Doing Business in India - RSM Austria

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global excellence in audit, tax & consulting
Doing business
in India

Foreword
The Indian economy grew by about 7.2% p.a. during 2009-10 despite the challenges on
account of slowdown faced by the global economies in the later part of 2008-09. The overall
growth of the economy can directly be attributed to its strong fundamentals, renewed
momentum in the manufacturing sector, infrastructure sector and growing contribution of
the service sector. Increased emphasis has been laid by the policy makers on further
integration of the economy with the global markets by laying a road map for implementation
of the Goods and Services Tax (GST) and convergence of the financial reporting standards
with International Financial Reporting Standards (IFRS).
The Indian Government plans to implement the Direct Taxes Code (DTC) from the fiscal year
2012-13 i.e. 1 April 2012. The basic purpose of the Direct Tax Code is to completely overhaul the
complexities of the existing Income Tax Act, 1961 and to make the tax structure simple and
also to provide a fair ground for collection and levy of taxes which would be light not only on
the individual tax payers, but also corporate houses and also foreign residents.
India is fast becoming the “outsourcing destination of choice” of the world in sectors such as
Information Technology, Pharmaceuticals, Banking and Finance, Insurance, Gem and
Jewellery, Manufacturing etc. This is mainly due to the ample availability of competent and
cost efficient workforce whereby setting up operations in India has become synonymous to
efficient and cost effective operations. The growing Indian middle class population has
placed India as “The market of the future”. As a result of these factors, many of the leading
companies all over the world have already set up operations in India or are planning to do so.
We have compiled this guide to provide an overview of various social, legal, tax and
commercial aspects in India, which can have a material impact on decision about doing
business in India.
Given the limitations in compiling a booklet of this size, our intention is to offer a broad
outline of the areas we feel are relevant to undertake business activities in India.
This guide cannot serve as a substitute for specific legal, tax or accounting advice concerning
a business undertaking in India. Therefore, when specific issues occur in practice, it will be
necessary to refer to the specific laws and regulations. RSM International or RSM Astute
Consulting Private Limited are not responsible for any action taken based on information
contained in this guide and any liability arising from any statements or error contained in it.
RSM Astute Consulting Private Limited along with its associates is the only Indian member of
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RSM International. RSM International is the world's 6 largest network of accounting and
consulting firms, with annual revenue exceeding US$ 3.87 billion and offices in more than 76
countries and can be contacted through any of RSM International's associated member firms
around the world.
Compiled by:
RSM Astute Consulting Private Limited.
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13 Floor, Bakhtawar,
229, Nariman Point, Mumbai - 400 021.
Tel: (91-22) 6121 4444/6696 0644 Fax: (91-22) 2820 5685
Email: emails@astuteconsulting.com
Url: www.astuteconsulting.com
DOING BUSINESS IN INDIA

Doing business
in India

Economy
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India is the 4 largest economy in the world in terms of Gross Domestic Product (GDP)
based on Purchasing Power Parity (PPP) method. India's GDP of US$ 1.286 trillion at
current prices makes it the twelfth largest economy in the world.
India witnessed a robust GDP growth in the last decade, averaging between 6-7% per
annum and for the Financial Year 2010-11, the GDP growth rate of India is expected to be
8.4%.
Exports for year ending on 31 March 2009 were US$ 185.3 billion and imports for the
year ended on 31 March 2009 stood at US$ 303.7 billion.
According to the World Fact Book, India is among the world's youngest nations with a
median age of 25 years as compared to 43 in Japan and 36 in USA. Of the BRIC—Brazil,
Russia, India and China—countries, India is projected to stay the youngest with its
working-age population estimated to rise to 70% of the total demographic by 2030, the
largest in the world. India will see 70 million new entrants to its workforce over the next
5 years.
India continues to be the most preferred destination—among 50 top countries—for
companies looking to offshore their information technology (IT) and back-office
functions, according to global management consultancy, AT Kearney.
Tax Rates at a Glance (Financial Year 2010-11)
Sr.
No.
India - A Business Perspective
Particulars
Income Tax Rates for Corporates, Firms:
1. Domestic Companies 33.2175% 30.90%
2. Foreign Companies 42.23% 41.20%
3. Partnership Firms 30.90% 30.90%
Income Tax Rates for Individuals, HUF, BOI, AOP
Foreign Investments
Rate of Tax
Income
exceeding
Rs. 1 crore
Income
up to
Rs. 1 crore
4. As per Income Slabs (INR) 0% to 30.90%
Foreign Direct Investment (FDI) is permitted under automatic route except in certain
prohibited activities and in certain activities with sectoral caps.
Dividends and sale proceeds of shares are freely repatriable subject to payment of
applicable taxes.
DOING BUSINESS IN INDIA

Marine Drive, Mumbai

India - CEOs Speak
Olli-Pekka Kallasvuo
Nokia
“India today is not an emerging economy. It
has fully emerged, and it is in full bloom.”
Tom Enders
Airbus
“You can't be global without being in India -
with its large number of highly skilled,
motivated and knowledgeable people.”
Michael Dell
Dell Computers
"India can become a major part of Dell's
operations and a major source of the human
capital that Dell takes on as a company...and
we are looking for further opportunities to
take advantage of skilled labour."
International Monetary Fund
"India will be key engine of world economy in
next decade"
Andrew Holland
DSP Merrill Lynch
“I believe that India's growth is on the
runway, ready to take off.”
Mike S. Zafirovski
Motorola Inc.
"Not only are there brilliant engineers here
[in India], I've been seeing that the
entrepreneurial spirit of the businesses is
second to none.”
Kensaku Konishi
Canon India
“One of the fastest growing economies in
the world, India is an excellent country for
any company to be in.”
Karl-Heinz Floether
Accenture
"We are delighted and impressed with the
growth we have been able to achieve in this
country. India is a key node in Accenture's
global delivery network.”
McKinsey & Co.
"India has an extraordinary talent pool with
virtually limitless potential”
Jack Welch
General Electric
"A truly global company will be one that uses
the intellect and resources of every corner
of the world . India is a developed country as
far as intellectual capital is concerned. The
opening of (offshore) development centres
mark a new level of commitment by GE in
india."
DOING BUSINESS IN INDIA

Contents
Hawa Mahal, Jaipur

CHAPTER 1 : INDIA A PROFILE
PHYSICAL FEATURES
Geography............................................................................................................... 1
Climate..................................................................................................................... 1
Contents
POPULATION AND SOCIAL PATTERNS
Population............................................................................................................... 1
Language ................................................................................................................ 2
Religion.................................................................................................................... 2
Education ................................................................................................................ 2
GOVERNMENT AND POLITICAL SYSTEM
Government Structure......................................................................................... 2
LEGISLATIVE AND LEGAL ENVIRONMENT
Legislation .............................................................................................................. 2
Legal Environment................................................................................................ 3
INFRASTRUCTURE
Transport................................................................................................................. 3
Communication...................................................................................................... 4
DOING BUSINESS IN INDIA

Education ................................................................................................................ 4
Medical Services.................................................................................................... 4
Housing.................................................................................................................... 4
INTERNATIONAL RELATIONS AND ASSOCIATIONS..................................... 4
CERTAIN KEY INFORMATION FOR VISITORS TO INDIA
Indian Currency ..................................................................................................... 5
Visitors' Visas......................................................................................................... 5
Indian Standard Time........................................................................................... 5
Business Hours ...................................................................................................... 5
Public Holidays ...................................................................................................... 6
Tourism.................................................................................................................... 6
Attire Code.............................................................................................................. 6
CHAPTER 2 : INDIAN BUSINESS AND INVESTMENT ENVIRONMENT
FRAMEWORK.......................................................................................................... 8
ECONOMIC TRENDS.............................................................................................. 9
ECONOMIC SECTORS ........................................................................................... 10
REGULATORY ENVIRONMENT
Investor Protection ............................................................................................... 10
Price Controls......................................................................................................... 11
Registration of Intellectual Property................................................................ 11
Competition Policy................................................................................................ 13
Environmental Regulation................................................................................... 13
FINANCIAL SECTOR
Banking System ..................................................................................................... 13
Insurance Sector ................................................................................................... 14
Capital Market........................................................................................................ 14
Stock Exchanges ................................................................................................... 15
Specialized Financial Institutions...................................................................... 16
Investment Institutions........................................................................................ 16
Mutual Funds.......................................................................................................... 16
Non Banking Finance Companies...................................................................... 17
Credit Rating Agencies ........................................................................................ 17
INCENTIVES FOR INDUSTRIES
Concessional Finance........................................................................................... 17
Central Government Investment Study ........................................................... 17
State Government Incentives............................................................................. 18
DOING BUSINESS IN INDIA

INCENTIVES FOR EXPORTS................................................................................ 18
ENERGY, MINERALS AND OTHER
NATURAL RESOURCES........................................................................................ 19
FOREIGN TRADE.................................................................................................... 19
OTHER FACTORS
Language ................................................................................................................ 19
Trained Manpower................................................................................................. 19
Low Research and Development Costs............................................................ 20
Financial Reliability............................................................................................... 20
CHAPTER 3 : BUSINESS ENTITIES
FORMS OF BUSINESS ENTITIES
Companies .............................................................................................................. 22
Branches of Foreign Companies ........................................................................ 23
Liaison Offices ....................................................................................................... 24
Project Office ......................................................................................................... 25
Partnerships ........................................................................................................... 26
Trusts ....................................................................................................................... 26
Limited Liability Partnerships (LLPs)............................................................... 26
SETTING UP A COMPANY
Incorporation of a Company............................................................................... 29
Initial Capital Requirements ............................................................................... 31
Kinds of Shares...................................................................................................... 32
Debentures ............................................................................................................. 33
Public Deposits ...................................................................................................... 33
Directors.................................................................................................................. 33
Managing Director ................................................................................................ 35
Secretary................................................................................................................. 35
STATUTORY REQUIREMENTS FOR COMPANIES
Annual Reports...................................................................................................... 36
Audit Requirements.............................................................................................. 36
Shareholders' Meetings ....................................................................................... 37
Online Filing System............................................................................................. 38
Filing of Documents / Returns ........................................................................... 38
Penalties for non compliance under the Companies Act, 1956 ................. 39
DOING BUSINESS IN INDIA

SIGNIFICANT COMPANY LAW REGULATIONS
Loans and Guarantees to Companies............................................................... 42
Loans and Guarantees to Directors .................................................................. 42
Disclosure of Interest by Directors.................................................................... 42
Dividends................................................................................................................. 42
Mergers.................................................................................................................... 43
Buy-back of shares ............................................................................................... 43
Audit Committee ................................................................................................... 44
Producer Companies ............................................................................................ 44
Takeovers ................................................................................................................ 44
Corporate Governance......................................................................................... 45
Winding Up.............................................................................................................. 47
CHAPTER 4 : HUMAN RESOURCES
BACKGROUND........................................................................................................ 49
LEGISLATIVE PROVISIONS
Mandatory Employee Benefits........................................................................... 49
Workers' Compensation....................................................................................... 53
Industrial Employment Act ................................................................................. 53
Industrial Disputes Act......................................................................................... 53
Equal Remuneration Act...................................................................................... 54
Contract Labour Act............................................................................................. 54
Trade Unions Act................................................................................................... 54
Health and Safety.................................................................................................. 54
ENGAGEMENT OF FOREIGN NATIONALS........................................................ 56
CHAPTER 5 : FOREIGN INVESTMENT IN INDIA
INTRODUCTION ..................................................................................................... 58
EXCHANGE CONTROL REGULATIONS
Introduction............................................................................................................ 58
Investment in India by a person resident outside India ............................... 59
Prohibition on investments................................................................................. 60
DOING BUSINESS IN INDIA

INVESTMENT UNDER VARIOUS FOREIGN INVESTMENT SCHEMES
Automatic Route of FDI ....................................................................................... 61
Investments in Sectors where 100% FDI Under Automatic
Route is not available........................................................................................... 61
Certain Important Aspects of the FDI Scheme .............................................. 62
Investments by Foreign Institutional Investors (FII) ..................................... 62
Investments by Non Resident Indians (NRI) ................................................... 63
Investments by Venture Capital Fund............................................................... 64
Purchase of Other Securities by FIIs................................................................ 65
Purchase of Other Securities by NRIs.............................................................. 65
Foreign Investment in Tier I and Tier II instruments
issued by banks in India....................................................................................... 66
Issue of rights / bonus shares to erstwhile
Overseas Corporate Bodies (OCBs) .................................................................. 66
Additional allocation of rights shares by
resident to non-residents .................................................................................... 67
Issue and acquisition of shares after merger or de-merger
or amalgamation of Indian companies............................................................. 67
Issue of shares under Employee Stock Options Scheme to
persons resident outside India........................................................................... 67
Transfer of Securities of Indian Companies by a Person
Resident Outside India......................................................................................... 68
Transfer of Securities of Indian Companies by a Person
Resident in India.................................................................................................... 69
Conversion of ECB/Lumpsum Fees / Royalty /
Import of Capital Goods by SEZ into equity ................................................... 69
Issue of shares by Indian companies ADR / GDR ......................................... 70
Investment in firm or proprietary concern in India....................................... 70
Establishment of Place of Business .................................................................. 71
EXTERNAL COMMERCIAL BORROWINGS (ECB)
Automatic Route ................................................................................................... 73
Approval Route ...................................................................................................... 76
Time period for realization of Export payments ........................................... 80
Time period for payments towards Import obligation ................................. 80
EXCHANGE CONTROL REGULATIONS FOREIGN TECHNOLOGY
TRANSFER AND ROYALTY PAYMENTS............................................................ 80
DOING BUSINESS IN INDIA

ANNEXURE 1
Sectors Prohibited for FDI................................................................................... 81
ANNEXURE 2
Sector specific guidelines for FDI...................................................................... 81
CHAPTER 6 : TAXATION SYSTEM
INTRODUCTION ..................................................................................................... 93
INCOME TAX ON CORPORATIONS
General Structure and Scope ............................................................................. 93
Rates of Tax ............................................................................................................ 93
Minimum Alternate Tax........................................................................................ 94
Fringe Benefits Tax ............................................................................................... 94
Dividend Distribution Tax .................................................................................... 94
Taxable Income ...................................................................................................... 97
Tax Benefits / Reliefs............................................................................................ 100
Transfer Pricing Regulations.............................................................................. 114
Relief for Tax losses.............................................................................................. 115
Returns and Payment of Taxes .......................................................................... 115
INCOME TAX ON NON-CORPORATES
Residential Status ................................................................................................. 116
Rates of Tax ............................................................................................................ 118
Taxable Income ...................................................................................................... 119
Gross Income.......................................................................................................... 119
Capital Gains Tax ................................................................................................... 120
Deductions and Reliefs ........................................................................................ 120
Clubbing of Minor's Income ................................................................................ 121
Relief for Tax losses.............................................................................................. 121
Returns and Payments of Taxes ........................................................................ 121
Presumptive Scheme for Small Businesses.................................................... 121
SPECIAL PROVISIONS FOR COMPUTATION OF
TAXABLE INCOME OF NON-RESIDENTS
Non-residents engaged in Specified Business ............................................... 122
DOING BUSINESS IN INDIA

Income of Non-resident Indians......................................................................... 122
Income of Foreign Institutional Investors........................................................ 123
Income of Offshore Funds................................................................................... 124
WITHHOLDING TAXES.......................................................................................... 124
DOUBLE TAX TREATIES....................................................................................... 124
OTHER ADMINISTRATIVE ASPECTS
Audit Reports......................................................................................................... 125
Assessment Procedure ........................................................................................ 125
Advance Rulings .................................................................................................... 126
OTHER DIRECT TAXES
Securities Transaction Tax.................................................................................. 126
Wealth Tax............................................................................................................... 127
Gift Tax..................................................................................................................... 127
Estate Duty ............................................................................................................. 127
Interest Tax............................................................................................................. 127
INDIRECT TAXES
Goods and Services Tax ('GST') ......................................................................... 128
Central Value Added Tax ('CENVAT')................................................................ 128
Customs Duty......................................................................................................... 128
Service Tax.............................................................................................................. 129
DIRECT TAX CODE ('DTC')................................................................................... 130
INTERNATIONAL FINANCIAL REPORTING STANDARDS ('IFRS') .............. 131
ANNEXURE I
Double Taxation Avoidance Agreements ('DTAA') Rates............................. 133
ANNEXURE II
Tax Deduction At Source ('TDS') Rates............................................................ 140
DOING BUSINESS IN INDIA

Chapter 1
India - A Profile
Golden Temple, Amritsar

1.0 PHYSICAL FEATURES
1.1 Geography
CHAPTER 1
INDIA - A PROFILE
India is situated in the southern Peninsula of the Asian continent and is the seventh
largest country in the world, in terms of size. It lies entirely in the northern
hemisphere and extends from the snow-covered Himalayan heights in the north to
the tropical rain forests of the south. India shares its borders with Afghanistan and
Pakistan to the north-west, China, Bhutan and Nepal to the north, and Myanmar and
Bangladesh to the east. Sri Lanka lies to south of India and is separated from India
by a narrow sea channel formed by the Palk Strait and the Gulf of Mannar.
0 0 0 0
India lies between latitudes 8 4’ and 37 6’ north and longitudes 68 7’ and 97 25’
east. It measures about 3,214 kilometers from north to south between its extreme
latitudes and 2,933 kilometers from east to west between the extreme longitudes.
India covers an area of 3,287,263 square kilometers and has a land frontier of 15,200
kilometers. India has a coastline of 7,516 kilometers.
The main land comprises of four regions: the mountain zone in the north, the plains
of the Ganges and the Indus rivers, a small desert region in the west and the
southern peninsula which consists of the Deccan plateau, mountains and coastal
strips.
1.2 Climate
India’s climate is mainly tropical monsoon type and is affected by two seasonal
winds: the north-east monsoon and the south-west monsoon. A year in India can be
conveniently divided into four sessions viz. the winter (January and February), the
hot weather summer (March through May), the rainy south-western monsoon (June
through September) and the post-monsoon period (October through December),
which is known as the north-east monsoon period in the southern Peninsula.
2.0 POPULATION AND SOCIAL PATTERNS
2.1 Population
As per the data published for 2001 census, India’s population as on March 2001 was
1028 million (532 million males and 496 million females), making India the second
most populated country in the world after China. The population comprises of 300
million people in the middle class bracket, which is a major consumer class in India.
The population growth rate was around 2.22% in the 1980s, which decreased
marginally to 2.14% in 1990s.
DOING BUSINESS IN INDIA 1

