Doing Business with India

Free Guide for Foreign Companies Doing Business in India, Investing in India, Outsourcing to India, Trading with India

On this page:

• Basic Information about India

• Legal System and Laws in India

• Corporate Taxes in India

• Tax Incentives for Exporters

• Double Taxation Treaties

• Transfer of Technology

• Repatriation

• Privatization in India

• Litigation in India and Dispute Resolution in India

• Arbitration in India

• Joint Ventures in India by Foreign Investor

• Establishing a Subsidiary in India by Foreign Investor

Some Basic Facts about India

Did you know that India.....

• is the world's second largest small car market

• is one of only three countries that makes its own supercomputers

• is one of six countries that launches its own satellites

• one hundred of the Fortune 500 have R & D facilities in India

• has the second largest group of software developers after the U.S.

• lists 6,500 companies on the Bombay Stock Exchange (only the NYSE has more)

• is the world's largest producer of milk, and second largest producer of food, including fruits and vegetables

• is a world economic power, with growth over the past few years averaging 8%

• is the world's fourth largest economy, based on purchasing power parity

• sends more students to the U.S. A. colleges than any other country in the world (In 2007, over 84,000 Indian students enrolled in the U.S. A.)

• has the world's second largest pharmaceutical industry after China

• has a middle class estimated at 300 million out of a total population of 1 billion

• with its large base of English speaking skilled human resource, it is most sought after destination for business process outsourcing, Knowledge processing etc.

• is the second largest English-speaking scientific, technical and executive manpower in the world

• produces more than 900 movies a year - significantly more than the USA

• has become increasingly attractive to foreign investors in various sectors

• its low costs and huge, English-speaking, workforce have made it popular with multinationals for work including manufacturing and call centers.

• provides many tax exemptions to companies set up in Special Economic Zone

• provides many tax incentives available to IT companies, business process outsourcing and KPO companies

• has a stable political system based on parliamentary democracy

• has a common law legal system with English as a court language

• is emerging as a major market and investment destination.

India is the largest country in South Asia and the seventh largest in the world. China, Nepal and Bhutan are the neighboring countries in the north, Bangladesh and Burma in the east and Pakistan and Afghanistan in the west. In the south the country tapers off into the Indian Ocean. India is the second most populous country in the world, with over one billion people. India is the largest democracy in the world. English is extensively used for business and is understood almost all over India. The Indian Rupee (International symbol is INR) is the country’s currency. India is committed to a free economy after having an economy controlled by licensing until 1991. India has become a member of the WTO and is disbanding quantitative restrictions on imports.

FACTS ABOUT INDIA

Indian Legal System & Major Commercial Laws of India

India is a common law country with a written constitution which guarantees individual and property rights. There is a single hierarchy of courts. Indian courts provide adequate safeguards for the enforcement of property and contractual rights. However, case backlogs often result in procedural delays. Most of the laws are codified. Regulations and policies fill in the details.

Major bodies of law in India affecting foreign investment are the Foreign Exchange management Act of 1999 ("FEMA"), the Companies Act of 1956, the Industries Act of 1951, the Monopolies and Restrictive Trade Practices Act of 1969 and the New Industrial Policy of 1991. Foreign collaboration and equity participation in India is regulated by the Foreign Exchange management Act of 1999. The Industries (Development Regulation) Act of 1951 governs industrial regulation. The Companies Act of 1956 regulates corporations and their management in India. The Monopolies and Restrictive Trade Practices Act of 1969 ("MRTP") governs restrictive and fair trade practices. The New Industrial Policy of 1991 ("NIP") which lays down the policy and procedure for foreign investment has liberalized and simplified the investment procedures. The major changes introduced by NIP are as follow:

1. NIP brings about a streamlining of procedures, deregulation, de-licensing, a vastly expanded role for the private sector and an open policy towards foreign investment and technology.

2. Foreign investors are allowed to hold more than 50% equity ownership in most of the sectors, and 100% percent equity ownership in some sectors.

3. Foreign Institutional Investors ("FII's) from reputable institutions (like pension funds, mutual funds) may participate in the Indian capital markets.

