent to an export-orientedmarket.TheimplementationoftheMedicalDevicesBill2016,alongoutstandinginitiativewhichattemptsto carve out the medical technology sector from pharma will be agamechanger.
Manufacturing and automotive
Healthcare
12 Doing Business in India
India is the world’s largest sourcing destination for the IT industry,accountingforapproximately67percentoftheUSD124-130bnmarket.Theindustryhasaworkforceofabout10mn.Moreimportantly,theindustryhasledtheeconomictransformation of the country and altered the perception of Indiaintheglobaleconomy.TheITindustryhasalsocreatedsignificantdemandintheIndianeducationsector,especiallyforengineeringandcomputerscience.
TheIndianITandITeSindustryisdividedintofourmajorsegments−ITservices,BusinessProcessManagement(BPM),softwareproductsandengineeringservices,andhardware.TheIndianITsectorisexpectedtogrowatarateof12-14percentforFY2016-17inconstantcurrencyterms.ThesectorisalsoexpectedtotripleitscurrentannualrevenuetoreachUSD350bnbyFY2025.
TheIndianM&Eindustryisasunrisesectorfortheeconomyandismakinghighgrowthstrides.ThissectorisexpectedtogrowataCompoundAnnualGrowthRate(CAGR)of14.3percenttotouchINR2.26tn(USD33.7bn)by2020,whilerevenuesfromadvertisingareexpectedtogrowat15.9percenttoINR994bn(USD15.5bn).Indiaisoneofthehighestspendingandfastestgrowingadvertisingmarketsglobally.Thecountry’sexpenditureonadvertisinggrewmorethan12percentin2016,andacceleratedfurtherin2017,ontheback
ofpopularsportingeventsliketheT20WorldCup,theIndianPremierLeague(IPL)andthemediablitzonstateelections.Thetelevisionsegment,whichcontinuestogetthehighestshareofspending,isexpectedtogrowby12.5percentin2017,ledbyincreasedspendingbypackagedconsumergoodsbrandsande-commercecompanies.
ThegovernmentofIndiahassupportedtheM&Eindustry’sgrowth through various initiatives such as digitising the cable distributionsectortoattractgreaterinstitutionalfunding,increasingFDIlimitfrom74percentto100percentincableandDTHsatelliteplatforms,andgrantingindustrystatustothefilmindustryforeasyaccesstoinstitutionalfinance.Also,thegovernment launched the Digital India programme to provide several government services to the people using IT and to integratethegovernmentdepartmentsandthepeopleofIndia.TheadoptionofkeytechnologiesacrosssectorsspurredbytheDigital India Initiative could help boost India’s Gross Domestic Product(GDP)byUSD550bntoUSD1trillionby2025.Thegovernment’sDigitalIndiaandMakeinIndiainitiativesdominatedtheIndianITindustryin2015andalsoboostedthestart-uprevolutioninthecountry.
The Indian retail and consumer industry is broadly segregatedintourbanandruralmarkets,attractingplayersfromacrosstheworld.Thesectorgrewatanannualrateof5.7percentbetween2005and2015.AnnualgrowthintheIndianconsumptionmarketisestimatedtobe6.7percentduring2015to2020and7.1percentduring2021to2025.Themaximumconsumerspendingislikelytooccurinthefood,housing,consumerdurables,andtransportandcommunicationsectors.Indiawillbeaninterestingarenainthenextfewyearsforglobalretailers.Withnewlargeformatmallsprovidinganchorspacetomanyinternationalfashionretailers,theconsumerwillbenefitfromaplethoraofchoices.Further,the current and expected real estate correction along with
economicreformssuchasGSTandinfrastructuredevelopmentschemes will also offer the brands an added incentive to stay investedinIndia.
TheGovernmentofIndiahasallowed100percentFDIunderthe automatic route in online retail of goods and services throughthemarketplacemodel,therebyprovidingclarityontheexistingbusinessesofe-commercecompaniesoperatinginIndia.Manystategovernments,corporateandeducationalorganisationsareworkingtowardsprovidingtrainingandeducationtocreateaskilledworkforceof500millionpeopleby2022.UnionCabinetreformslikeimplementationoftheGSTandSeventhPayCommissionareexpectedtogiveaboosttotheconsumerdurablesectorinIndiaduringFY2017-18.
Technology, Media and Entertainment (M&E)
Consumer products
Doing Business in India 13
Housingisoneofthebasicneedsofthepopulation.Thesectornot only employs the second most number of people directly andindirectlyinthecountry,butalsosupportsaround250ancillaryindustries.Thesectorcontributesmorethan6percenttothecountry’sGDP.However,thereisahugedemand-supply gap in the housing segment with a projected need of around18mnaffordablehousingunits.Andovertheyears,thesectorhasremainedlargelyunorganised,whichhassignificantlyimpactedtheperceptionofthesector.Withinthelastcoupleofyears,thegovernmenthasinitiatedvariousreforms−‘Housingforallby2022’scheme,creationof100
smartcities,relaxationsinFDInormstoattractinvestments&REITsregime.Apartfromthis,governmenthasfinallybeenabletoenactRERAandawardinfrastructurestatustoaffordablehousingsegment.
The plethora of these reforms not only have the ability to change the landscape of the sector in terms of bringing in muchneededtransparencyandaccountability,butalsoattract significant amount of investments for the sector – both overseas&domestic.
DemonetisationdrivebytheIndiangovernmentin2016,aimedatdrivingthecountrytowardsacashlesseconomy,isreflectiveoftherapidlychangingscenariointhecountry.This,alongwithmanymorepolicychangesandreforms,providesfinancialservicesafirmstanding.WhilethereareconcernsrelatedtohighlevelsofNon-PerformingAssets(NPAs)withbanksandotherfinancialinstitutions,thereisasilverlining.RBI,alongwiththegovernment,hastakenanumberofinitiativesforenhancing the accessibility and financial inclusion of all in the country.BankaccountpenetrationinIndiaincreasedfrom35percentin2011to53percentin2014.WithinitiativessuchasJanDhanYojana,thenumberofunbankedpopulationwithoutanybankaccountsinIndiacamedowncomedown
toaround233mnbytheendof2015,reflectingadropof58percentoverthelastfouryears.Asrecordedin2015,Indiahadatotalof1,440mndepositbankaccountsand1,170mnsavingbankaccountsin2015.Thecountryalsohasaround144mnofborroweraccounts.Withrisinglevelsofdigitisationandtechnologyadoption,thefinancialservicessectorisexpectedtodeepenitspenetrationandreachinthecountry.Consequently,theIndianbankingindustryhasthepotentialtobecomefifthlargestbytheendofFY2020andthefifthlargestbytheendofFY2025.
Real estate and construction
Financial services
14 Doing Business in India
Indiaisthelargestdemocracyintheworld.Itisestimatedthatthecountrytodayhasmorethan200politicalparties.Onefeature of the political parties in India is the dominant role playedbytheirleaders.Therearebothnationalandregionalparties,oneofwhichistheIndianNationalCongress(INC)whichhasbeenledmainlybytheNehru-Gandhifamilysincetheindependenceofthecountry.Tocompeteonanationallevel,manypoliticalpartiesformalliances.ThetwomainalliancesinthecountryareNationalDemocraticAlliance(NDA),acoalitionledbytheBharatiyaJanataParty(BJP),andUnitedProgressiveAlliance(UPA),acoalitionledbytheINC.
Structure of the governmentIndiaisthelargestmulti-partydemocracyintheworld.Itis a sovereign socialist secular democratic republic with a parliamentarysystemofgovernment,andaconstitution.TheConstitution of India provides for a parliamentary form of governmentwhich,althoughhascertainunitaryfeatures,isfederalinstructure.ThecounciloftheParliamentoftheUnionconsistsoftwolegislativehouses−theRajyaSabha(UpperHouse),whichrepresentsthestatesoftheIndianfederation,andtheLokSabha(LowerHouse),whichrepresentsthepeopleofIndiaasawhole.Atpresent,thecountryisaunionof29statesandsevenUnionTerritories(UTs).Eachstateisgovernedby a government comprising elected representatives of the public.
The central and state governments comprise a council of ministersheadedbyaPrimeMinisterandaChiefMinister,respectively.TheheadofthestateisthePresidentofIndia,whiletheheadofthegovernmentisthePrimeMinister.ThePrimeMinisterandtheChiefMinisterareusuallytheheadsofthepoliticalpartiesthatareelectedbythepeople.TheyhavesupportofallthemajoritymembersintheParliament.Electionsforthestate,centreandUTsareheldaftereveryfiveyears.
NewDelhiisthenationalcapitalofIndia.TheseatofthecentralgovernmentisNewDelhi.AlltheotherStategovernmentshaveprimaryresponsibilityformatterssuchaslawandorder,education,healthandagriculture.Currently,ShriNarendraModiisthePrimeMinisterofIndia.IndiaisamemberofmajorinternationalorganisationsincludingSouthAsianAssociationforRegionalCooperation(SAARC),Brazil,Russia,India,ChinaandSouthAfrica(BRICS),andtheCommonwealthofNations,amongothers.
Judiciary and lawIndiahasawell-established,independentjudicialsystem.TheSupremeCourtofIndiaisbasedinNewDelhi.Ineachstate,thereisaHighCourtinitscapitalcity.Thestatesalsohaveseveraldistrictcourts.
IndiaderivesmostofitsjudicialframeworkfromtheEnglishlegalsystem.ThemaingoaloftheIndianlawistoprotectthepromotionofbusinessentities,provideahealthyindustrialandsocialenvironmentandensurerobustlabourprotection.Till1991,manytradebarrierswereinplacesoastopromotethelocalindustry,butsince1991manybarriershavebeenliftedtopromotetheinfluxofforeigninvestorsinthecountry.
Political and legal system
Source:GrantThorntonDealTracker
Introduction
Doing Business in India 15
Foreign investment
IntroductionForeigninvestorskeentosetupoperationsinIndiaarerequiredtocomply,interalia,withtheforeignexchangecontrollawsofthecountry,particularlytheconsolidatedFDIPolicy,issuedbythegovernmentofIndiafromtimetotime.Accordingly,theCompaniesAct2013,ForeignExchangeManagementAct,1999(FEMA)andtheregulationsthereundergovernthesetting-upofincorporatedentities(jointventuresorwholly-ownedsubsidiaries)andofunincorporatedentities(branch,liaisonorprojectoffices).
FDI policyIn recognition of the important role played by FDI in acceleratingtheeconomicgrowthofthecountry,thegovernment initiated a slew of economic and financial reforms in1991.Indiaisnowusheringinthesecondgenerationreformsaimed at furthering the integration of the Indian economy with theglobaleconomy.
FDIisallowedinmostsectors,includingtheservicessector,throughthe‘automaticroute’withoutrequiringanyprior
governmentapproval.Ontheotherhand,inafewsectors,the existing and notified sectoral policy does not permit FDI beyondaceilingoritissubjecttocertainspecifiedconditions.
FDI can be brought in after obtaining an approval from the government.TheapprovingauthorityusedtobetheFIPBwhichusedtofunctionundertheMinistryofFinance.ThegovernmenthasabolishedFIPBwitheffectfromMay2017.Newproposalsfor FDI under approval route are now directly handled by the concernedministries.Towardsthisend,theDIPPhasissuedthe‘StandardOperatingProcedures’(SOP)forprocessingFDIproposals.ThisSOPclearlylaysdowntheproceduretosubmittheonlineapplicationthroughtheFIPBportal(nowknownastheForeignInvestmentFacilitationPortal).
The table below gives an indicative summary of the sectoral FDI policy:
FDI policy parameter Sectors
Automatic route FDIupto100percentpermittedundertheautomaticrouteinmostservices,manufacturing,infrastructuresectorandservices,B2Btrading,SingleBrandRetailTrading(SBRT)
Approval route FDIintheseactivitiesispermittedonlywithpriorgovernmentapproval,e.g.,non-operatingholdingcompanies,broadcastingcontentservices(FMradio)andprintmedia(newspaperandperiodicals)
Sectoralcapsand FDIlinkedconditions
FDIincertainsectorsissubjecttosectoralcapssuchasinsurance(49percent),defenceindustrysubjecttoindustrialLicense(49percent),multibrandretailtrading(51percent)andairlines(49percent)
Further,FDIincertainsectorsissubjecttospecifiedconditions−wholesaletrading,singlebrandretailtrading,e-commerce,constructiondevelopment−townships,housingandbuilt-upinfrastructureetc.