2.2 Language
India is a land of many languages and dialects. Hindi is the official language of the
Indian federation or union, while English is commonly used business language.
English language is acceptable for all the legal, commercial and business
documentation and communications.
2.3 Religion
More than 80% of India’s population is Hindus and around 13% are Muslims. The
other major religious communities are Christian, Sikh, Buddhist and Jain.
2.4 Education
Data published for 2001 census revealed that 64.80% of the total population are
literate and consisted of 75.30% men and 53.70% women. Amongst the youth the
literacy rate is 82%.
3.0 GOVERNMENT AND POLITICAL SYSTEM
3.1 Government Structure
The Indian federation or union is organized into 28 states and 7 union territories
with a single and uniform citizenship and a single judiciary. The capital of the Indian
government is the state of Delhi.
India is a sovereign, socialist, democratic and secular republic with a parliamentary
system of government, which is based on the U.K. parliamentary system. The
parliament is headed by the President and consists of two houses - the Lok Sabha
(the house of the people) and the Rajya Sabha (the council of states). Although the
President is the constitutional head of the government, the real executive power
resides with the Council of Ministers, with the Prime Minister as its head. The Council
of Ministers is collectively responsible to the Lok Sabha.
The Indian Constitution provides for the independence of other government bodies
for certain key areas like the judiciary, the Comptroller and Auditor General, the
Public Service Commissions and the Election Commission.
4.0 LEGISLATIVE AND LEGAL ENVIRONMENT
4.1 Legislation
Indian Constitution divides the various responsibilities into three categories: the
Union list, the State list and the Concurrent list. Parliament can make laws on
subjects in the Union list and the state legislature on subjects in the State list. Both,
the parliament and the state legislature can make laws on the subjects included in
the Concurrent list. This division helps in regulating the relations between the
Union and the States.
2
DOING BUSINESS IN INDIA

4.2 Legal Environment
The main sources of law in India are the Constitution statutes, customary laws and
case laws. The country’s constitution provides for a single integrated system of
courts to administer both Union and state laws. The judiciary in India is separated
from the executives.
At the apex of the entire judicial system is the Supreme Court of India, which
consists of the Chief Justice and other judges. The Supreme Court has original,
appellate and advisory jurisdiction and its decisions are binding on all courts within
the territory of India. Each state (or two or more states together) has a High Court, a
Chief Justice of the High Court and other judges who are appointed by the President
in consultation with the Governor of the state. There is a hierarchy of subordinate
courts under the various High Courts, which extend to the local courts, which decide
civil and criminal disputes of petty and local nature.
5.0 INFRASTRUCTURE
5.1 Transport
Internal public transportation in India is fairly well developed. The country is
extensively covered by rail and road networks. This surface transport network is
fairly supplemented by airline routes connecting the major cities.
The Indian Railways, which is the largest public sector undertaking in India, is the
backbone of the Indian Economy. It caters to both freight and passenger traffics and
has a vast network of 6,867 stations spread over route length of about 62,900 kms.
It is Asia’s largest and the world’s second largest railway system under a single
management.
India has the second largest road network in the world with total road length of 3.3
million kms. In 2009, freight traffic on the road is also fairly high and remains almost
exclusively in the private sector.
Inland water transport has not grown appreciably in the country because of poor
port or landing infrastructure. However, the industry is now growing and the
government is ambitiously developing coastal shipping.
India has bilateral air services agreements with over 100 countries. Air India is
India’s official national carrier operating across both domestic and international
routes. In 2007, Indian Airlines the domestic national carrier was merged with Air
India. Indian Airlines also operates on some international routes. Upon the
liberalization of the economy, an open sky policy was announced which has resulted
in a number of private air taxi companies operating on some of the major trunk
routes. Some of the major private air transport companies, operating on domestic
and international routes are Jet Airways, Kingfisher Airlines, Indigo, Spice jet etc.
DOING BUSINESS IN INDIA 3

5.2 Communication
The Indian telephone, telex and facsimile services both within India and to
international locations are fair. Total fixed and cellular connections in India was
exceeding 494 million as on August 2009 and are expected to cross 500 million
mark by 2010. An electronic mail service is also available and is fast catching up in
the leading cities. The total number of internet connections in India are exceeding 14
million and the broadband subscribers are about 6 million. The number of internet
users is estimated to be around 81 million in India.
Apart from the above services, India has a fairly well developed postal services
department. In fact India has the highest number of post offices in any country
(155,000 post offices). Major international courier service companies are also well
represented in India.
5.3 Education
Apart from schools, which provide education in the local language, India has good
day schools and boarding schools that offer a high standard of education in English.
In addition, special expatriate schools provide education for American, French,
German and Japanese children.
Scholarships are available under grants from the Ministry of External Affairs for
foreign students from select countries for graduate and postgraduate courses in
engineering, technology, management, medicine, pharmacy and general courses.
5.4 Medical Services
India has a fairly widespread and reasonably developed network of medical
facilities. However, private enterprises and trusts operate a well-developed
infrastructure of hospitals and polyclinics in major metropolitan areas and mediumsized
towns.
5.5 Housing
Adequate housing is available in most of the major metropolitan areas and in large
and medium-size towns. The rates tend to be higher in areas closer to the central
business district and lower in the suburbs. Apartments and houses are usually
available for outright purchase or on rent for maximum renewable periods of 60
months. Deposits equivalent to 10 or 15 times a month’s rent are generally required
in case of premises to be rented.
6.0 INTERNATIONAL RELATIONS AND ASSOCIATIONS
India has entered into bilateral agreements with a number of countries and is a
member of several international organizations, such as the United Nations, the
Commonwealth, the GSTP, UNCTAD, WTO and GATT. India has always taken
initiatives to develop friendly relations with its neighbours and has adopted a policy
4
DOING BUSINESS IN INDIA

of non-alignment to promote co-operation amongst all the nations. India has had an
active role in the Non-Aligned Movement and is also an active member of the South
Asian Association for Regional Cooperation (SAARC). India is a member of
Multilateral Investment Guarantee Agency (MIGA). MIGA serves as an insurer of
investments made in member countries against stipulated political risks in the host
country and also offers assistance in attracting new investment.
Apart from the Indo-EC Joint Commission, India has separate bilateral commissions
with Belgium, Cyprus, Finland, France, Germany, Italy, Netherlands, Spain, Sweden,
Switzerland, Turkey and the United Kingdom.
7.0 CERTAIN KEY INFORMATION FOR VISITORS TO
INDIA
7.1 Indian Currency
The Indian monetary unit is the Rupee (Rs. or INR). The Indian central bank viz.
Reserve Bank of India (RBI), is the sole authority for issuing currency in India.
Currency converting agencies have a reasonably spread network across all major
cities, tourist destinations and airports, where all leading currencies can be
converted to Indian rupees and vice versa.
From March 1993 the government has permitted a floating exchange rate for the
rupee, which is expressed in terms of the US dollar. The exchange rate for the rupee
as on 13 May 2010 was US $ 1 = Rs. 44.99 and Euro 1 = Rs 56.98.
7.2 Visitors’ Visas
Every foreigner entering India is required to possess a passport and visa. Visas
(tourist, business or entry) are issued on application to the Indian High Commission.
The visas normally expire six months from the date of issue. If the visa allows more
than one entry into the country, it must be used for the first time within six months
from the issue date.
7.3 Indian Standard Time
Indian Standard Time (IST) is five and one-half hours ahead of Greenwich Mean
Time.
7.4 Business Hours
The normal working week in India is usually Monday through Friday (9.30 a.m. to
5.30 p.m.). However, there are many organizations, which also work half day on
Saturdays or work on alternate Saturdays. Sunday is a public holiday. Banking
hours are generally between 10 a.m. and 3.00 p.m. on weekdays and 10 a.m. to 1.00
p.m. on all Saturdays, though some of the banks are now offering 24 hours banking.
Internet banking and telephone banking is also offered by most of the leading banks.
DOING BUSINESS IN INDIA 5

7.5 Public Holidays
The statutory public holidays vary from state to state and number around 20 in a
year. Holidays in private sector organizations generally vary from 10 to 15.
7.6 Tourism
There are various historic sites available to visitors. Hundreds of ancient temples
and mosques as well as other monuments provide a view not only of India’s past but
also its cultural and trade connections with the rest of the world.
There are several wildlife and game sanctuaries, winter sports facilities in the
northern region and water sports facilities in beach towns. The states of
Maharashtra, Goa, Kerala, Tamil Nadu and Orissa have attractive beaches, which are
popular destinations of visiting foreign tourists. Some of the world’s large hotel
chains as well as leading time-sharing leisure resort groups have a presence in India.
In an effort to promote tourism in the country, both the Indian Railways and Indian
Airlines offer round trip passes to tourists making payment in foreign currency.
7.8 Attire Code
Being a tropical country, clothing is often light, including formal office wear. Suits
and jackets are common in the cities but are usually restricted to senior corporate
executives.
6
DOING BUSINESS IN INDIA

Chapter 2
Indian Business And
Investment Environment
Bombay Stock Exchange, Mumbai

CHAPTER 2
INDIAN BUSINESS AND
INVESTMENT ENVIRONMENT
1.0 FRAMEWORK
India adopted a mixed economy after independence, resulting in the public and
private sectors’ co-existence in industrial activity. In the past, the public sector had
a dominant role in the economy. However, with the recent liberalization, the trend is
clearly towards a larger role for the private sector. The government has restricted
fresh public investments to only strategic and essential infrastructure areas. The
government is also divesting its equity in public sector enterprises outside these
areas.
The majority of business in India has been controlled by state-owned corporations,
business families and groups under multinational control. However, this dominance
is getting eroded with the entry of technocrats and successful first-generation
entrepreneurs. In many substantial private sector companies, the promoters hold a
minority stake but are able to retain control because of the widely dispersed
holdings. The public financial institutions hold large chunks of equity in many major
Indian private sector companies, but their involvement in the management
decisions is very limited and neutral. India also has a huge base of closely held small
and medium sized businesses, which cater to the local and regional markets.
The Indian government earlier exercised considerable control over the private
sector through licensing of the setting up of manufacturing capacities; approval
procedures for importing foreign capital, technology, capital goods, and raw
materials and allocation procedures for basic raw materials. However, the new
policies launched in the 1990s and continued thereafter in the new millennium by
the Government are dismantling many of the regulations and restrictions that have
previously made business operations in India difficult. Now, the Government has
initiated steps for introducing second-generation structural reforms to keep pace
with the global environment of competition after removal of trade barriers as per
the agreement entered into with World Trade Organization and correct the various
distortions in the economy. The emerging economic environment is more
competitive, dynamic and inviting to foreign investment and technology. Recently,
the Government of India significantly liberalized the foreign direct investment
policy for crucial sectors including banks, drugs, pharmaceuticals, construction,
arms and ammunitions and certain areas of telecommunication.
The Indian rupee has been made fully convertible on the trade and current account
and full convertibility on the capital account has been recommended. This full
convertibility will allow free convertibility of Indian financial assets to foreign
financial assets and vice versa at market determined rates. In order to create a
suitable legal framework for the implementation of full convertibility on capital
8
DOING BUSINESS IN INDIA

account and to liberalize the movement of foreign capital, a new law called the
Foreign Exchange Management Act (FEMA) has come into effect from 1 June 2000.
2.0 ECONOMIC TRENDS
The global economic meltdown and the consequent recession in the developed
countries over the past year, has adversely
impacted the Indian economy. In 2009-10, the
GDP Growth Rate
12
Gross Domestic Product (GDP) is expected to
10
grow at 7.2% which is quite encouraging
9.8
considering in retrospect the decline in GDP 8
9
to 6.7% in 2008-09 representing a drop of 6
7.2
6.7
2.1% from the average growth rate of 8.8% in
4
the previous five years (2003-04 to 2007-
08). Inspite of this, India is likely to remain the
second fastest growing major economy. India
2
0
was able to sustain a respectable growth rate
and is expected to bounce back quickly,
2006-07 2007-08 2008-09 2009-10
mainly due to its reliance on domestic demand and largely unaffected banking
sector.
1400
1200
1000
800
600
400
200
0
2006-07 2007-08 2008-09 2009-10
The Inflation as measured by the Wholesale
Price Index (WPI) for the 2008-09 was 5.9%.
A noteworthy development during 2008-09
was a sharp rise in the WPI inflation followed
by an equally sharp fall, with the WPI inflation
falling to unprecedented level of close to 0%
by March 2009. The inflation WPI index for
the period April-December 2009 has
decreased to 1.6%.
GDP (US$ Billion)
Foreign exchange reserves which had
declined to US$ 252 billion as on 31 March
2009 from US$ 309 billion as on 31 March 2008, has increased to US$ 283.5 billion
as on 31 December 2009.
The total exports for 2008-09 increased by 13.6% to US$ 185 billion. The total
imports for 2008-09 was about US$ 304 billion wherein the growth in imports was
20.47% in 2008-09.
There has been a sharp decline in the Rupee exchange rates during 2008-09,
wherein the currency depreciated by over 21% against the US$. The exchange rate
as on 15 August 2009 was Rs. 48.79 against 1 US$. However, the rupee has
strengthened in the latter period and the exchange rate as on 13 May 2010 was Rs.
44.99 against 1 US$. The fiscal deficit during the period shot up from 5.9% to 6.5%
of the GDP.
Indian stock markets experienced a downturn after having experienced a long spell
of growth between 2005 to early 2008 which is directly attributable to the current
international crisis resulting in an immediate effect of withdrawal of FII Investments.
DOING BUSINESS IN INDIA 9

This resulted in a fall in the Bombay Stock Exchange indices (Sensex) from its closing
of 17,578 on 28 February 2008 to a low of 7,697, on 27 October 2008. However, due
to improvement in the economic scenario, high sentiments and positive election
results and emphasis of government policies on growth, the Sensex has regained
some lost ground and reached a level of 16,430 as on 26 February 2010.
3.0 ECONOMIC SECTORS
Although India was primarily an agricultural country, the service sector is rapidly
increasing its share in the economy. The share of agriculture and allied sectors in
GDP has declined gradually from 18.9% in 2004-05 to 14.6% in 2009-10, whereas
the share of industry has remained the same at about 28% and services has gone up
from 53.2% to 57.2%.
4.0 REGULATORY ENVIRONMENT
The Indian Regulatory policy is driven by three objectives: to promote competition,
to protect consumers and investors from restrictive and unfair trade practices, and
to maintain the ecological balance and protect the environment. The major
governing statutes for trading, commercial and industrial enterprises in the country
are the Foreign Exchange Management Act, 1999; the Companies Act, 1956;
Competition Act, 2002; Securities and Exchange Board of India, 1992 (SEBI);
Regulations for Listed Companies and the Banking Regulation Act, 1949; which
governs the operations of banks including foreign banks. Since, the Foreign
Exchange Management (FEMA) Act, 1999 regulates foreign investment in India, it
has the greatest effect on foreign companies operating in India.
4.1 Investor Protection
SEBI was constituted as a statutory body under the SEBI Act, with effect from 30
January 1992 to monitor the activities of stock exchanges, merchant bankers,
mutual funds, brokers and other intermediaries. All applications for share issues
must be vetted by SEBI to ensure that the offer documents disclose the required
information. SEBI has also issued guidelines for disclosure and investor protection,
monitoring the work of merchant bankers, grading of prospectus, responsibilities of
lead managers, number of lead managers in every issue, etc.
The legal framework for protecting the interests of investors is provided by the
Companies Act, 1956 and the Securities Contracts (Regulation) Act, 1956. In order to
protect the interests of investors in the securities market and to develop the capital
market, SEBI was established. SEBI controls the securities market through its
detailed guidelines issued to all the players in the securities market. SEBI
regulations have rendered insider trading a punishable offence in specified
circumstances. The guidelines governing takeovers, public issues, capital adequacy
requirements, disclosure norms, etc. are being increasingly streamlined. Investors
having grievances have the option of either applying to the Monopolies and
Restrictive Trade Practices Commission or writing to the SEBI Investor Grievance
Cell and informing the concerned stock exchange. They can also file complaints with
various authorities under the Consumer Protection Act, 1986.
10
DOING BUSINESS IN INDIA

