Doing Business in India

1. Doing Business in India Contractor, Nayak & Kishnadwala Chartered Accountants, Mumbai, India Tel. +91-22-6623 0600 Fax. + 91 -22- 2261 5814 e mail gautam@cnkindia.com

2. Reasons for Doing Business in India • Large & Fast Growing Market • Global Outsourcing of Services • Political Stability • IPR Protection • Large Educated Workforce • Lower Costs • Business & Policy Environment • Tax Breaks & Subsidies

3. FDI Equity Inflows – Top Investing Countries

4. FDI Equity Inflows – Top Sectors

5. Establishment of Business • Applicable Laws governing Establishment of Business • Options for foreign companies/citizens • Applicable taxes

6. Applicable Laws • Industrial Policy of Government of India • Foreign Exchange Management Act, 1999 (FEMA) • Companies Act, 1956

7. Options for foreign companies/citizens • Liaison Office • Branch • Investment in Subsidiary company/joint venture/other company

8. Applicable taxes • Central • Income Tax [including Tax Deduction at Source (TDS, i.e. withholding tax), dividend distribution tax & fringe benefit tax] & Wealth Tax • Excise Duty • Service Tax • Customs Duty • State • VAT • Profession Tax

9. Industrial Policy • GoI New Industrial Policy of 1991 • Industrial Licensing, Foreign Investment, Foreign Technology Agreements, Public Sector Policy • Prohibited sectors, Sectors permitted under Automatic Route, Sectoral caps • Governed by Department of Industrial Policy & Promotion, Ministry of Commerce & Industry, Government of India (website: www.dipp.nic.in ) • Secretariat of Industrial Approvals (SIA)/ Foreign Investment Promotion Board (FIPB) for cases not covered by Automatic Route

10. Foreign Exchange Management Act (FEMA) • Exchange Control Regulations • Administered by Reserve Bank of India (RBI) – website www.rbi.org.in • Current Account convertibility with few restrictions • Capital Account controls with few permitted types of transactions • Liaison offices & branches of foreign companies, foreign direct investment in Indian companies • Foreign citizens (other than persons of Indian origin) not permitted to acquire shares on Indian stock exchanges

11. Setting up a Company • Incorporation process takes 20-30 days • Cost of incorporation of a company • About Rs.50,000 for authorised capital of Rs.100,000 • About Rs.75,000 for authorised capital of Rs.1,000,000 • Public limited company or private limited company

12. Setting up a Company… • Public limited company requirements: • Minimum capital of Rs.500,000 • At least 7 shareholders • At least 3 directors • Private limited company requirements: • Minimum capital of Rs.100,000 • At least 2 shareholders, and not exceeding 50 • At least 2 directors • Restrictions in articles re no. of shareholders, transfer of shares, invitation to subscribe to shares/debentures & acceptance of deposits.

13. Companies Act Requirements • All companies liable to get accounts audited • To file annual return and audited accounts electronically • To maintain minutes of shareholders and directors meetings • To have whole time company secretary if capital exceeds Rs. 50,000,000 • Secretarial audit if capital between Rs. 2,000,000 & Rs. 50,000,000 • Restrictions for public limited companies regarding managerial remuneration, inter corporate loans and investments

14. Liaison Office • Governed by FEMA and Companies Act • Prior Approval of RBI under FEMA • Subsequent registration with Registrar of Companies (RoC) • Not permitted to carry on any income earning activity in India • Only deposits by way of inward remittance permitted in bank account • To file annual audited accounts of liaison office with RBI & RoC • Not liable to income tax (except TDS)

15. Liaison Office…. • Permitted activities – • Representing parent company/group companies in India • Promoting export/import from/to India • Promoting technical/financial collaborations between parent/group companies and companies in India • Acting as communication channel between the parent company and Indian companies

16. Branch Office • Governed by FEMA and Companies Act • Prior Approval of RBI under FEMA • Subsequent registration with Registrar of Companies (RoC) • Can earn income in India • To file annual audited accounts of office with RBI & RoC • Liable to all taxes in India • Income tax at 40% plus surcharge (effectively 42.23%) • Transfer pricing provisions applicable

17. Branch Office – Permitted Activities • Export/import of goods • Rendering professional or consultancy services • Carrying out research, in which parent co engaged • Promoting technical/financial collaborations between parent/group companies and companies in India • Representing parent company in India and acting as buying/selling agent in India • Rendering services in Information Technology and development of software in India • Rendering technical support to products supplied by parent/group companies • Foreign airline/shipping company

18. Investment in Indian Company • Investment in shares of an Indian company • Either by direct subscription or by purchase of existing shares • Either under Automatic Route or with prior permission of FIPB • Subject to sectoral caps and prohibited sectors

19. Investment in Indian Companies- Prohibited sectors • Retail Trading (except single brand) • Atomic Energy • Lottery Business • Gambling & Betting • Real estate business or construction • Business of Chit Fund • Nidhi Company • Trading in TDRs • Agriculture (excluding floriculture, horticulture, seed development, animal husbandry, pisciculture, cultivation of vegetables & mushrooms under controlled conditions, services related to agro and allied sectors) and Plantations (other than tea plantations)

20. Investment in Indian Companies - Sectoral Caps • Scheduled Air Transport – 49% (100% for NRIs) • Non-Scheduled Air Transport – 74% (100% for NRIs) • Ground Handling – 74% (100% for NRIs) • Banking – 74% (FDI + FII and within this FII cannot exceed 49%) • Insurance - 26% • Telecommunications – 49% • NBFC activities – permitted list of 18 with minimum capitalization norms

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

22. Sectors under Automatic Route with no sectoral caps • All others, including • Software • BPO/KPO • Drugs & Pharmaceuticals • Advertising • Roads, Highways, Ports, Harbours • Shipping • Power

23. Certain Restrictions under Different Statutes/Policies • Professional Services – Statutes governing each profession • Print Media – Information & Broadcasting Ministry Guidelines • Investment in SEZ and Free Trade Warehousing – subject to Special Economic Zones Act, 2005 and Foreign Trade Policy • Satellite – Department of Space/ISRO • Petroleum & Natural Gas – Ministry of Petroleum & Natural Gas

24. Some Sector Specific Issues - Trading • Single Brand Retail Trading permitted under FIPB route • Test Marketing permitted under FIPB route • Franchise?

