doing business in india tp4 prodservsheet a4.qxd

India Shariah Finance Summit 2010New Delhi, 26-28 April 2010

KPMG IN INDIA

TAX

© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Foreword

Globally, Shariah Finance has been drawing attention from industry practitioners

and regulators alike as an increasingly mainstream offering. India is one of the

largest Islamic geographical markets in the world as Muslims constitute about

13.40 percent of India’s total population. The demographic factors coupled with

the overall growth in the Indian financial services sector, present significant

opportunity for global players to build and participate in a potentially large market

for Islamic finance. However, the key to doing Shariah Finance in India is to marry

the existing Indian regulations with the Shariah law principles, without coming foul

of either of them.

Even while the interest in the field has been on the rise, much more needs to be

done to improve the knowledge of Shariah Finance. Given the same, KPMG in

India in association with Taqwaa Advisory and Shariah Investment Solutions Pvt.

Ltd (‘TASIS’), a leading Indian Shariah advisory firm, has prepared this knowledge

paper which gives a broad overview of Shariah Finance in India and the broad tax

and regulatory framework of doing business in India.

TASIS has provided the research and expertise in drafting the first section of this

paper which deals with Shariah Finance from an Indian perspective.

This knowledge paper strives to highlight new business avenues in the form of

Shariah Finance in India.


Table of Contents

I. Shariah Finance – Indian perspective 2Introduction 2

What is Shariah Finance 4

Basic Contracts in Shariah Finance 6

Takaful (Shariah-compliant Insurance) 12

Shariah Guidelines for Insurance 12

Shariah Finance in India 16

Potential of Shariah Finance in India 17

Shariah Finance in Secular Countries 19

Existing Shariah Finance Products and Opportunities for Shariah Finance in India 20

Conclusion 22

2. Doing business in India 24Foreign direct investment in India 24

Portfolio investment in India 25

Foreign Investment Policy on FII investment 26

Investment as Foreign Venture Capital Funds 27

Sectorwise regulation in foreign investment (illustrative) 28

Local Indian Subsidiary or Joint Venture Company 31

Limited Liability Partnership 32

Direct taxes 35

Transfer Pricing in India 47

Indirect taxes 50

New Visa Regulations 55

New Foreign Trade Policy 59



1

Introduction

Financial arrangements constitute an integral part of the process of economic

development. A growing economy requires a progressively rising volume of

savings and adequate institutional arrangements for the mobilisation and

allocation of savings. These arrangements must not only extend and expand but

also adapt to the growing and varying financial needs of the economy. A well-

developed and efficient financial market is an indispensable prerequisite for the

effective allocation of savings in an economy. A financial system consisting of

financial institutions, instruments and markets provides an effective payment and

credit supply network and thereby assists in channeling of funds from savers to

investors in the economy. The task of the financial institutions or intermediaries is

to design ways and means to mobilise savings and help ensure its proper and

efficient allocation to meet the demands of the nation and facilitate broad-based

inclusive growth.

Shariah Finance or interest-free finance is one such novel mechanism which has

the potential to boost our economic growth. The Prime Minister’s Economic

Advisor Prof. Raghuram G. Rajan has already advocated (in the Report of the

committee on Financial Sector Reforms) inclusion of Interest-free finance in our

financial system. This according to the Committee Report, will help in financial

inclusion of a large number of our people who are not part of our financial system

because of their religious constraints. Another very important aspect highlighted

in this report is allaying the fear of instability with introduction of Interest-free

finance in the country. Successful functioning of this system in dozens of

countries (including those from Europe and North America) further underscores

that the system has more than just religious merit (as understood by some).

During the recent financial crisis the resilience shown by this system has not only

been noticed but also appreciated by regulators all over the world.

Shariah Finance (also called as Islamic Finance, Ethical Finance Interest-free

Finance or special finance in various countries) has its roots in the Islamic

religion. Concerns for equity and justice, lawful (halal) and prohibited (haram) and

a sense of responsibility towards the weaker sections of society are some of the

highlighted principles which guide and control the economic activity of the

believers in Islam.


Shariah Finance – Indian perspective12

The Banker in association with the Cambridge Consultancy Maris Strategies,

recently compiled a list of the top 500 Islamic Finance institutions from 47

countries. The following passage from the November 2007 issue is worth quoting

here.


This document outlines the underlying principles of Shariah Finance from the

Indian commercial perspective and therefore it will not dwell much upon the

theoretical and religious arguments behind Shariah Finance. Rather the focus is

more on demystifying the basic characteristics of Shariah Finance to enable one

to appreciate major commonalities and departures from the current financial

system and also inform about the trends and strategic advantages that are

associated with this financial segment.

Today’s Islamic finance industry is rapidly evolving from niche to

mainstream, with growth of Islamic banking assets now estimated at USD

750 bn and growing at a rate of 15 percent to 20 percent a year. The Gulf

Co-operation Council (GCC) proportion of total Islamic banking assets

has reached 30 percent and is projected to rise to 40 percent in the next

three years. In Malaysia, the Islamic share is currently 12 percent and the

government is committed to boosting this to 20 percent by 2010. In

Islamic countries such as the United Arab Emirates (UAE), where less

than 30 percent of the local population are Arabs, sharia-compliant banks

are gaining market share at the expense of conventional banks.The

spectacular acceptance and demand for Islamic finance means that within

the next decade, the industry is likely to capture half the savings of the

1.6 billion-strong Muslim world. It is tempting to assume that the growth

is being fuelled by an older generation of Muslims keen to take

advantage of an offering that complies with their traditional way of life.

Not so: the vast majority of the uptake comes from the under-30 segment

of the Islamic world, and it is this segment that holds the key to success

for the more than 250 Islamic banks that now operate in more than 75

countries worldwide. The popularity of Islamic finance among these

young Muslims is a response to a resurgence of interest in their cultural

and religious identity. This ‘baby boom’ of customers makes up the

backbone of the industry.

”

“

3

What is Shariah Finance?

Shariah is an understanding of Islamic Law. The codified form of Islamic law is

known as Islamic Fiqh (jurisprudence). In that sense, Shariah is a wider term

denoting an abstract form of law capable of adaptation, development and further

interpretation. The most important source of Shariah is Islam’s holy book (i.e.

Quran) and recorded traditions of the Prophet (Sunnah)1. There are some

secondary sources of the Shariah as well, which include analogical deduction

(reasoning), consensus of scholars, customs which are not contrary to Islamic

ethos and aim of public welfare. Of course, all these secondary sources derive

their authority from the primary sources. Contrary to public perception, Shariah

has the capacity of adapting and developing itself in the light of emerging

situations. However, there are a few fundamental aspects which are unalterable

and these includes those things which are prohibited in the Quran and Sunnah.

Basic guidelines of Shariah Finance are received from Islamic fiqh which enforces

a ban on certain types of economic activities. Major prohibitions under these

include:

• receipt and payment of interest (known as Riba)

• excessive ambiguity (known as Gharar)

• any kind of non-productive speculative activities such as gambling, wagering,

etc. (known as Maysir).

Also prohibited are the economic and business activities related to products or

services which are perceived to be harmful to human society, such as tobacco,

alcohol, armaments, drugs, pornography, etc. Believers are also strictly ordained

not to snatch each others’ wealth and property by wrongful or deceitful means.

Much emphasis is put on trade with mutual consent and sharing in risk. Money is

considered as a medium of exchange and store of value. It is considered only as

potential capital and hence entitled to a return only when risked along with labour

and effort (which includes management or entrepreneurship). In Shariah Finance

therefore money is not allowed to be bought and sold like a commodity. Any

charge on money lent for social causes, such as helping the poor in meeting their

consumption, medical or other dire needs is abhorred on account of the inherent

exploitation involved. At the same time any predetermined or fixed return for

partnering in business is also considered inequitable on account of the unknown

outcome of the business.

It is important to highlight here that it is not mandatory (from a Shariah point of

view) that the business of Shariah Finance be conducted only by certain groups

or adherents of a certain faith. Anybody who adheres to the Shariah prescriptions

irrespective of his/her faith, would be considered Shariah-compliant. However, it


1 Research by TASIS, 2010

4

is desired that a Board of reputed scholars of Shariah is appointed to oversee and

guide the operations of the enterprise (in respect of adherence to the Shariah.

This also helps in assuring the investors that the operations concerned are really

in consonance with Shariah principles.


5

Basic Contracts in Shariah Finance2

In principle any contract which does not flout Shariah law is considered permitted

and acceptable. However, the following major contracts used in Shariah Finance

are explained in some detail to underscore the basic characteristics of Shariah-

compliant contracts.

Keeping in view the Shariah considerations, financial institutions around the world

use many financial structures that can broadly be categorised as under:

• contracts of partnership

• contracts of exchange

• contract of loans.

It is to be noted here that these are the basic techniques. A certain degree of

variance in their practices may be observed from one country and region to

another. Sometimes the same techniques are pronounced and spelt differently in

different markets.

The section below gives a brief account of Shariah-compliant financing

techniques practiced by financial institutions across the world.

A) Contracts of Partnership

Mudarabah (Capital Financing):

This type of partnership may be called trust financing or sleeping partnership.

Mudaraba is an agreement between two parties where one party (known as

Rabbul Maal), provides the capital and the other known as 'Mudarib' brings his

entrepreneurial capabilities in managing the fund and the project. The profit

arising from the project is shared according to a predetermined formula. Losses if

any are borne by the provider of capital. In this structure, the provider of capital

has no right to participate in the management of the project.


Capital Provider(Rabbul Maal)

Entrepreneur (Mudarib)

Joint Venture(Mudaraba)


6

Source: Research by TASIS, 2010

Salient Features:

a. One partner brings capital and the other partner brings labour

b.Profits are shared between the parties in a pre-agreed ratio

c. Entrepreneur’s return is only through profit

d.Losses are borne by capital provider (in the case of liquidation all assets

belong to capital provider).

e.Mudaraba could be “restricted” or “unrestricted”

i. In “restricted Mudaraba” the managing partner (mudarib) is given

instructions not to invest the money except in a specified business and

manner.

ii. In “unrestricted Mudaraba” the managing partner has freedom to chose his

/her investments in the manner he/she deems fit.