FDIlinkedconditions
FDIinthesesectorsissubjecttospecifiedconditions−floriculture,horticulture,apicultureandcultivationofvegetablesandmushroomsundercontrolledconditions,wholesaletrading,singlebrandretailtrading,e-commerce,constructiondevelopment−townships,housingandbuilt-upinfrastructure,printmediaandasset reconstruction companies
16 Doing Business in India
FDI is not permitted in the following sectors:• Lotterybusinessincludinggovernment/privatelottery,online
lotteries,etc.• Gamblingandbettingincludingcasinos,etc.• Agriculture(excludingplantations−tea/coffee/rubber/
cardamom/palmoiltree/oliveoiltree)• Activities/sectorsnotopentoprivatesectorinvestment,e.g.,
atomicenergyandrailways(exceptmassrapidtransportsystems)
• Business of chit fund• Nidhicompany• TradinginTransferableDevelopmentRights(TDRs)• Realestatebusiness,orconstructionoffarmhouses(subject
tocertainexceptions)• Manufacturingofcigars,cheroots,cigarillosandcigarettes,
tobacco or tobacco substitutesForeign technology collaboration in any form including licensingforfranchise,trademark,brandnameandmanagementcontractisalsoprohibitedforlotterybusiness,gamblingandbettingactivities.
TomakeIndiaanattractivedestinationforforeigninvestors,theFDIpolicyallowsrepatriationofallprofits,dividends,royalty,andknow-howpayments,freely.
Exchange controlsFEMAreplacedtheForeignExchangeRegulationAct,1973tofacilitateexternaltradeandpayments,andtopromoteorderlydevelopmentandmaintenanceoftheforeignexchangemarketinIndia.
Asperthecurrentforeignexchangecontrolregulations,transactions are divided into current account and capital accounttransactions.Capitalaccounttransactionrefertosuchatransactionwhichalterstheassetsorliabilities,includingcontingentliabilities,outsideIndia,ofapersonresidentinIndia,orassetsorliabilitiesinIndiaofapersonresidentoutsideIndia.Thus,investmentbyabodycorporateoran entity in India and investment therein by a person resident outsideIndiaarecapitalaccounttransactions.
Currentaccounttransactions,ontheotherhand,aretransactionsotherthancapitalaccounttransactions.Suchtransactionscomprise,forinstance,paymentsdueinconnectionwithforeigntrade,othercurrentbusinessservices,
andshort-termbankingandcreditfacilities,intheordinarycourseofbusiness.Broadlyspeaking,currentaccounttransactionsarepermitted,unlessspecificallybarred,andcapitalaccounttransactionsareprohibited,unlessspecificallypermitted.
Capital instrumentsFEMA,readwithrelevantregulationsgoverningFDI,provide,interalia,thatIndiancompaniescanissueequityshares,fullyandmandatorilyconvertibledebentures,fullyandmandatorilyconvertiblepreferencesharesandwarrants(issuedinaccordancewiththeregulationsissuedbySEBI),subjecttothepricingguidelines/valuationnormsandreportingrequirements,toforeigninvestorssubjecttocertainprescribedrequirements.The FDI policy allows optionality clauses in equity shares and compulsorilyandmandatorilyconvertiblepreferenceshares/debenturesissuedtonon-residentinvestorsundertheFDIschemesubjecttocertainconditions.Thepolicyprovidesthatshareswithcall/putoptionsmaybeissuedtonon-residentinvestorsprovidedthenon-residentinvestorisnotguaranteedanyassuredexitpriceatthetimeofmakingtheinvestment.
Generalpermissionisalsoavailableforissuingshares/preferencesharesagainstlumpsumtechnicalknow-howfee,royaltydueforpayment,subjecttoentryroute,sectoralcapandpricingguidelines,andcompliancewithapplicabletaxlaws.Recently,thegovernmentalsoallowedcompaniestoissueequity shares against any other funds payable by the investee company(subjecttobonafidesbeingsatisfiedregardinglegitimacyofdues),remittanceofwhichdoesnotrequirepriorpermissionofthegovernmentorRBIunderFEMAoranyrules/regulationsframedordirectionsissuedthereunder.
Foreign currency loansIntermsoftheFEMAandtherelevantregulationsgoverningExternalCommercialBorrowings(ECBs),IndiancompaniesoperatingincertainspecificsectorsarepermittedtoavailECBfromcertaincategoriesofnon-residentlenderswithaspecifiedminimumaveragematurityperiodforspecifiedenduser,under the general permission or specific permission route as applicable.Importantly,optionallyconvertibleandredeemableinstrumentslikeredeemablepreferenceshares,optionallyconvertible shares and debentures also need to comply with theECBregulations.
Doing Business in India 17
Atpresentthereisathree-tracksystemunderwhichIndiancorporatescanavailECBsfromoverseas.Thefollowingtabledepictsthekeyparametersunderthethreetracks:
Parameter Track I (short-medium term foreign currency ECB)
Track II (long-term foreign currency ECB)
Track III (INR denominated)
Minimumaveragematurity Minimumaveragematurityof3/5years
Minimumaveragematurityof10years
INRdenominatedECBwithminimumaveragematurityof3/5years
Recognisedlenders Internationalbanks,internationalcapitalmarkets,foreignequityholders,longtermlenders,suppliersofequipmentetc.
SameasTrackIexceptoverseasbranches/subsidiariesofIndianbanks.
SameasTrackII
Permitted end uses Capital expenditures such as importofcapitalgoods,localsourcingofcapitalgoods,newprojects,expansionormodernisation
All purposes excluding real estate activities,investmentincapitalmarkets,onlending,purchaseofland,etc.
SameasTrackII
Eligibleborrowers Manufacturingcompanies,softwaredevelopmentsector,infrastructuresector,SEZunits,coreinvestmentcompanies,holdingcompanies,infra-relatedNon-BankingFinancialCompanies(NBFCs),etc.
TrackIentities,REITSandInfrastructure Investment Trusts (InvITS)
TrackIIentitiesandallNBFCs,companies engaged in miscellaneous services such asresearchanddevelopment,training and logistics services and not-for-profitentities
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Import/export controls Overtheyears,Indiantradepolicyhasundergonefundamentalshiftstocorrectthepreviousanti-importbias,throughthewithdrawalofquantitativerestrictions,reductionandrationalisationoftariffs,liberalisationinthetradeandpaymentsregime,improvementinaccesstoexportincentives,andestablishmentofarealisticandmarket-basedexchangerate.
ExportandimportofgoodsandservicesfromIndiaareallowedunderFEMA,readwiththeForeignExchangeManagement(CurrentAccount)Rulesasamendedfromtimetotime.The said export and import regulations stipulate guidelines pertaining to settlement and payment of export and import transactions,realisationofproceeds,advancereceiptsandpaymentswrittenoffandlimitspermissibleforthem.
The export regulations also set out the obligations for Indian exporters of goods such as submission of certain prescribed declarationsalongwithsupportingdocuments.Whilenoformsareprescribedforexportofservices,neverthelesstheexportproceeds are required to be realised within a stipulated time period(currentlyninemonths).
Similarly,theimportregulationsprovidethemanneranddocumentsrequiredtobefollowedbypersons,firmsandcompaniesformakingpaymentstowardsimportsintoIndia.Further,thesaidregulationsprovidethetimelineswithinwhich remittances against imports should be completed or an approvalbesoughtfromtheAD/RBIpriortotheexpirationoftheduedate.
Overseas direct investmentIndianparties(companyincorporatedinIndiaorabodycreated under an act of Parliament or a partnership firm registeredundertheIndianPartnershipAct1932oraLimitedLiabilityPartnership(LLP)incorporatedundertheLLPAct,2008)areeligibletoundertake‘overseasdirectinvestment’outsideIndiasignifyingalong-terminterestintheforeignentity(jointventureorwhollyownedsubsidiary).
AnIndianpartycanmakeoverseasdirectinvestmentundertheautomatic route in any bonafide activity up to the prescribed limitofitsnetworth(currently400percentofnetworth).Itmaybenotedthatrealestateandbankingbusinessaretheprohibitedsectorsforoverseasdirectinvestment.Overseasinvestment in the financial services sector is subject to specified conditionsincludingasatisfactorytrackrecordoftheinvestingparty,andthepriorapprovaloftheconcernedfinancialregulatorinIndia.
The regulations also prescribe provisions with respect to aspectssuchasissuanceofguarantee,ongoingcomplianceandreportingrequirementsandconditionsfordisinvestment.
Doing Business in India 19
Finance
Introduction
Indian financial services sector
ThefinancialsectorinIndiaisintrinsicallystrong,operationallysundry and exhibits competence and flexibility besides being sensitivetoIndia’seconomicaimsofdevelopingamarketoriented,industriousandviableeconomy.Thesectorcanbebroadly classified into two categories:
The organised sector:Comprisesprivate,publicandforeignownedcommercialandcooperativebanks,whichareknownasscheduledbanks,andinsurancesector.
The conventional sector:Comprisesindividualorfamily-ownedmoneylendersandNBFCs.
The force of liberalisation has transformed the structure of the financialsector.Therehavebeensignificantbankingreformsinthecountrysincetheliberalisationoftheeconomy.Thesereformshaveattractedforeignplayersinthebankingandfinancialsector.
TheRBIpolicyratesheavilyinfluencetheIndianfinancialservices.ThecurrentRBIratesason07March2018arebankrate:6.25percent;reporate:6percent;reversereporate:5.75percent.ThereserveratiosareCRR:4percentandSLR:19.5percent.
The Indian financial sector has the following broad categories:
Sr. No. Categories
1 Commercialandretailbanks
2 WhiteLabelAutomatedTellerMachine(WLA)
3 Paymentbanks/wallets
4 NBFC
5 HousingFinanceCompanies(HFC)
6 MicrofinanceInstitutions(MFIs)
7 Insurance companies
8 Capitalmarkets
9 Pension funds
10 Mutualfunds
11 PrivateequityandVentureCapital(VC)funds
12 AssetReconstructionCompanies(ARCs)
13 REIT/InvITfund
14 Angelorstart-upfund
20 Doing Business in India
ThebankingsectorisdominatedbyscheduledcommercialbankswhichincludePSUbanks,privatebanksandforeignbanks.Commercialbanksdealinalltypesofcommercialbankingbusinessesincludingcashmanagementsystem,AutomatedTellerMachines(ATMs),creditcards,termandworkingcapitalloans,housingandconsumerfinanceandpurchaseandsaleofforeigncurrencies.Manyfinancialinstitutions are becoming dynamic and entering new domains withinbankingsuchashomeloansfinance,carandretailbanking,etc.andhaveseparatedepartmentsforofferinginvestmentandstructuringservices.
In2016,inanendeavourtopromoteacashlesseconomy,thegovernment announced demonetisation of existing currency notesthroughtheRBI.ThedemonetisationprocessisexpectedtohaveapositiveimpactontheIndianeconomy,channelisingidlemoneythroughlegitimatebankingchannels.Hence,growingdepositsinthebanksmayresultinloweringtheinterestrates,furtherdroppingthelendingratesaswell.Thiswouldfurtherhelpinpromotingretailactivitiesintheeconomy.
WLAATMsset-up,ownedandoperatedbynon-bankentitiesarecalledWLAs.TheyprovidebankingservicestothecustomersofbanksinIndiabasedonthecards(debit/credit/prepaid)issuedbybanks.TheUnionCabinethasapproved100percentFDIundertheautomaticroutefornon-bankentitiesthatoperateWLA,subjecttocertainconditionsasprescribed.
Payment banks/walletsPaymentsbanksareanewmodelofbanksconceptualisedbytheRBIforfinancialinclusionbyproviding(i)smallsavingsaccountsand(ii)payments/remittanceservicestomigrantlabourworkforce,lowincomehouseholds,smallbusinesses,otherunorganisedsectorentitiesandotherusers.Theyreachcustomers mainly through the mobile phones rather than conventionalbanks.PaymentsbanksaregovernedbythefinalguidelinesreleasedbytheRBIforpaymentsbankson27November2015.
AirtelhaslaunchedIndia’sfirstlivepaymentsbank.Further,withpaymentsbanksusingsmartphonesandbiometricsystem(AadhaarCardenabledbankaccounts),theuseofcurrencycirculationintheseareastoowilldecreasedrastically.
NBFCsNBFCsarefinancialinstitutionsthatprovidecertaintypesofbankingservices,butdonotholdafullbankinglicence.NBFCsunder their criteria are permitted to offer substitutes to the
bankingservicessuchasloansandcreditfacilities,etc.Theyaregenerallyengagedinnon-fundbasedactivitiesthatkeepthem outside the scope of traditional oversight required under bankingregulations.