4. Joint ventures with trading companies and imports of secondhand plants and machinery are allowed.

5. Monopoly and restrictive trade practice restraints (i.e., antitrust laws) have been eased.

6. Customs duties have been slashed considerably; duty-free imports are allowed in some cases.

7. The rupee is completely convertible; 100% of foreign exchange earnings can be converted at free market rates.

8. Export policies have been liberalized.

9. The Foreign Exchange Regulation Act has been amended to encourage foreign investments in India.

10. A tax holiday is available for a period of 5 continuous years in the first 8 years of establishing exporting units.

11. A tax holiday for up to 5 to 8 years is available and 100% equity participation is allowed for the power projects in India.

12. Concessions in tax regime are available for foreign investors in high-tech areas.

Corporate Income Tax

Rates
Revenue accruing to foreign companies (including royalty and technical services fees) from providing services concerning the exploration or production of petroleum or natural gas is subject to a maximum tax on a deemed profit of 10% of gross revenue.

Foreign companies engaged in the execution of turnkey power project contracts approved by the government and financed by international programs are subject to a maximum tax on a deemed profit of 10% of gross revenue.

The corporate income tax effective rate for domestic companies is  35% while the profits of branches in India of foreign companies are taxed at 45%. Companies incorporated in India even with 100% foreign ownership, are considered domestic companies under the Indian laws.  For more details check our Tax Rates page

Non-Export Incentives

India offers a wide range of concessions to investors to provide incentives for economic and industrial growth and development. India's tax rates may not be one of the lowest in the world, but a careful tax planning keeping in mind the tax holidays and the following general tax incentives reduce the taxes considerably:

No corporate taxes are levied for a period of five years for projects set up for domestic power generation and transmission and also for projects in Electric Hardware Technology Park Schemes.

Deduction of preliminary and preoperative expenses incurred in setting up a project

Complete tax exemption on profits from exports of goods

Full or partial exemption of foreign exchange earnings on construction projects, hotel and tourism related services, royalties, commission, etc.

Liberal depreciation allowances

Deduction of capital research and development expenditures

New industrial undertakings may deduct 25% of their gross total income for eight years

Tax Incentives for Exporters

The New Export-Import Policy of 1992 provides substantial tax incentives for investments in Export Oriented Units ("EOU's") and industries located in the Export Processing Zones ("EPZ's"). Automatic approvals are given by the Secretariat for Industrial Approval for setting up 100% Export Oriented Units ("EOU"). Incentives and facilities available under the EOU scheme include concessional rent for lease of industrial plots, preferential power allocation and supply, exemption from import duty for capital goods and raw materials for power sector industries as well as for trading companies primarily engaged in export activity.

There are six EPZ's or free trade zones located in different parts of the country. These zones are designed to provide internationally competitive infrastructure facilities and duty-free and low cost environment. Various monetary and non-monetary incentives are granted which include import duty exemption, complete tax holiday, decentralized "single window clearance," etc.

Twenty-five percent of goods manufactured in EPZ's are permitted to be sold in the domestic market. No excise duty is payable on such items and customs duties on imported components is 50% of normal rates. Major exporters are allowed to operate bank accounts abroad to facilitate trade. Companies that sell in the domestic market as well as international markets may deduct export earnings from their tax liabilities.

Exporters and other foreign exchange earners have been permitted to retain 25% of their foreign exchange earnings in foreign currency. For 100% Export Oriented Units and units in Export Processing Zones, Electronic Hardware Technology Parks, retention up to 50% is allowed.

Other incentives include:

• Duty-free imports of raw materials and components.

• Tax holiday for a period of 5 continuous years in the first 8 years from the year of commencement of production.

• Exemption from taxes on export earnings even after the period of tax holiday.

• Exemption from central and state taxes on production and sale.

• Permission to install machinery on lease.

• Freedom to borrow self-liquidating foreign currency loans at the prime rate of interest.

• Inter-unit transfers of finished goods among exporting units.

• Decentralized single-window clearance of proposals concerning units in Export Processing Zones.

• EOU/EPZ units may export through Export Houses, Trading Houses and Star Trading houses.