Musharakah (Partnership):

This technique involves a partnership between two or more parties where all

partners bring capital towards financing the project. They share profit in a pre-

agreed ratio, but losses are borne on the basis of equity participation. All parties

in this case can participate in the management but it is not obligatory for them to

do so.


Partner 1

Partner 2

Partner 3

Musharakah (Joint Venture)

7


Salient Features:

a. All partners bring capital towards the project

b.Profits are shared among the parties in a pre-agreed ratio

c. Losses are borne by the parties in accordance with their capital contribution

d.All partners have a right to share in the management and decision making

process but this is not obligatory - If a partner wants to remain a sleeping

partner then that too is permitted

e.Partnership could be equal (Mufawada) or unequal (inan). In the former case

each partner is equal in rank with the others in terms of capital contribution,

profit and privileges. In the latter case, these rights are not same.

f. Partnership could also be perpetual or diminishing. In the latter case, the

existing partner slowly buys out the share of the other enabling him or her to

eventually exit from the project.

g.There are two variants of partnership in Musharakah:

i Partnership of ownership (Shirkat al-Milk). This is a partnership based on

joint ownership of properties or assets. This could further be of two types

i.e. voluntary such as partners buying some asset together, or involuntary

such as brothers and sisters becoming partners after inheriting a property.

ii Partnership through contract (Shirkat al-Aqd). This partnership is effected

through mutual contract among the partners.


8

B) Contracts of Exchange

Murabahah (Cost plus financing):

This is a sale contract mostly used for financing activities. A customer needing

finance requests the financing agency (say an Islamic Bank) to buy a certain item

for him and then sell it to him at cost plus a certain mark-up agreed between the

customer and the financing agency. Since interest is prohibited in Shariah and

trading is not, therefore, instead of giving the customer money to buy the item

he needs and charging interest on it the financing agency first buys the asset

needed by the customer on its own account and then sells it to the customer

with a certain profit margin. The customer repays the financing agency over a

period, usually in installments.


Salient Features:

a. Financing agency (upon request of the client) will buy the car with cash and

sell it to the client on credit with a mark-up.

b.This structure is tax inefficient and cannot be adopted by banks in countries

where banks are not permitted to trade in goods.

c. In many of the secular countries this mechanism is accommodated through

change in regulation.

d.Countries looking at forms have accepted this as equivalent to interest-based

financing.

e. In case of any delay in payment of installments, the finance agency cannot

increase the amount due from the client.

Financing Agency Client

CarCash purchase

Credit sale

Payment made in installments

9


Ijarah (Leasing):

Ijarah is a simple lease or a sale of usufruct. In its true sense, this contract is

purely an operating lease. Through some modifications this contract is converted

into a financial lease. There is Shariah requirement that two contracts cannot be

intermingled in one contract. To meet this obligation the financing agency will

have one contract of lease with the client. Separate from this, the financing

agency will also take a commitment from the client to buy the asset leased to

him at a pre-agreed price after the end of the lease.

Salient Features:

a. This contract is almost similar to Murabaha except that in this case the asset

instead of being sold to the customer is leased out to him.

b.This mode is adopted mostly in case of corporate financing where the client

is a corporate and requires heavy machinery such as cranes, aircraft, ship, etc.

c. In this case unlike in Murabaha, the asset remains on the books of the

financing agency.

d.This method of financing cannot be adopted by banks where banks are not

permitted to participate in leasing activities.

e.A significant difference between an Islamic lease and a conventional lease is

that in an Islamic lease all capital related costs (such as insurance and major

repairs) as well as risks (such as damage due to accidents and unforeseen

events) have to be borne by the lessor and not the lessee.


Financing Agency Client

CarCash purchase

Lease out

Payment of lease rentals

10


Bay al-Salam (Forward Purchase):

This is a contract for sale of goods where the price of the item is paid in advance.

In this system a buyer pays in advance for a specified quantity and quality of a

commodity, deliverable on a specific date, at an agreed price. This financing

technique is similar to a future or forward-purchase contract and is particularly

applicable to seasonal agricultural purchases. Under Islamic banking this

technique is generally used to buy goods, particularly raw materials, in cases

where the seller needs working capital before he can deliver the item.

Istisna (Manufacturing contract):

This is a contract of acquisition of goods by specification or order, where the

price is paid progressively in accordance with the progress of the work. This is

practiced for purchasing an item that is yet to be completed or produced, for

example, a house. Payments are made to the developer or builder according to

the stage of work completion.

Salient Features:

Istisna and Salam are both forward contracts with slight differences between

them:


Characteristics Istisna Salam

Subject matterThe subject matter of the contract

is always a made-to-order item

Not necessary. It can happen with

existing goods as well.

Delivery dateThe delivery date need not be fixed

in advanceIt needs to be fixed in advance

Payment Schedule Flexible Full in advance

11


Takaful (Shariah-compliant Insurance)3

The word Takaful comes from the Arabic word (kafala) which means guarantee.

Takaful works on the principle of cooperation and mutual help among the

members of a defined group. In other words Takaful is a method of joint

guarantee among a group of members or participants against loss or damage that

may befall any of them. The members of the group pool their contributions and

agree to jointly guarantee each other. Should any of them suffer a catastrophe or

disaster, he would receive a certain sum of money to meet the loss or damage.

Currently there are about 150 Takaful companies operating in about 40 countries.

Business of Takaful is growing at 20 percent per annum. Currently, Takaful

premiums are estimated at USD 3 billion of which 60 percent is in General Takaful

and the remaining 40 percent in Family Takaful. The largest market for Takaful is in

South-East Asia, followed by the Middle East, Africa, Europe and others.

Actually Takaful or Islamic (i.e., Shariah-compliant) insurance is a form of

insurance which works in compliance with Shariah. It is important to note that

Shariah laws are not against the concept of insurance but some of the activities

undertaken by insurance companies make the insurance activities non-compliant

under Shariah and therefore Shariah scholars have come up with the concept of

takaful that meets the objective of insurance within the parameters set by

Shariah. Some of the world’s top insurance companies are also actively engaged

in takaful.

Shariah Guidelines for Insurance3

Prohibition of interest (Riba) is a crucial aspect that makes conventional insurance

Shariah non-compliant. Contributions (premia) collected from the policyholders

are invested in interest bearing/earning instruments. The second important

prohibition is contractual ambiguity which is classified as Gharar. Gharar implies

the unavailability or non-specification of certain key aspects or information of a

contract For example, in an insurance contract (say life) the policyholder (who is

the subject matter of the contract) pays a premium for an event (his own death)

the timing of which is uncertain. In other words, the policyholder is paying a

definite price for a benefit which is contingent on an event which he cannot be

sure will occur. On the other side the insurance company is receiving a price for

something which it is not sure it will be called upon to deliver. Often the

relationship between the insurer and the insured becomes fraught with moral

hazards as one’s loss becomes another’s gain (and vice versa), thus leading to a

conflict of interest situation. This in Shariah falls under the category of gambling

(Maysir) which is also prohibited.



12

Takaful aims at meeting the underlying socially and economically desired

objective of financial protection and wellbeing of the deceased’s family (which is

likely to suffer due to his unexpected death), while complying with all the above

prohibitions.

Another consequential result of a conventional insurance policy that directly

violates another Shariah law is the nominee clause. A nominee in an insurance

policy is the sole beneficiary in the event of death of the policyholder whereas

under Shariah law anything left behind by the deceased would be required to be

distributed in accordance with the Islamic law of inheritance. Thus a nominee in a

takaful policy is a trustee designated to receive the benefits on behalf of all the

inheritors of the deceased.

How Takaful Works

Life Insurance (Family Takaful)

• A are the policyholders contributing premium B

• B (the total contributions), is bifurcated into two parts C & D

• C is the amount contributed (as donation) by each participant towards the pool

for securing them against the designated eventuality. Claims in the event of

occurrence of the designated eventualities are met from C. Policyholders

forfeit their claim on their contributions to C except to the residual part of it

which remains till the maturity of their policy

• D, the amount which goes into the investment account of each policyholder.

Any net return earned on this account is also added to the policyholder’s

investment account

• B, the total amount (of investable funds) comprising C&D is to be managed

by the insurance operator

• F, the insurance operator, who for managing the fund (B) will charge a fee (in

case of the Wakala Model) or take a share in the profits (in case of the

Mudaraba model). Losses (pro rata) in both the models are borne by the

insurance pool C.


A

PARTICIPANTS (Policyholders)

F

INSURANCE (Takaful) OPERATOR

B

Contributions

C

Donation

D

Investment90%

10%

E

Total Fund (100%)

13


General (non-life) Insurance

• In the case of General (non-life) insurance the whole contribution (B), without

being bifurcated goes into a common pool from which the risks are met

• Claims are met by disinvesting B to the extent of the requirement

• Here too operator F manages the fund either on Wakala or Mudaraba basis for

which it is remunerated in accordance with the respective agreement.


14

General Observations

• Cost of managing the operations is met from the contributions (B) in case of

Wakala model whereas in Mudaraba model it is borne by the operator (F). This

is the reason why the Mudaraba model is not so popular

• Based on the actuarial calculation, operator (F) aims at keeping some surplus

amount over and above the expected requirement of claims (C) in the case of

life policy and (B) in case of general

• Surplus over and above that expectation is either distributed back to the

policyholders or they are rewarded in the form of lower contributions in the

future

• Any shortfall in (C, Life) and (B, General) is met through interest-free loan

from the operator (F) which is recoverable in future years.


15

Shariah Finance in India

Shariah Finance is close to a trillion dollar industry today4 and is emerging as one

of the fastest growing areas of international finance. Currently its practices have

spread to over 75 countries of the world, these include many secular countries of

Europe, North America and South East Asia.

In the past few years, Indian regulators have approved schemes with exclusive

claims of Shariah compliance. The following table gives a glimpse of the important

actions that Indian government and institutions have taken in the recent past.

These actions are seen to have important ramifications for Shariah-compliant

business in the country.

The above actions indicate a cautious but systematic approach adopted by Indian

policy makers towards Shariah Finance. India Inc, having sensed the momentum

building up in favour of Shariah Finance, has started looking for strategic vantage

positions to exploit the niche opportunity. Many private sector players have come

up with Shariah-compliant/tolerant/friendly products abroad as well as in India. A

leading private sector player has created an entire vertical for distributing Shariah

tolerant products.