TheNBFCsectorinIndiahasundergoneasignificanttransformationoverthepastfewyears,withNBFCloansexpanding16.6percentintheyear,twiceasfastasthe8.8percentcreditgrowthacrossthebankingsectoronanaggregatelevel.
HFCThemandateoftheRBIistopromotehousingfinanceinstitutionstoimprove/strengthenthecreditdeliverynetworkforhousingfinanceinthecountry.HFCsareexpectedtoregulate the housing finance system of the country to prevent the affairs of any housing finance institution being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the housing finance institutions.
The biggest highlight of the government was to bring housing loansofuptoINR5mnunderaffordablehousingandINR2.8mninurbanandINR2.5mninothercentresunderprioritysectorlending.ThedecisionoftheRBItoincreaseLoanToValue(LTV)ratioto90percentforloansuptoINR3mnorlesswasanotherpositivesteptoenableHFCstolendmoretotheLow-andModerate-Income(LMI)group.
MFIThePrimeMinisterofIndiahaslaunchedtheMicroUnitDevelopmentandRefinanceAgency(MUDRA)tofundandpromoteMFIs,whichwouldinturnprovideloanstosmallandvulnerablesectionsofthebusinesscommunity.MFIsare the pivotal overseas organisations in each country that makeindividualmicrocreditloansdirectlytovillagers,microentrepreneurs,impoverishedwomenandpoorfamilies.Asadedicatedcreditdeliverychannelforvastunbanked/under-bankedsegments,NBFC-MFIshavebeenplayingasignificantroleintakingforwardthefinancialinclusionagendaofthegovernmentofIndia.
Insurance companiesTheInsuranceRegulatoryandDevelopmentAuthorityofIndia(IRDA),aspartofitsendeavourtoincreaseinsurancesectorgrowth,hasallowedanewdistributionavenuecalledthe‘pointofsale’person,whowillbeallowedtosellsimplestandardisedinsuranceproductsinthenon-lifeandhealthinsurancesegments,whicharelargelypre-underwritten.Therelaxation
Doing Business in India 21
intheFDIlimitto49percentintheinsurancesectorandpermissionforoffshorereinsurancetoentertheIndianmarketswouldassistIndiabecomethelargestinsurancemarketintheworld.OverfivereinsurancelicenceshavebeengrantedinIndiatopromotethereinsurancebusinessactivities.
ThegrossmarketsizeofIndia’sinsurancesectorisprojectedtotouchUSD350-400bnby2020,withtheIndianinsuranceindustry planning to increase the penetration level in the marketfromthecurrent3.9percentto5percentby2020.
Capital marketsTheIndiancapitalmarketcomprisesequity,debt,foreignexchange,derivativemarketsandfuturesmarketsincommodities.Further,inapotentialmovetoencourageforeigninvestmentintothedebtmarkets,theRBIreleasedadraftcircularon16May2016proposingtoexpandthebasketofpermissibleinstrumentsforForeignPortfolioInvestors(FPI)toincludeunlisteddebtsecuritiesaswell.
AccordingtotheDIPP,thetotalFDIinvestmentsIndiareceivedinFY2016-17wasUSD60.08bn.FPIs’netinvestmentsstoodatUSD8.58bninMarch2017,themaingrowthdriverforFPIsbeingtheequitymarket.
Pension fundsPensionfundsarecreatedbyanemployertomakecontributionsoffundssetasideforaworker’sfuturebenefit.WiththepassagepassageofthePensionFundRegulatoryandDevelopmentAuthority(PFRDA)Act2013,theinvestmentcorpusinIndia’spensionsectorisexpectedtocrossUSD1trillionby2025.Foreigninvestmentinthepensionsectorispermittedupto49percent.
Mutual fundsMutualfundsarepopularinIndia,becausetheyoffertheability to easily invest in increasingly complicated financial markets.Alargepartofthesuccessofmutualfundsistheadvantagestheyofferintermsofdiversification,professionalmanagementandliquidity.
Afterthetighteningofregulation,andwithrisingincomes,IndianowhasseveralfundhouseswithrecordAssetsUnderManagement(AUM)ofoverINR13,000bnatlastcount,andseverallakhunitholders.
Other sources of financePrivate equity and VC fundsInIndia,VCisregulatedbySEBI.Aventurecapitalmaybesetup by a company or a trust after a certificate of registration isgrantedbySEBI.AVCcanraisemoneyfromanyIndianorNon-ResidentIndian(NRI).Recently,SEBIproposedtoenhancetheinvestmentlimitforVentureCapitalFunds(VCFs)from10percentto25percentinoffshoreventurecapitalundertakingswithanIndianconnection.
Overthelastfewyears,Indiahasemergedasthethirdlargestbaseforstart-upsintheworld,aftertheUSandtheUK.Oneofthemostcommonwaysastart-upraisesmoneyforitsseedcapitalandfurtherfundingisbyventurecapital.AlternativeInvestmentFunds(AIF)refertoanyprivatelypooledinvestmentthatmaybefromIndianorforeignsourcesknownas‘privateplacement’.
In2015,theRBInotifiedaregulationwhichallowedforeigninvestmentandsimplifiedtheprocedureforinvestmentinAIFs.ThismovehasbeenapplaudedbytheAIFindustry,whichisrelativelynewinIndia.Withafreshinflowofforeigninvestment,therewillbeacceleratedgrowthindomesticAIFs,whichyieldbetter returns to investors as well as better investments for new andemergingbusinesses,socialventuresandinfrastructure.
ARCsARCshavebeencreatedtobringaboutasystemforrecoveringNPAsfromthebooksofsecuredlendersandunlockingthevalueofNPAs.Tohelptackletheissueofdecliningassetqualityofbanks,100percentFDIisallowedinARCsundertheautomaticroute.
REITs/InvIT fund REITorInVITisanalternatefund-raisingmechanismofferedtocapital-intensiveindustriesforcompaniesthatownincome-producingrealestateorinfrastructure.Assuch,theunitholdersofaREIT/InvITearnashareoftheincomeproducedthroughrealestateinvestment,withoutactuallyhavingtogooutandbuyorfinanceproperty.SEBIrelaxedtherulesforREITandInvITbyallowingthemtoinvestmoreinunder-constructionprojects,rationalisedunitholderconsentonrelatedpartytransactionsandremovedrestrictionsonSpecialPurpose
22 Doing Business in India
Vehicles(SPVs)toinvestinotherSPVsholdingtheassets.
Angel or start-up fund Angel investors are experienced entrepreneurs who have beenthroughthesamephaseandunderstandwhatittakestocreateabigcompanyfromanidea.Therearearound280investorsthatareapartofthisnetwork.Themainsectorsthatprominentlyinvolveangelinvestmentaree-commerce,
informationtechnology,healthcare,agricultureandthemobilesegmentofthetelecommunicationssector.
Doing Business in India 23
Business entities
IntroductionA foreign company has the following business entity options through which it can establish its presence in India:
These forms of business entities are discussed in detail as follows:
Unincorporatedentities • LiaisonOffice(LO)• BranchOffice(BO)• Projectoffice• Partnershipfirm
Incorporated entities • LLP• Limitedcompanypublic/private
LO Aforeigncompany(abodycorporateincorporatedoutsideIndia,includingafirmorotherassociationofindividuals)mayestablishitsLOinIndiabymakinganapplicationtotheAuthorisedDealerBank(ADBank)iftheprincipalbusinessoftheentityresidentoutsideIndiafallsundersectorswhere100percentFDIispermittedintermsoftheFDIpolicy.Incertaincases,theapplicationistobemadetotheRBIandprocessedinconsultationwiththegovernment,forinstance,wheretheapplicantisanNGOandwhentheapplicantisfromcertainspecified countries and setting up the LO in specified states in Indiaetc.
An LO is suitable for a foreign company which wishes to set up a representative office as a first step to explore and understand thebusinessandinvestmentclimateinthecountry.Thisofficeserves as a communication channel between the parent companyoverseasanditspresent/prospectivecustomersinIndia.TheLOcanalsobesetuptoestablishbusinesscontactsorgathermarketintelligencetopromotetheproductsorservicesoftheoverseasparentcompany.TheLOcannotundertakeanybusinessactivityorearnanyincomeinIndia.
BOAforeigncompanymayestablishitsBOinIndiabymakinganapplicationitsADbankinmostcases.TheBOshouldbeengagedintheactivityinwhichtheparententityisengaged,andpermissibleactivitiesforaBOincludeexporting/importinggoods,renderingprofessionalorconsultancyservices,undertakingresearchwork,promotingtechnicalorfinancialcollaborations,representingtheparentcompanyinIndiaandactingasbuying/sellingagentinIndia,renderinginformationtechnologyservicesandrenderingtechnicalsupport.
ABOisnotpermittedtoundertakeanymanufacturingactivityinthecountryexceptwheretheBOisset-upinaspecialeconomiczone.
Project officeA foreign company may open a project office in India without priorapprovalfromtheRBI,providedithassecuredacontractfrom an Indian company to execute a project in India and mettheprescribedconditions.Oncetheprojectexecutioniscompleted,asperthetermsofthecontractsawarded,theprojectofficewouldhavetobecloseddown.
24 Doing Business in India
Partnership firmsUnderthecurrentFDIpolicyandtheForeignExchangeManagementLaw,foreigninvestmentintoIndianpartnershipfirms(otherthanbynon-residentIndiansorpersonsofIndianorigin)requirespriorpermissionfromtheRBI.Apartnershipisanassociationoftwoormorepersonstocarryonasco-ownersofabusinessforprofit.Eachpartnerofapartnershiphasunlimitedliability.
LLPsAnLLPisahybridbetweenapartnershipfirmandacompany.Itisaseparatelegalentity,liabletothefullextentofitsassets,with the liability of the partners being limited to their agreed contributionintheLLP.ForeigninvestmentintoanLLPispermittedundertheautomaticroute(withoutrequiringpriorapproval)inthosesectorsinwhich100percentFDIisallowed.However,itshouldbenotedthatLLPsarenotpermittedtoraiseECBs.
An LLP is governed as per the LLP agreement between the partners,andintheabsenceofsuchagreementtheLLPwouldbegovernedbytheframeworkprovidedintheLimitedLiabilityPartnershipAct,2008.ThisActdescribesthemattersrelatingto mutual rights and duties of partners of the LLP and of the limitedliabilitypartnershipanditspartners.Importantly,theActmakesitmandatorytohavetwodesignatedindividualpartners,atleastoneofwhomshouldberesidinginIndia.
Any existing private company or existing unlisted public company can be converted into LLP by complying with therelevantprovisionsoftheLLPAct,2008.Taxneutralityconditionshavebeenstipulatedforsuchconversion.
Limited companyAlimitedcompanyisanincorporatedentity,whichisaseparatelegalentitydistinctfromitsmembers/shareholders.Asmentionedabove,foreigninvestmentinIndiaisgovernedbytheFDIpolicyofthegovernmentaswellastheForeignExchangeManagementLaw.Asperthecurrentpolicy,allcompaniesin India have to be incorporated under the provisions of the CompaniesAct,2013.
WitheffectfromMay2015,theminimumcapitalrequirementforcompanieshasbeendoneawaywith.
Private company: A minimum of two members and two directors are needed to establish a private company with at leastonedirectorbeingresidentinIndia.
Public company: A public company can be incorporated with minimum three directors and seven members with at least one directorbeingresidentinIndia.
Foreign investors while deciding to set up an entity in India as aprivatevis-à-visapubliccompanyconsiderseveralfactorssuch as:• While a private company can provide for restrictions on
transfer of its shares by inserting suitable clauses in the ArticlesofAssociation,nosuchrestrictionscanbeputontransferofsharesinapubliccompany,whicharefreelytransferable.
• A private company as the name suggests cannot invite publictosubscribeitssecurities.
• The compliances applicable to a private company under theCompaniesAct2013arefewerascomparedtothoseapplicabletoapubliccompany,suchasformationofvariousgovernancecommittees,secretarialaudits,appointment of independent directors and ceilings of managerialremuneration.
Doing Business in India 25
Labour
Employment contractIndia has adopted various measures to regulate the conditions underwhichfixed-termemploymentcontractsarewritten,appliedandinterpreted.LabourisaconcurrenttopicintheIndianConstitution−itissubjecttolegislationfrombothstateandcentralgovernments.TheIndianContractsAct,1872definestheterm‘contract’asanagreementlegallyenforceablebylaw.Theremustbealawfulofferandalawfulacceptancetoresultinanagreement.
