DOING BUSINESS IN INDIABASED ON E&Y REPORT

Prepared by: Devanshu Singhal, Dharmendra Kumar, Garima Lakhanpal, Parin Gosaliya, Himanshu Sirohi [Team_6_26_to_30]

Under guidance of Prof. V.K. Nangia

Contents

A. Introduction B. Key Sectors: An Overview C. Investment Climate &

Foreign Trade D. Entry Options E. Funding of Indian

Businesses F. Repatriation of Funds G. Forms of Enterprise H. Companies I. Economic Laws and

Regulations J. Mergers & Acquisitions

K. Individuals L. Direct Taxes M. Transfer Pricing N. Indirect Taxes O. Incentives Q & As Conclusion

A. Introduction

Geographical Profile Demographic Profile Political Profile Economic Profile

A. Introduction Contd.

A. Introduction Contd.

B.1 Key Sectors: Automation

Barriers to entry are relatively low and setting up operation fairly easy without the need for industrial licenses.

FDI of 100% is allowed under automatic route and some state governments offer other incentives too.

The automotive mission plan(2016) drafted in 2006 estimates that automotive industry will attain a turnover of US $145 contributing to more than 10% GPD and provide employment to more than 25 million people in the country.

Considering India low cost manufacturing capability and increasing R&D strength India’s is poised to play a significant role in world landscape.

India is world’s 2nd largest two wheeler market and 4th largest commercial vehicle commercial market and expected to be amongst top 5 passenger vehicle producing country by 2017.

India is expected to emerge as worlds 7th largest in automotive market by 2016 and 3rd largest by 2030

B.2 Key Sectors: Banking

In 2005 RBI announced a roadmap for setting banks in India. Phase1 proposed foreign banks can open a wholly owned

subsidiary(WOS) or convert existing branches to subsidiaries. Phase2 proposed to accord to full national acceptance to WOS by

foreign banks. This however has not yet become operational.

B.3 Key Sectors: Capital Markets SEBI was established as a statutory body in 1992 . MUTUAL FUNDS: The entry of private sector funds in 1993 has

given the Indian retail/corporate investors a wide choice of fund houses.

FIIs : global majors are investing in India, which is ranked as the most attractive country for retail investment among emerging markets.

B.4 Key Sectors: Entertainment Current size of the industry is estimated at INR 564 billion and is

expected to grow to INR 930 million by 2013. The ministry of information and broadcasting is responsible for

rules, laws and regulations. The TRAI is regulator for broadcasting and cable services. According to a CRISIL research it is expected that Indian industry

growth will be driven by continued increase in advertising spend, the fragmentation of media and changes in distribution media.

B.5 Key Sectors: Health Sciences The Indian pharmaceutical market stood at approx. USD 16.6

billion in 2008. Factors likely to catalyze growth:

Boom in demand for healthcare infrastructure. Growing penetration of health insurance. Increasing investments by private equity and venture capital

firms. The industry is poised to reach USD 2.2 billion by 2012.

B.6 Key Sectors: Information Technology(IT)

Contribution of 5.5% to India’s GDP in 2007-08 and estimated 5.8% in 2008-09.

Government continues to encourage foreign investment in IT-ITES sector but proposes to phase out certain export related incentives under new Direct Tax Code.

Continues to hold its position as most promising segments of country’s economy.

Government plans to grant R&D units, innovation focused start-ups, financial support for IT investment initiatives to encourage hardware sector.

B.7 Key Sectors: Insurance

Fifth largest insurance market(in terms of premium) among emerging global insurance economies.

Private sector companies giving tough competition to public sector companies who have been in existence for longer period.

FDI of up to 26% including FII and NRI investments is allowed which is proposed to increase to 49% subject a license granted by IRDA, the regulatory authority.

B.8 Key Sectors: Mining

India produces 86 minerals including 4 kinds of fuels, 10 metallic minerals, 46 non-metallic minerals, 3 atomic minerals and 23 minor minerals.

FDI up to 100% is allowed but investment is considerably below desired levels due to policy ad procedural issues.

Plans to achieve optimal mining and attractive investments with the latest technology through National Minerals policy.

B.9 Key Sectors: Oil and Natural Gas

India is world’s fifth largest consumer for primary energy where oil and gas accounts for 40% of its primary energy consumption.

Approximately 75% of crude oil demand being met through imports.

FDI of up to 100% is permitted except refineries owned by national oil companies.

Investments are expected to be undertaken to capitalize growing demand of 6-7% every year from 2009-25.

B.10 Key Sectors: Ports

12 major ports and around 200 non-major ports accounting for 95% of country’s total trade in volume and 70% in terms of value.

Government focuses to enhance private investment and improve service, grant powers to all ports authorities to provide contracts and development of inland container depots and container freight stations to facilitate cargo distribution.