Action Year

Establishment of Anand Sinha Committee under the Reserve Bank of India for studying Islamic

Financial Products. 2005

Appointment of Justice Rajinder Sachar Committee to report on the Social, Economic and

Educational status of the Muslim Community of India 2005

Committee led by Prof. Raghuram G. Rajan recommends Interest-free banking for financial

inclusion of Muslim community in India. 2008

Government of India calls for bids in connection with reconstruction of National Minority

Development Finance Corporation (NMDFC) on Shariah lines. 2008

SEBI permits India’s first Shariah tolerant Mutual Fund. 2009

SEBI permits India’s first Shariah tolerant Venture Capital Fund. 2009

Government owned general insurance company starts international re-takaful operatrions. 2009

Government of the state of Kerala announces launching of a Shariah-compliant Investment

company. 2009


4 Moody’s Investor Service: Global Credit Research, 6 April 2010.

16


Potential of Shariah Finance in India

Muslims constitute 13.4 percent of India’s total population5. In absolute terms

their population in India is second only to that of Muslims in Indonesia. According

to current estimates and research, India’s Muslim population is close to 175

million. Sixty percent of the community’s population is below 25 years of age and

over 35 percent of the community’s total population lives in urban areas, thus

making Muslims one of India’s youngest and most urbanised communities.

Economically, the Muslim community is not much dependent on agriculture which

is the mainstay of a major part (65 percent) of India’s population6.

Many prominent studies and reports have shown that Muslim participation in the

financial system of the country is minimal. A report dated November 2006 by a

committee headed by Justice Rajender Sachar (i.e. Sachar Committee Report) has

reported that almost 50 percent of the community’s population is excluded from

the formal financial sector. In some other studies it has been found that Muslim

participation in the financial sector is even less than their participation in India’s

prestigious government service (i.e. IAS). According to a Report by the country’s

Central Bank (i.e. RBI), Credit : deposit ratio of Muslims is 47 percent against the

national average of 74 percent. Another important study focusing on remittances

coming from the Middle East to the Indian state of Kerala highlights that annually

about INR 120,000 million (USD 2.4 billion) are sent back by expats of the

community. A great majority of this money is either lying idle in bank accounts

(more popularly known as 786 accounts) or is invested in real estate and

jewellery7. These findings indicate the community’s indifference towards the

financial system for religious reasons.

13

0% of Population % of Deposit % of Credit disbursed

2

4

6

8

10

12

14

7.4

0.5

Source: Sachar Committee Report, November 2006

5 Census 2001.

6 Census 2001 and research by TASIS, 2010

7 Working papers: Remittances by Religion, Migration, remittances and employment: Short term trends and long term implications by KC Zachariahand S. Irudaya Rajan, December 2007.

17


0

50

100

150

200

250

300

350

400

450

No.

Of C

ompa

nies

2004 2005 2006 2007 2008* 2009**

Shariah Compliant Companies

NSE Listed BSE 500

403

329297

424

331415

312

388

152

337

132

Source: Research by TASIS

18


Shariah Finance in Secular Countries

In many of the western countries such as UK, USA, Switzerland, France, Germany,

etc. many Shariah Finance institutions have come up to tap niche opportunities.

During the previous year alone UK has given licences to two Islamic banks

bringing the total number of Islamic banks in the country to five and Islamic

finance institutions to 25. In US, the number of Shariah Finance institutions is

more than 208. Tables 1 & 2 below show Islamic finance progress in recent years.

Table – 1

Islamic Finance Institution in the West

UK 25

US 20

Switzerland 5

France 4

Luxembourg 4

Ireland 3

Germany 3

Cayman Islands 2

Canada 1

Italy 1

Source: Institute of Islamic Banking and Insurance, UK

Source: Institute of Islamic Banking and Insurance, UK

Table -2

The Size of Islamic Finance Sector

Islamic Finance Institutions Size Number

(USD billion)

Islamic Banks 750 292

Islamic Bonds 173 732

Islamic Financing for Projects and Infrastructure 464 194

Islamic Real Estate Funds 56 102

Total 1443 1320

8 Institute of Islamic Banking and Insurance, UK

19


Existing Shariah Finance Products and Opportunities for ShariahFinance in India

Considering the country’s current banking regulation, Islamic Banking may be

difficult in India at the moment but there could be various other options available

within the existing regulations which can be utilised to launch Shariah-compliant

products. Below are a few of the products that could be availed within the

available regulatory environment.

Shariah-compliant Mutual Fund

India’s first actively managed Shariah-compliant Mutual Fund scheme was

designed in a manner that while complying with all the regulatory requirements it

also followed the Shariah laws. The scheme was launched when the stock market

was at one of its lowest level still the scheme generated considerable excitement

among the investors and mobilisation was far better than expected. This model

can be easily replicated by other players who are interested in capitalising on this

niche market.

Shariah-compliant Pension Plan

This scheme was designed and structured to be India’s first Shariah-compliant

scheme in the insurance sector. Indian insurance regulator IRDA is yet to permit a

Shariah-compliant insurance structure in India but the scheme is designed in such

a way that without contravening any of the existing IRDA regulations, the scheme

has been made Shariah-compliant. The scheme has paved the way for other such

insurance schemes in the country.

Shariah-compliant Real Estate Venture Fund

This was the first Shariah-compliant real estate venture capital fund to which

Indian capital market regulator SEBI gave its seal of approval. The scheme seeks

investments from Shariah conscious investors for the purpose of investing the

same in the real estate sector in a manner and through instruments that are

approved under Shariah. Another important aspect of the scheme is regular

monitoring by the Shariah Advisor. This is aimed at providing investors a high level

of comfort in the matter of Shariah compliance. The scheme being unique has

attracted lots of interest from media, policymakers and the public.

20

International Re-Takaful Operations on Shariah basis

India is one of the most Shariah-compliant countries in the world in terms of the

number of Shariah stocks available for investment and also the variety of these

stocks. To capitalise on this opportunity an reinsurance company planned to start

an international Re-takaful operation on Shariah basis. The scheme at the moment

is India’s only reinsurance scheme on Shariah basis.

Shariah-compliant Leasing

This is an area in which Shariah-compliant mode of financing has been practiced

in the country since the eighties, albeit on a small scale. Recently a major NBFC

player has entered this field, along with participation from a foreign player. The

viability of this mode of finance is greatly dependant on government regulations

which impact on this type of transactions. Secondly, in practice competitive

pressures on pricing of the leases can make it unviable unless the lessor has

access to non-equity interest-free sources of funding (such as profit-sharing

deposits).

Musharaka and Mudaraba based Financing

These transactions too have been practiced by various corporate and non-

corporate entities. They have been used to promote ventures in various fields,

particularly real estate and construction projects. Musharaka type arrangements

mostly take on the modern partnership organisational format as they are

essentially partnerships. They could also be structured as joint ventures, with the

passing of the Bill on LLPs, that is another organisational format which is now

available to put through mudaraba and musharaka arrangements.

Islamic NBFCs

Just a few days ago there have been reports in the press that the finance

ministry is considering a new category of non-banking finance companies

(NBFCs) that will offer Islamic banking products in India. If the ministry follows

through with relevant action in accordance with the reports, it is likely to be a big

move forward for Islamic finance in the country. At present, attempts at offering

Shariah-based products in India through the NBFC route have been hamstrung

due to certain specific NBFC rules. It is hoped that if a special category of NBFCs

is created to offer Islamic banking products, these hurdles are likely to be

removed. This could see a strong surge of interest in Islamic finance products in

India and attract significant capital flows into the country too.


21


Conclusion

This is the first time government has actively shown interest in Shariah Finance

business in India. This itself reassures that Shariah Finance is poised to grow

from its current position. Various players in the corporate sector have launched

Shariah complaint products, several state governments are looking at exploring

and capitalising on Shariah-compliant financing options. Ministry of Minority

Affairs is keen to bring its financing arm (National Minority Development Finance

Corporation) under Shariah and they are further looking at strengthening Shariah

compliance of various Muslim centred activities that fall under Wakf Act or related

to performing of hajj.

An important committee which submitted its report to the Indian government

about India’s future financial structure has mentioned a paragraph about Islamic

banking.

While interest-free banking is provided in a limited manner through

NBFCs and cooperatives, the Committee recommends that measures be

taken to permit the delivery of interest-free finance on a larger scale,

including through the banking system. This is in consonance with the

objectives of inclusion and growth through innovation. The Committee

believes that it would be possible, through appropriate measures, to create

a framework for such products without any adverse systemic risk impact.

- Raghuram Rajan Committee,

Chapter 3: Broadening Access to finance, Page 35

Looking at overall developments at private, government as well as international

levels it can be expected that India has the potential to become the next big

market for Shariah Finance in the world. Its success also likely depends upon the

preparedness of our corporate sector and the support it receives from our

regulators.

”

“

22


23


Doing business in India 2Foreign direct investment in India

The objective of India’s Foreign Direct Investment (FDI) policy is to invite and

encourage foreign investments in India. Since 1991, the guidelines and the

regulatory process has been substantially liberalised to facilitate foreign

investment in India. The administrative and compliance aspects of FDI including

the modes / instruments of investments in an Indian Company (e.g. Equity,

Compulsorily Convertible Preference Shares, Compulsorily Convertible

Debentures, ADR / GDR, etc.) are embedded in the Foreign Exchange Regulations

prescribed and monitored by the Reserve Bank of India (RBI). The Foreign

Exchange Regulation also contains beneficial schemes/provisions for investments

by Non-Resident Indians/Person of Indian Origin within the overall

framework/policy.

For the purpose of FDI in an Indian Company, the following categories assume

relevance:

• Sectors in which FDI is prohibited

• Sectors in which FDI is permitted

- Investment under Automatic Route

- Investment under Prior Approval Route i.e. with prior approval of the

Government through the Foreign Investment Promotion Board (FIPB).

The following diagram depicts the FDI policy in India:

Foreign Investment

Prior Approval Route (FIPB)

Investment in Sectors requiringprior Government approval

Previous venture in India in thesame field as stipulated

Investment exceeding sectoral caps forAutomatic Route permitted to the extent

Automatic Route

24


Apart from fresh investments in an Indian company, the above is also relevant for

transfers of shares, etc. which are subject to detailed guidelines / instructions and

approval requirements to the extent applicable.

Portfolio investment in India

• Foreign Institutional Investors (FII) registered with SEBI and Non-resident

Indians are eligible to invest in India under the Portfolio Investment Scheme

within prescribed guidelines and parameters.