Customary working hours and holidaysThenormalworkinghoursinafactoryperdayareeight.TheusualworkinghoursinIndiaare9amto5:30pmor9:30amto6pm.Incaseofcorporates,itissevenhoursperday,sixdaysaweek.Indiansubsidiariesofmultinationalcorporationsusuallyfollowafiveday,eighthourperdayweek.Normally,10daysofcasualleaveand20-30daysofprivilegeleaveisallowedinayear.MayDay,whichisknownastheInternationalWorkersDay,iscelebratedeveryyearon01MayinIndia.
Minimum wageTherearelawsinIndiaforworkersinmostsectorstoreceiveaminimumwage.Itisoneofthemostimportantaspectsofstartinganewlineofworkorrunninganorganisationsuccessfully.ThelawwhichenforcestheemployerstopaythesetminimumwagesinIndiaisknownastheMinimumWagesAct,1948.ThemaingoalofthisActistopreventtheexploitationofaworker.
Work permits for foreign workersAforeignnationalcomingtoIndiatoworkisrequiredtogetanemploymentvisa.Employmentvisasareusuallygrantedforoneyearorthetermoftheemployment/projectcontractandthetimeperiodcanbeextendedonceinIndia.Allforeigners(includingforeignersofIndianorigin)visitingIndiaonlong-termvisas(Student,Medical,ResearchandEmploymentVisaofmorethan180days)arerequiredtogetthemselvesregisteredwiththeForeignersRegionalRegistrationOfficer(FRRO).TheFRROregistrationprocesshasrecentlybeendigitalisedwiththeintroductionofane-FRROportalwithanaimtoprovidefaceless,cashlessandpaperlessservicetoforeignnationals.
PersonsofIndianOrigin(PIOs)whofallwithinacertaincategory,asspecified,whohavemigratedfromIndiaandacquiredcitizenshipofaforeigncountryotherthanPakistanand Bangladesh are eligible to avail the Overseas Citizen of India(OCI)statusaslongastheirhomecountriesallowdualcitizenshipinsomeformortheotherundertheirlocallaws.
Persons registered as OCI do not have the right to vote or the eligibilitytocontestforelectionstopublic/governmentoffices,etc.RegisteredOCIsshallbeentitledtothefollowingbenefits:• Multipleentry,multi-purposelife-longvisatovisitIndia• Exemptionfromreportingtopoliceauthoritiesforanylength
of stay in India• ParitywithNRIsinfinancial,economicandeducational
fields,exceptintheacquisitionofagriculturalorplantationproperties
A person registered as OCI for five years is eligible to apply for Indiancitizenshipifhe/shehasbeenresidinginIndiaforoneyearoutofthefiveyearsbeforemakingtherequest.
Social securitySocialsecurityisvalidonlyforthoseindividualswhoareemployedintheorganisedsector.TheEmployees’StateInsuranceSchemeprovidesmedicalcareandotherbenefitsforemployeesorlabourersearninglessthanUSD300amonth(INR21,000).
TheEmployees’ProvidentFundOrganisation(EPFO)isastatutorybodyundertheMinistryofLabourandEmployment,GovernmentofIndia,whichadministerssocialsecurityregulationsinIndia.Itismandatoryforallemployerswhoemploymorethan20peopletoapplythefundforthebenefitoftheirworkers.Itcoversallthepensionsandthesurvivorbenefitsintheeventofanyemployee’sdeath.Allemployeesarerequiredtocontribute12percentoftheirsalarytoEPFO.(VideFinanceAct,2018,reducedrateof8percentapplicableforwomenemployeesforfirstthreeyearsoftheiremployment).Thisisautomaticallydeductedbytheemployer.Employeesearnatax-freeinterestoncontributionsmadetothefund.EvenforeignorinternationalworkerswhoareemployedinIndiaaresubjecttothetermsofthisfund.Recently,theFinanceMinistryallowedEPFOtoinvest15percentofitscorpusinexchangetradedfunds.
Indiaalsohasasocialsecurityagreement,whichisabilateralagreementbetweentwogovernments.ThisagreementservestoprotecttheinterestsofIndiancitizensworkinginthefollowingcountries:• Australia• Austria• Belgium• CzechRepublic• Canada• Denmark• France
26 Doing Business in India
• Finland• Germany• Hungary• Japan• RepublicofKorea• Luxembourg• Netherlands• Norway• Portugal• SwissConfederation• Sweden
Sickness and pension arrangementsIt is compulsory for an employer to provide medical facilities toitsworkforcebycontributingtowardsEmployees’StateInsuranceSchemeasapplicable.
TheemployercontributestowardsaProvidentFundSchemeand a certain portion of the contribution is appropriated towardsaPensionScheme,whichprovidespensionbenefitstotheemployeesandtheirfamilymembers.Workersarealsoentitled to gratuity on completion of five years of continuous service.However,contributiontowardsaProvidentFundSchemeisnotrequiredifthenumberofemployeesinthatorganisationdoesnotexceed20.
Trade unionsThe trade unions in India are generally divided on political lines.Tradeunionshavestruggledhardtoachieveanadequatemeasureofprotectionagainstexploitation.Thetradeunionsworktoprotecttheinterestoftheworkersanddiscusskeyworkplace-relatedissueswiththemanagementsuchaswagesandbenefits.
ThesixmajorCentralTradeUnions(CTU)inIndiaaretheUnitedTradeUnionCongress(UTUC),BhartiyaMazdoorSangh(BMS),HindMazdoorSang(HMS),AllIndiaTradeUnionCongress(AITUC),CentreofIndianTradeUnions(CITU)andtheIndianNationalTradeUnionCongress(INTUC).Atradeunionwillbe recognised if it functions for more than a year after its registration.Incaseanorganisationhasmorethanoneunion,forittoberecognised,itmusthaveatleast15percentofworkersasitsmembers.
Source:MinistryofLabourandEmployment,MinistryofOverseasIndianAffairs
Doing Business in India 27
Accounting, reporting and audit requirementsSummaryInIndia,accounting,reportingandauditingrequirementsofbusiness entities are primarily governed by the regulations issuedbytheInstituteofCharteredAccountantsofIndia(ICAI),theSecuritiesandExchangeBoardofIndia(SEBI),theMinistryofCorporateAffairs(MCA)andtheCentralBoardofDirectTaxes(CBDT).
The ICAI has issued accounting standards that are applicable toallentitiesengagedincommercial,industrialorbusinessactivities.Thelegalrecognitiontothesestandardshasbeen given by the central government by notification of the standardsundertheCompaniesAct,2013(2013Act).The2013ActisanactoftheParliamentofIndiawhichgovernstheincorporationofacompany,mannerofconductingtheaffairsofacompany,responsibilitiesofitsboardofdirectorsandotherprovisionsincludingwindingup.Italsoprescribesthefinancial reporting and auditing requirements to be followed by all companies including foreign companies as defined in the 2013Act.
ThecompanieslistedonarecognisedstockexchangeinIndiaaregovernedbyrulesandregulationsissuedbytheSEBIfromtimetotime.Inaddition,thereisindustry-specificguidancerelating to financial reporting issued by the relevant authorities suchastheRBI.
Thefollowingsub-sectionsdiscusssomeofthecommonrequirements:
Records to be maintainedEverycompanyshouldfollowaccrualbasisofaccounting.The2013Actrequiresthattherecordscanalsobemaintainedinelectronic mode in the prescribed manner and are required to beretainedforaminimumperiodofeightyears.Further,thecentral government has the power to direct the company to retainthestatutorybooksforlongerperiods,incertaincases.
Preparation of financial statementsEverycompanyisrequiredtopreparebothseparateandconsolidated financial statements on an annual basis in accordancewiththeaccountingframeworkapplicabletothecompany.Further,alistedcompanyisalsorequiredtopublishquarterlyorhalfyearly,asthecasemaybe,interimfinancialinformation,subjectedtoreview,intheformatsprescribedbySEBIwithintheprescribedtimelines.
Contents of financial statementsThe2013Actlaysdowntheformatforpresentationoffinancialstatementsofcompaniesexceptinsurance,bankingandelectricity companies and other classes of companies for which formoffinancialstatementsisspecifiedbythegoverningact.Financialstatementscomprisebalancesheet,statementofprofitandloss,cashflowstatement,astatementofchangesinequity(ifapplicable)andrelatednotes.
ConsolidationThe 2013 Act mandates the preparation of consolidated financial statements if a company has one or more subsidiaries unless the following conditions complied with:• Itisawholly-ownedsubsidiaryorpartiallyownedsubsidiary
ofanothercompanyandallitsothermembers,includingthosenototherwiseentitledtovote,havebeenintimatedinwriting and they do not object to the fact that company is notpresentingconsolidatedfinancialstatements.
• Its securities are neither listed nor in the process of listing on anystockexchange,inIndiaoroutsideIndia.
• Its ultimate or any intermediary holding company files consolidated financial statements with the registrar which are in compliance with the applicable accounting standards.
Audit of financial statementsEverycompanyinIndia,irrespectiveofitssize,musthaveitsfinancial statements audited by a Chartered Accountant in practice(memberoftheICAI).Theauditsarerequiredtobeconducted in accordance with the auditing standards issued by the ICAI and notified by the central government under the 2013Act.Inaddition,theIncome-taxAct,1961mandatesaudits of taxpayers meeting certain specified thresholds to be conductedbyaCharteredAccountantinpractice(memberoftheICAI).
Auditing standardsTheStandardsofAuditingissuedbytheICAIaresubstantiallysimilar to the auditing standards issued by the International AuditingandAssuranceStandardsBoard(IAASB)oftheInternationalFederationofAccountants(IFAC).
Reporting on internal financial controlsIncaseofalistedcompany,directorsarerequiredtolaydowninternal financial controls to be followed by the company and report annually whether such internal financial controls wereadequateandoperatingeffectively.Incaseofother
28 Doing Business in India
companies,directorsarerequiredtoreportwhethersuchinternalfinancialcontrolswereadequate.
Incaseofallcompanies,auditorsarerequiredtoreportwhether internal financial controls over financial reporting in relation to separate and consolidated financial statements wereadequateinoperatingeffectively.
The2013Actdoesnotprescribeaninternalcontrolframeworkforthepurposeofreportingbyauditorsanddirectors.
Mandatory firm rotationToreducetherisksofexcessivelong-termfamiliarity,the2013Act prohibits auditor appointment for a period of more than five consecutiveyears(inthecaseofindividualasanauditor)or10consecutiveyears(inthecaseofanauditfirmasanauditor)bylistedandcertainotherclassofcompanies.Individual/auditfirm as an auditor that has completed the above prescribed period of appointment is eligible for appointment as auditors afteraperiodoffiveyearsfromthecompletionoftheabove-mentionedperiod.
Inspection of recordsThebooksofaccountsandotherrecordsareopentoinspectionbyanydirector,RegistrarofCompaniesandothergovernment authorities such as those involved with excise and salestax.
Accounting yearUnderthe2013Act,companiesarerequiredtoadoptauniformfinancialyearendingon31Marchunlessspecificallypermittedbytheauthorities.Similarly,theaccountingyearmustendon31Marcheveryyearforincome-taxpurposes.
Filing of financial statements/resultsAcompanyisrequiredtoholdanAnnualGeneralMeeting(AGM)withinsixmonthsoftheendofthefinancialyear,andfilingofthefinancialstatementswiththeRegistrarofCompaniesisrequiredwithin30daysoftheAGM.Further,listedcompaniesalsoneedtofiletheaudited(orreviewed,asapplicable)financialresultswiththestockexchangewithin60daysincaseofannualperiodsand45daysincaseofquarterlyperiodsexceptlastquarter.
Language in which business records are required to be maintainedThereisnoprescribedlanguageformaintenanceofbooksandbusinessrecords.ItcanbemaintainedinanyIndianlanguage.CompaniesgenerallymaintaintheiraccountsinEnglish.
Maintenanceofaccountingrecordsinaforeigncurrencyandpresentationoffinancialstatements.
Theaccountingrecords,whetherelectronicormanual,havetobekeptinIndiancurrency.However,theforeigncurrencyamountsmayalsobedisclosed.
Accounting frameworkThe2013Actprescribestwoaccountingframeworks:IndianAccountingStandards(IndAS),whicharebasedonInternationalFinancialReportingStandards(IFRS)asissuedbytheInternationalAccountingStandardsBoardwithcertaincarve-outs,mandatoryforcertainclassofcompanies,andstandardsthataresubstantiallydifferentfromIndAS.Companies are required to determine the relevant accounting frameworkaspertheapplicablelaw.Further,companymayirrevocablyopttoprepareIndAScompliantfinancialstatementsfortheaccountingperiodsbeginningonorafter01April2015.