Government’s investment in port is expected to be approximately USD22 million in eleventh five year plan.

B.11 Key Sectors: Power

Total quantum of power generated by country was 763.6 billion units in 2009 with growth of 5.3% in last five years.

Shortage in power supply was around 12% which is a cause of government concern.

Lured by the prospect of selling power at prevailing high short-term rates increasing profitability, many players are setting up their merchant power plant.

Seen as an attractive investment option with FDI up to 100% in power generation and other activities.

B.12 Key Sectors: Real Estate Industry saw a decline in 2008, characterized by high interest

rates, declining sales and a severe liquidity crunch. Absorption of commercial and retail real estate declined whereas

low/mid segment houses continued to drive the demand. Situation is likely to improve as prices stabilize and buyers

eventually decide to buy properties. FDI up to 100% is allowed in the areas of Township, housing,

hotels & tourism, SEZs, construction and related engineering services.

B.13 Key Sectors: Retail

With an expected growth of USD475 billon by 2012, India’s retail sector is at the peak becoming the second largest employer of the country.

FDI up to 100% and 51% is allowed in wholesale trading and retailing “single brand” products respectively.

Growth @ 20-25% is expected annually with many international retailers establishing their presence in the country.

Rising purchase power, changing consumer patterns are a boost for retail in India.

B.14 Key Sectors: Road and Highways

India has the second largest road network spread across approx. 3.3 million kms.

MOSRTH and NHAI administers national highways. Rural road are maintained and monitored by MoRD.

FDI up to 100% is permitted with provision of capital grants of up to 40% of the project cost to enhance viability of the projects.

Policies to create opportunities for private sector. Govt. has launched National Highway Development Programme

with an objective to develop and upgrade over 50000 kms of national highways.

B.15 Key Sectors: Telecommunications

Indian telecom subscriber base crossed the 500 million mark placing it on the second position worldwide.

Indian wireless market offers significant opportunities for expansion driven by a favourable demographic profile, improving coverage, sharp decline in cost of ownership and low rural penetration.

Indian telecom is able to attract substantial investments from global players.

Recent policies include auction and allotment of spectrum for broadband wireless access license and for 3G telecom services as well.

C. Investment Climate and foreign trade

C.1 Foreign Investment Framework FDI:

The government permits FDI on an automatic basis except with respect to a small negative list.

FIPB: Foreign Investment Promotion Board considers proposals for

foreign investments which do not qualify for automatic approval.

Foreign Exchange Controls: It promotes orderly development and management of Foreign

Exchange market in India.

C. Investment Climate and foreign trade (contd.)

C.2 Regional and International Trade Agreements:

Trade agreements enable wider economic cooperation in the fields of services as well as investment and intellectual property, resulting in greater trade liberalization.

Some of the existing key trade agreements are SECA, APTA, SAARC, South Asian Free Trade Agreement etc.

C. Investment Climate and foreign trade (contd.)

C.3 Imports and Exports India accounts for 1.64% of the global trade in goods and services

worldwide. Foreign Trade Policy lays special emphasis on sectors like

agriculture, handicrafts, leather etc. to generate employment and increase India’s share in global trade.

Exports: USD167 billion in FY09. Imports: USD 284 billion in FY09. Trade deficit stood at USD 117 billion in FY09 due to rapid

industrialization.

D. Entry Options in India

Liaison Office: Foreign Corporations are permitted to open liaison offices in

India to undertake liaison. Branch Office:

Foreign corporations may open branch offices to conduct business in India, and this requires a specific permission from RBI.

Local Indian Subsidiary Companies: It provides maximum flexibility to conduct business in India,

however the exit procedure norms of these companies are relatively more cumbersome.

E. Funding of Indian Businesses Equity Share Capital

Equity Capital is limited by authorization capital mentioned in Memorandum of Understanding. It can be repatriated on liquidation or on transfer.

Preference Share Capital If convertible to equity, considered as FDI and regulated by FDI regulations

as per the industry. If non convertible, considered ECB.

Debentures & Borrowings Automatic route (no approval required) if less than USD 500 million. Approval route (approved by RBI) in case greater than USD 500 million. If non convertible, subjected to end use restrictions.

ADRs/GDRs/FCCBs. Only qualified companies are allowed to raise capital through these

instruments. If FDI Limit exceeds, permission from FIPB is required.

F. Repatriation of Funds

Repatriation of Capital: Remitted with capital appreciation Limited to 2% of exports and 1% of domestic sales under automatic

route without ToT (Transfer of Technology) . Limited to 5% of exports and 8% of domestic sales under automatic

route with ToT . Dividends

Consultancy Services: Limited to USD 1 million under automatic route and USD 10 million for telecom, railways, roads, sea ports, urban infrastructure, industrial parks.

Pre-incorporation Services: Limited to 5% of investment or USD 100,000 whichever is higher.