• Investment by FIIs are primarily governed by the Securities and Exchange

Board of India (Foreign Institutional Investors) Regulations, 1995, (‘SEBI

Regulations’). Eligible Institutional Investors that can register as FIIs include

Asset Management Companies, Pension Funds, Mutual Funds, Banks,

Investment Trusts, Insurance Companies, Re-insurance Companies,

Incorporated/Institutional Portfolio Managers, Investment Manager / Advisor,

International or Multilateral organisation, University Funds, Endowment

Foundations, Charitable Trusts and Charitable Societies, Foreign Government

Agencies, Sovereign Wealth funds, Foreign Central Bank, Broad based Fund,

Trustee of a Trust.

Sub-account means any person resident outside India, on whose behalf

investments are proposed to be made in India by a foreign institutional investor

and who is registered as a sub-account under these regulations. Entities eligible

to register as sub-account are braid based funds, portfolio which is broad based,

proprietary funds of the FII, foreign corporate and foreign individuals satisfying

the prescribed conditions, etc.

Conceptually, an application for registration as an FII can be made in two

capacities, namely as an investor or for investing on behalf of its sub-accounts.

SEBI grants registration as FII based on certain criteria, namely constitution and

incorporation of FII, being regulated in home country, track record, previous

registration with any Securities Commission, legal permissibility to invest in

securities as per the norms of the country of its incorporation, fit and proper

person, etc. SEBI grants registration to the FII and sub-account which is

permanent unless suspended or cancelled by SEBI, subject to payment of fees

and filing information every three years. The approval of the sub-account is co-

terminus with that of the FII.


25

Foreign Investment Policy on FII investment

FII investments in India are subject to the following policy / limits:

1) As per RBI, no single FII / sub-account can acquire more than 10 percent of the

paid-up equity capital or 10 percent of the paid-up value of each series of

convertible debentures issued by the Indian company. In case of foreign

corporates or individuals, each such sub-account shall not invest more than 5

percent of the total issued capital of that company.

2) All FIIs and their sub-accounts taken together cannot acquire more than 24

percent of the paid-up capital or paid up value of each series of convertible

debentures of an Indian Company. The investment can be increased upto the

sectoral cap / statutory ceiling, as applicable to the concerned Indian company.

This can be done by passing a resolution by its Board of Directors followed by

passing of a special resolution to that effect by its General Body. Also, in certain

cases, the permissible FDI ceiling subsumes or includes a separate sub-ceiling for

the FII Investment as per stipulation which needs to be complied with.

3) FIIs/sub-accounts can transact in dematerialised form through a recognised

stock broker and on a recognised stock exchange and are required to give or take

delivery of securities. Further, short selling is permitted within prescribed

parameters / norms. FIIs /sub-accounts can also lend or borrow securities in the

Indian market under a scheme framed by SEBI.

4) FIIs can buy / sell securities on Stock Exchanges in most sectors except those

that are prohibited. They can also invest in listed and unlisted securities outside

Stock Exchanges subject to prescribed guidelines / compliances / approvals.


26

Investment as Foreign Venture Capital Funds

A SEBI-registered Foreign Venture Capital Investor (FVCI) with specific approval

from the RBI under FEMA regulations can invest in Indian Venture Capital

Undertakings (IVCU) or Indian Venture Capital Fund (IVCF) or in a scheme floated

by such IVCFs subject to the condition that the IVCF should also be registered

with SEBI and compliance with the underlying framework / guidelines.

The FVCI can purchase equity / equity linked instruments / debt / debt

instruments, debentures of an IVCU or of a VCF through initial public offer or

private placement in units of schemes / funds set up by a VCF. The purchase, sale

of shares, debentures, and units can be at a price that is mutually acceptable to

the buyer and the seller.


27


Automatic route specified activities subject tosectoral cap and conditions (if any)

Prior approval from FIPB whereinvestment is above sectoral cap foractivities listed below

Prohibited list

AirportsExisting Airports – beyond74% up to

100%

Agriculture [excluding floriculture, horticulture, development ofseeds, animal husbandry, pisciculture, aqua-culture, cultivationof vegetables and mushrooms (specified) and services related toagro and allied sectors ) and plantations (other than teaplantations).

Greenfield 100%Asset reconstructioncompanies

49% Atomic energy

Existing 74% Broadcasting Business of chit fund

Air transport services – scheduled FM Radio 20% Gambling and Betting

Non resident Indians 100% Cable network 49% Housing and real estate business

FDI 49%Direct-To-home (DTH)(Withinthis limit, FDI component notto exceed 20%)

49% Lottery business

Air transport services – non scheduled /chartered and cargo airlines

Setting up hardwarefacilities

49% Nidhi Company

Non resident Indians 100%Uplinking a news and currentaffairs TV channel

26% Retail Trading (except 51% in single brand product retailing)

FDI 74%Uplinking a non-news andcurrent affairs TV channel

100% Trading in Transferable Development Rights

Air transport services- others Helicopterservices /seaplane services (specified)

100%Cigar and cigarettesmanufacture

100%

Alcohol distillation and brewing 100% Commodity Exchanges 49%

Banking (private sector) 74% /100%

Courier services other thanthose under the ambit ofIndian Post Office Act, 1898

100%

Civil Aviation Services Credit Information Companies 49%

Sectorwise regulation in foreign investment (illustrative)

28


Automatic route specified activities subject to sectoral capand conditions (if any)

Prior approval from FIPB where investment is above sectoralcap for activities listed below

Prohibited list

Ground Handling services Defense production 26%

Non resident Indians 100%Infrastructure companies in securities markets namely, StockExchanges, Depositories and Clearing Corporations

49%

FDI 74%Investment companies in infrastructure / services sector(except telecom)

100%

Maintenance and repair organisations, flying traininginstitutes; and technical training institutions

100%Mining and mineral separation of titanium bearing mineralsand ores, its value addition and integrated activities

100%

Coal and lignite mining (specified) 100% Petroleum and natural gas – Refining (PSU) - 49%

Coffee, rubber processing and warehousing 100% Print Media 26%

Construction development projects (specified) 100%Publishing of newspapers and periodicals (including foreignnews papers subject to prescribed condition) dealing withnews and current affairs

26%

Drugs and Pharmaceuticals including those involving use ofrecombinant DNA technology

100%Publishing of scientific magazines / specialty journals /periodicals

100%

Floriculture, horticulture, development of seeds, animalhusbandry, pisciculture, aqua-culture, cultivation ofvegetables and mushrooms (specified) and services relatedto agro and allied sectors

100% Satellite Establishment and Operation 74%

Hazardous Chemicals (specified) 100% Tea Sector – including tea plantation 100%

Industrial explosives manufacture 100% Telecommunication

Industrial parks 100%Basic / cellular services unified access services, valueadded and other specified services - beyond

49%upto74%

Insurance 26%ISP with gateways, radio paging, end to end bandwidth -beyond

49%upto74%

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Automatic route specified activities subject to sectoral capand conditions (if any)

Prior approval from FIPB where investment is above sectoralcap for activities listed below

Prohibited list

Mining covering exploration and mining of diamonds, andprecious stones, gold, silver and minerals)

100%ISP without gateway, infrastructure provider (specified),electronic mail and voice mail – beyond

49%upto74%

Non banking finance companies (specified) 100% Trading

Petroleum and Natural gas Trading of items sourced from Small Scale sector 100%

Refining (private companies) 100%Test marketing of such items for which a company hasapproval for manufacture

100%

Other specified areas 100% Single brand product retailing 51%

Power including generation (except atomic energy),transmission, distribution and Power Trading

100%

Special Economic Zones and Free Trade Warehousing Zones(setting up of Zone and setting up of units in these Zones)

100%

Telecommunication

Basic / cellular services unified access services, valueadded and other specified services 49%

ISP with gateways, radio paging, end to end bandwidth 49%

ISP without gateway 49%

Infrastructure provider (specified), electronic mail and voicemail

49%

Source: Certain sectoral cap include investments by NRI / FII / FVCI investments and need to be read with various underlying Press Notes / Notifications / Conditions as stipulated.

30

Local Indian Subsidiary or Joint Venture Company

Subject to Foreign Direct Investment Guidelines and Foreign Exchange

Regulations, a foreign company can set-up its own wholly-owned Indian

Subsidiary or Joint Venture Company with an Indian or Foreign Partner.

Subsidiary or a Joint Venture Company can be formed either as a Private Limited

Company or a Public Limited Company. A private limited company is obliged to

restrict the right of its members to transfer the shares, can have only 50

shareholders and is not allowed to have access to deposits from public directly. It

is also subject to less corporate compliances requirements as compared to a

public company which is eligible for listing on stock exchanges. A company is

regulated inter alia by the Registrar of Companies (ROC) under the Companies

Act, 1956. The table bellow highlights certain key differences between a private

and public company.

A private company can commence business immediately on obtaining a

Certificate of Incorporation from the Registrar of Companies (ROC). A public

company is required to obtain a “Certificate of Commencement of Business” by

filing additional documents with the ROC.


Sr. No. Particulars Private Company Public Company

1. Minimum number of shareholders Two Seven

2. Maximum number of shareholders Fifty Unlimited

3. Minimum number of directors Two Three

4. Maximum number of directors Seven Twelve (can be increasedwith Government approval)

5. Minimum paid –up capitalrequirement in general

INR 1,00,000 (Approx. USD 2200)

INR 5,00,000 (Approx. USD 11000)

31


Limited Liability Partnership

The Limited Liability Partnership Act, 2008 has introduced a new form of business

structure in India i.e. a Limited Liability Partnership (LLP). LLP is alike a private

limited company having a distinct legal entity separate from its partners. It has

perpetual succession and a common seal unlike a traditional partnership firm. LLP

adopts a corporate form combining the organisational flexibility of partnership with

advantage of limited liability for its partners.

Currently, there are no specific guidelines for foreign investment in LLP. However,

like Partnership Firms, this should need prior approval of the Reserve Bank of

India.


32


ParticularsRepresentative /

Liasion officeBranch office Project office Subsidiary / joint venture

1. Setting- uprequirements

Prior approval of RBI. Prior approval of RBI. Prior approval not required if

certain conditions are fulfilled.