25. Some Sector Specific Issues - Real Estate Development • Subject to • minimum development area – 10 hectares for serviced housing plots, 50,000 sq.mtrs. for construction • minimum capitalization norms – US $ 5 million for JVs, US $ 10 million for WOS – funds to be brought in within six months of commencement of Company’s business • time period for completion – 50% within 5 years from receipt of statutory approvals • lock-in period for funds – 3 years from completion of minimum capitalisation

26. Taxation – Income Tax • Scope of Taxation • For residents & domestic companies, worldwide income • For non-residents – income accruing, arising or received in India, or deemed to accrue or arise or be received in India

27. Income Tax – Rates of Tax • Domestic Companies – 30% plus surcharge (effectively 33.2175%) • Foreign Companies – 40% plus surcharge (effectively 42.23%) • Dividend Distribution tax – 15% plus surcharge (effectively 16.995%)

28. Withholding Tax Rates for Payments to Foreign Companies

29. Other tax provisions • No provisions for group consolidated returns • No controlled foreign corporation rules • No thin capitalization rules • Deemed Dividend in respect of loans to shareholders • Rates of Depreciation prescribed on written down value basis • No carry backward of losses • Carry forward of losses for 8 years • Minimum Alternate Tax at 18% of book profits • Authority for Advance Rulings for non-residents

30. Some Tax Holidays • New Software Technology Park Units & Export Oriented Units – 100% of export profits till 31st March 2012 • New Units in Special Economic Zones – 100% of profits for first 5 years, 50% of profits for next 5 asst. years – for the next 5 year, up to 50% of the amount transferred to SEZ Reinvestment Reserve account. • Infrastructure Companies – 100% of profits for any 10 consecutive years out of first 20 years • Power Generation, Transmission & Distribution units - 100% of profits for any 10 consecutive years out of first 15 years

31. Double Taxation Avoidance Agreements • Override domestic tax law, to the extent that treaty more beneficial to taxpayer • Comprehensive Treaties with 79 countries

32. Double Taxation Avoidance Agreements – Some Treaties

33. Double Taxation Avoidance Agreements – Some Treaties

34. Transfer Pricing • Applicable to transactions between related entities, at least one of which is a non-resident • 5 recognised methods for ALP determination • Comparable Uncontrolled Price • Resale Price Method • Cost Plus Method • Profit Split Method • Transactional Net Margin Method • No safe harbour rules • Transfer Pricing Audit • Scrutiny of transactions exceeding Rs.150,000,000 in a year

35. Income Tax Procedures • Payment of advance tax • Filing of tax returns • Assessment by Assessing Officer • Appeals to Commissioner (Appeals) • Appeals to Income Tax Appellate Tribunal • Appeals to High Court • Reference to Supreme Court • Website www.incometaxindia.gov.in

36. Excise Duty • Duty payable by manufacturer on manufacture of goods • To be paid at time of removal from factory • Normally payable on selling price – generally recovered from customer • Normal rate of 10% plus education cess (effectively 10.30%) • Cenvat Credit available for excise duty paid on inputs & service tax paid on input services • Website www.cbec.gov.in

37. Service Tax • Payable by service provider on provision of specified services • Most services taxable, other than medical services • Payable on value of services at 10% plus education cess (effectively 10.30%) – generally recovered from customer • Payable by service recipient on import of services • Export of services exempt • Cenvat Credit available for excise duty paid on inputs & service tax paid on input services • Website www.servicetax.gov.in

38. Customs Duty • Payable on import of goods into India • Payable on clearance of goods from port/airport • Normal Customs Duty rate of 10% plus education cess (effectively 10.30%) • Additional Duty to match Excise Duty rates • Special Additional Duty at 4% of value • Website www.cbec.gov.in

39. VAT • Payable on sale of goods • Payable on sale price, including excise duty • Lease and works contracts deemed to be sales • Normal rate of 12.5% • Set off available for VAT paid on purchases • Central Sales Tax on inter-state transfers • No VAT on purchases during course of import or on exports

40. Cultural Aspects of Doing Business in India • Land of different cultures – people from North India more aggressive, from South India more conservative, from West India more businesslike • Both strongly held traditional values and emerging modern business practices prevalent • Greet with a handshake or namaste • Always use formal titles (Mr., Dr., Sir, Madam ) when greeting for first time • Punctuality – be prepared for delays in appointments, particularly in Government offices

41. Cultural Aspects of Doing Business in India …. • Most Indians are reluctant to say no directly - try and understand the message behind the words • Get to know your counterpart as a person and gain his trust • Be willing to share a cup of tea/coffee and indulge in small talk before getting down to the main business • Do not be offended at personal questions • Do not be too aggressive or forceful or confrontationist – try and use reasoned logic after understanding the other person’s problem

42. Thank You!