4.2 Price Controls
4.3 Registration of Intellectual Property
4.3.1 Trademarks
4.3.2 Patents
Prices of certain essential consumption goods, raw materials and intermediate
products are directly regulated by the government. The government amended the
Monopolies and Restrictive Trade Practices Act in 1991 to increase protection for
consumers. In addition, the Consumer Protection Act, 1986 created quasi-judicial
mechanisms at the district, state and national levels to settle consumer grievances.
There is, however, a distinct trend towards reduction in pricing and distribution
controls, and the government’s policy is to do away with administered prices as far
as possible. At present, the new free market has transferred economic power to the
more aware and demanding consumer.
India being one of the signatories to Trade Related Aspects of Intellectual Property
Rights (TRIPS) under the General Agreement on Tariffs and Trade (GATT) under the
World Trade Organization (WTO) it has to comply with the provisions of TRIPS which
aims to rationalize the laws of Intellectual Property Rights of all member countries
which includes Trademarks, Patents, Industrial Designs, Copyrights, Geographical
Indications, etc. In view of the above, India has amended its Intellectual Property
Laws (IPR) namely, Trade Marks Act, Industrial Designs Act, Copyrights Act and
Patents Act in line with TRIPS Agreement.
The Trade Marks Act 1999, allows registration of marks not only used in connection
with goods but also in respect of marks in relation to services. Trademarks once
registered will be valid for a period of 10 years and the same can be renewed for
successive periods of 10 years thereafter. Registration of trademarks confers on the
registered proprietor of the trade mark the exclusive right to use the trademark in
relation to its goods / services in respect of which the trademark is registered and to
obtain relief in respect of infringement of the trademark by others. Infringement of
trademarks is a cognizable and non-bailable offence. However, all infringement of
trade marks are not treated as cognizable and non-bailable offence.
The Patents Act, 1970 as amended by the Patents (Amendment) Act, 2002 and
Patent (Amendment) Act, 2005 provides for the grant of a patent for any
“invention”. Invention means a new product or process involving an inventive step
and capable of industrial application. Inventive step means a feature that makes the
invention not obvious to a person skilled in the art. Protection under the Patents Act
is available for a period of 20 years for every patent.
There is no distinction between Indian nationals and foreign nationals concerning
the right to obtain patents. Every international application under the Patents
Corporation Treaty for a patent, designating India shall be deemed to be an
application under the Patents Act, 1970, provided a corresponding application is
filed before the Controller in India. The government has the power to acquire
patents for a public purpose. In the said event, the act preserves the patent holder’s
right to be compensated adequately.
DOING BUSINESS IN INDIA 11

4.3.3 Designs
After expiry of three years from the date of grant of the patent, any person may
make a request for grant of licence to work on the patented invention by making an
application to the Controller of Patents alleging that reasonable requirements of
the public with respect to the patented invention have not been satisfied or the
patented invention is not available to the public at a reasonable price.
With a view to fulfill the requirements of any treaty, convention or arrangement
between India and any other country, the Patents Act allows the Indian government
to declare a country as a “convention country”. India has entered into bilateral
arrangements with Canada, Ireland, Australia, New Zealand, Sri Lanka and the
United Kingdom to accord their citizens priority in respect of grant of patents and
the protection of patent rights and on reciprocal basis similar privileges to Indian
Citizens.
In line with TRIPS, the Patents Act, 1970 has been amended by Patent (Amendment)
Act, 2002 and Patent (Amendment) Act, 2005. The Amendment provides the
period of patent in all cases shall be for a term of 20 years instead of 14 years and 7
years.
The Designs Act, 2000 protects all features of shapes, configurations, patterns or
ornaments in a design that appeal to the eye in the finished article. Registration of a
design with the Controller General of Patents and Designs confers on the registered
proprietor a right to take action against third parties if the design is used
fraudulently. The act provides protection to a registered design for 10 years at first
instance which can be further renewed for a period of 5 years (altogether for
maximum 15 years) and thereafter it becomes public property.
4.3.4 Copyrights
Copyrights vest in authors on the creation of their works and require no
registration. If registered, however, registration provides prima facie evidence of a
copyright’s validity. Copyright is regulated as per the provisions of The Copyright
Act, 1957.
Copyrights subsist in the following classes of work:
Original literary, dramatic, musical and artistic works
Cinematograph films
Sound recording
Photographs.
Copyright also subsists in computer programs (which are defined as “programs
recorded on any disc, tape, perforated media or other information storage device
that is fed into or located in a computer or computer-based equipment capable of
reproducing any information”).
The Copyrights Act, 1957 provides for copyright enforcement. A person whose
copyright is infringed may sue for civil relief such as an injunction and damages, and
may institute criminal proceedings for infringement in certain cases.
12
DOING BUSINESS IN INDIA

The Central Government by order may direct that all or any provisions of this Act
shall apply to works of other countries. This means that any person who enjoys a
copyright in one of the convention countries automatically enjoys a statutory
protected copyright in India.
4.4 Competition Policy
The newly enacted Competition Act, 2002, has constituted the Competition
Commission of India (‘CCI’) which is empowered to ensure free and fair competition
in the market. The Competition Act aims at preventing practices having adverse
effect on competition, to promote and sustain competition in markets, to protect
the interest of consumers and to ensure freedom of trade carried on by the other
participants in the markets in India. The main purposes of the Competition Act are
(a) Prohibition of anti-competitive agreements, (b) Prohibition of abuse of dominant
position, and (c) Regulation of combinations.
4.5 Environmental Regulation
All proposed industrial units have to obtain environmental clearance from the
relevant air and water pollution control boards, which operate under the Ministry of
Environment and Forests.
5.0 FINANCIAL SECTOR
5.1 Banking System
India has a vast network of about 88,408 bank branches that held deposits of about
Rs. 38,341 billion as of 31 March 2009.
5.1.1 Reserve Bank of India (RBI)
The Indian central bank is the Reserve Bank of India (RBI) and its primary function is
to act as the banker and financial adviser to the government, the commercial banks
and some of the other financial institutions. It is the sole authority for the issue of
bank notes and the supervisory body for all banking operations in the country. Its
other functions include execution of the government’s monetary policy, regulating
the money flow in the economy and acting as the custodian of India’s foreign
exchange reserves.
5.1.2 Commercial Banks
The commercial banks may be classified into the following five categories:
i. The State Bank of India and its associate banks
ii. Other nationalized banks
iii. Private sector banks
iv. Regional rural banks and
v. Foreign banks
The commercial banks transact all types of commercial banking business. They are
also allowed to set up (with the prior approval of the RBI) subsidiaries to engage in
DOING BUSINESS IN INDIA 13

non-banking finance activities viz. merchant banking, equipment leasing etc. The
Commercial banks, apart from providing working capital facilities for various
sectors of the economy, also provide capital market advisory services, foreign
exchange services, investment consultancy and personal banking services.
Regional Rural Banks: The regional rural banks are set up to increase the flow of
credit to smaller borrowers in the rural areas. They may be said to be special
purpose banks catering primarily to the rural agricultural sector.
Foreign Banks: Most of the major banks from major countries are represented in
India through branches, network offices, representative office or agency
arrangements. Foreign banks offer a variety of services including foreign-currency
loan syndication, foreign exchange risk management and other innovative financial
products. Approximately 42 foreign banks operate through the major cities in India.
Private Sector Banks: Private sector banks have gained a strong foothold in the
Indian banking scenario in the last decade. The private banks in India offer a wide
gamut of banking and financial services.
5.2 Insurance Sector
The primary legislation that deal with insurance business in India are Insurance Act,
1938 and Insurance Regulatory & Development Authority (IRDA) Act, 1999.
Government of India has opened up the sector to private participation in recent
past. Details of permissible foreign investment in this sector is discussed separately.
There are more than 10 companies in life insurance business including government
corporation i.e. Life Insurance Corporation of India and almost equal number of
companies in non-life insurance business including government corporation i.e.
General Insurance Corporation of India.
5.3 Capital Market
The Indian capital market is very well-developed, and it provides a very important
source of finance to both public and private sector companies. The major
developments in the capital market include the following:
The Securities and Exchange Board of India (SEBI) was empowered to
oversee the operations of the exchanges, regulate the capital market and
protect investors.
Trading introduced in derivative based on index and in stock options of the
certain companies satisfying certain parameters.
Trading in listed company on stock exchanges in dematerialized form has
been made mandatory to reduce the settlement cycle to 2 days.
The interest rates on convertible and non-convertible debentures are
allowed to be market determined.
Free-market pricing of share issues has increased activity on the stock
exchanges.
14
DOING BUSINESS IN INDIA

The concepts of book building and market making have been introduced.
Under the Portfolio Investment Scheme, the RBI has permitted investment
in shares and debentures of Indian companies by Non-Resident Indians
(NRIs).
Portfolio investments are permitted by Foreign Institutional Investors
(FIIs).
Various tax incentives have been offered to encourage foreign
institutional investment.
The government plans to offer up to 49% equity of many public sector
companies to private investors.
A new takeover code has been introduced to protect the interests of the
small investors and to strengthen the regulatory framework of takeovers.
Domestic shares are allowed to be reconverted to American Depository
Receipt/ Global Depository Receipt.
5.4 Stock Exchanges
India currently has about 30 million shareholders and 23 recognized stock
exchanges. These stock exchanges deal in securities issued by the central and state
governments, public sector companies and public limited companies. Most activities
on the stock exchanges occur in corporate securities. Gilt-edged securities
consisting of securities issued by the central, state and other government bodies
are also listed on recognized stock exchanges. Bombay Stock Exchange and
National Stock Exchange accounts for more than 97% of the total turnover. Foreign
Institutional Investors are permitted to also invest in corporate and government
debt.
SEBI is the regulatory authority for all the stock exchanges. In order to facilitate
stock exchange transactions, India has been modernizing the operations of its stock
exchanges by introducing screen based trading. The trading on stock exchange has
been made mandatory in dematerialized form for all scrip commencing from April
2002.
SEBI has also laid down eligibility criteria for setting up dedicated stock exchanges
for the Small and Medium Enterprises (SME) sector. Apart from fulfilling other
criteria, the exchange should have a balance sheet networth of atleast Rs. 1000
million (about US$ 22.23 million).
5.4.1 Bombay Stock Exchange
Bombay Stock Exchange (BSE) is India’s premier stock exchange. It lists over 4,900
companies. BSE has trading terminals in about 300 cities. The market capitalization
of the Bombay Stock Exchange in August 2009 was US$ 1.08 trillion. BSE introduced
DOING BUSINESS IN INDIA 15

trading in derivative based on BSE Sensex from 9 June 2000 and trading in stock
options of certain companies from 9 July 2001.
5.4.2 National Stock Exchange
National Stock Exchange (NSE) started operations in 1994 with a view to facilitating
transparent trading. The NSE provides nation-wide trading facilities to investors
through established network linkages in about 350 cities nationwide. The NSE had
1587 listed companies as on 31 March 2009 with a market capitalization of Rs. 47,019
billion (US$ 950 billion) and average daily volume of Rs. 45 billion (US$ 1.03 billion).
The NSE is India’s primary exchange for wholesale debt. NSE introduced trading in
derivative based on Nifty Index from 12 June 2000 and trading in stock options of
certain companies from 2 July 2001.
5.4.3 Listing Requirements
There is no statutory requirement for public limited companies in India to have their
shares listed on a recognized stock exchange. However, the companies have to be
listed if their shares or debentures are offered to the public for subscription by
prospectus. Companies have to fulfill the stock exchange requirements in order to
have their shares listed. In case the company does not satisfy the prescribed
conditions of the stock exchange and is not admitted to the exchange, it has to
refund the amounts paid by subscribers.
5.5 Specialized Financial Institutions
There are numbers of specialized financial institutions in India at the national as
well as the state level. India has an integrated structure of financial institutions
known as All India Financial Institutions (AFIs), which provide term finance and
other assistance to industries. Some of the most important financial institutions,
which play a very instrumental role in India’s development are the Industrial
Development Bank of India (IDBI), the Industrial Finance Corporation of India (IFCI)
and the Industrial Reconstruction Bank of India (IRBI).
India also has other financial institutions, which are set up for specific purposes.
These include the National Bank for Agricultural and Rural Development (NABARD),
the Shipping Credit Corporation of India, the National Housing Bank and the
Discount and Finance House of India, which is a specialized institution to develop an
active secondary market for money market instruments.
5.6 Investment Institutions
Most of the specialised investment institutions in India are in the public sector.
These include the Unit Trust of India, the Life Insurance Corporation of India,
General Insurance Corporation, mutual funds set up by subsidiaries of the State
Bank of India and other nationalised banks and other financial institutions.
5.7 Mutual Funds
Mutual funds play a significant role in the capital market. They are established in the
form of trusts under the Indian Trusts Act and are operated by separate asset
16
DOING BUSINESS IN INDIA

management companies. The mutual fund market was dominated by public sector
financial institutions and public sector banks till 1993, when the government opened
up the sector to private participation. The gross mobilization of resources by all
mutual fund schemes during July 2009 was around Rs. 9,288 billion (about US$ 190
billion).
Mutual Funds are now permitted to make investment in short term as well as long
term foreign debt securities with highest foreign currency credit rating by
accredited / registered credit rating agencies in the countries with fully convertible
currencies including government securities of the countries having AAA rating.
5.8 Non-Banking Finance Companies
The Non Banking Finance Companies (NBFCs) form an integral part of the Indian
financial system. They have to conform to the overall framework of the monetary
and credit policy of the government. The government has permitted foreign direct
investment in NBFCs in merchant banking, underwriting, portfolio management
services, investment advisory services, financial consultancy, stock broking, asset
management, venture capital, custodial services, factoring, credit rating agencies,
leasing and finance and housing finance. Foreign direct investment in the NBFC
sector is put on automatic route subject to compliance with guidelines to be issued
by Reserve Bank of India.
5.9 Credit Rating Agencies
The credit rating agencies rate corporate debt and equity securities such as
debentures, shares and commercial paper. They also rate the credit risk of
companies, a factor often used by nationalized banks in evaluating loan
applications. Credit ratings have become all the more necessary because it has
become mandatory for companies to obtain a credit rating before issuing
convertible and non-convertible debentures. The Credit Rating Information
Services of India Limited (CRISIL), the first credit rating agency in India was
established in January 1988 and the Investment Information and Credit Rating
Agency of India (ICRA) was established in March 1991. Credit Analysis and Research
Ltd. (CARE) is another leading credit rating agency and was set up in November
1993.
6.0 INCENTIVES FOR INDUSTRIES
6.1 Concessional Finance
New and existing businesses established in specified backward areas of the country
are able to obtain finance for major expansion plans at below normal interest rates.
Other benefits may include low commitment fees and extended repayment periods.
6.2 Central Government Investment Subsidy
Industrial undertakings located in specified backward areas, which are largely the
DOING BUSINESS IN INDIA 17

same as those where concessional finance is available, are eligible for a Central
Government subsidy towards the cost of land, buildings, machinery and equipment.
6.3 State Government Incentives
In keeping with a federal structure, many State Governments operate their own
incentive programmes to attract industrial investments. Details of incentive
packages often vary from one state to another but would broadly include subsidized
power, availability of low-cost land, assistance in feasibility studies, tax breaks and
exemptions/ deferment of specific duties.
7.0 INCENTIVES FOR EXPORTS
Exporters are eligible for a number of special incentives.
Duty Drawback: Exporters are entitled to drawback import duties and excise
duties paid by them on material inputs of products exported at specified rates,
depending upon the type of product exported.
Freight Concessions: Freight rate reductions and priority wagon booking facilities
are made available on the railways for transport of raw material for export
production and finished products for export.
Export Credit Guarantee: This guarantee is provided by the Export Credit
Guarantee Corporation at low rates of premium to banks and other financial
institutions to enable exporters to obtain better credit facilities.
Advance Licences: These are issued to exporters for import of raw materials for
manufacture of finished products, without payment of custom duties. Duty free
import of capital goods may also be permitted if the product to be manufactured is
for export.
Special Import Licences: These licences for items in the negative list of imports
are made available to specified categories of exporters.
Royalty Payment: There is no restriction on the payment of royalty from India and
can be remitted without any approval of government or Reserve Bank of India. In
addition, a commission on exports can also be paid to agents outside India.
Special Incentives: These are available to units set up in Special Economic Zones
(SEZs), Export Processing Zones (EPZs) and 100% Export Oriented Units (EOUs).
While EOUs can be set up anywhere in the country, there are designated SEZs and
EPZs which provide internationally competitive duty free environment for low cost
export production through basic infrastructure facilities like: developed land,
standard design factory buildings, roads, power, water supply, drainage, customs
clearance and telecommunications. Presently, these units are eligible to credit
100% of their eligible export receipts of foreign exchange to their Exchange
Earners’ Foreign Currency (EEFC) account. These tax incentives are discussed in
details in chapter on Taxation System.
18
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EOUs/EPZs have to achieve specified value addition norms. Apart from tax
holidays, EOUs/EPZs can import capital goods and industrial inputs free of custom
duty and are exempt from payment of Central and State sales tax. Supplies by
domestic tariff area units to EOUs/EPZs are regarded as deemed exports and are
exempt from excise duty.
Special Economic Zones: To create stimulating infrastructure facilities of
international standards in export production, Special Economic Zones (SEZ) can
now be set up in the private, public, joint sector or by state governments. Certain
EPZ have now be been converted into SEZ. Units in SEZ have comparably better
incentives from units in EPZ.
8.0 ENERGY, MINERALS AND OTHER NATURAL
RESOURCES
Energy is an essential input for economic development and improving the quality of
life. The primary source of commercial energy in India is coal, which provides about
63% of India’s commercial requirements. Nuclear and solar energy are developing,
but still have a long way to go to be truly accepted in India as a major energy
provider.
9.0 FOREIGN TRADE
The government has announced various policies with the intention of reducing the
protection of domestic industry. These policies included substantial reduction in
import licensing, decanalization of imports and exports, and lowering of tariffs.
However, international trade has not been completely freed with the primary aim of
avoiding a drain of foreign exchange reserves and to discourage the importing of
non-essential and luxury items.
Major commodities exported from India are gems, jewellery, ready-made garments,
machinery, tools, transportation equipment, manufactured metal goods, electronics,
software, cotton, leather, drugs, iron ore, marine products and tea. India’s exports
amounted to US $ 185 billion during the financial year 2008-09. India’s imports in the
2008-09 financial year were US $ 304 billion.
10.0 OTHER FACTORS
10.1 Language
The government as well as the industry conducts their activities in English, India has
the second largest English speaking population after the United States.
10.2 Trained Manpower
India has one of the largest pool of trained, scientific and technical manpower in the
world. This manpower is available very cheap when compared to the manpower
costs prevailing in developed countries.
DOING BUSINESS IN INDIA 19