If activities / sectors falls underAutomatic Route, no prior approvalbut Only post facto filings with theRBI is obligated. Otherwise obtainGovernment/ FIPB approval and thencomply with post facto filings

2. Permitted activities Only liaison / representation /communication role ispermitted. No commercial orbusiness activities orotherwise giving rise to anybusiness income can beundertaken.

Activities listed / permitted byRBI can only be undertaken.Local manufacturing and retailtrading is not permitted.

Permitted if the foreigncompany has a securedcontract from an Indiancompany to execute a projectin India.

Any activity specified in thememorandum of association of thecompany. Wide range of activitiespermissible subject to FDIguidelines / framework.

3. Funding for localOperations

Local expenses can be metonly out of inward remittancesreceived from abroad fromHead Office throughnormal banking channels.

Local expenses can be metthrough inward remittancesfrom Head Office orfrom earnings from permittedoperations

Local expenses can be metthrough inward remittancesfrom Head Office orfrom earnings from permittedoperations

Funding may be through equity orother forms of permitted capitalinfusion or borrowings (local as wellas overseas per prescribed norms)or internalaccruals

4. Limitation of liability Unlimited liability in Indiawithin overall liabilityobligation of Foreign Company

Unlimited liability in Indiawithin overall liabilityobligation of Foreign Company

Unlimited liability in Indiawithin overall liabilityobligation of Foreign Company

Liability limited to the extent ofequity participation in theIndian Company

5. Compliancerequirements underCompanies Act

Requires registration andperiodical filing of accounts /other documents



Required to comply withsubstantial higher statutorycompliance and filings requirementsas compared to LO / BO

6. ComplianceRequirements underForeign ExchangeManagementRegulations

Required to file an AnnualCompliance Certificate fromthe Auditors in India with theRBI

Required to file an AnnualActivity / ComplianceCertificate from the Auditorsin India with the RBI

Compliance certificatesstipulated for variouspurposes

Required to file Periodic and Annualfilings relating to receipt of capitaland issue of shares to foreigninvestors

7. ComplianceRequirements underIncome Tax Act

No tax liability as generally itcannot / does notcarry out any commercial orincome earning activities. Maybe advisable to file an Income-tax return.

The company is obliged to paytax on income earned andrequired to filereturn of income in India. No further tax on repatriationof profits which arepermissible in both cases

The company is obliged to paytax on income earned andrequired to filereturn of income in India. No further tax on repatriationof profits which arepermissible in both cases

Liable to tax on global income onnet basis.

Dividend declared is freelyremittable but subject to distributiontax of 16.995 percent on Dividendsdeclared / distributed / paidpursuant to which dividend is taxfree for all shareholders – limitedinter-corporate dividend set-offapply

8. PermanentEstablishment (PE)

LO generally do not constitutePE / taxable presence underDouble Taxation AvoidanceAgreements (DTAA) due tolimited scope of activities inIndia

Generally constitute aPermanent Establishment (PE)and are a taxable presenceunder DTAA as well domesticincome-tax provisions

Generally constitute aPermanent Establishment (PE)and are a taxable presenceunder DTAA as well domesticincome-tax provisions

It is an independent taxable entityand does not constitute a PE of theForeign Company per se unlessdeeming provisions of the DTAA areattracted

Comparative Summary

A comparative summary of previously discussed business entities is as under:

33



34

Direct taxes

India follows a ‘residence’ based taxation system. Broadly, taxpayers may be

classified as ‘residents’ or ‘non-residents’. Individual taxpayers may also be

classified as ’residents but not ordinary residents’.

The ‘tax year’ (known as the financial year) in India, runs from 1 April to 31 March,

of the following calendar year for all taxpayers. The ‘previous year’ basis of

assessment is used i.e. any income pertaining to the ‘tax year’ is offered to tax in

the following year (known as the assessment year).

Taxable income has to be ascertained separately for different classes of income

(called as ‘heads of income’) and is then aggregated to determine total taxable

income. Income tax is levied on ‘taxable income’, comprising of income under the

following categories, referred to as ‘Heads of Income’:

- Salaries

- Income from house property

- Profits and gains of business or profession

- Capital gains and

- Income from other sources.

Generally, the global income of domestic companies, partnerships and local

authorities are subject to tax at flat rates, whereas individuals and other specified

taxpayers are subject to progressive tax rates. Foreign companies and non

resident individuals are also subject to tax at varying rates on specified incomes

which are received / accrued or deemed to be received / accrued in India.

Agricultural income is exempt from Income-tax at the central level but is taken

into account for rate purposes. Income earned by specified organisations e.g.

trusts, hospitals, universities, mutual funds, etc., is exempt from Income-tax,

subject to the fulfillment of certain conditions.

India adopts the self-assessment tax system. Taxpayers are required to file their

tax returns by specified dates. The Tax Officer may choose to make a scrutiny

assessment to assess the correct amount of tax by calling for further details.


35

Generally, taxpayers are liable to make Income-tax payments as advance tax, in

three or four instalments, depending on the category they belong to, during the

year in which the income is earned. Balance tax payable, if any, can be paid by

way of self-assessment tax at the time of filing the return of income. Employed

individuals are subject to tax withholding by the employer on a ‘pay-as-you-earn’

basis. Certain other specified incomes are also subject to tax withholding at

specified rates.

Residential status

Individual

Depending upon the period of physical stay in India during a given tax year, an

individual may be classified as a resident or a non-resident or a ‘not ordinarily

resident’ in India.

Company

A resident company (also referred to as an Indian Company) is a company formed

and registered under the Companies Act, 1956 or one whose control and

management is situated wholly in India. An Indian company by definition is always

a resident.

A non-resident company is one, whose control and management are situated

wholly outside India. Consequently, an Indian company that is wholly owned by a

foreign entity but managed from India by foreign individuals / companies is also

considered as a resident Indian company.

Kinds of taxes

Corporate income tax

Income-tax is levied on income earned during a tax year as per the rates declared

by the annual Finance Act.

Minimum Alternate Tax (MAT)

With a view to bring zero tax paying companies having book profits, under the tax

net, the domestic tax law requires companies to pay MAT in lieu of the regular

corporate tax, in a case where the regular corporate tax is lower than the MAT.


36

However, MAT is not applicable in respect of:

- Income exempt from tax (excluding exempt long-term capital gains from tax-

year ending 31 March 2007)

- Income from units in specified zones including Special Economic Zones

(SEZs) or specified backward districts

- Income of certain sick industrial companies.

MAT is levied at 152 percent (plus applicable surcharge and education cess) of the

adjusted book profits of companies where the tax payable is less than 15 percent

of their book profits. Surcharge is applicable at 103 percent in the case of

companies other than a foreign company, if the adjusted book profits are in

excess of INR 10,000,000. Education cess is applicable at 3 percent on income-

tax (inclusive of surcharge, if any).

A tax credit is available being the difference of the tax liability under MAT

provisions and regular provisions, to be carried forward for set off in the year in

which tax is payable under the regular provisions. However, no carry forward shall

be allowed beyond the tenth assessment year succeeding the assessment year

in which the tax credit became allowable.

Dividend Distribution Tax (DDT)

Dividends paid by an Indian company are currently exempt from Income-tax in

the hands of the recipient shareholders in India, however the company paying the

dividends is required to pay DDT on the amount of dividends declared. The rate

of tax is 16.9954 percent (inclusive of surcharge and educational cess). DDT is a

tax payable on the dividend declared, distributed or paid. An exemption from this

tax has been granted in case of dividends distributed out of profits of SEZ

developers.

Domestic companies will not have to pay DDT on dividend distributed to its

shareholders to the extent of dividend received from its subsidiary if:

- The subsidiary has paid DDT on such dividend received; and

- Such a domestic company is not a subsidiary of any other company.

A company would be subsidiary of another company if such a company holds

more than half in nominal value of equity share capital of the company.


2 As per the Finance Bill, 2010 MAT is proposed to be levied at 18 percent (plus applicable surcharge and education cess) of the adjusted bookprofits of companies where the tax payable is less than 18.

3 The Finance Bill, 2010 has proposed to reduce the surcharge from 10 percent to 7.50 percent.

4 16.609 percent proposed in the Finance Bill, 2010.

37

Securities Transaction Tax (STT)

STT is levied on the value of taxable securities transactions at specified rates.

The taxable securities transactions are –

- Purchase / Sale of equity shares in a company or a derivative or a unit of an

equity-oriented fund entered into in a recognised stock exchange

- Sale of unit of an equity-oriented fund to the mutual fund

- The rates of STT are:

Wealth Tax

Wealth tax is leviable on specified assets at 1 percent on the value of the net

assets plus surcharge and cess as held by the assessee (net of debts incurred in

respect of such assets) in excess of the basic exemption of INR 3,000,000.

Capital gains tax

Capital gains arising from the transfer of capital assets (e.g. shares, stocks,

immovable property, etc.) are liable to capital gains tax. The length of time of

holding of an asset determines whether the gain is short term or long term.


Transaction Purchase/Sale ofequity shares, unitsof equity orientedmutual fund(delivery based)

Sale of equityshares, units ofequity orientedmutual fund (non -delivery based)

Sale of Derivatives(on the premiumamount)

Sale of an option insecurities

Sale of derivatives(where the option isexercised)

Sale of unit of anequity oriented fundto the mutual fund

Rates 0.125% 0.025% 0.017% 0.017% 0.125% 0.25%

Paid by Purchaser/ seller Seller Seller Seller Purchaser Seller

Source: Certain sectoral cap include investments by NRI / FII / FVCI investments and need to be read with various underlying Press Notes / Notifications / Conditions as stipulated.

38

Long term capital gains arise from assets held for 36 months or more (12 months

for shares, units, etc).

Gains arising from transfer of long-term capital assets are taxed at special rates /

eligible for certain exemptions (including exemption from tax where the sale

transaction is chargeable to STT). Short-term capital gains arising on transfer of

assets other than certain specified assets are taxable at normal rates.

The following figure shows the rates of capital gains tax:

Taxability of non resident Indians

Non-resident Indians are also be liable to tax in India on a gross basis depending

upon the type of income received.