See also Tax Rates in India | Withholding Tax Rates For Foreign Companies Doing Business In India Under The Tax Treaties

Double Taxation Treaty

India has entered into tax treaties with a number of countries including, Australia, Belgium, Canada, Denmark, France, Germany, Indonesia, Japan, Korea, Mauritius, Singapore, the United Kingdom and the United States. These treaties endeavor to avoid double taxation and attract know- how and technology. In many treaties the withholding tax on royalties and fees for technical services emanating from India is lower than the general tax rate. A careful planning and corporate structuring can reduce the tax obligations considerably. The following treaties have been successfully used by international investors to reduce their tax obligations in India and in their home countries:

(a) India - U.S.A. Tax Treaty

The the best prospect sectors for U.S. exports to India, according to US Department of Commerce, are: Airport & Ground Handling Computer and Peripherals Education Services Electrical Power Generation, Transmission & Distribution Equipment Food Processing & Cold Storage Equipment Machine Tools Medical equipment Mining & Mineral Processing Equipment Oil & Gas Field Machinery Pollution Control Equipment Safety and security equipment Telecommunication Equipment Textile Machinery Water _____****_____

The Indo-U.S. tax treaty considerably reduces the withholding tax in India for royalties, fees for technical services, and for interest paid to the US banks and financial institutions. The withholding tax on dividends arising out of India is 15%, if the parent company owns at least 10% of the voting stock. The withholding tax on royalties and technical services fees is at the rate of 15%. The capital gains is taxed at a rate of 20%. The withholding tax on rental of equipment and interest paid to U.S. banks and financial institutions is at the rate of 10%. All these rates are lower than the regular withholding tax rates.

(b) India - Mauritius Tax Treaty

The withholding tax rates for dividends and capital gains can be reduced further by a careful corporate structuring and tax planning. The Indo-Mauritius tax treaty offers reduced withholding taxes for companies incorporated in the island country of Mauritius. Recently some U.S. companies have invested in India through offshore subsidiaries incorporated in Mauritius. For companies incorporated in Mauritius there is no withholding tax on capital gains in India and the withholding tax on dividends is only 5%. The companies incorporated in Mauritius, at present, can opt not to pay any tax in Mauritius.

See also Tax Rates in India | Withholding Tax Rates For Foreign Companies Doing Business In India Under The Tax Treaties

Transfer of Technology Agreements in India and Approvals

Approvals
The Reserve Bank of India ("RBI") accords automatic permission for foreign technology agreements in high priority industries up to 5% royalty for domestic sales and 8% for exports, subject to total payment of 8% of sales over 10 year period from date of agreement or 7 years from commencement of production. In addition, lump-sum technology payments up to Rs. 1 crore, i.e., (Rs. 10 million) are permitted under the automatic approval system. The prescribed royalty rates are net of taxes and are calculated according to standard procedures.

Subject to the aforesaid guidelines, automatic approval is available in non-high priority industries, if no foreign exchange is required for any payment.

Governing Laws

Transfer of technology agreements must be subject to the laws of India. These agreements can be subject to arbitration under the rules of international institutions like the International Chamber of Commerce (the "ICC"). Arbitration can take place in India or abroad. India is a party to the 1958 New York Convention on Enforcement of Arbitration Awards. Foreign awards are, therefore, enforceable in India. Under Indian law, upon termination of the transfer of technology agreement after its 7-10 year period, the technology is deemed to be perpetually licensed to the Indian party for use in India. Special rules apply to the transfer of technology to Indian government companies.

Repatriation of Investments & Profits from India

One of the biggest concerns for foreign investors is how to get dollars out of India? Historically, it is not a problem to repatriate investments and profits from India. The Overseas Private Investment Corporation ("OPIC"), a U.S. government backed insurer of foreign commercial dealings, has never had to pay a claim due to India's failure to provide foreign exchange. Dividends, capital gains, royalties and fees can be repatriated easily with the permission of the Reserve Bank of India. In a short, specified list of consumer goods industries, dividend balancing is required against export earnings.

In case of an exit decision, the overseas promoter can repatriate his share after discharging tax and other obligations. He can also disinvest his share either to his Indian partner, to another company, or to the public. Even during the so-called worst period no foreign company left India without proper and due compensation. Problems do arise when people and businesses try to go around the rules or from inexperience.

Rupee, the Indian currency, is convertible for the current account. It means that:

Repatriation of foreign exchange at the existing market rates has become easier.

