doing business in india -...

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Doing Business in India

Contractor, Nayak & KishnadwalaChartered Accountants, Mumbai, India

Tel. +91-22-6623 0600Fax. + 91 -22- 2261 5814

e mail gautam@cnkindia.com

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Reasons for Doing Business in India

Large & Fast Growing Market

Global Outsourcing of Services

Political Stability

IPR Protection

Large Educated Workforce

Lower Costs

Business & Policy Environment

Tax Breaks & Subsidies

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FDI Equity Inflows –Top Investing Countries

Rank Country Cumulative Inflows

(April 2000 to Nov 2010)

USD Million

% of total value

1 Mauritius 52,398 42%

2 Singapore 11,557 9%

3 U.S.A. 9,204 7%

4 U.K. 6,269 5%

5 Netherlands 5,289 4%

6 Japan 4,631 4%

7 Germany 2,903 2%

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FDI Equity Inflows –Top SectorsRank Sector Cumulative Inflows (April 2000

to November 2010)

USD Million

% of total value

1 Services (Fin & Non-Fin) 26,197 21%

2 Computer Software & Hardware

10,446 8%

3 Telecommunications 10,023 8%

4 Housing & Real Estate 9,356 8%

5 Construction activities 8,887 7%

6 Power 5,611 5%

7 Automobile 5,129 4%

8 Metallurgical industry 4,090 3%

9 Petroleum & Natural Gas 3,195 3%

10 Chemicals 2,767 2%

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Establishment of Business

Applicable Laws governing Establishment of Business

Options for foreign companies/citizens

Applicable taxes

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Applicable Laws

Industrial Policy of Government of India

Foreign Exchange Management Act, 1999 (FEMA)

Companies Act, 1956

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Options for foreign companies/citizens

Liaison Office

Branch

Investment in Subsidiary company/joint venture/other company

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Applicable taxes

Central Income Tax [including Tax Deduction at Source

(TDS, i.e. withholding tax), dividend distribution tax & fringe benefit tax] & Wealth Tax

Excise Duty

Service Tax

Customs Duty

State VAT

Profession Tax

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Industrial Policy

GoI New Industrial Policy of 1991

Industrial Licensing, Foreign Investment, Foreign Technology Agreements, Public Sector Policy

Prohibited sectors, Sectors permitted under Automatic Route, Sectoral caps

Governed by Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India (website: www.dipp.nic.in )

Secretariat of Industrial Approvals (SIA)/ Foreign Investment Promotion Board (FIPB) for cases not covered by Automatic Route

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Foreign Exchange Management Act (FEMA)

Exchange Control Regulations

Administered by Reserve Bank of India (RBI) –website www.rbi.org.in

Current Account convertibility with few restrictions

Capital Account controls with few permitted types of transactions

Liaison offices & branches of foreign companies, foreign direct investment in Indian companies

Foreign citizens (other than persons of Indian origin) not permitted to acquire shares on Indian stock exchanges

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Setting up a Company

Incorporation process takes 20-30 days

Cost of incorporation of a company

About Rs.50,000 for authorised capital of Rs.100,000

About Rs.75,000 for authorised capital of Rs.1,000,000

Public limited company or private limited company

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Setting up a Company…

Public limited company requirements: Minimum capital of Rs.500,000 At least 7 shareholders At least 3 directors

Private limited company requirements: Minimum capital of Rs.100,000 At least 2 shareholders, and not exceeding 50 At least 2 directors Restrictions in articles re no. of shareholders,

transfer of shares, invitation to subscribe to shares/debentures & acceptance of deposits.

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Companies Act Requirements

All companies liable to get accounts audited To file annual return and audited accounts

electronically To maintain minutes of shareholders and directors

meetings To have whole time company secretary if capital

exceeds Rs. 50,000,000 Secretarial audit if capital between Rs. 2,000,000 &

Rs. 50,000,000 Restrictions for public limited companies regarding

managerial remuneration, inter corporate loans and investments

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Liaison Office

Governed by FEMA and Companies Act Prior Approval of RBI under FEMA Subsequent registration with Registrar of Companies

(RoC) Not permitted to carry on any income earning activity

in India Only deposits by way of inward remittance permitted

in bank account To file annual audited accounts of liaison office with

RBI & RoC Not liable to income tax (except TDS)

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Liaison Office….