Foreign nationals

Indian tax law provides for exemption of income earned by foreign nationals for

services rendered in India, subject to prescribed conditions. For example:

- Remuneration from a foreign enterprise not conducting any business in India

provided the individual’s stay in India does not exceed 90 days and the

payment made is not deducted in computing the income of the employer

- Remuneration received by a person employed on a foreign ship provided his

stay in India does not exceed 90 days. Automatic route specified activities

subject to sectoral cap and conditions (if any)


Type of gain Tax rate in case of transfer of assetssubject to payment of SecuritiesTransaction Tax (STT)

Tax rate in case of transfer ofother assets

Long-term capital gains NIL 20 percent

Short-term capital gains 15 percent Normal Tax Rates applicable tocorporates/ individuals

Source: Corporate tax rates are given under the head ‘Companies’ and individual tax rates are given under head ‘Personal taxes’

39

Companies

A resident company is taxed on its global income. A non-resident company is

taxed on income which is received/accrued or deemed to accrue/arise in India.

The scope of Indian income is defined under the Act. The tax rates for the tax

year 2010-11 are given in the table below:

A company is additionally required to pay the other taxes e.g. STT, MAT, Wealthtax, DDT, etc.

The Limited Liability Partnerships

The Finance Act 2009 has introduced the tax treatment for the Limited Liability

Partnerships which are recently introduced by the Limited Liability Partnership

Act, 2008 in India. The terms ‘Firm’, ‘Partner’ and ‘Partnership’ has amended and

an LLP defined under the LLP Act has been put on par with a partnership firm

under the Indian Partnership Act, 1932 (General Partnership) for the purpose of

income-tax. Consequently, provisions relating to interest and remuneration to

partners would apply to a LLP, while provisions applicable to companies such as

MAT, DDT, etc. will not apply to an LLP.


Source: Income-tax 30 percent plus surcharge of 106 percent (if the total income exceeds INR 10,000,000) thereon plus educationcess of 3 percent on Income-tax including surchargeNote: * Income-tax 40 percent plus surcharge of 2.5 percent thereon plus education cess of 3 percent on Income-tax includingsurcharge.

Type of Company Effective tax rate (including surcharge and educational cess)

Domestic company 33.995 percent#

Foreign company 42.23 percent*

5 33.22 percent is proposed in the Finance Bill, 2010.

6 The Finance Bill, 2010 has proposed to reduce the surcharge from 10 per cent to 7.50 percent.

40

Foreign Institutional Investors (FII)

To promote the development of Indian capital markets, qualified FIIs / sub

accounts registered with the Securities and Exchange Board of India (SEBI) and

investing in listed Indian shares and units, are subject to tax as per beneficial

regime as under:

In addition, there is a surcharge of 2.5 percent in case of companies and 10

percent in case of non-corporate where the income exceeds INR 1,000,000 and

education cess of 3 percent. Additionally, capital gains earned by an FII are not

subject to withholding tax in India.

The rate of tax on other short-term capital gains is 30 percent plus surcharge and

education cess; and on long-term capital gains (if not exempt) is 10 percent plus

surcharge and education cess.

Relief from Double Taxation

For countries that have Double Tax Avoidance Agreements (DTAAs) with India,

bilateral relief is available to a resident in respect of foreign taxes paid. Generally,

provisions of DTAAs prevail over the domestic tax provisions. However, the

domestic tax provisions may apply to the extent that they are more beneficial to

the taxpayer. The DTAAs would also prescribe rates of tax in the case of dividend

income, interest, royalties and fees for technical services which should be applied

if the rates prescribed in the Act are higher. Business income of a non-resident

may not be taxable in India if the non-resident does not have a permanent

establishment in India.


Interest 20 percent

Long-term capital gains # NIL

Short- term capital gains # 15 percent

Source: Subject to payment of Securities Transaction Tax (STT)

41

Tax Incentives

Special Economic Zones (SEZs)

Units set up in SEZs

A unit which sets up its operations in SEZ is entitled to claim Income-tax holiday

for a period of 15 years commencing from the year in which such unit begins to

manufacture or produce articles or things or provide services.

The benefits are available against export profits, as under:

Deduction of 100 percent for the first five years

Deduction of 50 percent for the next five years (unconditional)

Deduction of 50 percent for the next five years (subject to conditions for creation

of specified reserves).

SEZ developer

A 100 percent tax holiday (on profits and gains derived from any business of

developing an SEZ) for any 10 consecutive years out of 15 years has been

extended to undertakings involved in developing SEZ’s notified on or after 1 April,

2005 under the SEZ Act, 2005.

Offshore Banking Units (OBU) and International Financial Services Center

units (IFSC) set up in SEZs

OBUs and IFSCs located in SEZs are entitled to tax holiday of 100 percent of

income for the first five years and 50 percent for next five consecutive years.

Export oriented Units (EOU)

Undertakings set-up in Export Processing Zones (EPZ) / Free Trade Zones (FTZ) or

Electronic Hardware Technology Park (EHTP) or Software Technology Park (STP) or

100 percent EOUs, are eligible for a deduction of 100 percent on the profits

derived from exports for 10 consecutive years beginning from the year in which

such undertaking begins manufacturing or commences its business activities.

Such a deduction would be available only up to financial year 2011-2012.


42

Food processing

A 100 percent tax holiday to undertakings from the business of processing,

preservation, and packaging of fruits or vegetables or meat and meat products or

poultry or marine or dairy products or from the integrated business of handling,

storage, and transportation of food grains for the first five consecutive years and

thereafter, 30 percent (25 percent for non-corporate entities) for the next five

consecutive years.

Business of collecting and processing biodegradable waste

A 100 percent tax holiday to undertakings from the business of collecting and

processing or treating of bio-degradable waste for generating power or producing

bio-fertilisers, bio pesticides or other biological agents or for producing bio-gas or

making pellets or briquettes for fuel or organic manure, for the first five

consecutive years.

Commercial production or refining of mineral oil

A 100 percent tax holiday to undertakings (excluding undertakings located in

North eastern region) engaged in commercial production of mineral oil for the

first seven consecutive years. An undertaking, which is wholly owned by a public

sector company or any other company in which a public sector company or

companies hold at least 49 percent of the voting rights, engaged in refining of

mineral oil set up before 31 March, 2012 will be entitled to a 100 percent tax

holiday for the first seven consecutive years provided it has been notified by the

Indian Government before 31 May, 2008.


43

In-house research and development

A deduction is available of one and one-half7 times of the scientific research

expenditure incurred (excluding expenditure on cost of land or building) on an in-

house research and development facility as approved in bio-technology or in the

manufacture or production of drugs, pharma, electronic equipments, computers,

telecom equipments, chemicals, or other specified articles. The weighted

deduction is available on such expenditure incurred upto 31 March, 2012.

A deduction is available of 1508 percent of the scientific research expenditure

incurred (excluding expenditure on cost of land or building) on an in-house

research and development facility engaged in the business of manufacture or

production of any article or thing other than prohibited article or thing listed in the

Eleventh Schedule. The weighted deduction will be available from 1 April 2010.

Capital expenditure incurred in specified industries

The Finance Act, 2009 has introduced a deduction in respect of entire capital

expenditure (excluding expenditure on cost of land or goodwill or financial

instrument) incurred by the taxpayer engaged in following businesses:

• Setting up and operating cold chain facilities for specified products

• Warehousing facilities for storage of agricultural produce

• Laying/operating cross-country natural gas or crude or petroleum oil pipeline

network for distribution/storage

• Business relating to building and operating a new hotel of two star or above

category anywhere in India which starts operations on or after 1 April, 2010 (

proposed insertion by the Finance Bill, 2010).

Deduction to the expenditure incurred prior to commencement of operation of

the above specified business will be allowed, if the expenditure was capitalised in

the books of the taxpayer on the date of commencement of operation. The

deduction will be allowed to the taxpayer in the year of commencement of the

operation.


7 The Finance Bill, 2010 has proposed to increase the weighted deduction to two times of the scientific research expenditure from one and one-half times.

8 The Finance Bill, 2010 has proposed to increase the weighted deduction to 200 percent from 150 percent.

44

Industrial parks, model towns, and growth centers

For developers of industrial parks

Hundred percent tax holiday is available to developers of industrial parks for any

10 consecutive assessment years out of 15 years beginning from the year in

which the undertaking or the enterprise develops, develops and operates or

maintains and operates an industrial park, provided the date of commencement

(i.e. the date of obtaining the completion certificate or occupation certificate) of

the industrial park is not later than 31 March, 2011.

Tax holiday in respect of infrastructure projects

Undertakings engaged in prescribed infrastructure projects are eligible for a

consecutive 10 year tax holiday as set out below:

- A 10 year tax holiday in a block of 20 years has been extended to undertakings

engaged in developing / operating and maintaining / developing, operating and

maintaining any infrastructure facility such as roads, bridges, rail systems,

highway projects including housing or other activities being an integral part of

the project, water supply projects, water treatment systems, irrigation

projects, sanitation and sewerage systems or solid waste management

system

- A 10 year tax holiday in a block of 15 years has also been extended to

undertakings involved in developing / operating and maintaining,/ developing,

operating and maintaining, ports, airports, inland waterways, inland ports or

navigational channels in the sea

- A similar tax holiday (10 years out of a block of 15 years) has been extended to

undertakings engaged in the business of laying and operating cross country

natural gas distribution network, including pipe lines and storage facilities

being an integral part of such a network. Since the Finance Act, 2009 has

introduced this incentive in a modified form (given above under the heading

“Capital expenditure incurred in specified industries”) the same has been

proposed to be discontinued.


45

Tax holiday in respect of power projects

Undertakings engaged in prescribed power projects are eligible for a consecutive

10 year tax holiday as set out below:

- A tax holiday of 10 years in a block of 15 years has also been extended to

undertakings set up before 31 March, 2010 with respect to the following:

- Generation / generation and distribution of power laying of network of new

lines for transmission or distribution undertaking a substantial renovation

(more than 50 percent) and modernisation of the existing network of

transmission or distribution lines.

- The Finance Act, 2009 has extended the start date from 31 March 2010 to 31

March 2011.

Tax holiday in respect of hospitals/hotels/convention centers

- A 100 percent tax holiday for the first five consecutive years to an undertaking

deriving profits from the business of operating and maintaining a hospital

located anywhere in India (subject to exclusions), provided the hospital is

constructed and has started or starts functioning at anytime before 31

March,2013.