Exporters can retain 25% of total receipts in foreign currency accounts to meet requirements such as travel, advertising, etc.

Foreign exchange will be available at market rates for all imports except specified essential items.

Foreign exchange requirements for private travel, debt servicing, dividend or royalty payments and other remittances may also be obtained from banks or exchange dealers at the current market rate.

The system has the advantages of completely bypassing bureaucratic controls and freeing importers from delays and inefficiencies.

Privatization, Private & Public Sector in India

Almost all the agriculture sector in India is in private hands. Most of the industrial sector is open to private participation. The number of industries reserved for the public sector has been reduced to 6. The industries reserved for public sector are arms and ammunition, defense equipment, defense aircraft and warships, atomic energy, coal lignite, mineral oils, and sulfur and diamonds. All other areas are open to the private sector and private sector participation on a selective basis even in the still restricted areas is being considered. In practice railways, post and telegraph, shipbuilding, oil exploration and mineral industries are mostly government owned. A process of disinvestment of government holdings in selected public enterprises has been initiated. The government plans to form a new corporation, Indian Railways Catering Tourism Corporation (IRCTC). IRCTC will take over catering work and enter into tourism projects and trains in collaboration with private sector.

Litigation in India

India is a common law country. Most of the courts use English as the court language.

There is single hierarchy of courts in India with the Supreme Court of India at the top.

See also  Arbitration in India | Litigation in India | Dispute Resolution in India |  International Commercial Arbitration  | UNCITRAL Model Law on International Arbitration

Arbitration in India & International Commercial Arbitration

Recently India enacted the Arbitration and Conciliation Act, 1996 ("New Law"). The New Law is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration ("Model Law"). Among others, the objectives of the New Law are to harmonize the Indian arbitration law with the Model Law and establish an internationally recognized legal framework for arbitration, consolidate the laws on domestic and international arbitration and conciliation, and enforcement of foreign awards. Another important purpose of the New Law is to encourage arbitration as an alternate dispute resolution process and avoid prolonged judicial process.  

See also  Arbitration in India | Litigation in India | Dispute Resolution in India |  International Commercial Arbitration  | UNCITRAL Model Law on International Arbitration

Establishing Wholly-owned Subsidiary in India by Foreign Investors

India allows, in many sectors, setting up of subsidiaries in India which are wholly owned by foreign investor, including foreign companies.

There are two ways to form subsidiaries in India:

• Automatic route; and

• Special Permission Route

In certain sectors such as information technology, development of integrated townships, mass rapid transport services, export oriented manufacturing, 100% ownership by foreign investors is allowed, subject to certain terms and conditions. However, they have to apply for and obtain permission from government authorities. In certain other sectors FDI up to a specified percentage is permitted under the automatic route, See also FDI in India Sector wise Guide | FDI in Small Scale Sector in India Further Liberalized

In certain other sectors FDI up to 100 is permitted with prior approval of the Foreign Investment Promotion Board (“FIPB”)/Secretariat of Industrial Approvals (“SIA).

The obvious advantages of a subsidiary are total control over funding, management and profit share of the business. However, the flip side is that in a subsidiary where the total management is foreign, the advantage of local knowledge of customs and methods is lacking from very outset.

See also Formation of Subsidiary in India | Starting a Business in India | Opening Branch in India | Incorporating company in India | Procedure for Formation of Company in India

See also  Government Approvals for Investing in India  |  Entry Strategies in India for Foreign Investors  |  FIPB Approval for Foreign Investment in India  |  RBI Approvals for FDI in India

Joint Ventures in India by Foreign Investors

Joint Venture companies are the most preferred form of corporate entities for investment in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office.

The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India in the form FC (RBI) is required. The application can be made either by the Indian party or the foreign party. Existing companies having foreign equity holding and desiring to increase it to 74% can also obtain automatic approval if they are in priority areas. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities.

Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's").

For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters.

Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated.

Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture agreement. Before signing the joint venture agreement, the terms should be thoroughly discussed to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties. See also Joint Ventures in India | Joint Venture Agreements | Outsourcing Agreements | Outsourcing to India | Formation of Subsidiary in India |  Starting a Business in India | Opening Branch in India | Incorporating company in India | Procedure for Formation of Company in India