Other remittances No prior approval required to remit profits earned by Indian branches

to Head Offices located outside India.

G. Forms of Enterprise

Sole Proprietorship Single individual owns, manages, controls the whole business. Not necessary to register. Only legal existence is through

proprietor. Profit/Loss borne solely by owner. Unlimited liability, extends beyond capital invested.

Partnerships Profits/Losses shared among partners in ratio of invested capital. Partners limited to 2-10 in banking and 2-20 in other industries Transfer of ownership done only with consent of other partners.

Limited Liability Partnership (LLP) Governed by LLP Act, 2008. Aims to provide limited liability with

enough flexibility in organizing business as in Partnership. Legal and corporate entity which has perpetual succession and is

separate from its partners. Has provisions pertaining to maintenance of annual accounts,

corporate actions (such as mergers), winding up etc.

H. Companies

Private and public companies.

I. Economic Laws & Regulations Indian Contract Act, 1872(ICA): This law governs contracts, which

encapsulates provisions governing the entire life of contract, from its formation to implementation, and to conclusion.

Protection of Intellectual Property Rights: Legal framework still in transition but moving towards international conventions as India of GATT & TRIPS.

Labor Laws: To provide good working environment for labor and protect their interests, confirms to conventions of ILO.

Anti Trust regulation: To prevent monopolies from creating restraints on trade or commerce and reducing competition in India.

The Negotiable Instruments Act, 1881: This Law relates to promissory notes, bills of exchange, cheques and other negotiable instruments.

The Sale of Goods Act, 1930: This Law Act defines transactions between seller and buyer.

The Arbitration and Conciliation Act, 1996: Legislation based on Model Law on International Commercial Arbitration adopted by United Nations Commission on International Trade Law (UNCITRAL) in 1985.

J. Mergers and Acquisitions

Mergers Reorganization of a company by a compromise or by an arrangement between the

company and its shareholders or creditors requires the sanction of the jurisdictional High Court, shareholders, creditors and other regulatory authorities.

Power of approval has been shifted from High Court to National Company Law Tribunal (NCLT) which is still in the process of being formed.

Acquisitions Corporate action taken to buy a company’s ownership stakes in to assume control

over the target firm. Shares of the company closely held: acquisition in agreement with the shareholders

otherwise regulations issued by SEBI need to be complied with. Demergers Splitting of a part of an existing company which operated completely separate from

the original company. Slump Sale Transfer of an identified business from one company to another for a lump sum

consideration without assigning values to individual assets/liabilities. Buy Back of Shares Repurchase of outstanding shares by a company In order to reduce the number of

shares on the market. Capital Reduction Process of decreasing a company’s shareholder’s equity through shares cancellation

and share repurchase.

K. Individuals

Visa and Registration Requirements Visa on arrival: not required by nationals of Nepal, Bhutan and Maldives(upto 90 days). Temporary landing Facility/Permit(TLF/TLP): not available for the nationals of Sri Lanka,

Bangladesh, Pakistan, Iran, Afghanistan, Somalia, Nigeria, Ethiopia and Algeria. Tourist Visa. Business and Employment Visa.

Foreign Exchange Regulations Salaries earned locally may be repatriated only by individuals holding employment visas. An expatriate worker, who is employed by a foreign company, but who is either a resident

(but not a permanent resident) or citizen of India employed by a foreign company outside India, may open and maintain a foreign currency account with a foreign bank while assigned to a corporate entity of the foreign company in India.

Residential Permit Foreign nationals required to register with police authorities at the local registration office

within two weeks from their date of arrival if their visas are valid for longer than six months

A foreign national holding a visa valid for six months or less, who wishes to stay back in India beyond the period of validity, must register within two weeks after 180 days from the time of his/her arrival in India.

A PIO card holder, whose continuous stay in India exceeds 180 days, is required to register within 30 days after the 180 days from his/her arrival in the country.

K. Individuals Contd.

Family and personal considerations Work visas for family members: Spouses or dependents of working

expatriates must obtain separate work permits to be employed in India. Children of working expatriates must obtain student visas to attend Indian schools.

Driver’s Permit: Foreign nationals should obtain international drivers' licenses in their home countries valid for 6 months. To obtain an Indian driver's license, individuals should apply to the Regional Transport Authority, which issues learners' permits, a month after which driver’s license is issued on the basis of a driving test and verbal examination on local laws of driving.

Other Matters PIO Card: can be issued to a person fulfilling any of the following conditions:

1. The individual has held an Indian passport at any time.

2. The individual or any of his/her parents, grandparents or great-grandparents were born in and are permanently resident in India.

3. The individual's spouse is a citizen of India or a PIO. Dual Citizenship: persons of Indian origin, who are also citizens of one of the

listed countries can acquire "Overseas Citizenship" of India without surrendering the citizenship of the other country.