- A tax holiday for the first five consecutive years to an undertaking deriving

profits from the business of a hotel or from the business of building, owning

and operating a convention centre, in specified areas, if such a hotel/

convention centre is constructed and has started or starts functioning before

31 July 2010 (As proposed in the Finance Bill, 2010).

- A tax holiday for the first five consecutive years to an undertaking deriving

profit from the business of a hotel located in the specified district having a

World Heritage Site, if such hotel is constructed and has started or starts

functioning before 31 March, 2013.


46

Transfer Pricing in India

India introduced detailed transfer pricing regulations in the Income Tax Act, 1961

(Act), as an anti - avoidance measure aimed to ensure that fair and equitable

proportion of profits arising from cross border transactions between related

entities are received in India.

The Indian transfer pricing provisions are generally in line with the Transfer Pricing

Guidelines for Multinational Enterprises and Tax Administrators issued by

Organization for Economic Co - Operation and Development (“OECD Guidelines”)

albeit with some significant differences such as a wider definition of the term

associated enterprise; and the concept of arithmetical mean as opposed to

internationally followed statistical measures of median/arm’s length range. The

regulations also prescribe rigorous mandatory documentation requirements and

impose steep penalties for non-compliance.

Determination of arm’s length price

The Indian transfer pricing regulations require arm’s length price in relation to an

international transaction to be determined in accordance with the most

appropriate method from out of the following prescribed methods:

• Comparable uncontrolled price (CUP) method

• Resale price method (RPM)

• Cost plus method (CPLM)

• Profit split method (PSM)

• Transactional Net Margin Method (TNMM).

Unlike the OECD guidelines, there is no order of preference prescribed, although

in practice transfer pricing authorities do attempt to use traditional methods such

as CUP, RPM and CPLM, before accepting a profit-based approach. The choice of

the most appropriate method is required to be made having regard to factors

which inter alia include nature and class of transaction, the classes of associated

enterprises undertaking the transaction, the functions performed by them, etc.

Compliance Requirements

The burden of proving that the international transactions comply with the arm’s

length principle lies with the taxpayer. Further, the Act requires every person

entering into an international transaction to maintain prescribed information and

documents relating to international transactions.


47

The prescribed documentation includes details of ownership structure, description

of functions performed, risks undertaken and assets used by respective parties,

discussion on the selection of most appropriate method and economic analysis

resulting into determination of arm’s length price. Failure to maintain the

prescribed documentation can result in penalties up to 2 percent of the value of

the international transactions. Further, failure to furnish the prescribed

documentation within the prescribed time limit can result in penalties that can

extend up to 2 percent of the value of the international transactions.

In addition to maintaining the prescribed documentation, taxpayers are also

required to obtain a certificate (detailing the particulars of international

transactions) from an accountant and file the same with the Revenue Authorities

on or before the due date of filing return of income. Penalty of INR 100,000 can be

levied for non - filing of the certificate by the prescribed date.

Transfer Pricing Assessments

Transfer pricing matters are dealt by specialised Transfer Pricing Officers. In

accordance with the past internal administrative guidelines of the Revenue

Authorities, all taxpayers reporting international transactions with associated

enterprises exceeding INR 150 million are subjected to a mandatory transfer

pricing audit. To the extent of transfer pricing adjustments made as a result of the

audit, taxpayers lose any tax exemption to which they are otherwise entitled to.

Further, there are potential penalties to the extent of one - time to three - times of

the incremental tax arising as a result of any adjustment.

Dispute Resolution Mechanism

In order to facilitate expeditious resolution of transfer pricing disputes and

disputes relating to taxation of foreign companies, an alternate dispute resolution

mechanism is provided in the form of Dispute Resolution Panel (DRP) effective

from 1 October 2009 [a collegium comprising of three Commissioners of Income -

tax]. Under this mechanism, the Assessing Officer (AO) is required to forward the

draft of the proposed assessment order to the taxpayer, which the taxpayer may

accept or lodge an objection with the DRP within 30 days. The DRP upon hearing

both sides shall issue necessary directions to the AO for completing the

assessment, within a period of 9 months from the end of the month in which the

draft order is forwarded to the taxpayer. Such directions of the DRP would be

binding on the AO. Any appeal against the order passed by the AO in pursuance of

the directions issued by the DRP shall be filed by the taxpayer directly with the

Income - tax Appellate Tribunal.


48


49

Indirect taxes

• The Ministry of Finance, Government of India (Department of Revenue)

through the Central Board of Excise and Customs (CBEC), the apex Indirect

tax authority, implements and administers Central Excise, Customs and

Service tax laws. Circulars, notifications and clarifications issued by the CBEC

supplement these Indirect tax laws.

Customs duty

• Customs duty is a federal levy payable on the import of goods into India. The

rate of Customs duty is based on the tariff classification of goods being

imported in terms of the Customs Tariff Act, 1975 (Customs Tariff) [which is

aligned with the Harmonized System of Nomenclature (HSN) followed

internationally]. Further, various concessions/ exemptions are available

depending on the nature of goods, their intended use, status of the importer,

country of export, etc.

• The general effective rate of Customs duty on import of capital goods is 21.52

percent and for other goods is 24.42 percent, and comprises of various duties

and cesses levied on a cumulative basis [Basic Customs Duty is usually levied

at the rate of 7.5 percent on capital goods and at 10 percent on other goods;

Additional Customs Duty in lieu of Excise duty (CVD) at 8.24 percent;

Additional Duty of Customs in lieu of local sales tax (ADC) at 4 percent;

Education Cess (including the Secondary and Higher Education Cess) at 3

percent].


50

Import-export policy

• Import of goods into India and export of goods from India is regulated by the

Foreign Trade Policy (the Policy) which is framed by the Ministry of Commerce

and Industry, Government of India. The Policy remains in force for five years

and is periodically amended. The Policy provides for various exemptions and

concessional schemes which may be availed for the import and export of

goods.

Excise duty

• Excise duty is a federal duty levied on manufacture of goods in India and is

payable upon clearance of the goods from designated establishments

(factories, warehouses, etc.). Excise duty is levied as per the provisions of the

Central Excise Act, 1944 (the Excise Act) at the rates prescribed in the Central

Excise Tariff Act, 1985 (Excise Tariff). The excise tariff is also aligned with the

HSN.

• The duty is usually levied at the rate of 8.24 percent (excise duty at 8 percent,

education cess at 2 percent of excise duty and Secondary and Higher

Education cess at 1 percent of excise duty.

Service tax

• Service tax is a federal levy on provision of notified taxable services in India.

Service tax is currently leviable at the rate of 10.30 percent (Service tax at

percent, education cess at 3 percent of Service tax and Secondary and Higher

Education cess at 1 percent of Service tax) on the gross amount charged for

services provided. Presently, more than 100 taxable services are notified

under Chapter V of the Finance Act, 1994 which is the governing legislation for

Service tax.


51

Export of Services

• As per the Export of Service Rules, 2005 (the Export Rules), Service tax is not

applicable on ‘export’ of taxable services.

• Export Rules prescribe three different categories under which taxable services

may be classified depending on their nature, in order to determine whether

provision of the same to an offshore service recipient would qualify as an

export of service. The essential concept of ‘export’ is based on zero-rating

principles adopted by several countries around the world.

Import of Services

• As per the Taxation of Services (Provided from outside India and Received in

India) Rules, 2006 (the Import Rules), where any taxable service is provided by

a service provider based outside India to a service recipient located in India,

liability to discharge Service tax devolves upon the recipient of such services

in India under the reverse charge mechanism, subject to the satisfaction of

specified conditions.

Cenvat credit

• In order to reduce the cascading effect of both Excise duty and Service tax,

the Cenvat Credit Rules, 2004 provide for Cenvat credit of Excise duty paid on

inputs and capital goods and Service tax paid on input services that are used

in the manufacture of excisable goods or for provision of taxable services.

Such credit may be used to discharge an output Excise duty or Service tax

liability.

• Further, Cenvat credit is also available in respect of specified components of

the import duties paid (Generally CVD and ADC in case of manufacture and

any CVD in case of services) where such imported goods are used in the

manufacture of excisable goods / provision of taxable services in India.


52

Value Added tax (VAT) / Central Sales tax (CST)

• VAT and CST are levied on the sale of movable goods in India including various

intangibles (e.g. Patent, Trade Mark, etc.).

VAT

• VAT is a state specific levy on sale of goods within a state in India. VAT is

generally payable at the rates of 4 percent (on specified products including

industrial inputs, information technology products, capital goods, etc.) or 12.5

percent (residual rate applicable to most of the goods), though higher rates are

also prescribed for specified goods.

• Further, subject to prescribed conditions, VAT paid on inputs may be available

as credit for set-off against output VAT or CST liability of the dealer.

CST

• Where a sale transaction entails the movement of goods from one state in

India to another, the transaction would qualify as an inter-state sale and would

be chargeable to CST under the Central Sales Tax Act, 1956 (‘the CST Act’). In

case the purchaser can issue the required statutory declaration forms, CST

would be levied at a concessional rate of 2 percent, else the VAT rate

applicable on local sale of goods in the dispatching state, would be applicable

on such sales.

• Further, it is pertinent to note that the CST is a non-creditable levy and cannot

be off-set against an output VAT or CST liability.

• It may be noted that CST is intended to be phased out on introduction of

Goods and Service Tax (‘GST’) which is proposed to be introduced from April

2010.


53

Entry tax

• Entry tax is a state levy on the entry of specified goods into a state for

consumption, use or resale within a specified jurisdiction. Entry tax is payable

by the person bringing such goods into the local area/ state (typically referred

to as ‘importer’).

• Typically, many states allow a set-off of the Entry tax paid against the output

VAT payable on the sale of goods. Alternately, a refund is provided for in case

the goods are sent out of the local area/ state in the same condition. The rate

of Entry tax on different products varies from state to state, and generally

ranges between 2 percent to 15 percent.

• It may be noted that the constitutionality of Entry tax laws in various states is

under review before the Supreme Court of India and developments with

respect to the same need to be monitored closely.

Research and Development Cess (R&D Cess)

• R&D Cess is leviable at the rate of 5 percent on import of technology under a

foreign collaboration. The term ‘foreign collaboration’ has been defined to

include Joint ventures, partnerships, etc.

• Import of any designs/ specifications from outside India or deputation of

foreign technical personnel, under a foreign collaboration, would also be liable

to R&D Cess.