10.3 Low Research and Development Costs
Research and development costs in India are generally very low when compared to
the costs that would be incurred in any major industrialized countries. In the present
scenario, it is possible for the foreign companies to establish 100% foreign-owned
research and development (R&D) companies in India, and import the laboratory
equipments and other facilities required for R&D. Further to encourage R&D across
all sectors of the economy, the Finance Act 2010 introduced by the Finance Ministry
of the Government of India has increased weighted deduction on expenditure
incurred on approved in-house R&D from 150% to 200%.
10.4 Financial Reliability
Repatriation of capital or dividends for investments made in India is freely allowed.
The fiscal deficit which was at 5.9% during the period 2008-09 is envisaged to
touch 6.5% of the GDP during 2009-10. Foreign exchange reserves of India which
were about US $ 252 billion on 31 March 2009 has increased to US$ 277 billion as on
26 March 2010.
India is a member of the convention of the Multilateral Investment Guarantee
Agency, which provides insurance to foreign investors against political risks.
20
DOING BUSINESS IN INDIA

Chapter 3
Business Entities
Charminar, Hyderabad

CHAPTER 3
BUSINESS ENTITIES
1.0 FORMS OF BUSINESS ENTITIES
The principal forms of business organizations in India, apart from government
organizations and sole proprietary concerns are:
i. Companies - public and private
ii. Branches of foreign companies
iii. Liaison/Branch/Project offices of foreign companies
iv. Partnerships
v. Trusts
vi. Limited Liability Partnerships (LLP)
1.1 Companies
At present, the legislative provisions governing companies are contained in the
Companies Act, 1956.
Companies in India are broadly classified into public sector companies’ viz. with
predominant government shareholding and private sector companies’ viz. with
predominant private shareholding. Private sector companies may further be
classified as public limited companies or private limited companies. Companies can
also be classified into companies limited by shares, companies limited by guarantee
and unlimited liability companies. However, for business purposes, generally
companies limited by shares are used and consequently, the discussion regarding
companies in this guide is pertaining to such companies. The shares of public
companies may or may not be listed on stock exchanges in India. (e.g. The National
Stock Exchange of India Ltd (NSE), Bombay Stock Exchange Ltd (BSE), etc.) The
regulatory provisions for private limited companies are less stringent than those
relating to public limited companies. Public limited companies whose shares are
listed on stock exchanges are subject to the regulations of the Securities and
Exchange Board of India (SEBI) and the respective stock exchanges.
Private companies that are subsidiaries of public companies (i.e. where
shareholding of Public companies is more than 50%) are however treated at par
with public companies.
Shares of public limited companies are freely transferable, whereas it is subject to
restrictions in case of private limited companies. However, transfer of shares to nonresidents
is regulated by Foreign Exchange Management Act, 1999.
The system of depository has been introduced by the Depositories Act and
Securities Exchange Board of India (Depository & Participants) Regulations, 1996
which has smoothened the transfer of shares in case of listed companies.
22
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1.2 Regulations
The financial reporting environment in India is stringently regulated by the
government, through various regulators and government agencies. There are a
large number of mandatory compliances, the failure of which can lead to penalties
and other more severe consequences.
The Indian legal system is constituted by a framework of various laws and
enactments based on Common Law and include the following acts that contain
provisions and guidelines for the primary functioning of the corporates in India:
Companies Act 1956;
Chartered Accountants Act 1949;
Reserve Bank of India Act 1934;
Income Tax Act 1961;
Securities and Exchange Board of India Act 1992;
Securities Contract (Regulation) Act 1956;
Banking Regulation Act 1949;
Insurance Act 1938.
The various regulators that influence financial reporting in India include:
Ministry of Corporate Affairs (Regulator for all corporate enterprises);
Securities and Exchange Board of India or SEBI (Regulator for all listed
companies);
Reserve Bank of India or RBI (Regulator for all Banking and Finance
entities);
Insurance Regulatory and Development Authority or IRDA (Regulator for
all Insurance companies);
Institute of Chartered Accountants of India or ICAI (Regulator for
Chartered Accountants and auditors).
1.3 Branches of Foreign Companies (Branch Office)
Foreign companies engaged in manufacturing and trading activities abroad have
been allowed to set up branch offices in India. Permission for setting up branch
offices is granted by RBI on a case-to-case basis. Application for permission to set up
branches is to be made with the Authorized Dealer Category I bank (AD) along with
the requisite documents, which would then be submitted with the RBI along with
recommendations and suggestions of the AD. The essential parameters considered
by RBI on such an application is the worldwide operating history of the foreign
company, proposed activities in India, profit making track record of the foreign
company in the home country and its net worth. The additional criteria to be
satisfied for eligibility regarding track record and net worth are as under:
DOING BUSINESS IN INDIA 23

Sr.
No.
Criteria
Requirements
1 Track Record A Profit making track record during the immediately
preceding five financial years in the home country of the
foreign company proposing to establish BO.
2 Net Worth* Not less than US$ 100,000 or its equivalent
* Net worth includes total of paid-up capital and free reserves, less intangible assets
as per the latest Audited Balance Sheet or Account Statement certified by a
Certified Public Accountant or any Registered Accounts Practitioner by whatever
name.
Foreign companies engaged in manufacturing and trading activities abroad have
been allowed to open branch offices to carry on the following activities in India:
i. To export / import goods.
ii. To render professional or consultancy services.
iii. To carry out research work, in which the parent company is engaged.
iv. To promote technical or financial collaborations between Indian
companies and parent or overseas group company.
v. To represent the parent company in India and acting as buying / selling
agent in India.
vi. To render services in Information Technology and development of
software in India.
vii. To render technical support to the products supplied by parent / group
companies.
viii. To act as branch of a foreign airline / shipping company.
Foreign Companies are required to furnish certain specified information and
comply with provisions of the Companies Act, 1956 on establishing a place of
business in India.
1.4 Liaison / Representative Offices
One of the preferred routes for foreign companies to enter the Indian markets is
setting up a liaison / representative office. Permission to set up such offices is
granted for an initial period of 3 years, which may be extended from time to time.
The essential parameters considered by RBI on such an application is the worldwide
operating history of the foreign company, proposed activities in India, profit making
track record of the foreign company in the home country and its net worth. The
additional criteria to be satisfied for eligibility regarding track record and net worth
are as under:
Sr.
No.
Criteria
Requirements
1 Track Record A Profit making track record during the immediately
preceding three financial years in the home country of
the foreign company proposing to establish LO.
2 Net Worth* Not less than US$ 50,000 or its equivalent
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* Net worth includes total of paid-up capital and free reserves, less intangible assets
as per the latest Audited Balance Sheet or Account Statement certified by a
Certified Public Accountant or any Registered Accounts Practitioner by whatever
name.
Application for grant of approval is to be made with the Authorized Dealer Category
I bank (AD) which would then forward it to the RBI along with suggestions and the
requisite documents. RBI may grant approval for setting up a liaison office on
receipt of such an application. Some of the criterions which shall be considered by
the RBI before granting approval include profit making track record of the foreign
company in the home country and its net worth.
Foreign companies are permitted to establish an office or to post a representative in
India for carrying on liaison activities, subject to the following conditions:
i. Commission or fee is charged or any other remuneration received by the
Indian office of the foreign company for its liaison activities in India.
ii. Except for the liaison work, the office does not undertake any activity of a
trading, commercial or industrial nature without the prior permission of
the Reserve Bank of India.
iii. All expenses of the Indian office are met exclusively by remittances from
abroad through normal banking channels.
iv. No borrowing or lending of any money from / to any person in India
without the prior permission of RBI.
v. The Indian office submits an annual statement to the AD and a copy to the
Directorate General of Income Tax (International Taxation), New Delhi,
giving details of remittances received from abroad, supported by bank
certificates, together with a copy of the final accounts of the Indian office
certified by a Chartered Accountant.
Liaison offices are permitted to carry out the following activities in India:
i. To represent the parent company / group companies in India.
ii. To promote export / import from / to India.
iii. To promote technical / financial collaborations between parent / group
companies and companies in India.
iv. To act as a communication channel between the parent company and
Indian companies.
Foreign companies having only liaison offices and not engaged in any trading,
manufacturing or other commercial activity in India, have to furnish certain
mandatory information to the Registrar of Companies in India.
1.5 Project Office
Foreign companies planning to execute specific projects in India can set up
temporary project /site offices in India for such purpose. The standard conditions
imposed for operating such offices are:
The foreign company has secured from an Indian company a contract to
execute a project in India.
DOING BUSINESS IN INDIA 25

The project is funded by inward remittance from abroad; or
The project is funded by a bilateral or multilateral International Finance
Agency; or
The project has been cleared by an appropriate authority; or
A company or entity in India awarding the contract has been granted Term
Loan by a Public Financial Institution or bank in India for the project.
The foreign company shall furnish a report to the concerned Regional
Office of the RBI under whose jurisdiction the project office is set up
comprising the following details:
Name and address of the Foreign Company;
Particulars of authority awarding the projects/contract;
Total amount of contract;
Address and tenure of Project Office;
Nature of Project Undertaken.
Foreign companies having only project office and not engaged in any trading,
manufacturing or other commercial activity in India, have to furnish certain
mandatory information to the Registrar of Companies in India.
1.6 Partnerships
Partnerships are established by a partnership deed, which is registered with the
Registrar of Firms. The Indian Partnership Act, 1932 lays down provisions regarding
rights and obligations of partners, retirement and admission of partners,
dissolution of firm and related aspects.
Indian laws prohibit partnerships of more than 20 persons from carrying on any
business and partnerships of more than 10 persons for carrying on the business of
banking.
1.7 Trusts
Trusts are generally established in India for business of mutual fund and for
charitable, religious and other non-profitable purposes.
There are special provisions relating to taxation of mutual funds and charitable
trusts which provide for tax exemption under specified circumstances.
1.8 Limited Liability Partnerships (LLPs)
The concept of LLP is new to India and the Limited Liability Partnership Act, 2008
has permitted setting up of LLPs with effect from 1 April 2009.
Some of the salient features of an LLP are as under:-
LLP is a body corporate having a separate legal entity distinct from its
members.
LLP has a perpetual succession and any change in partners of LLP will not
affect the existence, rights or liabilities of the LLP.
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Any individual, body corporates, including LLPs, a foreign LLPs and Indian
as well as foreign companies can be partners in LLPs.
LLP shall have at least
two partners
two designated partners who are individuals and at least one of
them shall be resident in India.
If all the partners of any LLP are bodies corporates or LLPs, they shall
nominate their respective individuals to act as designated partners, of
whom at least one shall be resident in India.
Designated Partner’s are liable for compliance under the Act and in the
event of non-compliance will be liable for the penalties.
In an LLP, there is no upper limit on maximum number of partners unlike
an ordinary partnership firm where the maximum number of partners
cannot exceed 20.
Every partner of LLP is the agent of the LLP for the purpose of the
business of the LLP, but not of other partners.
Every designated partner shall obtain a Designated Partner Identification
Number (DPIN) which is similar to Director Identification Number (DIN) as
provided under the Companies Act, 1956.
An obligation of the LLP whether arising in contract or otherwise, shall be
solely the obligation of the LLP. The liabilities of the LLP shall be met out of
the property of the LLP
While the LLP is a separate legal entity, liable to the full extent of its assets,
however, the liability of the partners is limited to their agreed contribution
in the LLP which may be of tangible or intangible nature or of both tangible
and intangible in nature.
No partner is liable on account of the independent or unauthorized actions
of other partners, thus, allowing individual partners to be shielded from
joint liability created by another partner’s wrongful business decisions or
misconduct.
Registering authority of LLP is the Registrar of Companies under the
Companies Act, 1956.
The name of an LLP must end with the words “limited liability partnership”
or the acronym “LLP”.
The mutual rights and duties of partners of an LLP inter se and those of
LLP and its partners shall be governed by an agreement between the
partners or between LLP and the partners subject to the provisions of the
proposed legislation. In the absence of any such agreement, the same
shall be governed by Schedule I to the Act.
The right of a partner to share profits and losses of the LLP are
transferable either wholly or in part. The transfer in such a way shall not
DOING BUSINESS IN INDIA 27

cause the disassociation of the partner or the dissolution and winding up
of the LLP. Further, the transfer of right does not, by itself, entitle the
transferee or assignee to participate in the management or conduct of the
activities of the LLP or access information concerning the transactions of
the LLP.
The provisions of the Indian Partnership Act 1932 shall not apply to LLPs.
Other entities such as firms, private companies and unlisted public
companies can get themselves converted into LLPs. However, an LLP
cannot be converted into any other form of business entity. Upon
conversion, all property of firm or company shall be transferred to and
shall vest in the LLP and the firm or the company shall be deemed to be
dissolved and removed from the records of the Registrar of firms or
Registrar of Companies as the case may be.
The payment of remuneration and interest to partners is deductible if
conditions which are stipulated under the Limited Liability Partnership
Act and Income Tax Act are satisfied.
LLPs shall be obliged to maintain annual accounts, file a statement of
accounts and solvency and annual return with the Registrar of Companies
every year and all these documents shall be open for public inspection at
the office of the Registrar of Companies.
Audit of LLP is mandatory only if annual turnover exceeds Rs. 40 lacs or
contribution exceeds Rs. 25 lacs. The Finance Act 2010 has increased the
annual turnover limit of Rs. 40 lacs to Rs. 60 lacs, from financial
year 2010-11.
The financial year of an LLP has to be compulsorily kept at 31 March.
The Central Government has the powers to investigate the affairs of an
LLP.
LLP shall by its name, have the power of suing and being sued.
LLP can acquire, own, hold, develop or dispose of property both movable
and immovable.
The winding up of LLP may be either voluntary or by the Tribunal to be
established under the Companies Act, 1956. Till the tribunal is established,
the power in this regard shall vest with High Court.
Compromise or arrangement including merger and amalgamation can be
made between LLP and it creditors and LLP and its partners and between
LLPs.
Foreign LLPs can establish a place of business in India and carry on their
business by registering under the Act.
Some of the basic taxation aspects applicable to an LLP includes:
The applicable tax rates would be 30.9%
Minimum Alternate Tax (MAT) provisions are not applicable in case of
LLPs
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No Dividend Distribution Tax (currently at an effective rate of 16.61%
for FY 2010-11) on profits distributed to the partners of LLP.
Remuneration receivable by partners of LLP will be taxed in the
hands of the partners as “Income from Business & Profession”.
The benefits of presumptive taxation are not applicable in case of
LLPs.
2.0 SETTING UP A COMPANY
2.1 Incorporation of a Company
The steps involved in the incorporation of a company include availing a suitable
name for the company, determining the location of the registered office of the
company, determining the authorised share capital, drafting the Memorandum of
Association and Articles of Association and thereafter submitting the necessary
documents and returns to the Registrar of Companies (ROC). The Ministry of
Corporate Affairs has introduced MCA-21 e-Governance programme with a view to
providing all services relating to ROC offices on-line in e-Governance mode.
Accordingly all filings with the ROC including compliances with respect to
Incorporation of a Company have to be done electronically duly authenticated by
digital signatures of the authorized persons.
A minimum of seven subscribers are required for incorporation of a public limited
company (two in case of a private limited company). The procedure of incorporation
generally takes 4-6 weeks.
All documents pertaining to incorporation of a company having foreign individuals /
foreign companies residing outside India as shareholders shall be certified by an
official of the Government to whose custody the original is committed and be duly
apostillized/notarized in accordance with Hague Convention.
2.1.1 APPROVAL OF NAME
Companies Act, 1956 governs the operations of a corporate enterprise. First step in
incorporation of a company is to seek approval for the proposed name from the
Registrar of Companies (‘ROC’) of the State/Union Territory, in which the registered
office of the company is proposed to be situated. The promoters of the company
have to apply to the Registrar of Companies for availability of the proposed name of
the company. The approval is granted subject to conditions namely; the name
should not be ambiguous or similar to an existing company, etc. Further, the words
‘Limited’ and ‘Private Limited’ should form the last part of the name of a public or
private company respectively. The compliances regarding application of name is to
be made electronically through the portal of the Ministry of Corporate Affairs
(www.mca.gov.in).
The documents that are to be filed with the ROC for the purposes of incorporation of
a company include, along with other forms, the Memorandum of Association (’MoA’)
and Articles of Association (‘AoA’). After obtaining approval, the Memorandum and
Articles of Association of the proposed company are filed with the Registrar of
DOING BUSINESS IN INDIA 29