TheMCAhasnotified39IndAS,whicharebasedonIFRSwithcertaincarve-outs.IndASareapplicabletocompaniesinthemannerspecifiedintheroadmapissuedbytheMCA.ThefollowingistheroadmapformandatoryadoptionofIndASbyallcompaniesotherthaninsurancecompanies,bankingcompaniesandNBFCs:• TheapplicabilityofIndASismademandatoryunderPhase
IforcompanieswhosenetworthisINR5bnormoreforaccountingperiodsbeginningonorafter01April2016,withcomparativesfortheperiodending31March2016orthereafter.
• UnderPhaseII,IndASaremademandatoryforaccountingperiodsbeginningonorafter01April2017,withcomparativesbeginningforperiodending31March2017orthereafterforcompanieshavingnetworthmorethanINR2.5bn,butlessthanINR5bn.
• UnderbothPhaseIandPhaseII,IndASwouldbemandatorily applicable to companies whose equity and debt securities are listed or are in the process of listing on anystockexchangeinIndiaoroutsideIndia,aswellastotheholding,subsidiary,jointventureorassociatecompaniesofthecompaniescoveredabove.
Separateroadmapshavebeenissuedforbanks,insurancecompaniesandNBFCstotransitiontoIndAS;theearliestperiodisaccountingperiodbeginningonorafter01April2018.
ROC filingTheMCArequiresfilingoffinancialstatementswiththe
Doing Business in India 29
RegistrarofCompanies,usingtheeXtensibleBusinessReportingLanguage(XBRL)taxonomy,forthefollowingcompanies:• all companies listed in India and their Indian subsidiaries;• allcompanieshavingapaidupcapitalofINR50mnand
above; and• allcompanieshavingaturnoverofINR1bnandabove.
All the remaining companies are required to fill the prescribed forms.
TheXBRLdocumentsoffinancialstatementsarerequiredtobecertifiedbyaCharteredAccountantorCompanySecretaryorCostAccountantinwholetimepractice.
Income Computation and Disclosure Standards (ICDS)In view of the significant developments in convergence with IFRS,ICDSwerenotifiedundertheIncome-taxAct,whichare,inprinciple,closertotheexistingIndianGAAPthantheIFRS-basedIndAS.Thesestandardsareeffectivefromthecurrentfinancialyear(2016-17)itselfandarerequiredtobefollowedby all taxpayers following the mercantile system of accounting for the purpose of computation of income from business and ‘otherincome’chargeabletotax.
30 Doing Business in India
Direct tax
Income tax is chargeable on taxable income computed in accordancewiththeprovisionsoftheIncome-taxAct,1961(hereinafterreferredtoasthe‘Income-taxAct’).Incomecanbebrought within the tax net under the following heads of income:
1.Income from salary
2.Income from house property
3.Profitsandgainsfrombusinessandprofession(PGBP-businessincome)
4.Capital gains
5.Incomefromothersources(Incomenotspecificallycoveredunderaboveheadsofincomelikeinterestanddividend.)
All taxpayers are required to follow a uniform tax year from 01Aprilto31Marchfortaxpurposes,referredtoas‘previousyear’,irrespectiveofthefinancialyearfollowedforaccountingpurposes.
Indiafollowsamixofsource-basedandresidence-basedtaxation.GlobalincomeofaresidentistaxableinIndia.However,non-residentsaretaxableoncertainIndia-sourcedincome.
Taxation of individualsDependinguponthedurationofphysicalpresenceinIndia,anindividual can be:• ResidentandOrdinarilyResident(ROR)• ResidentandNon-OrdinarilyResident(RNOR)• Non-Resident(NR)
Scopeoftaxationofanindividualisasfollows:• RORsaretaxableontheirworldwideincome• RNORsandNRsaretaxablefortheirIndia-sourcedincome
Thepersonaltaxratesforthefinancialyear2018-19areasfollows:
Income slabs (USD) Income slabs (INR) Rate of tax (%)
UptoUSD3,750* UptoINR250,000 Nil
USD3,750to USD7,500
250,000to500,000 5%oftheamountoftotal income exceeding INR2,50,000
USD7,500to USD15,000
500,000to1,000,000 INR12,500+20%ofthe amount of total incomeexceedingINR500,000
AboveUSD15,000 Above1,000,000 INR112,500+30%ofthe amount of total incomeexceedingINR1,000,000
*Minimumexemptionlimitfor:
Seniorcitizens(age60yearsandabovebutlessthan80years):INR300,000(USD4,500)
Veryseniorcitizens(age80yearsandabove):INR500,000(USD7,500)
*USDratetakenat66.66
Doing Business in India 31
All rates mentioned in this chapter are exclusive of applicable surchargeandHealthandEducationCess.Pleaserefertothesectionon‘Rateofsurchargeandcess’forfurtherdetails.
Taxation of partnership firm (including LLP)Scopeoftaxableincomeofafirmisasfollows:• Resident:Taxedonworldwideincome• Non-resident:Taxedonincome(a)received/deemedtohave
beenreceivedinIndiaor(b)accrued/deemedtohavebeenaccrued in India
A firm is said to be resident in India in every case except where during that year the control and management of its affairs are situatedwhollyoutsideIndia.
Thetaxrateforthefinancialyear2018-19is30percent.
Taxation of companiesScopeoftaxableincomeofacompanyisasfollows:• Resident*:Taxedonworldwideincome• Non-resident:Taxedonincome(a)received/deemedtohave
beenreceivedinIndiaor(b)accrued/deemedtohavebeenaccrued in India
*FromFY2016-17onwards,acompanyshallbearesidentinIndiaifitisanIndiancompanyoritsPlaceofEffectiveManagement(PoEM)isinIndia.PoEMhasbeendefinedtomeanaplacewherekeymanagementandcommercialdecisions that are necessary for the conduct of business of an entityasawholeare,insubstance,made.TheIndianrevenueauthorities have also released guidelines for determination of PoEMofaforeigncompanyinIndia.
Tax rate for domestic company
Thecorporatetaxratesforthefinancialyear2018-19areasfollows:
Sr.No Prescribed conditions Tax rate
(a) Total turnover or the gross receipts in the FY2016-17doesnotexceedINR2,500mn (USD39mn)
25%
(b) Otherthancorporatesfallingunder(a)above 30%
Domesticcompaniessetuponorafter01March2016andengaged solely in manufacture or production have an option to betaxedat25percentsubjecttofulfilmentofcertainspecifiedconditions(Pleaserefertothesectionon‘Taxincentivesformanufacturingcompanies’forfurtherdetails).
Tax rate for foreign company
Thecorporatetaxrateforaforeigncompanyis40percent.
Rate of surcharge and cess
Rate of surcharge
Taxpayer
Net income (USD)
<INR10mn (USD0.15mn)
INR10-100mn(USD0.15mn-1.50mn)
>INR100mn(USD1.50mn)
Domestic company
Nil 7% 12%
Foreign Nil 2% 5%
TaxpayerNet income (INR)
>INR5mn(USD0.075mn) <INR10mn(USD0.15mn)
>10mn(USD0.15mn)
Individuals/Association of Persons (AoP)
10% 15%
Firm/LLP/localauthority
Nil 12%
Rate of Health and Education Cess
AHealthandEducationCess*of4percentisapplicableonalltaxpayersandalllevelsofincome,andiscomputedontheamountoftaxcomputed,inclusiveofsurcharge(whereverapplicable).
*TheFinanceAct,2018hasreplacedtheEducationCess(2%)andSecondaryandHigherEducationCess(1%)applicableuntilFY2017-18withHealthandEducationCessonincome-taxinclusiveofsurcharge(whereverapplicable)calculatedattherateof4percent.
32 Doing Business in India
Minimum Alternate Tax (MAT)/Alternate Minimum Tax (AMT)Indiahasaminimumtaxregime,wherebyMAT/AMTispayablebycorporates/otherpersonsonprofitsasperbooks(subjecttospecifiedadjustments)/adjustedtotalincome,wheretaxpayable on total income under the normal provisions of Income-taxActislessthanMAT/AMT.
Type of taxpayer
Rate of tax (%)
Applicability Credit availability
Company 18.5%ofbookprofits
MATisleviablewhere tax payable on the total income is less than18.5percentofbookprofits.
The excess of MATovernormaltax is treated as credit,whichcanbesetoffinany15subsequentyears against normal tax liability subject to prescribed limitation.
LLP claiming certain specifieddeductions
Persons (otherthancompany andLLP)claiming certain specifieddeductions$
18.5%onadjusted total income
AMTisleviablewhere tax payable on the total income is lessthan18.5per cent of adjusted total income.
The excess of AMTovernormaltax is treated as credit,whichcanbesetoffinany15subsequentyears against normal tax liability subject to prescribed limitation.
$ItisapplicablewhentheadjustedtotalincomeexceedsUSD0.03mn(INR2mn).
MATprovisionsapplytoaforeigncompanyonlyifithasapermanentestablishmentinIndia(inaccordancewiththeprovisionsofrelevanttaxtreaty)orincasewherethereisnotaxtreatyavailable,ifitisrequiredtoseekregistrationunderanylawforthetimebeinginforcerelatingtocompanies.
Taxation of dividendsIncome distributed in the form of dividends by domestic companiesischargeabletoaDividendDistributionTax(DDT).Suchdividendincomeisgenerallyexemptfromtaxinthehandsoftherecipients.DDTisrequiredtobecalculatedonthegrossed-upamount.
*Deductionofdividendsreceivedfromasubsidiaryisallowed,subjecttocertainconditions,forcomputingDDT.However,nocreditofDDTpaidonthedividendreceivedisallowedundertheIndianlaws.Further,DDTisnotataxdeductibleexpense.
Particular Rate of tax (%) Basis for levy
Domestic company paying dividend
15%asDDT Dividendsdeclared,distributed or paid after specifiedadjustments*
Wherearesidentassessee(exceptdomesticcompaniesandspecifiedcharitableinstitutions)receivesaggregatedividendinexcessofINR1mn(USD15,000)fromdomesticcompanies,taxattherateof10percentontheamountofdividendinexcessofINR1mnshallbelevied.
Dividend received from a foreign company is taxable in the hands of Indian shareholders at their effective tax rates.However,inthecaseofdividendsreceivedbyanIndian company from a foreign company in which the Indiancompanyholds26percentormoreequity,taxataconcessionalrateof15percentislevied.However,incomputingdividendincomefromsuchforeigncompany,nodeductionofanyexpenditureisallowed.
Taxation on income distributed by way of buy-back of unlisted sharesTaxisleviedattherateof20percentonthe‘distributedincome’ paid by unlisted companies to their shareholders on buy-backofitsownshares.
‘Distributedincome’iscomputedasthedifferencebetweentheamountpaidasconsiderationforbuyingbacktheunlistedshares and the consideration received by the company at the time of issuing such shares computed in accordance with prescribedrules.Suchtaxwouldbepaidbythecompanywhilebuyingbackitsownshares.
Incomefrombuy-backofsharesisexemptinthehandsoftheshareholders.
Capital gains taxCapitalgainstaxisleviedontransferofacapitalasset.Capital gains is computed by deducting the cost of acquisition fromthesaleconsideration.ThecapitalgainsarecategorisedintoShort-TermCapitalGain(STCG)andLong-TermCapitalGain(LTCG)dependingontheperiodofholdingoftheassettransferred.
Incaseofnon-residentinvestors,gainfromtransferofshares/debentures of an Indian company is computed in foreign exchange used for the investment and then converted in Indian rupeesonthedateoftransfer,thusprovidingforadjustmentoffluctuationinforeignexchange.
Doing Business in India 33
STCG
Status of taxpayer Type of asset Rate of tax
Applicable to both residentsandnon-residents
Equitysharesorunitsofanequity-oriented fund or unit of a business trustonwhichSTTispaid*
15%
Applicable to both residentsandnon-residents
Capital assets other than those mentioned above
a.SlabratesforindividualandHUFs b.Applicabletaxrateforthose not covered above suchas40%forforeigncompanies
LTCG
Status of taxpayer Type of asset Rate of tax
Both residents and non-residents
Equityshares,unitofequity oriented fund or unit of business trustonwhichSTTispaid*
10%**
Residents Listed securities (otherthanaunit)onwhichSTTisnotpaid*orZeroCouponBond(ZCB)
Lower of: a.20%with‘indexation’(indexationisnotavailableonZCB);or b.10%without‘indexation’
Residents Capital assets other than those covered above
20%
Non-residents Listed securities (otherthanaunit)onwhichSTTisnotpaidorZCB
10%aftertakinginto account foreign exchangefluctuation.However,forexfluctuationisnotavailable on zero coupon bonds
Non-residents Sharesanddebentures other than covered above fornon-residents
10%withouttakinginto account foreign exchangefluctuation
Non-residents Capital assets other than those covered abovefornon-residents
20%
*ThebenefitshallalsobeavailableifSTTisnotpaidbuttransactionisundertakenonarecognisedstockexchangelocatedinaninternationalfinancialservicecentreandconsiderationisinforeigncurrency.