Permitted activities – Representing parent company/group companies in

India

Promoting export/import from/to India

Promoting technical/financial collaborations between parent/group companies and companies in India

Acting as communication channel between the parent company and Indian companies

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Branch Office

Governed by FEMA and Companies Act Prior Approval of RBI under FEMA Subsequent registration with Registrar of

Companies (RoC) Can earn income in India To file annual audited accounts of office with RBI

& RoC Liable to all taxes in India Income tax at 40% plus surcharge (effectively

42.23%) Transfer pricing provisions applicable

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Branch Office – Permitted Activities

Export/import of goods Rendering professional or consultancy services Carrying out research, in which parent co engaged Promoting technical/financial collaborations between

parent/group companies and companies in India Representing parent company in India and acting as

buying/selling agent in India Rendering services in Information Technology and

development of software in India Rendering technical support to products supplied by

parent/group companies Foreign airline/shipping company

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Investment in Indian Company

Investment in shares of an Indian company

Either by direct subscription or by purchase of existing shares

Either under Automatic Route or with prior permission of FIPB

Subject to sectoral caps and prohibited sectors

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Investment in Indian Companies- Prohibited sectors Retail Trading (except single brand)

Atomic Energy

Lottery Business

Gambling & Betting

Real estate business or construction

Business of Chit Fund

Nidhi Company

Trading in TDRs

Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture, cultivation of vegetables & mushrooms under controlled conditions, services related to agro and allied sectors) and Plantations (other than tea plantations)

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Investment in Indian Companies - Sectoral Caps

Scheduled Air Transport – 49% (100% for NRIs)

Non-Scheduled Air Transport – 74% (100% for NRIs)

Ground Handling – 74% (100% for NRIs)

Banking – 74% (FDI + FII and within this FII cannot exceed 49%)

Insurance - 26%

Telecommunications – 49%

NBFC activities – permitted list of 18 with minimum capitalization norms

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Some Sectors for which Automatic Route not available Petroleum sector (except refining), LNG/Gas pipelines Commodity Exchange Infrastructure Companies in Securities Market Credit Information companies Investment companies in infrastructure & services Defence & Strategic Industries Atomic Minerals Print Media Broadcasting Satellite Postal Services Courier Services Establishment & Operation of Satellite Development of Integrated Township Tea Sector Asset Reconstruction Companies

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Sectors under Automatic Route with no sectoral caps

All others, including Software

BPO/KPO

Drugs & Pharmaceuticals

Advertising

Roads, Highways, Ports, Harbours

Shipping

Power

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Certain Restrictions under Different Statutes/Policies

Professional Services – Statutes governing each profession

Print Media – Information & Broadcasting Ministry Guidelines

Investment in SEZ and Free Trade Warehousing –subject to Special Economic Zones Act, 2005 and Foreign Trade Policy

Satellite – Department of Space/ISRO

Petroleum & Natural Gas – Ministry of Petroleum & Natural Gas

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Some Sector Specific Issues -Trading

Single Brand Retail Trading permitted under FIPB route

Test Marketing permitted under FIPB route Franchise?

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Some Sector Specific Issues -Real Estate Development

Subject to

minimum development area – 10 hectares for serviced housing plots, 50,000 sq.mtrs. for construction

minimum capitalization norms – US $ 5 million for JVs, US $ 10 million for WOS – funds to be brought in within six months of commencement of Company’s business

time period for completion – 50% within 5 years from receipt of statutory approvals

lock-in period for funds – 3 years from completion of minimum capitalisation

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Taxation – Income Tax

Scope of Taxation

For residents & domestic companies, worldwide income

For non-residents – income accruing, arising or received in India, or deemed to accrue or arise or be received in India

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Income Tax – Rates of Tax

Domestic Companies – 30% plus surcharge (effectively 33.2175%)

Foreign Companies – 40% plus surcharge (effectively 42.23%)

Dividend Distribution tax – 15% plus surcharge (effectively 16.995%)

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Withholding Tax Rates for Payments to Foreign Companies