2.1.2 MOA
2.1.3 AOA
Companies for registration. On registration, a Certificate of Incorporation is issued
which is conclusive evidence of the company having been incorporated. It usually
takes 4–6 weeks to incorporate a company in India.
There is an office of the Registrar of Companies in each Indian State and in some
cases, for a group of adjoining States. A company needs to be registered only once
with the Registrar in the State based on the location of its registered office and can
then do business all across the country.
The MoA sets out the constitution of the company. The MoA of every company
should state the following:
The name of the company with ‘Limited’ as the last word of the name in the
case of a public company and with ‘Private Limited’ as the last words of the
name in the case of a private company;
The State in which the registered office of the company is situated;
The main objects to be pursued by the company on its incorporation along
with objects incidental or ancillary to attainment of the main objects;
Other objects of the company;
The liability of its members,
The authorised share capital (i.e. the amount of share capital with which
the company is to be registered) and division thereof into shares of a fixed
amount.
The minimum paid-up capital.
The objects clause is generally comprehensive in nature but the same can be
amended by a special resolution of the shareholders.
There should be at least seven (7) subscribers to the MoA in case of a public
company and at least two (2) subscribers to the MoA in case of a private company.
The AoA contain the rules and regulations for managing the internal affairs of the
company and achieving the objects set out in the MoA. This document is
subordinate to the MoA.
The articles of association set out the internal rules of the company. They contain
provisions relating to share capital, the rights of members, procedure for the
conduct of various general meetings of members, rights of members at general
meetings, constitution of the Board of Directors, powers of Board and other similar
matters regarding internal regulations of a company. A company need not register
its own individual articles, but may adopt the model articles provided under the
Companies Act, 1956.
It is essential for a private company to have its own AoA, whereas there is no such
essential requirement for a public company. If a public company does not register its
AoA, the standard model of AoA as provided in the Companies Act, 1956 applies.
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Draft copies of the memorandum, articles and prospectus should be submitted to
the stock exchange for approval in case the company wishes to list its shares by
offering the same to the members of the public.
2.1.4 Registration Fees and Stamp Duty
The costs associated with incorporation of a company relate to drafting and printing
of the Memorandum and Articles of Association, stamp duty and company
registration fee which is linked to the quantum of authorised capital.
Registration fees are calculated on a specified scale based on the company’s
authorised share capital. The minimum fee of Rs. 4,800 (about US$ 107) applies to
companies with authorised share capital up to Rs. 100,000 (about US$ 2,223). The
maximum amount of registration fee payable is Rs. 20 million (about US$ 444,543).
Stamp duty is payable on the basis of authorised share capital which varies from
state to state. (1 US$ = Rs. 44.99)
2.1.5 Certificate of Incorporation
The Registrar of Companies on being satisfied that all the requirements pertaining
to incorporation have been met and the objectives of the company being
considered are lawful, issues the Certificate of Incorporation. The Company
thereafter comes into existence as a legal person distinct from its members. A
private limited company can commence business upon obtaining the Certificate of
Incorporation. A public limited company on the other hand has to further obtain a
Certificate of Commencement of Business from the Registrar after filing the
prospectus / statement in lieu of prospectus before commencing business or
exercise any borrowing powers.
Where a company has issued a prospectus inviting the public to subscribe to its
shares, the company cannot commence business until the amount of minimum
subscription stated therein has been received.
2.2 Initial Capital Requirements
The minimum paid-up capital required for a private limited company is Rs. 100,000
(about US$ 2,223) and for a public limited company is Rs. 500,000 (about US$
11,114).
The minimum paid up equity capital for a public limited company to get its shares
listed on the stock exchange is Rs. 100 million (about US$ 2.22 million), and at least
25% of the issued capital must be offered to the public for subscription. 10% of the
issued capital can be offered to the public for subscription in case the size of the
offer to the public is Rs. 1 billion (about US$ 22.23 million) or more and the offer is
through book building method. However, the minimum equity capital is much lesser
for listing on the Over the Counter Exchange of India. For listing on the Bombay
Stock Exchange and National Stock Exchange, the minimum paid up equity capital
should be Rs. 100 million and the market capitalization of the applicant’s equity shall
not be less than Rs. 250 million (about US$ 5.56 million) provided however that the
DOING BUSINESS IN INDIA 31

paid up equity capital can be less than Rs. 100 million (about US$ 2.22 million), if the
market capitalization of the applicant’s equity is not less than Rs. 1 billion (about US$
22.23 million). However, in any case the paid up equity capital of the company shall
not be less than Rs. 50 million (about US$ 1.11 million). A public limited company
cannot make any allotment of shares unless a minimum subscription of 90% of the
issue amount has been subscribed. For continuation of listing all listed companies
should have non-promoter holding to the extent of 10% of the post issue capital (for
an existing company which had in the past offered shares to the extent of 10%
pursuant to the relevant regulations) or 25% for a new company.
2.3 Kinds of Shares
A public limited company is allowed to have only two classes of share capital viz.
equity and preference shares.
2.3.1 Equity shares are further divided into shares with
i. voting rights
ii. with different rights as to dividend, voting or otherwise as per the rules
prescribed.
As per the Companies (Issue of Share Capital with Differential Voting Rights) Rules,
2001, only such companies fulfilling certain basic criteria are allowed to issue shares
with differential voting rights viz., three year track record of distributable profits,
non default inter alia in respect of filing of accounts, annual returns, repayment of
deposits, redemption of debentures, payment of dividend. Approval of the
shareholders for issuing such shares should be obtained at a General Body Meeting
of the shareholders and in case of listed companies through system of postal ballot.
Such shares, however, can be issued to the extent of 25% of the company’s total
issued share capital only. So far as private limited company is concerned, there is no
restriction on issue of shares of only two kinds as mentioned above and also there is
no restriction of issue of shares with disproportionate rights.
2.3.2 Preference shares, which carry a pre-determined coupon rate for payment of
dividend each year can be of different types i.e. Cumulative, Non-cumulative,
Convertible and Non-convertible. Only redeemable preference shares can be issued
and the maximum period within which shares should be redeemed should not
exceed twenty years. Preference shareholders have voting rights only under certain
given conditions like non-payment of dividends:
i. in case of cumulative Preference shares, for an aggregate period of not
less than two years and
ii. in case of non-cumulative Preference shares, either for a period of two
years immediately preceding the commencement of meeting of the
shareholders or for an aggregate period of not less than three years.
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On winding up, preference shareholders receive first priority for repayment of
capital, with the equity shareholders being entitled to the remaining surplus, if any.
2.3.3 A company may issue shares at a premium, which can be utilized only for specified
purposes provided under the Companies Act, 1956.
A company may issue shares at a discount i.e. price less than the par value of shares,
subject to the approval of the members of the general body meeting and approval of
Company Law Board.
2.4 Debentures
Companies may also issue debentures. A debenture is an acknowledgement of debt
given under the common seal of the company. They are normally secured by a
charge on the company’s assets, bearing a fixed rate of interest and are redeemable
at a future date. Debentures may be wholly or partially convertible into shares at a
stated date.
The money raised through debentures forms a part of company’s capital structure
though it does not form part of the company’s share capital.
Public limited listed companies are allowed to issue debentures as per the
guidelines framed by The Securities and Exchange Board of India (SEBI). SEBI now
permits companies to issue convertible or non-convertible debentures. Every listed
Company desirous of issuance of debentures must list all debentures with the stock
exchange irrespective of the mode of issuance i.e. whether issued on private
placement basis or through public/rights issue, and it shall be done through a
separate Listing Agreement on Debentures. Some of the important conditions are
compulsory credit rating, appointment of Trustees and creation of Debenture
Redemption Reserve. Debentures issued by unlisted companies also need to be
secured. Listed Companies are now permitted to make a combined offering of Non
Convertible Debentures with warrants.
2.5 Public Deposits
Acceptance of deposits from the public is another major source of raising funds. The
Government in consultation with RBI has prescribed the upper limits, the manner
and the conditions subject to which, deposits may be invited or accepted by a
company from the public/ members of that company. Only a Public Limited
Company can raise such public deposits. However, limits are prescribed for
acceptance of deposits by companies are 10% and/or 25% of the aggregate of the
Company’s paid-up capital and free reserves for Public Companies and 35% of the
aggregate of its paid-up capital and free reserves for Government Companies.
2.6 Directors
A company primarily acts through two (2) agencies, a general body of shareholders
and the Board of Directors. The Board of Directors is a managerial body and its
accountability to shareholders must be assured.
DOING BUSINESS IN INDIA 33

The requirements for public and private companies are as follows:
Requirements Public Private
Minimum numbers of subscribers/shareholders/members 7 2
Maximum number of subscribers/shareholders/members No limit 50
Minimum number of directors 3 2
Therefore even if a foreign company wants to incorporate its 100% subsidiary in
India, it will need one other shareholder, which could be another foreign body
corporate or foreign resident individual or a Indian resident individual, who would
hold at least one share, as a nominee of the foreign company or in his own name. The
third option is for the second shareholder to be an Indian resident or Foreign
resident individual who could hold one share jointly with the foreign company in
order to satisfy the requirement of a minimum of two shareholders. The first
arrangement is, however, preferable in case of private companies in order to retain
the character of the Indian company as a “pure” private company.
Directors are responsible for the management of the day to day affairs of the
company. Unless otherwise required by the company’s articles, directors need not
be shareholders. The directors should meet periodically by convening Board
Meetings. There should be at least one board meeting in each quarter and four
board meetings in a year. Decisions taken are resolved by passing appropriate Board
Resolutions. The directors can pass resolution by circulation in certain
circumstances without holding a Board Meeting.
In case of every public company (and a private company, which is a subsidiary of a
public company) at least two-thirds (2/3) of the total number of directors are liable
to retire by rotation (one-third of such directors shall retire at every AGM). The
remaining one-third (1/3) directors (non-rotational) may be appointed as provided
in the company’s AoA.
In the case of a private company, which is not a subsidiary of a public company, the
appointment of directors may be as per the procedure specified in its AoA. Where
the AoA do not provide otherwise, the directors are to be appointed in a General
meeting. The provisions relating to rotational retirement of directors do not apply in
case of a private company, which is not a subsidiary of a public company.
A person cannot be a director in more than 15 public limited companies. Alternate
directorships, directorships in private companies which are neither subsidiaries nor
holding companies of a public company and directorships in unlimited liability
companies) are not considered for the above purpose. Every public limited company
should have at least 3 directors, but not more than 12 (unless it has received
approval of the Department of Corporate Affairs). On other hand, a private limited
company must have at least 2 directors. An alternate director may be appointed by
the Board of Directors when a director is expected to remain outside the state in
which meetings of the Board are ordinarily held for a continuous period of three
months.
Directors can be appointed by the shareholders in the annual general meeting, by
the board of directors and also by the central government. Directors may also be
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nominated by financial institutions and debenture holders where terms of grant of
loan or issue of debentures so provide.
Small shareholders i.e shareholders holding shares of nominal value of
Rs. 20,000 (about US$ 445) or less may elect a director to represent the interest of
small shareholders.
The day to day management of the company resides with the board of directors,
although some of the specified matters require approval of the shareholders.
Only individual can be appointed as a Director of a company. Every individual
intending to be appointed as a Director of a company or who is already being
appointed as a Director of a company before the commencement of the Companies
(Amendment) Act, 2006, must obtain Director Identification Number (DIN) from
Ministry of Corporate Affairs, Government of India. Every existing Director to whom
DIN has been allotted, shall intimate the DIN within one month from the date of its
receipt to the company(s) where he is Director. Every company shall in-turn intimate
the DIN to Registrar of Companies with one week of the receipt of intimation from
the Director.
2.7 Managing Director
The company is managed by the Board of Directors who may delegate any of its
powers, except where any transaction requires approval of the Board of Directors
under the Companies Act, to any director or managing director. Only individual can
be appointed as a Director of a company.
Every public limited company and a private limited company, which is a subsidiary of
a public limited company having paid-up capital of Rs. 50 million (about US$ 1.11
million) or more, must have a managing or whole time director or a manager.
Appointment and compensation of a managing director do not require approval of
the Department of Corporate Affairs if the appointment is made within the
guidelines and subject to the remuneration ceiling prescribed. In case of public
limited companies, certain limits have been specified for maximum remuneration
that can be paid to managing or whole time directors. The total remuneration to all
directors shall not exceed 11% of the net profits of the company. There are no
restrictions on the appointment and remuneration of managing directors or whole
time directors or managers of private limited companies.
2.8 Secretary
Every company with paid-up capital of Rs. 50 million (about US$ 1.11 million) or more
must have a full time secretary who should be a member of the Institute of Company
Secretaries of India (ICSI), who is responsible for the compliance of company law,
SEBI regulations and other allied laws. The companies which are not required to
have whole time secretary and are having paid up capital of Rs. 1 million or more
(about US$ 22,227) and above and less than Rs. 50 million should file with the
Registrar of Companies a certificate from a secretary in whole time practice as to
whether the company has complied with all provisions of the Companies Act, 1956.
DOING BUSINESS IN INDIA 35

3.0. STATUTORY REQUIREMENTS FOR COMPANIES
3.1 Annual Reports
All corporate entities in India irrespective of their size are required to prepare and
file audited financial statements in accordance with Accounting Standards (“AS”)
issued by the Institute of Chartered Accountants of India (“ICAI”) and their
governing statute which may include:
Companies Act for all incorporated entities;
Reserve Bank of India (RBI) Guidelines and Prudential Norms, and the
Banking Regulation Act, for banking companies;
The Insurance Act and the Insurance Regulatory and Development
Authority Act for insurance companies;
Electricity Acts for power companies, etc.;
Listing Agreement entered between the listed Companies and Stock
Exchange with which they are listed.
A set of financial statements in India generally includes:
balance sheet;
profit and loss account;
cash flow statement;
explanatory notes to the financial statements and supplementary
schedules.
Financial statements do not, however, include such items as reports by directors,
statements by the chairman, discussion and analysis by management and similar
items that may be included in a financial or annual report, which all form part of
overall financial reporting.
Financial Statements should be presented to the shareholders for their approval in
annual general meeting. The board of directors report should also include a
Directors Responsibility Statement. Directors’ Responsibility Statement basically
aims at highlighting the accountability of Directors in good corporate governance.
The financial statements of a holding company should also include a copy of the
financial statements of its subsidiary company and a statement showing the
holding company’s interest in the subsidiary. Listed public limited companies should
circulate the cash flow statements along with annual financial statements among
its members.
3.2 Audit Requirements
Every company is required to get its accounts audited under the Companies Act,
1956. The auditor should be a member of the Institute of Chartered Accountants of
India (ICAI) holding a Certificate of Practice. There are mandatory audit
requirements under certain other laws as well.
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In case of certain specified industries, in addition to the regular audits, an audit of
cost accounts is required by a qualified cost accountant who is a member of the
Institute of Cost & Works Accountants of India (ICWAI) holding a certificate of
practice.
3.3 Shareholders Meetings
Every company must hold an Annual General Meeting (AGM). The time limit
between two AGMs should not exceed 15 months. The matters considered at an AGM
(which are known as ordinary business) normally include:
i. The consideration of the accounts, balance sheet and the reports of the
Board of Directors and auditor.
ii. The declaration of dividend.
iii. The appointment of directors in place of those retiring by rotation.
iv. The appointment of and the fixing of the remuneration of the auditor.
Any other business in the AGM or in case of any other meetings is referred to as
special business.
Every member entitled to vote at the AGM must receive a written notice of the
meeting at least 21 days in advance. (a private company may prescribe shorter time
frame for notice period as per its Articles).
The AGM should be held on or before the earliest of the three relevant dates as
prescribed under:
a. six months from the closure of the financial year;
b. 15 months from the previous AGM;
c. last day of the next calendar year.
The date of the profit and loss account should not precede six months from the date
of the meeting, however, in the case of first accounts this period of six months can
extend to nine months.
In addition to the statutory meeting (to be held within six months of commencement
of business by a public limited company only) and the AGM, the Companies Act also
provides for extraordinary general meetings (EGMs). The board of directors may call
EGMs at their discretion. The directors must call an EGM, however, on a request from
members with at least 10% of the voting rights.
A simple majority of votes carries an ordinary resolution but special resolutions
must be supported by the votes of at least 75% of the members voting. Special
resolutions are generally those with constitutional significance for the company
such as, a resolution to alter the memorandum of association or articles of
association or the registration of a private company as a public company or vice
versa and reduction of share capital.
DOING BUSINESS IN INDIA 37

3.4 Online Filing System
Ministry of Corporate Affairs (MCA) has vide Notification dated 10/02/2006
amended the Companies (Central Government) General Rules and Forms, 1956,
wherein all the forms and returns as mentioned in the notification are required to
filed electronically through internet with Registrar of Companies (ROC).
3.4.1 Directors Identification Number (DIN)
Director Identification Number (DIN) is a unique identification number for an
existing director or a person intending to become the director of a proposed
company. In the scenario of e-filing, obtaining DIN for every director is a prerequisite
for filing certain company related documents.
3.4.2 Digital Signature Certificate (DSC)
A Digital Signature is the electronic signature duly issued by the Certifying
Authority that shows the authenticity of the person signing the same. Every user i.e.
Director or Authorised Representative of a Foreign Company who is required to sign
an e-Form for submission with MCA (i.e. through internet) requires a Digital
Signature Certificate.
3.5 Filing of Documents / Returns
Every company must file its annual accounts with the Registrar of Companies
(‘ROC’) within 60 days from the date of the annual general meeting. (which is
required to be held within six months of the financial year end and once in every
year) containing the following:
Director’s report;
Auditor’s report;
Financial statements.
Further in addition, listed companies are also required to send copies of the annual
report, cash flow report, unaudited quarterly results to the stock exchange also.
Filing of applications, documents, inspections etc. through electronic form
Any applications, balance sheet, prospectus, annual returns, forms, declarations,
memorandum or articles of associations, particulars of charges, notices or any
communications, intimations, as may be required to be filed or delivered under the
Companies Act or any rules made thereunder shall be filed through electronic form
and authenticated in such manner as may be specified in the rules. Registrar shall
maintain all the applications, documents filed under this Act in the electronic form
and registered or authenticated in such manner as may be specified in the rules.
Inspection of these documents can be made by any person through electronic form.
All fees, charges or other sums shall be paid though the electronic form. Registrar
shall register these documents filed or delivered under this Act or rules made
thereunder and issue such certificates or perform duties or discharge functions or
exercise power under this act or rules made thereunder.
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3.6 Penalties for non compliance under the Companies
Act, 1956
Section
Nature of default
Penalty
11 C o n t r a v e n t i o n o f t h e
p rov i s i o n s re l a t i n g to
formation of associations and
partnerships exceeding
certain number
77A
C o n t r a v e n t i o n o f t h e
p rov i s i o n s re l a t i n g to
purchase of own securities
80 Contravention of provisions
related to issue of redeemable
preference shares
84 Issue of share certificate with
fraudulent intention
142 Not getting registered the
charge created on the assets
of the company
150 Failure to maintain register of
member in the prescribed
manner
162 Failure to file annual return
within prescribed time in
accordance with section 159
Every member is liable for penalty
which may extend to Rs. 10,000
The company or every officer of the
company who is in default shall be
punishable with imprisonment for a
term which may extend to two years or
with fine which may extend to
Rs. 50,000 or with both
The company and every officer of the
company who is in default shall be
punishable with fine which may extend
to Rs. 10,000
The company shall be punishable with
fine which may extend to Rs. 10,000
and every officer of the company who is
in default shall be punishable with
imprisonment for a term which may
extend to six months or with a fine
which may extend to Rs. 100,000 or
with both
The company and every officer of the
company or other person who is in
default shall be punishable with fine
which may extend to Rs. 5,000 for
every day during which default
continues
The company and every officer of the
company who is in default shall be
punishable with fine which may extend
to Rs. 500 for every day during which
the default continues
The company and every officer of the
company who is in default shall be
punishable with fine which may extend
to Rs. 500 for every day during which
the default continues
DOING BUSINESS IN INDIA 39