• R&D Cess paid is available as deduction with respect to Service tax payable

for Consulting Engineer’s services and Intellectual Property Right-related

services.

Octroi duty

Octroi duty is a local authority levy, which is levied on entry of goods into a

municipal/ local area for use, consumption or sale. This levy is presently applicable

only in certain municipalities.


54

New Visa Regulations

The Ministry of Commerce and Industry (MCI) had issued a letter dated 20 August

2009 requiring all foreign nationals in India holding Business Visa (BV) and working

on project/ contract based assignments in India to return to their home countries

on expiry of their BV or by 30 September 2009, whichever is earlier. This deadline

was subsequently extended to 31 October 2009 by the Ministry of Home Affairs

(MHA).

The MHA has now issued Frequently Asked Questions 1 (FAQs) on work related

visas issued by India, clarifying the purpose, duration and various scenarios under

which BV/ Employment Visa (EV) may be granted to foreign nationals.

Key clarifications as per the FAQs issued by MHA.


55

Employment Visa (EV)

EV shall be granted to a foreign national who is a skilled and qualified professional

or person who is being appointed at a senior level or as a technical expert.

EV shall not be granted for jobs which are routine/ ordinary/ secretarial in nature or

for which large number of qualified Indians are available.

The FAQs provide the following illustrative scenarios under which EV shall be

granted to foreign nationals:

• For execution of a project/ contract (irrespective of the duration of the visit).

• Visiting customer location to repair any plant or machinery as part of warranty

or annual maintenance contract.

• Foreign engineers/ technicians coming for installation and commissioning of

equipments/ machines/ tools in terms of contract for supply of such

equipment, etc.

• Foreign experts imparting training to the personnel of the Indian company.

• For providing technical support/ services, transfer of know-how, etc. for which

the Indian company pays fees/ royalty to the foreign company deputing the

foreign national.

• Foreign nationals coming to India as consultants on contract for whom the

Indian company pays a fixed remuneration (whether monthly or otherwise).

• Foreign artists engaged to conduct regular performances for the duration of

employment contract given by Hotels, clubs, etc.

• For taking up employment as coaches.

• Foreign sportsmen who are given contract for a specified period by the Indian

club/ organisation.

• Self-employed foreign nationals coming to India for providing engineering,

medical, accounting, legal or such other highly skilled services in their capacity

as independent consultants.


56

Business Visa

The FAQs provide the following illustrative scenarios under which BV shall be

granted to foreign nationals:

• To establish industrial/ business venture or to explore possibilities to set up an

industrial/ business venture in India.

• To purchase/ sell industrial/ commercial products or consumer durables.

• For attending technical meetings, board meetings, general meetings for

providing business services support.

• Foreign nationals who are partners in the business or functioning as Directors

in the company.

• For consultations regarding exhibitions, participation in exhibitions, trade fairs,

etc. and for recruitment of manpower.

• Foreign buyers who come to transact business with suppliers/ potential

suppliers, to evaluate/ monitor quality, give specifications, place orders, etc.

relating to goods/ services procured from India.

• Foreign experts/ specialists on a visit of a short duration in connection with an

ongoing project for monitoring the progress of the work, conducting meetings

with Indian customer and/ or to provide high level technical guidance.

• For pre-sales or post-sales activity not amounting to actual execution of any

contract/ project.

• Foreign trainees of multinational companies coming for in-house training in

regional hubs of the concerned company located in India.

• Foreign students sponsored by AIESEC for internships on project based work

in India.

BV cannot be converted into EV in India

Foreign nationals who are already in India on BV are not allowed to convert their

BV into EV in India. Therefore, they have to necessarily leave India by 31 October

2009 and get EV overseas.


57

Foreign company not having presence in India cannot sponsor EV

Where a foreign entity does not have any project office/ subsidiary/ joint venture/

branch office in India, it cannot sponsor a foreign national for EV.

EV does not necessarily to result in legal employment

An Indian company/ organisation which has awarded a contract for execution of a

project to a foreign company can sponsor employee of a foreign company for EV.

Further, such Indian organisation/ entity would not necessarily be considered the

legal employer of that person.

• The Ministry of Labour and Employment has provided for new norms of

granting employment visa (as per the press release dated 16 December 2009).

• In the present economic situation, Indian companies are awarding work for

execution of projects/contracts to foreign companies, including Chinese

companies which have resulted in inflow of foreign nationals. It has come to

the notice of the Government of India that a large number of foreign nationals

coming for execution of projects/contracts in India are on Business Visas

instead of Employment Visas.

• After reviewing the matter, the Government of India has decided that Business

Visa is to be issued only to foreign nationals visiting India to establish an

industrial/business venture or to explore possibilities to set up

industrial/business venture in India.

• The Government of India has also decided that all foreign nationals coming for

execution of projects/contracts in India will have to come only on Employment

Visa. Such visas are to be granted only to skilled and qualified professionals

appointed at senior levels and will not be granted for jobs for which a large

number of qualified Indians are available. (For details, please refer to our earlier

Flash News )

• As per the internal guidelines issued by Ministry of Labour and Employment to

the Indian embassies abroad, employment visa for foreign personnel coming

to India for execution of projects/contracts may be granted by Indian Missions

to highly skilled and professionals to the extent of 1 percent of the total

persons employed on the project subject to a maximum of 20. However, the

number of employees can be for a maximum of 40 for power and steel sector

projects till June 2010. In case more foreign nationals are required for any

project then clearance of Ministry of Labour & Employment is required.


58

New Foreign Trade Policy – Introduced on 27 August 2009.

The Government had announced a new Foreign Trade Policy on 27 August 2009.

Though the Policy does not introduce any new scheme, it seeks to extend relief

through relaxation of the existing schemes to exporters impacted by global slow

down. The Policy aims at encouraging exports, increasing employment in the

country and fuel growth in the share of international trade.

The Government expects to double India’s exports of goods and services by 2014

(USD 168 billion in 2008-09) and to double India’s share in global trade by 2020

(1.64 percent in 2008). While the measures proposed in the Policy are not radical,

they appear to be in the right direction.

Highlights of the Policy are summarised below:

Export Promotion Capital Goods (‘EPCG’) Scheme

Import of capital goods allowed at zero customs duty to exporters of specified

products, like engineering and electronic products, basic chemicals and

pharmaceuticals, apparels and textiles, plastics, etc. In these cases, export

obligation (‘EO’) equivalent to 6 times of duty saved required to be met in 6 years.

This specific Scheme to be valid till 31 March 2011

EO on import of spares, moulds, etc. reduced to 50 percent of the normal

specific EO

Served from India Scheme (SFIS)

Entitlement of duty credit scrip increased from 5 to 10 percent of foreign

exchange earnings for specified hotels, clubs and other service providers in the

tourism sector.

Following would not be included for computation of SFIS entitlement:

- Telecommunication services provided by service providers in Telecom sector

- Foreign exchange earnings for services provided by airline and shipping lines for

routes not touching India.


59

Duty Entitlement Passbook (‘DEPB’) Scheme

Scheme extended up to 31 December 2010.

Advance Authorization Scheme (‘AAS’)

A minimum 15 percent value addition on imported inputs is prescribed.

Export Oriented Units (‘EOU’) Scheme

Board of Approvals to consider extension of block period by one year for

calculation of Net Foreign Exchange, for those units which complete five years

block period in between 30 September 2008 and 30 September 2009.

Procurement of finished goods for consolidation along with manufactured goods

allowed to the extent of 5 percent of exports in the preceding year.

Focus Market Scheme (‘FMS’)

Percentage of credit entitlement increased from 2.5 percent to 3 percent and

benefit of credit entitlement extended for exports made to 26 more countries

(including 16 from Latin American Block and 10 from Asia-Oceania block)

Focus Product Scheme (‘FPS’)


scope expanded to specified products including engineering products, electronic

products, plastic products, textile products, green technology products (like wind

mill, wind powered generating sets, electrically operated vehicles etc.), etc.


60

Market Linked Focus Product (MLFP) Scheme


benefit of credit entitlement extended to products including pharmaceuticals,

articles of iron and steel, articles of aluminium, dyes, paints, soaps, etc. exported

to countries like Brazil, South Africa, Australia, etc.

Miscellaneous

Additional incentive scrip equivalent to 1 percent of FOB value of exports made

during 2009-10 and 2010-11 to be given to Status Holders in leather, textiles and

jute, handicrafts, specified engineering, plastics and basic chemicals sectors. The

scrip can be used for procurement of capital goods with actual user condition.

Exemption from terminal excise duty has been extended for supplies made by an

Advance Authorisation holder to a manufacturer holding another Advance

Authorisation if such manufacturer supplies to ultimate exporter.

Payment of customs duty for EO shortfall under AAS, EPCG and Duty Free Import

Authorisation allowed by debiting duty credit scrips, like DEPB, SFIS. Earlier the

payment was allowed in cash only.

Various procedural relaxations provided such as:

- Reduction in/ exemption from application fees for availing incentives

- Transit loss claims received even from private approved insurance companies

allowed for EO fulfilment

- Incentives not to be recovered from the exporters where RBI specifically

writes off the export proceeds realisation

- Dispatch of imported goods directly from port to site allowed under AAS for

deemed supplies

- Additional ports/ locations to be enabled on the EDI

- A Directorate of Trade Remedy Measures and an Inter Ministerial Committee

to be set up to resolve issues faced by exporters.

An updated compilation of standard input and output norms and (HS) classification

of export and import published after five years.


61

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© 2010 KPMG, an Indian Partnership and a member firm of theKPMG network of independent member firms affiliated withKPMG International Cooperative (“KPMG International”), a Swissentity. All rights reserved.

KPMG and the KPMG logo are registered trademarks of KPMGInternational Cooperative (“KPMG International”), a Swiss entity.

The information contained herein is of a general nature and is not intended to address the circumstances of

any particular individual or entity. Although we endeavour to provide accurate and timely information, there

can be no guarantee that such information is accurate as of the date it is received or that it will continue to

be accurate in the future. No one should act on such information without appropriate professional advice

after a thorough examination of the particular situation.

Vikram UtamsinghExecutive Director andHead - Markets+91 22 3090 [email protected]

Abizer DiwanjiExecutive Director+91 22 3090 [email protected]

Naresh MakhijaniExecutive Director+91 22 3090 [email protected]

KPMG ContactsKPMG in India

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