**AspertheFinanceAct,2018,theexistingtaxexemptiononLTCGarisingontransferofalistedequityshareoraunitofanequityorientedfundetc.(subjecttoSTT)hasbeenwithdrawn.AnyLTCGarisingfromsuchtransfersmadeonorafter01April2018andinexcessofINR0.1mnshallbetaxedat10percent.Further,LTCGearnedupto31January2018hasbeengrandfathered.
There is a separate computation mechanism to compute capitalgainsfordepreciablebusinessassets,whichformpartofblockofassetsheldbyataxpayer.
Taxation of NRsNRsaretaxableontheincomereceivedoraccruinginIndiaandincomedeemedtohavebeenreceivedoraccruedinIndia.Deemed accrual provides for taxation on the following terms:
Business income: Businessincomeofanon-residentistaxableinIndiaifithas‘businessconnection’inIndia.Theterm‘businessconnection’isconceptuallysimilartoPermanentEstablishment(PE)asdefinedintaxtreaties.Profitsfromabusinessincomeofanon-resident,attributabletooperationscarriedoutinIndia,aretaxableinIndia.
TheFinanceAct,2018(w.e.f.FY2018-19)haswidenedtheterm‘businessconnection’toincludeinitsambit(a)‘significanteconomicpresence’and(b)anybusinessactivitycarriedthroughapersonwho habitually plays the principle role leading to conclusion of contractsbyanon-resident.
Theterminologyof‘significanteconomicpresence’wasintroducedtotaxnon-residentswhooperatedwithouthavingaphysicalpresenceinIndialikee-commercecompaniesandotherdigitisedformofbusinesses.
Fees for Technical Services (FTS):Feesformanagerial,technicalorconsultancyservicesrenderedbyanNRaretaxableinIndia(whereanNRdoesnothaveaPEinIndia)attherateof10percentofgrossreceipt.
Royalty income:Royaltypayabletoanon-residentistaxableattherateof10percentofgrossreceipts.SpecificprovisionsoftheIncome-taxActseektotaxpaymentsforuseofcomputersoftwareandtelecommunicationchargesasroyalty.
Interest income: Taxattherateof20percentisapplicableoninterestpayablebyanIndiancompanytoanNRformoniesborrowedinforeigncurrency.Alowerwithholdingrateof5percent is applicable on interest payable on external commercial borrowings,long-termbondsandrupeedenominatedbondsissuedbefore01July2020.Similarly,lowerrateofwithholdingof5percentisavailableforinterestpayabletoaFIIoraQualifiedForeignInvestor(QFI)onarupeedenominatedbondof an Indian company or a government security issued before 01July2020,subjecttocertainotherconditions.
Capital gains:GainsaccruedtoanNRonaccountoftransferofacapitalassetsituatedinIndiaaretaxableinIndia.
34 Doing Business in India
AspertheindirecttransferprovisionsintheIncome-taxAct,shares or an interest in a foreign company shall be deemed to besituatedinIndiaifsuchsharesorinterestderives,directlyorindirectly,itsvaluesubstantiallyfromassetslocatedinIndia.
IfaPEofanon-residentisformedinIndia,theaforesaidincomes would be taxable on a net basis at the rate applicable toforeigncompanies.
Tax treaty benefit:Anon-residentcoveredbyataxtreatycanbetaxedunderthetaxtreatyortheIncome-taxAct,whicheverismorebeneficial.Indiahasavastnetworkoffavourabletaxtreaties.Tilldate,Indiahasenteredintocomprehensivetaxtreatieswith96countries.Recently,IndiahasenteredintoataxtreatywithHongKong.
Tax treaties with various countries provide benefits in the form of capital gains exemption on transfer of shares of Indiancompanies.However,intherecentpasttaxtreatieswithMauritius,SingaporeandCyprushavebeenrevisedto withdraw capital gains exemption on transfer of shares acquiredonorafter01April2017,whilesimultaneouslygrandfatheringtaxbenefittothesharesacquiredbefore01April2017.Further,taxtreatieswithAustralia,US,UK,Singaporeetc.providerestrictivetaxtreatmentforincomefromFTS.
AnNRisrequiredtofurnishaTaxResidencyCertificate,whichisissuedbytherevenueauthoritiesofhis/herstateofresidence.Inaddition,thenon-residentisrequiredtofurnishcertainadditionalinformation,asprescribed.
Equalisation levyAnequalisationlevyof6percentoftheamountofconsiderationforspecifiedservices,i.e.,onlineadvertisement,provisionfordigitaladvertisingspaceetc.payabletoanon-resident(nothavingaPEinIndia),istobedeductedbytheremitterwitheffectfrom01June2016.Thelevyhasbeenintroduced to tax digital services rendered by foreign service providerswithouthavingapresenceinIndia.
Security Transaction Tax (STT)STTisleviedonvarioussecuritytransactionscarriedoutthrougharecognisedstockexchangeinIndia.Areducedrateof capital gains is prescribed for the transactions which have beensubjectedtoSTT.
Commodities Transaction Tax (CTT)CTTisleviedalongthelinesofSTT.CTTisleviedontaxablecommoditiestradedatrecognisedassociations.
Wealth tax WealthtaxhasbeenabolishedvideFinanceAct,2015.
Gift taxIndiadoesnotlevygifttaxunderaseparatestatute.However,certainreceiptsofsumofmoneyorproperty(includingimmovableormovableproperty,sharesandsecuritiesetc.)byany person without adequate consideration are taxed as other incomeinthehandsoftherecipient.Further,theIncome-taxActseekstotaxsharepremiumreceivedinexcessoffairmarketvalueinthehandsoftheissuerofshares.
Estate dutyNoestateordeathdutyischarged.
Computation of business incomeBusinessincomeisgenerallytaxableonthenetbasis,i.e.,grossincomelessallowabletaxdeductions.Expenseslaidoutandexpendedforbusinesspurposes(otherthancapitalexpenses)aredeductiblefromtheincomeofthetaxpayerforincome-taxpurposes.ThedeductibilityisfurthersubjecttoexceptionsandfulfilmentofconditionsasstatedintheIncome-taxActsuchaswitholdingtax.
The following principles are generally applied for examining the admissibility of an expense:• Expenseshouldbeincurredforthebusiness• Expenseshouldbeincurredinthepreviousyear• Expenseshouldnotbeofapersonalnature• Expenseshouldbeofarevenuenature−expensesofa
capital nature are not allowed• Expenseshouldnotbeforapurposeprohibitedbylaw
Certain expenses are specifically disallowed or the quantum of deductionisrestricted.Theseinclude:• Income-tax• ExpenditureincurredonCSRactivities• Expenditureforthepurposeofearningexemptincome• Expensesincurredincashbeyondspecifiedlimit.• Provisionfortaxes,duties,interestonloansfrompublic
financialinstitutionsorontermloansfromascheduledbankand certain contributions to statutory funds on behalf of employees,notactuallypaid.However,suchexpenditureisdeductibleintheyearinwhichitisactuallypaid.
Depreciation of capital assets is allowed on the basis of the reducingbalancemethodusingvaryingrates,dependingonthenatureofassets.Allsimilartypesofassetseligibleforthe
Doing Business in India 35
samerateofdepreciationareclubbedtogetherina‘block’anddepreciationischargedonthevalueofthatblock.Depreciationisavailableforafullyear,irrespectiveoftheactualperiodofuseoftheasset.However,intheyearofacquisitionoftheasset,depreciation is allowed at half the normal rates if the asset is usedforlessthan180daysinthatyear.
Further,additionaldepreciationattherateof20percentinthecaseofanynewplantandmachinery(otherthanshipsandaircraft)shallbeallowedprovidedsuchplantandmachineryhas been acquired and installed by the assessee engaged in the business of manufacture; or production of any article or a thing; or in the business of generation or generation and distributionofpower.
Depreciationonintangibleassetssuchasknow-how,patents,copyrights,trademarks,licences,franchisesorothersimilarbusinessorcommercialrightsisalsoavailable.
Theratesofdepreciationfordifferentblocksofassetsareasfollows:
Blocks of assets Rates
Residentialbuildingsexcepthotelsandboardinghouses 5%
Buildingsmeantfornon-residentialpurposessuchashotels and boarding houses
10%
Furnitureandfittings 10%
General plant and machinery 15%
Intangible assets 25%
Computers 40%
ICDSThecentralgovernmenthasnotifiedICDS,whichprescribethedetailed provisions to be applied while computing tax under the heads profits and gains from business and profession and otherincome.ThesestandardsareapplicablefromFY2016-17onwards.
DelhiHighCourtstruckdownvariousclausesofseveralICDSonthegroundsthattheywereinconsistentwiththeprovisionsoftheAct.SuchICDSwerespecificallyintroducedwithintheIncome-taxActbytheFinanceAct,2018toremoveinconsistencies
Set-off of business loss and unabsorbed depreciationBusinesslosses,otherthanfromspeculationbusiness,arepermitted to be set off against income from any other source (exceptincomefromemployment,i.e.,salaryincome)inthesameyear.Businesslosseswhichcouldnotbesosetoffarepermitted to be carried forward for setting off against business profitsarisingintheeightsubsequentyears.Unabsorbeddepreciation is permitted to be carried forward for an unlimited period.
Key direct tax incentives/tax holidaysIndia provides various tax incentives in the form of higher deduction/taxexemptions.Thebenefitsofmostofthetaxincentiveshavebeengraduallyphasedout.
Research and development activitiesTheIncome-taxActprovidesfordeductionforexpenditureincurredonscientificresearchrangingfrom100percentto150percentoftheamountofexpenditure.Mostoftheweighteddeductionswillbephasedoutw.e.f.FY2020-21.
Patent box regime• In order to encourage indigenous research and development
activities,royaltyincomeoftheeligibleassesseesinrespectof a patent developed and registered in India shall be taxableat10percentonthegrossamountofroyalty.
• An‘eligibleassessee’meansanIndianresidentwhoisthe true and first inventor of the invention and whose name appears on the patent register as the patentee in accordancewiththePatentsAct,1970.
Tax incentives for manufacturing companies• Domesticcompaniessetuponorafter01March2016,
engaged in the business of manufacture or production of anyarticle/thinghaveanoptiontopaytaxesonalowercorporateincometaxrateof25percent.Thetotalincomeof such companies should be computed in the prescribed manner and the company shall not be eligible for any other taxincentives.
• 100percentdeductionofprofitsandgainsavailablefor10consecutiveyearstoanyundertakinginvolvedinthemanufactureandproductionofanyarticle/thing,locatedinNorth-Easternstates(providedtheundertakingcommencesmanufacturingby31March2017)andcarryingonanyeligiblebusiness.
• Adeductionof15percentofthecostofcertainprescribed
36 Doing Business in India
assets provided to assessees engaged in manufacturing or productionofanyarticle/thinginanynotifiedbackwardareasinAndhraPradesh,Telangana,BiharandWestBengal.
Special Economic Zones (SEZs)AnSEZisaspecificallydelineatedduty-freeenclavedeemedtobeaforeignterritoryforpurposesoftradeoperations,dutiesandtariffs.
The deductions are:• To SEZ developer:For100percentofprofitsandgains
derivedfromdevelopingandmaintaininganSEZfor10consecutiveassessmentyearsoutof15yearscommencingfromtheyearinwhichanSEZhasbeennotifiedbythecentralgovernment.ThedeductionshallnotbeavailablewheredevelopmentofSEZbeginsonorafter 01April2017.
• To SEZ unit: For profits and gains derived by its unit set up in anySEZthatcommencesmanufactureorproductionofanyarticle/thingorstartsprovidingservicesonorbefore 31March2020asfollows:i. 100percentexportprofitsforthefirstfiveyearsii. 50percentofexportprofitsforthenextfiveyearsiii.Upto50percentofexportprofitsforthenextfiveyears
(subjecttotransferofprofitstoaspecialreserve)
Start-ups• 100percentdeductionoftheprofitsearnedbyaneligible
start-upinanyofthethreeconsecutiveyearsoutoftheinitialsevenyearsofitsoperations.
• The deduction is however available only to a new entity which is not set up by way of the splitting up or restructuring ofanexistingundertaking.