Section
Nature of default
168 Default in holding Annual
G e n e r a l M e e t i n g i n
accordance with section 166
188 Default in circulating any
resolution that a member
want to put at general
meetings
205A
If the unpaid dividend is not
transferred to special account
within the prescribed time
209 Failure to maintain books of
account in the prescribed
manner
210 Failure to lay accounts before
annual general meetings
211 Failure to prepare the
financial statements in
a c c o r d a n c e w i t h t h e
requirements of Schedule VI
212 Failure to include prescribed
particulars of the subsidiaries
company along with the
financial statements of the
parent company
217 Failure to prepare or attach
directors report in the
prescribed manner
Penalty
The company and every officer of the
company who is in default shall be
punishable with fine which may extend
to Rs. 50,000 and in case of a
continuing default with a further fine
which may extend to Rs. 2,500 for
every day during which default
continues
Every officer of the company who is in
default shall be punishable with fine
which may extend to Rs. 50,000
The company and every officer of the
company who is in default shall be
punishable with fine which may extend
to Rs. 5,000 for every day during which
the failure continues
The person who was responsible for
the compliance shall be punishable
with imprisonment for a term which
may extend to six months or with fine
which may extend to Rs. 10,000 or with
both
The person who was responsible for
the compliance shall be punishable
with imprisonment for a term which
may extend to six months or with fine
which may extend to Rs. 10,000 or with
both
The person who was responsible for
the compliance shall be punishable
with imprisonment for a term which
may extend to six months or with fine
which may extend to Rs. 10,000 or with
both
The person who was responsible for
the compliance shall be punishable
with imprisonment for a term which
may extend to six months or with fine
which may extend to Rs. 10,000 or with
both
The person who was responsible for
the compliance shall be punishable
with imprisonment for a term which
may extend to six months or with fine
which may extend to Rs. 20,000 or with
both
40
DOING BUSINESS IN INDIA

Section
233B
Nature of default
Failure to get cost accounts
audited
Penalty
The company shall be liable to be
punished with fine which may extend
to Rs. 5000 and every officer of the
company who is in default shall be
l i a b l e t o b e p u n i s h e d w i t h
imprisonment for a term which may
extend to three years or with fine
which may extend to Rs. 50,000 or with
both
266A
266C
266D
266E
Failure to make application for
a l l o t m e n t o f D i r e c t o r
Identification Number.
Obtaining more than one
D i re c to r I d e n t i f i ca t i o n
Number by same individual
Failure to intimate Director
Identification Number to
concerned Companies
Failure to intimate Director
Identification Number to
Registrar of Companies
Punishment may extend to Rs. 5,000
and where contravention is continuing
further fine of Rs. 5,000 for every day
a f te r t h e f i rst d u r i n g w h i c h
contravention continues.
Punishment may extend to Rs. 5,000
and where contravention is continuing
further fine of Rs. 5,000 for every day
a f te r t h e f i rst d u r i n g w h i c h
contravention continues.
Punishment may extend to Rs. 5,000
and where contravention is continuing
further fine of Rs. 5,000 for every day
a f te r t h e f i rst d u r i n g w h i c h
contravention continues.
Punishment may extend to Rs. 5,000
and where contravention is continuing
further fine of Rs. 5,000 for every day
a f te r t h e f i rst d u r i n g w h i c h
contravention continues.
295 Loan, etc, to director in
contravention of section 295
Every person who is knowingly a party
to the contravention shall be
punishable either with fine which may
extend to Rs. 50,000 or with simple
imprisonment for a term which may
extend to six months
372A
Inter-corporate loans and
investments exceeding the
limit prescribed
The company and every officer of the
company who is in default shall be
punishable with imprisonment which
may extend to two years or with fine
which may extend to Rs. 50,000
DOING BUSINESS IN INDIA 41

4.0 SIGNIFICANT COMPANY LAW REGULATIONS
4.1 Loans and Guarantees to Companies
The Directors of Public Companies can make investment, give loan and guarantees
to other body corporates up to 60% of its paid up capital and free reserves or 100%
of its free reserves whichever is higher. If the above limit is exceeded then the
approval of the shareholders at a general body meeting by way of special resolution
is required. In case any term loan taken from any financial institution is outstanding
and there is a default in repayment of loan installments in that event for making
investment, giving loan and guarantees prior approval of the financial institution
should be obtained. The above restrictions are however not applicable to insurance
companies, banking companies, financial institutions, investment in subsidiary
companies and private companies.
4.2 Loans and Guarantees to Directors
No public company can without the prior approval of the Department of Corporate
Affairs give any loan to, or any guarantee or provide any security in connection with
a loan made by any other person to or to any other person by a director of the
lending company or its holding company, his relatives and associated enterprises.
4.3 Disclosure of Interest by Directors
Every director of the company who is any way directly or indirectly concerned or
interested in a contract or proposed contract to be entered into by or on behalf of
the company should disclose his concern or interest at a meeting of the Board of
Directors.
A general notice at a meeting of the Board at the end of each financial year stating
that he is a director or a member of such body corporate and as such is deemed to
be interested in case of any contract which may be entered into by the company
after the date of the said notice is also a sufficient disclosure of interest.
4.4 Dividends
A company must pay dividends only out of its undistributed profits after providing
for depreciation on fixed assets and after minimum transfers to reserves, in the
manner prescribed in the Companies Act, 1956 and in rules applicable to the
declaration of dividends. The Board of directors recommend the declaration of
dividends based on which the shareholders decide the rate of dividends to be
declared. For Financial Year 2009-10, a tax of 16.995% is payable on the amount of
profits to be distributed as dividends in addition to the corporate tax by the
company. Simultaneously, dividends have been exempted from tax in the hands of
the recipients. The Finance Act 2010 has reduced surcharge from 10% to 7.5%,
accordingly the effective rate of dividend distribution tax would reduce from
16.995% to 16.60875% for Financial Year 2010-11.
The dividends declared must be paid within 30 days of the general meeting and the
unpaid amount, if any, needs to be transferred to a separate bank account.
42
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4.5 Mergers
The trend towards globalization has increased the intensity of mergers, in a bid to
create more focused, competitive, viable large players in each industry. The recent
liberalization of the earlier state controlled, sluggish Indian economy has made
mergers necessary and acceptable.
The basic regulations covering mergers are governed by the Companies Act, 1956
while the procedural aspects are covered by the Company Court Rules, 1959.
In India, most mergers involve the transfer of undertaking of an existing company or
several existing companies to another existing company of which all the members
of the transferor company or companies become or have the right to become the
members and the subsequent dissolution of the transferor company or companies.
However, it is also possible to effect amalgamations by transfer of undertaking of
two or more existing companies to a new company formed to takeover the same, of
which all the members of the transferor companies become or have the right to
become members and the subsequent dissolution of the transferor companies. The
merger is effected only after obtaining confirmation from the shareholders,
creditors, and the High Courts of the respective states of the companies. The power
of sanctioning mergers has been transferred from the High Court to the National
Company Law Tribunal (NCLT). NCLT will be an exclusive body dealing in matters
pertaining to mergers, liquidation, rehabilitation of sick companies and other
corporate matters previously handled by the Company Law Board. However, NCLT is
yet to be constituted and on its constitution it will be in a position to dispose of
matters pertaining to corporate restructuring, in a far more efficient manner in
comparison to High Courts, since it will be an exclusive body dealing with the said
matters.
Further, the Listing Agreement has been amended in order to safeguard the interest
of the shareholders, whereby the listed company as well as unlisted company which
are getting merged shall be required to appoint an independent merchant bankers
for giving a fairness opinion on the valuation done by valuers for the company and
unlisted company.
4.6 Buy-Back of Shares
The Companies can buy-back their own shares or other specified securities from
their free reserves, share premium account or proceeds of any issue made
specifically for buy-back purpose upto a limit of 25% of the total paid up capital and
free reserves. However, the buy-back of equity shares in any financial year shall not
exceed 25% of its total paid-up equity capital and free reserves in that financial year.
The buy-back of shares should be authorised by a special resolution passed in
general meeting of the company. In case the buy-back is or less than 10% of the total
paid up equity capital and free reserves then the buy-back can be by means of a
resolution of the Board of Directors. In case of listed companies, the buy back is
regulated by the regulations framed by Securities Exchange Board of India (SEBI),
through SEBI (Buy-Back of Securities) Regulations, 1998 which provides for
detailed and stringent disclosure norms. In case of unlisted companies, the buyback
is regulated by Department of Company Affairs through Private Limited
Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules,
1999. The said rules, similar to the SEBI Rules provide for detailed disclosure norms.
DOING BUSINESS IN INDIA 43

4.7 Audit Committees
For better corporate governance constitution of an audit committee in case public
companies (listed and unlisted) having paid-up capital of not less than
Rs. 50 million (US$ 1.11 million) has been prescribed. Audit Committee should consist
of not less than three directors and such number of other directors as the Board
may determine. Two-thirds of the total number of the members of the committee
should be directors, other than managing or whole-time director. The
recommendations of the Audit Committee on any matter relating to financial
management including the audit report, are binding on the Board of Directors. In
case the Board of Directors do not accept the recommendation of the Audit
Committee, it shall record the reasons thereof and communicate such reasons to
the shareholders.
4.8 Producer Companies
A new concept has been introduced in the Companies Act, 1956 enabling
incorporation of co-operative societies as producer companies and conversion of
existing cooperatives into companies, on optional basis.
4.9 Takeovers
The SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997,
popularly known as the Takeover Code, contains the guidelines to be followed by the
acquirers of controlling stakes in a listed company. The key features of the Takeover
Code are:
Any person, who along with persons acting in concert, acquires 15% or
more of the equity shares of a listed company, is required to make an open
offer to the public shareholders to acquire at least 20% more equity
shares.
The price at which the open offer is made has to be the highest of:
The negotiated price at which the 15% block has been purchased.
The price paid by the acquirer or persons acting in concert with him
for acquisition, if any, including by way of allotment in a public or
rights or preferential issue during the twenty-six week period prior to
the date of public announcement, which ever is higher.
The price computed on the basis of the average of the weekly high
and low of the closing prices of the shares of the target company as
quoted on the stock exchange where the shares of the company are
most frequently traded during the twenty-six weeks or the average of
the daily high and low of the closing prices of the shares as quoted on
the stock exchange where the shares of the company are most
frequently traded during the two weeks preceding the date of public
announcement, whichever is higher:
An open offer is also required in cases where the acquisition leads to
change of control over the target company, irrespective of the quantum of
stake acquired. This provision also gets triggered in case of indirect
acquisitions, ie where there is change of control over an Indian company
44
DOING BUSINESS IN INDIA

pursuant to a global transaction involving the holding company of the
target company.
Certain types of acquisitions, such as sale of shares amongst promoters,
inter-se are exempt from application of the Takeover Code. Promoters may
also use the “creeping acquisition” route to acquire up to 5% shares in any
financial year (ending on 31 March) till they reach 75%. Even promoters
have to make an open offer in case their shareholding pursuant to a
creeping acquisition exceeds 75%.
While ensuring compliance with the Takeover Code, the requirements of
the listing agreement also have to be kept in mind, ie the public
shareholding (non-promoter shareholding) should not go below 25% or
10% as provided in listing agreement. If it does, then the promoters have to
take steps to increase the public holding to the minimum level within six
months either through fresh issue of shares or sale of part stake by
promoters. Companies who are not able to comply with this requirement
have to seek de-listing of their shares.
A listed company seeking to de-list can do so after the public holding falls
below 25% or 10% as provided in listing agreement. SEBI has mandated
that if a promoter plans to buy out equity in a bid to de-list the company, it
must use the reverse book-building process that will permit the
shareholders (institutional and retail) to discover the exit price.
Promoters are defined as any person or persons who are directly or
indirectly in control of the company or any person or persons named as
“promoters” in the offer document or in the shareholding pattern
disclosed by the company to the exchanges.
A promoter or every person forming part of the promoter group of any
company shall, disclose details of shares of that company pledged by him,
if any, to that company. The company shall disclose the information
received as above from a promoter or promoter group to all the stock
exchanges, on which the shares of company are listed, within seven
working days of the receipt thereof, if, during any quarter ending of any
year either aggregate number of such shares exceeds twenty five
thousand; or one per cent of total shareholding or voting rights of the
company, whichever is lower.
5.0 Corporate Governance
The Companies Act and the listing agreement executed between the company and
the stock exchange contain several requirements relating to corporate governance.
The main requirements are:
At least 50% of the board of director should be non-executive.
One third of the board or one half should be of independent directors
depending upon the position of the chairman.
All fees/compensation, if any paid to non-executive directors, including
independent directors is required to be fixed by the board and approved by
the shareholders.
DOING BUSINESS IN INDIA 45

The meetings of the board are required to be held at least four times a year,
with a maximum time gap of four months.
A director shall not be a member in more than 10 committees or act as
Chairman of more than 5 committees across all companies in which he is a
director. Furthermore it should be a mandatory annual requirement for
every director to inform the company about the committee positions he
occupies in other companies and notify changes as and when they take
place.
The board is required to lay down a code of conduct for all board members
and senior management of the company and the annual report is required
to contain a declaration of its compliances duly signed by CEO.
The Board of Directors should set up two mandatory committees to be
called Audit Committee and Shareholders Grievance Committee.
Audit committee is required to be set up with minimum three directors as
members and two thirds of the members of audit committee should be
independent directors and chairman of the audit committee is necessarily
required to be an independent director. The Chairman of the Audit
Committee shall be present at Annual General Meeting to answer
shareholder queries.
The audit committee should meet at least four times in a year and not
more than four months should elapse between two meetings. Broad term
of reference has been set out for the working of the audit committee.
At least one independent director on the Board of Directors of the holding
company is required to be director on the board of directors of a material
non listed Indian subsidiary company.
A summary of transactions with related parties in the ordinary course of
business is required to be placed periodically before the audit committee.
Where in the preparation of financial statements, a treatment different
from that prescribed in an Accounting Standard has been followed, the
fact shall be disclosed in the financial statements, together with the
management’s explanation as to why it believes such alternative
treatment is more representative of the true and fair view.
The company is required to lay down risk assessment and minimization
procedures.
Remuneration paid to directors and all other pecuniary relationship of
director with the company is required to be disclosed in the corporate
governance section of the annual report.
Corporate governance section has to include a section of management
perception and analysis of the threats, opportunities, risks, concerns,
outlook, etc.
A board committee under the chairmanship of a non-executive director
shall be formed to specifically look into the redressal of shareholder and
investors complaints like transfer of shares, non-receipt of balance sheet,
46
DOING BUSINESS IN INDIA

non-receipt of declared dividends etc. This Committee shall be designated
as ‘Shareholders/Investors Grievance Committee’.
The CEO i.e the Managing Director or Manager appointed in terms of the
Companies Act, Chief Finance Officer has to certify that they have
reviewed financial statements and these statements do not contain any
materially untrue statement or omit any material fact or contain
statements that might be misleading and these statements present a true
and fair view of the company’s affairs and are in compliance with the
existing accounting standards, applicable laws and regulation.
The company has to obtain a certificate from either the auditors or
practicing company secretaries regarding compliances of conditions of
corporate governance as stipulated in the listing agreements and annex
the same to the director’s report which is sent annually to all the
shareholders. The same shall also be filed with the stock exchange along
with the annual report filed by the company.
The company shall submit a quarterly compliance report on corporate
governance to the stock exchanges within 15 days from the close of the
quarter.
5.1 Winding Up
Companies registered under the Companies Act, 1956 can be dissolved in the
following manner:
Winding up;
Being declared a defunct company.
A company may be wound up in the following manner:
Voluntarily (by the shareholders/ by the creditors) by passing a special
resolution and with the approval of High Court;
Voluntarily by the High Court.
Winding up is a means by which a company is dissolved and its assets are realised
and applied to payment of its debts. Once the debts are satisfied, the balance
amount is paid back to the members in proportion to their contribution to the
capital of the company.
In case the ROC is of the view that a company is not carrying on business or is not in
operation, he may strike off the company’s name from the ROC, only after providing
the company with an opportunity to be heard.
Where a body corporate incorporated outside India (which has been carrying on
business in India) ceases to carry on business in India, it may be wound up as an
unregistered company.
DOING BUSINESS IN INDIA 47

Chapter 4
Human Resources
Kathakali- An Indian Dance Form

1.0 BACKGROUND
CHAPTER 4
HUMAN RESOURCES
The working population of India consists of three categories: organized work force,
unorganized work force and self-employed individuals. The organized sector
accounts for only one-tenth of India’s labour force but earns one-fourth of the
nation’s total wages and income.
India’s pool of trained workers, one of the largest in the world includes scientists,
computer software and electronics professionals, finance professionals,
accountants, advertising and marketing experts. The government encourages new
investment in regions with high unemployment and setting up of small-scale units.
The state or central governments are empowered to fix minimum wages based on
the cost-of living index for employees working in scheduled employment. The
government may appoint inspectors to ensure that the provisions of the act are
observed. However, India continues to be very cheap source of labour.
2.0 LEGISLATIVE PROVISIONS
The laws governing labour in India are very complex in nature and favour the
employees. Employers are required to provide most employees with a written
statement of the terms and conditions of their employment. The statement must
have details about salary, hours of work, disciplinary rules and complaint
procedures, the notice period for termination, holidays, the provident fund,
pensions, gratuities and other employee related details. Violation of labour law is
viewed with strictness and severe punishment is imposed on errant employers if
violations are observed.
By law, employees are entitled to a minimum period of notice of termination, which
varies according to the terms of employment. Legislation protects employees from
unfair dismissal.
The labour law reforms including closure of a factory employing less than 300
workmen without any legal hassles are on the anvil.
2.1 Mandatory Employee Benefits
Certain mandatory employee benefits required to be made by an employer in India
(including social security schemes) are as follows, please note that the regulations
are applicable to all employees employed in India:
DOING BUSINESS IN INDIA 49