L. Direct Taxes

Administration Administration, supervision and control in the area of direct taxes lies

with the CBDT. The CBDT works under the MoF, exercises significant influence over the working of the country's direct tax laws.

The Indian tax year extends from 1 April of a year to 31 March of consequent year.

Corporate Income Tax: A corporation’s Income comprises of

Income from business. Capital gains realized on any disposition of the corporation's capital

assets. Residual income arising from non-business activities. Income from House property.

Determination of taxable income Income from House Property: Earned by renting out of house

property. Income from Business.

L. Direct Taxes Contd.

Capital gains and losses: Proceeds in excess of cost from the disposition of capital assets are generally taxed as capital gains.

1. General Provisions.

2. Special provisions relating to capital gains.

3. Amalgamations, demergers and slump sales. Income from other sources

1. Investment Income: Amounts declared, distributed or paid as dividends by Indian corporations are not taxable in the hands of the shareholders.

Other direct taxes Minimum Alternate Tax(MAT): paid by corporations on the basis of

profits disclosed in their financial statements. DDT: Dividends paid by domestic corporations are exempt from tax in

the hands of the recipients. FBT: Introduced in 2005 but recently abolished. Wealth tax.

L. Direct Taxes Contd.

Foreign Tax Relief Tax treaties entered by India with several other countries govern foreign

tax relief to avoid double taxation.

Appeal Mechanism Conventional Route:

1. Appeal to Commissioner of Income Tax.

2. Appeal to Income Tax Appellate Tribunal (ITAT).

3. Appeal to the High Court.

4. Appeal to the Supreme Court. Dispute Resolution Panel (DRP).

Income Tax (Individuals): Governed by residential status of individual during tax year.

Types of income subject to tax Employment Income.

L. Direct Taxes Contd. Taxation of Employer-Provided Stock Options (ESOPs). Income from house property. Self-employment and business income. Capital gains on assets . Income from other sources (investments, lotteries).

Income Tax filing and payment process All income is taxed on the basis of the fiscal tax year from 1 April to 31

March. All taxpayers, including non-residents, must file ROI if their income exceeds the maximum amount that is not liable to taxation.

ROI for salary income needs to be filed by 31 July, ROI for self-employment or business income must also be filed by 31 July, or, if accounts are subject to a tax audit, by 30 September every year.

Other Direct Taxes Wealth Tax: At the rate of 1% if the taxable value of an individual's net

wealth exceeds INR3 million. Social Security: No social security taxes are levied in India.

M. Transfer Pricing Rules

Comprehensive transfer pricing regulations(TPRs) were introduced from 1 April, 2001 with the objective of MNCs manipulating prices in intra-group transactions.

M. Transfer Pricing Rules Contd. : Methods of TPRs

Comparable

control price

method

Resale price

method

Cost plus method

Profit split method

Transactional and

net margin method

M. Transfer Pricing Rules Contd. : Safe Harbor RulesCircumstances under which tax authorities accept a transfer price declared by a tax payer. DISPUTE RESOLUTION PANEL

ADR panel is to resolve transfer pricing disputes for all categories of tax payers as well as disputes relating to the taxation of foreign companies on a fast track basis.

ADVANCE PRICING ARRANGEMENTS APAs are currently not in force in India

N. Indirect Taxes

Excise Duty: Excise is applicable on the goods manufactured within India

and is payable by the manufacturer. Rate of 8% + education cess 2% and SHEC at 1% of the excise duty making effective duty exposure 8.24%.

Service Tax: Service Tax is applicable on the provision of the specified

services in India. It is levied at the uniform rate of 10% of the value service plus education cess at 2% and SHEC at 1% of service tax, making effective tax exposure 10.30%.

N. Indirect Taxes Contd.

VAT:VAT is an intra-state multi-point tax system and is levied on value added products at each stage.

Entry Tax:Entry tax is levied by state on the entry of goods within its jurisdiction, for use, consumption or sale on the purchase value of the goods.

N. Indirect Taxes Contd.

Research Development Cess : It is levied by the central government at 5% on import of

technology into India through a foreign collaboration. It is paid by the importer.

Other Significant Taxes: Stamp duty Profession tax Luxury tax Property tax Entertainment tax

O. Incentives

Direct Tax Incentives:

Profits from new undertakings

FTZ’s and STPs/HTPs (subjected to MAT)

Investment-linked incentives (setting up and operating a cold chain facility, setting up and operating a warehousing facility

for storage of agricultural produce)

O. Incentives Contd. : SEZs

Computation of

profits from

exports

Indirect tax

incentives for SEZ units

Incentives for

developers of SEZ

O. Incentives Contd. : State Level

Investment

incentivesPower

Tariff Incentiv

esOther

incentives

Questions/Discussions

What were the key aspects ? What factors make India as a

favorable business destination ?

Anything else…