• Thestart-upshouldbeengagedinabusinesswhichinvolvesinnovation,developmentorimprovementofproductsorprocessesorservices,orascalablebusinessmodelwithahighpotentialofemploymentgenerationorwealthcreation.
• Thestart-upshouldholdacertificateofeligiblebusinessfromtheInter-MinisterialBoardofCertificationasprescribedby the DIPP
− The DIPP has recently prescribed the forms required to besubmittedtotheInter-MinisterialBoardofCertificationfor approval to claim tax holiday and for exclusion of start-upsfromfairvaluationonissueofshares.
• Further,thestart-upshouldnothaveaturnoverexceeding USD3.74mn(INR250mn)intheyear(s)inwhichdeductionisclaimed.
Business-specific incentives for capital expenditure• 100percentdeductiononcapitalexpenditureavailable
for the following categories of specified businesses which commence operations its operation on or after specified dates:
− Layingdownoroperatingcross-countrynaturalgasorcrude pipeline
− Laying down and operating slurry pipeline for transportation of iron ore
− Settingupandoperatingsemi-conductorandwaferfabrication manufacturing facility
− Building and operating a hotel of two stars or above − Bee-keepingandproductionofhoneyandbeeswax − Settingupandoperatinganinlandcontainerdepotora
container freight station − Developing or operating and maintaining a new
infrastructurefacilityonorafter1April2017• 150percentdeduction(restrictedto100percentwith
effectfrom01April2017)oncapitalexpenditureshallbeavailable for the following categories of specified businesses which commence operations on or after specified dates:
− Settingupandoperatingacoldchainfacility − Settingupandoperatingawarehousingfacilityfor
storage of agricultural produce − Buildingandoperatingahospitalwithatleast100beds
for patients − Developing and building a housing project under specific
schemes − Production of fertilizer
Corporate tax complianceWithholding taxTheIncome-taxActcastsanobligationoneachtaxpayertowithholdtaxonspecifiedpayments,including,amongothers,on the following:• Salaries• Interest• Rent• Commissionorbrokerage• Payments to contractors• Professional/technicalfees/royalty• Consideration payable on transfer of immovable property
Allpaymentstonon-residents,whicharetaxableinIndiaattracttaxwithholding.
Indian tax withholding provisions also extend to payments madebyNRs.Thus,incertainsituations,anNRmaking
Doing Business in India 37
paymenttoanothernon-resident/residentisrequiredtoundertaketaxwithholdingaspertheIndianregulations.
Further,thedeductee,i.e.,thepersonwhosereceiptsaresubjecttotaxwithholding,needstodisclosehis/herPermanentAccountNumber(PAN).Incasethepersonfailstodoso,withholding tax rate would be the higher of the following rates• TherateprescribedintheIncome-taxAct;or• Attherateinforce,i.e.,theratementionedintheFinance
Act,2018;or• 20percent
However,theincreasedrateofwithholdingtaxwouldnottriggerforcertainpaymentstoNRsnothavingPANiftheNRfurnishesprescribedinformation.
Quarterlyreturns(inprescribedformdependingonthenatureofpayment)needtobefiledwithrespecttotaxeswithheldduringtherelevantquarter.
Extensiveprovisionsarebuiltinforenforcingcompliancewithtaxwithholdingobligations.Interestandpenaltiesmaybeleviedincaseofnon-compliancewithwithholdingtaxobligations.
Advance taxEverytaxpayerisrequiredtopayhis/hertaxliabilityfortheyearduringthepreviousyearitself,ininstallmentsprescribed.Thetaxliabilityistobeworkedoutonthebasisofanestimateofcurrentyearincome,andtheincometaxthereonshallbecalculated at the rates in force during the relevant previous year.Interestisleviedfornon-compliancewithadvancetaxprovisions.
Self-assessment taxEverytaxpayerisliabletocomputetherequiredtaxpayable(ifany)onthebasisofactualincome,afterconsideringthecreditfortheadvancetaxpaidandtaxesdeductedatsource.Self-assessmenttaxispayablebeforefilingthereturnofincome.
PANEveryperson(asperthecriteriaprescribedintheIncome-taxAct)isrequiredtomakeanapplicationfortheallotmentoftaxregistrationnumber,termedasPAN.TheapplicationistobemadeinForm49A/Form49AA(dependingupontheresidentialand/orregistrationstatusofanassessee).
Thisnumberistobequotedonalltaxreturns,correspondencewith the tax authorities and documents relating to the prescribedcategoriesoftransactions.FailuretoquotePAN
by the income recipient may result in a higher rate of tax withholding.
AspertheFinanceAct,2018,non-individualresidentpersonswhichenterintoafinancialtransactionamountingtoINR0.25mnormoreshallberequiredtoobtainPAN.Also,inordertolinkthefinancialtransactionsundertakenbysuchentitieswithnaturalpersons,itisproposedthatmanagingdirector,director,partner,trustee,principalofficerorsimilarpersoncompetenttoactonbehalfofsuchentityshallalsoberequiredtoobtainPAN.
Tax Deduction and Collection Account Number (TAN)EverypersonresponsibleforwithholdingtaxinaccordancewiththeprovisionsoftheIncome-taxActisrequiredtomakean application for the allotment of withholding tax registration numberwhichiscalledtheTAN.TheapplicationistobemadeinForm49Bwithinonemonthfromtheendofthemonthinwhichthetaxisdeducted.
Recently,therequirementforobtainingPANandTANhasbeeneasedforcorporateassessees.Acommonapplicationmaybesubmittedbythecompanyforincorporation,PANandTANthroughtheMCAportal.
Tax return filingAll taxpayers are required to file a return of income for a previousyearwithintheprescribedduedates.
However,NRsearningonlyinterestanddividendincomearenotrequiredtofileareturnofincomeinIndia.
Different due dates have been prescribed for this purpose undertheIncome-taxAct,whichareasbelow:
In case of:
• a company • aperson(otherthanacompany)whose
accounts are required to be audited under the Income-taxActorunderanyotherlawinforceduring the period
• aworkingpartnerofafirmwhoseaccountsarerequiredtobeauditedundertheIncome-taxActor under any other law in force during the period
30thdayofSeptemberof the assessment year
• a taxpayer who is required to file an accountant’s report under the transfer pricing regulations
30thdayofNovemberof the assessment year
• any other assesse 31stdayofJuly of the assessment year
38 Doing Business in India
AmaximumfeesofINR10,000(USD150)isprescribedwherereturnofincomeisfiledafterprescribedduedates.Further,interestattherateof1percentontheamountoftaxontotalincome is prescribed for every month of default in furnishing thereturnofincome.
General Anti-Avoidance Rules (GAAR)TocontrolImpermissibleAvoidanceArrangement(IAA)enteredintobyapersontoavoidtaxes,theprovisionsofGAARhavebeenintroducedinIndia.Itisnotedthatanarrangementwouldbe considered an IAA where its main purpose is to obtain a tax benefit.AnagreementwillalsobetreatedasanIAAifitlacks‘commercialsubstance’anddoesnotmeetthecriteriaofbeingabonafidebusinesstransactionintheordinarycourse.
Notwithstandingtheabove,GAARprovisionswillnotapplytoan arrangement where the tax benefit arising in aggregate doesnotexceedINR30mn.
GAARdealswithaggressivetaxplanninginvolvingtheuseofsophisticatedstructures.TheprovisionsofGAARareeffective 01April2017.
Direct tax enforcement in India
Filling the return of income
Appeal to filed with the
appellate authorities
Scrutiny audit of return
of income initiated by Assessing
Officer (AO)*
Demand (if any) to be paid within
30 days from date of receipt of assessment order
Audit of return of income
completed by AO and order
passed
*AOcanmakeareferencetotheTransferPricingOfficer(TPO)forTransferPricing(TP)audit.The TPO completes TP audit on receipt of reference from AO and forwards the TPO order to
theAOformergingitwiththeassessmentorderoncompletionoftheauditofreturnofincome.
Ittakesabout21to33months(dependinguponwhetherareferenceismadetoTPO)tocompleteanauditfromtheend
oftheassessmentyear.Thisperiodisproposedtobegraduallyreducedto12monthsovernextthreeyears.
E-assessment Initially,thecentralgovernmenthadintroducede-assessmentproceduresin2016onapilotbasiswhichwasfurtherextendedin2017.Asapartofthispilot,therevenueauthoritieshavebeenissuinge-noticesforscrutinyassessmentstotheassessees.
Subsequently,TheFinanceAct,2018hasamendedtheIncome-tax Act to enable the central government to notify a new e-assessmentschemeforscrutinyassessmentstobecarriedout without any personal interface between the taxpayer and therevenueauthorities.
Direct tax dispute resolution processDisputeresolutionisamulti-layeredprocessinIndia.
Assessment order passed
by AO
High Court
Commissioner (Appeals)**
Supreme Court
Appellate Tribunal
Appeal within 120 days
**Alternatively,applicationmaybefiledwiththedisputeresolutionpanelobjectingtovariationsproposedbytheAOtotheincomeofthetaxpayer.
Theentirelitigation,tilltheSupremeCourtlevel,generallygetssettledoveraperiodof10years.
Other alternatives to resolve tax litigation• Settlementcommission• Advancerulingfortransactions(includingproposedones)
involvingnon-residentsandcertainresidents.• MAP:Analternatemechanismundertaxtreatiesforresolving
international tax disputes by the competent authorities of eachstate.
Doing Business in India 39
Goods and Services TaxThe Government of India made possible the introduction of thenation’sbiggesttaxreform−GST.Itaimstomitigatethecascading or double taxation by way of single point taxation systemwithfreeflowofinputcredits.
Scope of GSTGSTistobeleviedonsupplyofallgoodsandservicesexceptthesupplyofalcoholforhumanconsumption.LevyofGSTonpetroleumcrude,high-speeddiesel,motorspirit(commonlyknownaspetrol),naturalgasandaviationturbinefuelhasbeen postponed and to be notified by the government at a laterdate.
Dual structure levyGSTisadualstructurewhereinbothcentreandstates/UTshave the power to levy the tax on supplies on goods and services.Theduallevystructurewillbeasunder:
• CentralGoodsandServicesTax(CGST)tobeleviedbythe
centreandStateGoodsandServicesTax(SGST)/UnionTerritoryGoodsandServicesTax(UTGST)tobeleviedbyrespectivestates/unionterritoriesonallsupplieswithinastate/unionterritory;
• IntegratedGoodsandServicesTax(IGST)tobeleviedbycentreonallsuppliesbetweenthetwodifferentstates/unionterritories.Further,IGSTisalsotobeleviedonexport/importofgoodsorservicesfrom/toIndia.
• CompensationCess(Cess)tobeleviedonspecifiedsupplies for the purpose to compensate the states for the lossofrevenueonaccountofimplementationofGST.
Nature of supplyLevyofCGSTandSGST/UTGSTorIGSTwilldependuponthenatureofsupply.SeparateprovisionsforgoodsandserviceshavebeenincorporatedunderGSTlawtoidentifythenatureofsupply.Locationofsupplierandtheplaceofsupplyofgoods or services are the two factors to determine the nature of supply.
Indirect tax
IntroductionofGSTon01July2017wasasignificantreformintheindirecttaxationofthenation.AbsorbingalargenumberofCentralandStatetaxesmainlycentralexcise,ServiceTax,ValueAddedTax,CentralSalesTax,EntryTax,Octroi,EntertainmentTax,LuxuryTax,CountervailingDutyandSpecialAdditionalDutyonCustomsinitself,GSThasledthewayforacommonnationalmarket.Keyindirecttaxesapplicableinthecountryare:
• GST – Tax on supplies of goods and services
• Customs Duty – Duty imposed on import of goods to India
• Professional Tax–Taxonprofessions,trades,callingsandemployments
40 Doing Business in India
• Intra-statesupply:Locationofsupplierandplaceofsupplyofgoodsorservicesarewithinthesamestate/unionterritory
• Inter-statesupply:Locationofsupplierandplaceofsupplyofgoodsorservicesarewithdifferentstates/unionterritory
Point of levy under GSTThe earlier indirect taxes prevailing in India entailed multiple pointsoflevy.Forinstance,excisedutywasleviedonthemanufactureofgoods.Servicetaxwasleviedontheprovisionoftaxableservices.VATwasleviedonthesaleofgoods.
ThetriggeringpointforlevyofGSTisthesupply.Provisionsfordeterminingthetimeofsupplyhavebeenprovided,bothinrespectofgoodsandservices.Hence,thetaxincidencewouldbeatthe‘timeofsupply’asagainstthemultiplepointsoflevyundertheearlierregime.