Employee
benefit
What is it?
Applicability
Other details- like
cost to employer
Provident
fund (PF)
Gratuity
It is a social security
program introduced
by the government,
where
- e m p l oye rs a re
required to deduct
contributions at a
specified rate*
from the salary
p aya b l e to a n
employee.
- In addition, the
employer must
c o n t r i b u t e a n
amount equal* to
the employee’s
contribution,
- Th e a g g re g a te
amount is then
deposited in a fund
called Provident
Fund.
* currently 12% of
wages
Employees who have
rendered continuous
service of not less
than 5 years are
entitled to Gratuity at
the time of retirement
/ r e s i g n a t i o n /
superannuation /
death / disablement.
Applicable to every
b u s i n e s s
organization in
India employing 20
or more persons in
t h e s c h e d u l e d
Industry .
M a n d a to r y fo r
employees earning
monthly wages
l e s s e r t h a n
Rs. 6,500 (US$
145).
Applicable to every
b u s i n e s s
organization in
India employing 10
or more persons.
P a y a b l e u p o n
termination to
e m p l o y e e
c o m p l e t i n g 5
y e a r s o f
c o n t i n u o u s
service.
The current rate of
interest on PF
deposits is 8.5%
The Fund primarily
aims at providing
income to the
e m p l o y e e , o n
his/her retirement
and there are some
restrictions on
withdrawal
L i m i t e d
withdrawals from
the fund is allowed
f o r h o u s i n g ,
medical expenses
etc.
Withdrawals are
also permitted on
r e s i g n a t i o n ,
termination and
retirement.
C o s t t o t h e
employer is 12% of
the wages, which is
g e n e r a l l y
negotiated as cost
to company.
If termination is
due to death or
d i s a b l e m e n t ,
c o m p l e t i o n o f
continuous period
of 5 year shall not
be necessary
Gratuity has to be
paid at the rate of
15 days wages for
each completed
year of service
s u b j e c t t o a
maximum of Rs.
3 5 0 , 0 0 0 ( U S $
7 , 7 8 0 ) . T h e
maximum ceiling
of Rs. 350,000 is
increased to Rs.
10,00,000 (US$
22,227) w.e.f. 24
May 2010
50
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Employee
benefit
Employees’
State
Insurance
Bonus
What is it?
I t p r o v i d e s
w o r k e r s w i t h
medical relief, sick
pay, m a te r n i ty
b e n e f i t s a n d
compensation for
e m p l o y m e n t
injuries, including
e m p l o y m e n t
related fatalities.
Contributions by
the employer and
the employee are
p a i d t o t h e
Employee State
Insurance Scheme.
Annual payment of a
lump-sum bonus to
employees, which is
l i n k e d t o t h e
e m p l o y e r ’ s
profitability.
Applicability
Applicable to every
b u s i n e s s
organization in
I n d i a ( n o n -
seasonal)
Mandatory only
for employees
earning monthly
wages lesser than
Rs. 15,000 (US $
333).
Applicable to every
b u s i n e s s
organization in
India employing
2 0 o r m o r e
persons .
Mandatory only for
employees earning
monthly salary or
wages lesser than
Rs. 10,000 (US$
223).
Other details- like
cost to employer
15 days wages are
calculated as [15 /
26 * (wages of last
m o n t h o f
employment)]
Employee can be
entitled to better
terms of gratuity.
The employer and
e m p l o y e e a r e
r e q u i r e d t o
contribute 4.75%
a n d 1 . 7 5 %
respectively of the
wages
C o s t t o t h e
employer is 4.75%
of the wages
Employers must
pay a bonus of
6 0 % o f t h e
allocable surplus,
which is calculated
after deducting a
r e t u r n o n
investment from
profits after tax,
limited to 20% of
a n e m p l oye e’s
salary.
T h e a c t a l s o
provides for a
minimum bonus of
8 . 3 3 % o f a n
employee’s salary,
which is payable
e v e n i f t h e
employer is in
losses.
The bonus must be
paid within eight
months after the
c l o s e o f t h e
accounting year.
DOING BUSINESS IN INDIA 51

Employee
benefit
D e p o s i t
L i n k e d
Insurance
Scheme
Maternity
Benefit
What is it?
Additional social
security in the form of
life insurance to the
f a m i l y o f t h e
deceased employee
( m e m b e r o f t h e
scheme). The scheme
is linked with amount
of accumulation in the
p r o v i d e n t f u n d
account
A welfare legislation
t o r e g u l a t e t h e
e m p l o y m e n t o f
women in certain
establishments for
certain period before
and after Child birth,
miscarriage and to
provide maternity
benefit.
Applicability
Applicable to all
establishments to
which Employees’
Provident scheme
applies.
A p p l i c a b l e t o
factories covered
under the Factories
Ac t, 1 948, m i n e,
plantation, and also
t o S h o p s &
Establishments in
which ten or more
w o r k e r s a r e
employed, but do not
apply to any factory or
esta b l i s h m e nt to
which the provisions
of Employee state
Insurance Act, 1948
apply
Other details- like
cost to employer
The cost to the
employer can very
from 8.33% of the
salary to 20 % of
salary
Employee does not
contribute anything,
but the employer
contributes 0.5% of
the total wages.
Maternity benefit
at the rate of the
average daily wage
for the period of
the employees’
actual absence
i m m e d i a t e l y
proceeding the
day of her delivery
and for the six
weeks immediately
following that day.
I n c a s e o f
miscarriage, leave
w i t h wa g es a t
t h e r a t e o f
maternity benefit
for a period of six
weeks immediately
following the day
of her miscarriage.
I n c a s e o f
t u b e c t o m y
operation, leave
w i t h wa g es a t
t h e r a t e o f
maternity benefit
for a period of two
weeks immediately
f o l l o w i n g t h e
t u b e c t o m y
operation.
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Employee
benefit
What is it?
Applicability
Other details- like
cost to employer
Minimum
Wages
The Minimum Wages
Act, 1948 provides
minimum wages to
employees in certain
employments in order
t o p r e v e n t t h e
exploitation of the
unorganized labour.
A p p l i c a b l e t o
employees employed
as casual, daily rated,
t e m p o r a r y o r
permanent working in
t h e i n d u s t r i e s
s p e c i f i e d i n t h e
schedule to the Act.
Many states in India
have included Shops
a n d C o m m e r c i a l
establishment in the
schedule and as such
the Act is applicable to
shops and commercial
establishments
The employers have
t o e n s u r e t h e
compliance of the
M i n i m u m w a g e s
notifications issued
b y t h e s t a t e
government from
time to time.
The term wages is defined differently for calculation of above benefits.
2.2 Workers’ Compensation
The Workmen’s Compensation Act, 1923 provides workers with a convenient and
easy method to claim compensation for personal injury from an employment
related accident.
2.3 Industrial Employment (Standing orders) Act, 1946
The object of the Industrial Employment (Standing orders) Act, 1946 is to require
the employers in industrial establishments formally to define conditions of
employment of workman under them. 'Standing order' means the rules of conduct
for workmen employed in industrial establishment relating to matters like
attendance, leave, misconduct, etc enumerated in the schedule of the Act. It applies
to every industrial establishment wherein one hundred or more workmen (in
Maharashtra it is fifty workmen by virtue of a state amendment) are employed on
any day of the preceding twelve months. The standing orders are to be certified by a
certifying officer appointed under the Act. The rules provide for model standing
orders.
2.4 Industrial Disputes Act, 1947
Industrial Disputes Act, 1947 is aimed to resolve or reduce the difference between
employers and the workmen with a view to bring industrial peace and thereby
increasing industrial production in the country. Matters related to change of service
conditions, retrenchment, lay off and closures of industrial units are regulated
under this Act.
DOING BUSINESS IN INDIA 53

2.5 The Equal Remuneration Act, 1976
The equal remuneration Act provides for payment of equal remuneration to men
and women workers for the same work or work of a similar nature and for the
prevention of discrimination on the ground of sex against women in the matter of
employment.
2.6 The Contract Labour (Regulation and Abolition )Act, 1970
The Contract labour (Regulation and Abolition) Act, 1970 is aimed to regulate the
employment of contract labour in certain establishment and provides for its
abolition in certain circumstances. The Act mandates registration of principal
employer and the contractor who are covered under the Act. However the Act is not
applicable to establishments performing works only of an intermittent or casual
nature.
2.7 Trade Unions Act , 1926
The Trade Unions Act provides for registration of Trade unions and to confer on the
registered trade unions certain protection and privileges.
2.8 Health and Safety
Employers have a legal duty to take reasonable care of their employees. An
employee who is injured at work may be able to claim compensation for the
employer’s negligence.
Generally regulations relating to working conditions in commercial establishments
as per the relevant state legislations cover the following aspects
Daily and weekly hours of work
Holidays in a week
Opening and closing hours for women
Intervals for meal etc.
Minimum leave days
Wages for overtime work
The Factories Act, 1948 specifically covers the health and safety of workers. The
main objectives of the act are to regulate the working conditions in factories and to
ensure that employers meet basic minimum requirements of health, safety and
welfare for factory workers. In addition, the act regulates working hours, leave,
holidays, overtime, and the employment of women and children.
Some of the key working condition requirements as per the Factories Act, 1948 are
as follows
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2.8.1 Cleanliness
Daily removal of dirt.
Floor to be washed once a week.
Effective drainage of the effluents.
Repainting of the factory walls once in five years.
If painted in the washable paints, repaint once in three years & washed
once in six months.
Check relevant washing rules according to the paint used.
Register of these dates to be maintained.
2.8.2 Disposal of wastes and effluents
2.8.3 Ventilation and temperature
2.8.4 Artificial humidification
2.8.5 Over crowding
2.8.6 Lighting
The company shall make effective arrangements for the treatment of
wastes and effluents resulting from the manufacturing process.
The company should maintain the prescribed measuring instruments
and records.
If dust or fume given off due to manufacturing activities, effective
measures to be taken to prevent inhalation and accumulation in work
room.
Methods and tests for determining the humidity of the air to be carried
out and recorded.
Water from public supply/drinking water/purified water.
No room in any factory shall be overcrowded to an extent injurious to the
health of the workers employed therein.
14.2 cubic meters per workman employed in each workroom is the space
specified under the act.
In all places of works passage sufficient lighting is required.
Windows/skylights shall be kept clean on inner and outer sides.
2.8.7 Drinking water
All points drinking water points shall be marked.
DOING BUSINESS IN INDIA 55

The Factories Act safeguards against the use and handling of hazardous
substances. Employers have a duty to provide a clean and safe working
environment. In addition, they must ensure that any member of the public who
might be affected by their working practices is similarly protected.
3.0 ENGAGEMENT OF FOREIGN NATIONALS
Indian firms / companies may engage the services of foreign nationals (including
non-resident persons of Indian nationality / origin) without prior approval of
Reserve Bank of India. If the period of engagement of the foreign national is upto 3
months, then the concerned foreign national can hold any valid visa i.e.
employment, business, tourist, etc. However, if the period of engagement exceeds
three months then the concerned foreign national should hold employment visa
only.
Foreign national can remit abroad income earned from employment subject to
deduction of applicable withholding tax thereon. The foreign nationals who are
resident but not permanently resident in India can avail facility of recurring
remittance for family maintenance, etc. of their net salary (i.e., after deduction of
contribution to provident funds and taxes payable).
All foreigners including foreigners of Indian origin visiting India on long term (more
than 180 days) vide Employment Visa will be required to get themselves registered
with the appropriate Foreigner’s Regional Registration Office (FRRO) within 14 days
of arrival in India, irrespective of the duration of their stay.
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Chapter 5
Foreign Investment In India
Gateway of India, Mumbai

CHAPTER 5
FOREIGN INVESTMENT IN INDIA
1.0 INTRODUCTION
1.1 The liberalization process started in India in 1991 and second-generation reform
st
started in the first decade of 21 century has virtually opened out Indian economy
for foreign investment in all the sectors, barring few sensitive sectors. The
liberalization process has thrown open opportunities for inbound investment
(foreign companies investing in India) as well as outbound investment (Indian
companies investing out of India) in almost every field of business from the
consumer durables sector to core infrastructure sector. The World Bank has
appreciated the Indian liberalization reforms in one of its Annual Report stating
“India is moving rapidly towards closer integration with the global economy and the
reform process, which has been brought about in such a short time, represents an
irreversible movement towards a vibrant economy.” In this process of liberalization,
India has taken various measures like de-licensing, permitting foreign institutions to
invest in shares and securities under portfolio investment, current account
convertibility, liberalizing exchange control regulations, drastically reducing the
rates of customs duty and direct taxes, permitting Indian companies to list on
foreign stock exchanges and set up overseas operations, permitting resident
Indians to buy shares and securities listed abroad etc.
1.2 Accordingly, Foreign Investment in India is still regulated among other legislations,
by the Exchange Control Regulations although under new regulations, the focus has
been shifted on managing foreign exchange instead of regulating the same. In this
note, we have restricted our discussion on Foreign Investments in India.
2.0 EXCHANGE CONTROL REGULATIONS – FOREIGN
INVESTMENTS
2.1 Introduction
In India, till 31 May 2000, exchange control transactions were regulated by Foreign
Exchange Regulation Act, 1973 (‘FERA’). FERA has been repealed by the Foreign
Exchange Management Act, 1999 (‘FEMA’), which has come into force with effect
from 1 June 2000. The provisions under FEMA are liberal compared to provisions
under FERA. The analysis of FEMA provisions contained herein is updated as on 30
April 2010.
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Foreign Investment in India-Schematic Representation:
Foreign Investments
Foreign Direct
Investments
Foreign Portfolio
Investments
Foreign Venture
Capital
investments
Other Investments
(G-sec, NCDs etc.)
Investment on
non-repatriable
basis
Automatic
Route
Govt.
Route
Persons
Resident
Outside India
Flls
NRIs,
PIO
SEBI regd.
FVCIs
Flls
NRIs,
PIO
NRIs,
PIO
VCF,
IVCUs
2.2 Investment in India by a person resident outside India /
Eligibility for investing in India
2.2.1 A person resident outside India (other than a citizen of Pakistan) or an entity
incorporated outside India, (other than an entity incorporated in Pakistan) can
invest in India, subject to the FDI Policy of the Government of India. A person who is
a citizen of Bangladesh or an entity incorporated in Bangladesh can invest in India
under the FDI Scheme, with prior approval of FIPB.
NRIs, resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are
permitted to invest in shares and convertible debentures of Indian companies under
FDI Scheme on repatriation basis, subject to the condition that the amount of
consideration for such investment shall be paid only by way of inward remittance in
free foreign exchange through normal banking channels.
2.2.2 Overseas Corporate Body (OCB) means a company, partnership firm, society and
other corporate body owned directly or indirectly to the extent of at least 60% by
Non-Resident Indians and includes overseas trust in which not less than 60%
beneficial interest is held by Non-resident Indians, directly or indirectly, but
irrevocably. OCBs have been de-recognised as a class of investors in India with
effect from 16 September 2003. Erstwhile OCBs which are incorporated outside
India and are not under adverse notice of Reserve Bank can make fresh investments
under the FDI scheme as incorporated non-resident entities, with the prior approval
of Government of India if the investment is through Government Route; and with the
prior approval of Reserve Bank if the investment is through Automatic Route.
DOING BUSINESS IN INDIA 59