Nature of Payment Rate

Interest on Foreign Currency Loan 21.115%

Royalties & Fees for Technical Services

10.5575%

Dividends Nil

Short Term Capital Gains 15.83625%

Long Term Capital Gains 21.115%

Other Income 42.23%

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Other tax provisions

No provisions for group consolidated returns No controlled foreign corporation rules No thin capitalization rules Deemed Dividend in respect of loans to shareholders Rates of Depreciation prescribed on written down

value basis No carry backward of losses Carry forward of losses for 8 years Minimum Alternate Tax at 18% of book profits Authority for Advance Rulings for non-residents

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Some Tax Holidays

New Software Technology Park Units & Export Oriented Units – 100% of export profits till 31st March 2012

New Units in Special Economic Zones – 100% of profits for first 5 years, 50% of profits for next 5 asst. years – for the next 5 year, up to 50% of the amount transferred to SEZ Reinvestment Reserve account.

Infrastructure Companies – 100% of profits for any 10 consecutive years out of first 20 years

Power Generation, Transmission & Distribution units -100% of profits for any 10 consecutive years out of first 15 years

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Double Taxation Avoidance Agreements

Override domestic tax law, to the extent that treaty more beneficial to taxpayer

Comprehensive Treaties with 79 countries

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Double Taxation Avoidance Agreements – Some Treaties

Country Interest Royalty FTS

Belgium 15 10 10

Cyprus 10 15 10

Denmark 15 20 20

France 10 10 10

Germany 10 10 10

Italy 15 20 20

Ireland 10 10 10

Malta 10 15 10

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Double Taxation Avoidance Agreements – Some Treaties

Country Interest Royalty FTS

Netherlands 10 10 10

Norway 15 10 10

Portugal 10 10 10

Spain 15 10/20 20

Sweden 10 10 10

Switzerland 10 10 10

United Kingdom 15 10/15 15

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Transfer Pricing

Applicable to transactions between related entities, at least one of which is a non-resident

5 recognised methods for ALP determination Comparable Uncontrolled Price Resale Price Method Cost Plus Method Profit Split Method Transactional Net Margin Method

No safe harbour rules Transfer Pricing Audit Scrutiny of transactions exceeding Rs.150,000,000 in

a year

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Income Tax Procedures

Payment of advance tax

Filing of tax returns

Assessment by Assessing Officer

Appeals to Commissioner (Appeals)

Appeals to Income Tax Appellate Tribunal

Appeals to High Court

Reference to Supreme Court

Website www.incometaxindia.gov.in

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Excise Duty

Duty payable by manufacturer on manufacture of goods

To be paid at time of removal from factory Normally payable on selling price – generally

recovered from customer Normal rate of 10% plus education cess

(effectively 10.30%) Cenvat Credit available for excise duty paid

on inputs & service tax paid on input services Website www.cbec.gov.in

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Service Tax

Payable by service provider on provision of specified services

Most services taxable, other than medical services Payable on value of services at 10% plus education

cess (effectively 10.30%) – generally recovered from customer

Payable by service recipient on import of services Export of services exempt Cenvat Credit available for excise duty paid on inputs

& service tax paid on input services Website www.servicetax.gov.in

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Customs Duty

Payable on import of goods into India

Payable on clearance of goods from port/airport

Normal Customs Duty rate of 10% plus education cess (effectively 10.30%)

Additional Duty to match Excise Duty rates

Special Additional Duty at 4% of value

Website www.cbec.gov.in

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VAT

Payable on sale of goods

Payable on sale price, including excise duty

Lease and works contracts deemed to be sales

Normal rate of 12.5%

Set off available for VAT paid on purchases

Central Sales Tax on inter-state transfers

No VAT on purchases during course of import or on exports

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Cultural Aspects of Doing Business in India

Land of different cultures – people from North India more aggressive, from South India more conservative, from West India more businesslike

Both strongly held traditional values and emerging modern business practices prevalent

Greet with a handshake or namaste

Always use formal titles (Mr., Dr., Sir, Madam ) when greeting for first time

Punctuality – be prepared for delays in appointments, particularly in Government offices

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Cultural Aspects of Doing Business in India ….

Most Indians are reluctant to say no directly - try and understand the message behind the words

Get to know your counterpart as a person and gain his trust

Be willing to share a cup of tea/coffee and indulge in small talk before getting down to the main business

Do not be offended at personal questions

Do not be too aggressive or forceful or confrontationist – try and use reasoned logic after understanding the other person’s problem

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Thank You!