Tax rates under GSTAllgoodsandservicesarefittedintoafour-tierratestructureof5,12,18and28percent.Whileessentialitemslikefoodgrainswillattractazerorate,demeritandluxurygoodswillattractthehighestrateandmayattractcessalso.
Anti-profiteeringOneofthemajorobjectivesforimplementationofGSTwastoprovideafreeflowoftheinputtaxcredits,whichshouldresultinareductioninthepricesofgoodsandservices.Tosafeguardtheconsumers,anti-profiteeringprovisionshavebeenincorporatedunderGST,castingresponsibilitiesonthe suppliers to reduce their prices of goods and services on account of benefit of reduced tax rate or availability of input taxcredits.Suppliersnotcomplyingwiththeanti-profiteeringprovisions are liable for penal consequences and also cancellationofregistrationunderGST.
Customs DutyCustomsduty,afederalgovernmentlevyis,leviableonimport/exportofgoodsto/fromIndia.Thetaxableeventforlevyisimport/exportandimport/exportdutyispayableatthetimeofimport/exportofgoodsto/fromIndia.IndiafollowstheHarmonisedSystemofNomenclature(HSN)classificationrules,andthegoodsareclassifiedunderdifferentchapter/tariffheadings,primarilyaccordingtotheirdescription,componentsanduse.Thedutiesortaxesapplicableonimportshall comprise:
• Basiccustomsduty–BCD(standardrateof10percent)• Customscess(leviableoncomponentofBCDat3percent)• IGSTat18percent(leviableontotalvalueofBCDplus
customscess)
Currently,theeffectivestandardrateofcustomsdutythat is applicable on the import of goods is approximately around30.15percentwithinputtaxcreditofIGST,subjecttoexemption/concessionasmaybeavailable/notifiedfromtimeto time and Free Trade Agreements entered into by India with othercountries.However,currently,thereisnoexportdutyleviableongoodsexportedfromIndia,exceptforafewgoodssuchasminerals(whicharescarcelyavailable).
Professional taxProfessionaltaxisaleviedbythestateonprofessions,trades,acallingoremploymentinastate.Thus,everypersonwhois engaged in any of the activities mentioned above is liable topayprofessionaltax.Notallthestategovernmentslevyprofessionaltaxcurrently.Instateswheresuchalevyexists,every enterprise and employee earning a salary is required to registerandpayprofessionaltax.
Doing Business in India 41
BackgroundGlobalisation and increased integration between economies worldwide has paved way for global business operations and subsequentlycomplexinter-companytransactions.Thesetransactions could lead to base erosion and shifting of profits toopaquetaxjurisdictions.Therefore,transferpricingisunderconstantscrutinyoftaxauthoritiesglobally.
IndianTransferPricingRegulations(TPRegulations)wereintroducedinIndiain2001toavoidshiftingofprofitsfromIndia to another jurisdiction due to international transactions withrelatedparties,i.e.,AssociatedEnterprise(s)(AEs).Further,thescopeofTPRegulationswasextendedtoincludeSpecifiedDomesticTransactions(SDT)witheffectfrom2012.
LegislationAsperTPRegulations,internationaltransactionsandSDTsbetweenAEsshouldcomplywiththearm’slengthprincipal,i.e.,apricewhichisappliedorproposedtobeappliedinatransactionbetweenpersonsotherthanAEs,inuncontrolledconditions.
International transactionTheActdefinestheterm‘internationaltransaction’tomeanatransactionbetweentwoormoreAEs,eitherorbothofwhomarenon-residents,inthenatureofpurchase,saleorleaseoftangibleorintangibleproperty,orprovisionofservices,financing or any other transaction having a bearing on the profits,income,lossesorassetsofsuchenterprisesoranycostcontributionagreement.
Further the definition of international transaction also includes ‘deemedinternationaltransaction’,whichmeansthatatransaction entered into by an enterprise with a person other thananAE(whetherresidentornon-resident)shallbedeemedasaninternationaltransaction,if:• there exists a prior agreement between such other person
and the associated enterprise; or• thetermsofsuchatransactionare,insubstance,
determined between such other person and the associated enterprise.
SDTsTransferpricingprovisionswerealsointroducedforSDTsoastocurbtheshiftofprofitsbetweenresidententities.Thenatureoftransactionincludestransactionenteredintowithentities/withinbusinessunitsclaimingtaxexemptions.SDTprovisionsare applicable where the aggregate of such transactions exceedsasumofUSD3mn6(INR200mn)inayear.
AEs International transactionsIntheIndianTPRegulations,thedefinitionofAEsisbroadlysimilartothedefinitionintheOrganisationforEconomic Co-operationandDevelopment(OECD)TPGuidelines.AEs in relation to another enterprise mean enterprise:• whichparticipate,directlyorindirectly,orthroughone
ormoreintermediaries,inthemanagementorcontrolorcapital of the other enterprise; and
• inrespectofwhich,oneormorepersonswhoparticipate,directlyorindirectly,orthroughoneormoreintermediaries,initsmanagementorcontrolorcapital,arethesamepersonswhoparticipate,directlyorindirectly,orthroughoneormoreintermediaries,inthemanagementorcontrolorcapitaloftheotherenterprise.
Further,theActprescribes13situationswheretwoormoreenterprisesareconsideredasAEs.
SDTAEsforthepurposeofSDTareanyentitiescloselyconnected,toentitiesclaimingcertainspecifiedtaxholidays/exemptionsbenefit.
MethodologiesTheArm’sLengthPrice(ALP)inrelationtoaninternationaltransactionandSDTisrequiredtobedeterminedbyanyofthefollowing methods: • ComparableUncontrolledPrice(CUP)method• ResalePriceMethod(RPM)• CostPlusMethod(CPM)• ProfitSplitMethod(PSM)• TransactionalNetMarginMethod(TNMM)• Any other method as prescribed TheTPRegulationsdonotprescribeanyprioritycriteriaintermsofselection/applicationofmethods.
Transfer pricing in India
6ThelimitisapplicablefromFY2015-16.Earlier,thelimitwasUSD0.75mn(INR50mn)
42 Doing Business in India
ALPThe ALP means price charged or would have been charged for a transaction between independent parties under similar situation.TheTPRegulationprescribestheuseofeithertherangeconcept(35thto65thpercentile)orarithmeticmeandepending on the method applied and number of comparables selected.
Compliance requirement
Compliance requirement Due date of submission
Obtain accountant’s report in Form 3CEB
Accountant’s report is a brief summary of international transaction(s)andSDTalong with the method used to justify the arm’s lengthnature.This document is to be certified by a Chartered Accountant or a firm of Chartered Accountants
30 November of each assessment year for international transactions or SDTundertakenduringtherelevantfinancialyear (April–March)
TP documentation (TP study)
TP study is a detailed documentation(requirementsareinlinewiththeOECDguidelines)relatingtointernationaltransaction(s)orSDTwhichisused to justify their arm’s length nature.Thisdocumentationistobemaintained,andupdatedonanannualbasis,iftheaggregatevalue of the international transaction(s) entered into the enterprise exceeds USD 0.1 mn (INR 10 mn)
Enterpriseisrequiredtomaintain contemporaneous documentation and needs to submit documentation on request by the Income Tax Department
Country-by-Country (CbC) reportingInordertomeetthecommitmenttoBaseErosionandProfitShifting(BEPS)initiativeofG-20andtheOECD,anewsectionhas been inserted in the Act which mandates the requirement ofCbCreportinginlinewithAction13oftheBEPSactionplans.
These regulations require an Indian entity which is part of a MultinationalEnterprise(MNE)grouptomaintainthefollowinggroupinformationbywayofthreefiles(inadditiontotheinformation already required in relation to international transactions):
• MasterFile(MF)• Local file • CbCReporting(CbCR)isrequiredtobefiledbytheparent
entityofanMNEgroupwithannualconsolidatedgrouprevenue in the immediately preceding accounting year of morethan€750mn(INR55bn,USD830.50mnapprox.)
TheMFandCbCR(asapplicable)arerequiredtobefiledby31Marcheachyear.
7OECDTransferPricingguidelinesforMultinationalEnterprises&TaxAdministrations,July2010
Doing Business in India 43
Compliance timeline
Beginning of tax year
Due date for maintaining TP documentation & e-filingaccountantsreport
Limitation for completing TP assessment
Time period for maintenance of documentation for FY2017-18
Limitation for initiating assessment by AO
Draft order of AO
Close of tax year
1 Apr 2017
30 Sep 2019
1 Aug 2021
30 Sep 2021
31 Mar 2018
31 Mar 2027
30 Nov 2018
44 Doing Business in India
Safe harbour rules‘Safeharbour’isdefinedasthecircumstancesinwhichtheincome-taxauthoritiesshallacceptthetransferpricethatisdeclaredbytheassessee.SafeharbourrulesareeffectiveinIndiafromthefinancialyear2012-13,andareavailableforaperiodofthreeyears.Atpresent,safeharbourruleshavebeenprescribed for the following transactions:• Provision of software development services• ProvisionofIT-enabledservices• Providing corporate guarantee• ContractR&Dservicesrelatingtosoftwaredevelopment• Manufactureandexportofcoreautocomponents• Manufactureandexportofnon-coreautocomponents• Lowvalueaddingintra-groupservices
Penalty provisionsPenaltyprovisionsforthefollowingnon-complianceshavebeenprescribed by the Act:• Underreportingandmisreportingofincome• Failure to maintain statutory TP documents• Failure to report a transaction in the accountant’s report• FailuretofurnishMF• Failure to furnish the accountant’s report
TP audit TPauditisconductedbytheTPO,aspecialisedofficerfromtherevenuedepartment.IftheregularAOofataxpayerconsidersitnecessaryorexpedientsotodo,he/shemaywiththepreviousapprovaloftheCommissioner,refertothe computation of the ALP in relation to the international transactionsorSDTofthetaxpayertotheTPO.
The taxpayer has the option of approaching the dispute resolution panel or filing appeal before the Commissioner of Income-tax(Appeals).
SafeharbourrulesandAPAaredispute-avoidancemechanismsandMAPisadisputeresolutionmechanism.
Advance Pricing Agreement (APA) The APA programme was introduced in the Indian TP Regulationsin2012.UndertheAPAschemeavailablefromFY2013-14,anypersoncanenterintoanagreementwiththeboard,aftertheapprovalofthecentralgovernment,fordetermining the ALP or for specifying the manner in which the ALP is to be determined in relation to an international transactiontobeenteredintobythatperson.
APA can be entered in relation to an international transaction only.TheAPAcanbeunilateral,bilateralormultilateral.
In2014,roll-backprovisionswereintroducedintheIndianAPAscheme,whichenablepersonsenteringintoanAPAtoroll-backthe results of the APA to a period not exceeding four preceding years from the year from which the APA is proposed to be applicable.
Mutual Agreement Procedure (MAP) Inordertoavoiddoubletaxation,MAPhasprovedtobeaneffective method where the revenue authorities of two different nationstrytoresolveadisputetogether.
UnderMAP,anagreementwhichseekstoavoideconomicdouble taxation or conflicting taxation would be reached betweenthetaxauthorities.Also,underMAP,disputesareresolved through competent authorities of the contracting states.
Doing Business in India 45
Glossary of abbreviations
AMT: AlternateMinimumTax
AO: Assessing Officer
AoP: Association of Persons
APA: Advance Pricing Agreement
BCD: Basic Customs Duty
CAGR: CompoundAnnualGrowthRate
CBDT: Central Board of Direct Taxes
CD: Countervailing Duty
CSO: CentralStatisticsOffice
DIPP: Department of Industrial Policy & Promotion
FEMA: ForeignExchangeManagementAct1999
Fintech: Financial Technology
FIPB: Foreign Investment Promotion Board
GAAR: GeneralAnti-AvoidanceRules
GST: GoodsandServicesTax
ICDS: IncomeComputationandDisclosureStandards
IT&ITeS: InformationTechnology&InformationTechnologyEnabledServices
MAT: MinimumAlternateTax
NBFC: Non-BankingFinancialCompany
RBI: ReserveBankofIndia
REIT: RealEstateInvestmentTrust
RNOR: ResidentandNon-OrdinarilyResident
ROR: ResidentandOrdinarilyResident
SDT: SpecifiedDomesticTransaction
SEBI: SecuritiesandExchangeBoardofIndia
TP: Transfer Pricing
TPO: Transfer Pricing Officer
USFDA: UnitedStatesFoodandDrugAdministration
46 Doing Business in India
Acknowledgements
Editorial review Design
Rohit Nautiyal Tanmay Mathur
Gurpreet Singh
For further information, please contact:
Spriha Jayati [email protected]+919323744249
Doing Business in India 47
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