2.3 Prohibition on investments
2.3.1 Foreign investment in any form is prohibited in a company or a partnership firm or a
proprietary concern or any entity, whether incorporated or not (such as, Trusts)
which is engaged or proposes to engage in the following activities:
i. Business of chit fund, or
ii. Nidhi Company , or
iii. Agricultural or plantation activities or
iv. Real estate business, or construction of farm houses
v. Trading in Transferable Development Rights (TDRs).
“Real Estate Business” mentioned above, does not include development of
townships, construction of residential/commercial premises, roads or bridges
educational institutions, recreational facilities, city and regional level
infrastructure, townships.
It is further clarified that partnership firms /proprietorship concerns having
investments as per FEMA regulations are not allowed to engage in print Media
sector.
2.3.2 In addition to the above, investment in the form of FDI is also prohibited in certain
sectors such as:
a. Retail Trading (except single brand product retailing)
b. Atomic Energy
c. Lottery Business
d. Gambling and Betting
e. Business of chit fund
f. Nidhi company
g. Trading in Transferable Development Rights(TDRs)
h. Activities / sectors not opened to private sector investment
i. Agriculture (excluding Floriculture, Horticulture, Development of seeds,
Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms,
etc. under controlled conditions and services related to agro and allied
sectors) and Plantations (other than Tea Plantations).
j. Manufacture of Cigars, Cheroots, Cigarillos & Cigarettes, of Tobacco or of
Tobacco substitutes.
The sectors which are prohibited are annexed vide Annexure-1
2.4 Investment under Foreign Direct Investment (‘FDI’) Scheme
Entry routes for investments in India
Foreign investment is freely permitted in almost all sectors. Under Foreign Direct
Investments (FDI) Scheme, investments can be made by non-residents in the shares
/ convertible debentures of an Indian Company, under two routes; Automatic Route
and Approval / Government Route. Under the Automatic Route, the foreign investor
or the Indian company does not require any approval from the Reserve Bank or
Government of India for the investment. Under the Approval / Government Route,
prior approval of the Government of India, Ministry of Finance, Foreign Investment
Promotion Board (FIPB) is required. Entry route for non-resident investors in India
as well as sector specific investment limits in India are given in Annexure -2.
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2.4.1 Automatic route of FDI
The Government of India has substantially expanded the scope of foreign
investment under the Automatic Route to include all items/ activities, except
certain items, for investment under FDI. FDI up to 100 % is allowed under the
automatic route from foreign/NRI investor without prior approval in most of the
sectors including the services sector. FDI in sectors/activities under automatic
route does not require any prior approval either by the Government or RBI.
An Indian company receiving investments from outside India for issuing shares /
convertible debentures / preference shares under the FDI scheme, should report
the details of the amount of consideration to the RBI within 30 days from the date of
receipt of inward remittances.
Foreign investment coming as fully convertible preference shares would be treated
as part of share capital. This would be included in calculating foreign equity for
purposes of sectoral caps on foreign equity, where such caps have been prescribed.
Foreign investment coming as any other type of preference shares {nonconvertible,
optionally convertible or partially convertible) would be considered as
debt and shall require conforming to External Commercial Borrowings (ECB)
guidelines / ECB caps.
2.4.2 Investments in sectors where 100% FDI under automatic route is not available
i. The RBI’s Automatic Route is not available for Foreign investment in Indian
Company which is engaged in any activity, or in manufacturing of item
included in is given in the Annexure 1 of this note. An Indian company which
is not engaged in the activity or manufacture of items listed in Annexure 1
is permitted to issue shares or convertible debentures to a person resident
outside India upto the extent specified in Annexure 2 on repatriation basis,
subject to compliance with the provisions of the Industrial Policy and
Procedures, provided –
a. The issuer company does not require an industrial license;
b. The shares/ convertible debentures are not being issued for
acquiring existing shares of any Indian company;
c. If the person resident outside India to whom the shares are being
issued proposes to be a collaborator or proposes to acquire the
entire shareholding of a new Indian company, he should have
obtained Central Government’s approval if he had any previous
investment/ collaboration/ tie up in India (according to press
note number 1 (2005 series) dated 12 January 2005 previous
means prior to 13 January 2005) in the same field in which the
Indian company issuing the shares is engaged. This restriction is
not applicable for issue of shares of an Indian company engaged
in Information Technology sector or in the mining sector.
DOING BUSINESS IN INDIA 61

ii.
Subject to compliance with the provisions, an Indian company which
proposes to undertake activities included in Annexure 2 is permitted to
issue shares / convertible debentures to persons resident outside India
out of fresh capital issued for financing expansion programme for carrying
on such activities.
2.4.3 Certain important aspects of the FDI scheme
i. Price of shares issued by Indian Company to persons resident outside India
under the FDI Scheme, shall be on the basis of SEBI guidelines in case of
Companies listed on any recognized stock exchange in India. In case of
companies not listed on any recognized stock exchange in India, valuation
of shares has to be done on fair valuation basis by a Registered Category - I
Merchant Banker or a Chartered Accountant as per Discounted Cash Flow
method.
ii.
iii.
iv.
The rate of dividend on preference shares issued by an Indian company to
a person resident outside India should not exceed 300 basis points over
the Prime Lending Rate of State Bank of India prevailing as on the date of
the Board meeting of the company in which issue of such shares is
recommended.
Indian companies which are eligible to issue shares to persons resident
outside India under the FDI Scheme will be allowed to retain the share
subscription amount in a foreign currency account with the prior approval
of RBI.
It is worth noting that there are no separate schemes for Non-Resident
Indians (‘NRIs’) for direct investment in India on repatriation basis. NRIs
are now on par with any other foreign investor and they may invest in the
shares/ fully convertible debentures issued by an Indian company under
the FDI Scheme.
2.5 Foreign Portfolio Investments
Foreign Institutional Investors (FIIs) registered with SEBI and Non-resident Indians
(NRIs) are eligible to purchase shares and convertible debentures issued by Indian
companies under the Portfolio Investment Scheme (PIS).
2.5.1 Investment by FIIs under Portfolio Investment Scheme (PLS)
Reserve Bank has given general permission to SEBI registered FIIs / sub-accounts to
invest under the PIS.
Shareholding
i. Total shareholding of each FII/sub-account under this Scheme shall not
exceed 10 % of the total paid up capital or 10 % of the paid up value of each
series of convertible debentures issued by the Indian company.
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ii. Total holdings of all FIIs/sub-accounts put together shall not exceed 24 %
of the paid-up capital or paid-up value of each series of convertible
debentures. This limit of 24 % can be increased to the sectoral cap /
statutory limit, as applicable to the Indian company concerned, by passing
a resolution of its Board of Directors followed by a special resolution to
that effect by its General Body.
iii.
A domestic asset management company or portfolio manager, who is
registered with SEBI as an FII for managing the fund of a sub-account can
make investments under the Scheme on behalf of
a. a person resident outside India who is a citizen of a foreign state,
or
b. a body corporate registered outside India;
Provided such investment is made out of funds raised or collected or brought from
outside through normal banking channel. Investments by such entities shall not
exceed 5 % of the total paid-up equity capital or 5 % of the paid-up value of each
series of convertible debentures issued by an Indian company, and shall also not
exceed the overall ceiling specified for FIIs.
SEBI registered FIIs have been permitted to purchase shares / convertible
debentures of an Indian company through offer/private placement, subject to the
ceilings prescribed, i.e. individual FII/sub account - 10% and all FIIs/sub-accounts
put together - 24% of the paid-up capital of the Indian company and to the sectoral
limits, as applicable. Indian company is permitted to issue such shares provided
that:
i. in the case of public offer, the price of shares to be issued is not less than
the price at which shares are issued to residents; and
ii.
in the case of issue by private placement, the price is not less than the price
arrived at in terms of SEBI guidelines or guidelines issued by the erstwhile
Controller of Capital Issues, as applicable. Purchases can also be made of
PCDs / FCDs/ Right Renunciations / Warrants / Units of Domestic Mutual
Fund Schemes.
2.5.2 Investments by Non –Resident Indians (NRIs)
i. NRIs are allowed to invest in shares of listed Indian companies in
recognized Stock Exchanges under the PIS. NRIs can invest through
designated ADs, on repatriation and non-repatriation basis under PIS
route up to 5% of the paid up capital / paid up value of each series of
debentures of listed Indian companies. The aggregate paid-up value of
shares / convertible debentures purchased by all NRIs cannot exceed 10%
of the paid-up capital of the company / paid-up value of each series of
debentures of the company. The aggregate ceiling of 10% can be raised to
24%, if the General Body of the Indian company passes a special resolution
to that effect.
DOING BUSINESS IN INDIA 63

ii.
iii.
iv.
The NRI investor has to take delivery of the shares purchased and give
delivery of shares sold. Short Selling is not permitted.
Payment for purchase of shares and/or debentures on repatriation basis
has to be made by way of inward remittance of foreign exchange through
normal banking channels or out of funds held in NRE/FCNR account
maintained in India. If the shares are purchased on non-repatriation basis,
the NRIs can also utilise their funds in NRO account in addition to the
above.
Shares purchased by NRIs on the stock exchange under PIS cannot be
transferred by way of sale under private arrangement or by way of gift to a
person resident in India or outside India without prior approval of RBI.
v. NRIs are allowed to invest in Exchange Traded Derivative Contracts
approved by SEBI from time to time out of Rupee funds held in India on
non-repatriation basis subject to the limits prescribed by SEBI.
When the total holdings of FIIs/NRIs under the Scheme reach the trigger limit, which
is 2 % below the applicable limit (for companies with paid-up capital of Rs. 1000
crores and above, the trigger limit is 0.5% below the applicable limit), Reserve Bank
will issue a notice to all designated branches of AD Category - I banks cautioning
that any further purchases of shares of the particular Indian company will require
prior approval of Reserve Bank. Reserve Bank gives case-by-case approvals to FIIs
for purchase of shares of companies included in the Caution List. This is done on a
first-come-first-served basis.
Once the shareholding by FIIs/NRIs reaches the overall ceiling / sectoral cap /
statutory limit, Reserve Bank puts the company on the Ban List. Once a company is
placed on the Ban List, no FII or NRI can purchase the shares of the company under
the Portfolio Investment Scheme.
2.6 Investment by Venture Capital Fund
i. A SEBI registered Foreign Venture Capital Investor (FVCI) with specific
approval from RBI under FEMA Regulations can invest in Indian Venture
Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a
Scheme floated by such IVCFs subject to the condition that the VCF should
also be registered with SEBI.
An IVCU is defined as a company incorporated in India whose shares are
not listed on a recognized stock exchange in India and which is not
engaged in an activity under the negative list specified by SEBI.
A VCF is defined as a fund established in the form of a trust, a company
including a body corporate and registered under the Securities and
Exchange Board of India (Venture Capital Fund) Regulations, 1996 which
has a dedicated pool of capita raised in a manner specified under the said
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Regulations and which invests in Venture Capital Undertakings in
accordance with the said Regulations.
ii.
iii.
iv.
FVCIs 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. At the
time of granting approval, RBI permits the FVCI to open a foreign currency
account or rupee account with a designated branch of an AD Category – I
bank.
The purchase / sale of shares, debentures and units can be at a price that is
mutually acceptable to the buyer and the seller.
AD Category – I banks can offer forward cover to FVCIs to the extent of
total inward remittance. In case the FVCI has made any remittance by
liquidating some investments, original cost of the investments has to be
deducted from the eligible cover to arrive at the actual cover that can be
offered.
2.7 Purchase of other securities by FIIs
Foreign Institutional Investors (FIIs) can buy Government securities / treasury bills,
listed non-convertible debentures / bonds issued by Indian companies and units of
domestic mutual funds either directly from the issuer of such securities or through
a registered stock broker on a recognized stock exchange in India. Purchase of debt
instruments by FIIs are subject to limits notified by SEBI.
2.8 Purchase of other securities by NRIs
i. On non-repatriation basis
a. NRIs can purchase shares / convertible debentures issued by an
Indian company on non-repatriation basis without any limit.
Amount of consideration for such purchase shall be paid by way
of inward remittance through normal banking channels from
abroad or out of funds held in NRE / FCNR / NRO account
maintained with the AD Category - I bank.
b. NRI can also, without any limit, purchase on non-repatriation
basis dated Government securities, treasury bills, units of
domestic mutual funds, units of Money Market Mutual Funds.
Government of India has notified that NRIs are not permitted to
make Investments in Small Savings Schemes including PPF. In
case of investment on non-repatriation basis, the sale proceeds
shall be credited to NRO account. The amount invested under the
scheme and the capital appreciation thereon will not be allowed
to be repatriated abroad.
DOING BUSINESS IN INDIA 65

ii.
On repatriation basis
An NRI can purchase on repatriation basis, without limit, Government
dated securities (other than bearer securities) or treasury bills or units of
domestic mutual funds; bonds issued by a public sector undertaking (PSU)
in India and shares in Public Sector Enterprises being disinvested by the
Government of India, provided the purchase is in accordance with the
terms and conditions stipulated in the notice inviting bids.
2.9 Foreign Investment in Tier I and Tier II instruments issued by
banks in India
FIIs registered with SEBI and NRIs have been permitted to subscribe to the
Perpetual Debt instruments (eligible for inclusion as Tier I capital) and Debt Capital
instruments (eligible for inclusion as upper Tier II capital), issued by banks in India
and denominated in Indian Rupees, subject to the following conditions:
i. Investment by all FIIs in Rupee denominated Perpetual Debt instruments
(Tier I) should not exceed an aggregate ceiling of 49 % of each issue, and
investment by individual FII should not exceed the limit of 10 % of each
issue.
ii.
iii.
iv.
Investments by all NRIs in Rupee denominated Perpetual Debt
instruments (Tier I) should not exceed an aggregate ceiling of 24 % of
each issue and investments by a single NRI should not exceed 5 percent of
the issue.
Investment by FIIs in Rupee denominated Debt capital instruments (Tier II)
shall be outside the limits stipulated by SEBI for FII investment in
corporate debt instruments.
Investment by NRIs in Rupee denominated Debt Capital instruments (Tier
II) shall be in accordance with the extant policy for investment by NRIs in
other debt instruments.
2.10 Issue of rights / bonus shares to erstwhile Overseas Corporate
Bodies (OCBs)
FEMA provisions allow Indian companies to freely issue Rights / Bonus shares to
existing non-resident shareholders, subject to adherence to sectoral cap, if any.
However, such issue of bonus/rights shares have to be in accordance with other
laws/statutes like the Companies Act, 1956, SEBI (Disclosure and Investor
Protection) Guidelines (in case of listed companies), etc. The price of shares offered
on rights basis by the Indian company to non-resident shareholders shall not be
lower than the price at which such shares are offered to resident shareholders.
OCBs have been de-recognised as a class of investors with effect from 16 September
2003. Therefore, companies desiring to issue rights shares to such erstwhile OCBs
will have to take specific prior permission from the Reserve Bank. As such,
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entitlement of rights shares is not automatically available to OCBs. However, bonus
shares can be issued to erstwhile OCBs without RBI approval.
2.11 Additional allocation of rights shares by resident to
non-residents
Existing non-resident shareholders are allowed to apply for issue of additional
shares / convertible debentures / preference shares over and above their rights
share entitlements. The investee company can allot the additional rights shares out
of unsubscribed portion, subject to the condition that the overall issue of shares to
nonresidents in the total paid-up capital of the company does not exceed the
sectoral cap.
2.12 Issue and acquisition of shares after merger or de-merger or
amalgamation of Indian companies
Mergers and amalgamations of companies in India are usually governed by an order
issued by a competent Court on the basis of the Scheme submitted by the
companies undergoing merger/amalgamation. Once the scheme of merger or
amalgamation of two or more Indian companies has been approved by a Court in
India, the transferee company or new company is allowed to issue shares to the
shareholders of the transferor company resident outside India subject to the
conditions that :
i. The percentage of shareholding of persons resident outside India in the
transferee or new company does not exceed the sectoral cap.
ii.
The transferor company or the transferee or the new company is not
engaged in activities which are prohibited in terms of FDI policy
2.13 Issue of shares under Employee Stock Options Scheme to
persons resident outside India
2.13.1 Listed Indian companies are allowed to issue shares under the Employees Stock
Option Scheme (ESOPs), to its employees or employees of its joint venture or wholly
owned subsidiary abroad who are resident outside India, other than to the citizens
of Pakistan. Citizens of Bangladesh can invest with the prior approval of FIPB.
Shares under ESOPs can be issued directly or through a Trust subject to the
condition that:
i. The scheme has been drawn in terms of relevant regulations issued by the
Securities and Exchange Board of India; and
ii.
The face value of the shares to be allotted under the scheme to the nonresident
employees does not exceed 5 % of the paid-up capital of the
issuing company.
2.13.2 Unlisted companies have to follow the provisions of the Companies Act, 1956. The
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Indian company can issue ESOPs to employees who are resident outside India, other
than to the citizens of Pakistan. ESOPs can be issued to the citizens of Bangladesh
with the prior FIPB approval. The issuing company is required to report the details of
such issues to the concerned Regional Office of the Reserve Bank, within 30 days
from the date of issue of shares.
2.14 Transfer of shares and convertible debentures of an Indian
company by a person resident outside India
Foreign investors can also invest in Indian companies by purchasing / acquiring
existing shares from Indian shareholders or from other non-resident shareholders.
General permission has been granted to non-residents / NRIs for acquisition of
shares by way of transfer subject to the following:-
i. A person resident outside India (Other than NRI and OCB) may transfer by
way of sale or gift the shares or convertible debentures to any person
resident outside India (including NRIs).
ii.
NRIs and erstwhile OCBs may transfer by way of sale or gift the shares or
convertible debentures held by them to another NRI.
In both the above cases, if the transferee has previous venture or tie-up in India
through investment / technical collaboration/trade mark agreement in the same
field in which the Indian company, whose shares are being transferred, is engaged,
he has to obtain prior permission of SIA/FIPB to acquire the shares. This restriction
is, however, not applicable to the transfer of shares for investments to be made by
Venture Capital Funds registered with SEBI; or where in the existing joint venture
investment by either of the parties is less than 3%; or where the existing joint
venture / collaboration is defunct or sick or for transfer of shares of an Indian
company engaged in Information Technology sector or in the mining sector.
iii.
iv.
A person resident outside India can transfer any security to a person
resident in India by way of gift.
A person resident outside India can sell the shares and convertible
debentures of an Indian company on a recognized Stock Exchange in India
through a registered broker.
v. A person resident in India can transfer by way of sale, shares / convertible
debentures (including transfer of subscriber’s shares), of an Indian
company in sectors other than financial service sector (i.e. Banks, NBFC,
Insurance, ARCs and infrastructure companies in the securities market viz.
Stock Exchanges, Clearing Corporations and Depositories) under private
arrangement to a person resident outside India, subject to the prescribed
guidelines.
vi.
General permission is also available for transfer of shares / convertible
debentures, by way of sale under private arrangement by a person
resident outside India to a person resident in India, subject to the
prescribed guidelines.
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vii.
The above General Permission also covers transfer by a resident to a nonresident
of shares / convertible debentures of an Indian company,
engaged in an activity earlier covered under the Government Route but
now falling under Automatic Route of RBI, as well as transfer of shares by a
non-resident to an Indian company under buy-back and / or capital
reduction scheme of the company. However, this General Permission is not
available for transfer of shares / debentures of an entity engaged in any
activity in the financial service sector (i.e. Banks, NBFCs, ARCs, Insurance
and infrastructure providers in the securities market such as Stock
Exchanges, Clearing Corporations, etc.).
2.15 Transfer of shares/convertible debentures by a person resident
in India
i. A person resident in India who proposes to transfer to a person resident
outside India (not being erstwhile OCBs) any security by way of gift, shall
make an application to the RBI in the prescribed form.
ii.
Transfer of existing shares/convertible debentures of an Indian company
other than private sector bank, non-banking financial company (NBFC)
and insurance company, by a resident to a non-resident not being
erstwhile OCBs, by way of sale, can be effected, subject to the specified
sectoral limits, without prior approval of Government and RBI subject to
the following:
a. such company is not engaged in rendering any financial services
i.e. service rendered by banking and non-banking companies
regulated by RBI, insurance companies regulated by Insurance
Regulatory and Development Authority (IRDA) other companies
regulated by any other financial regulator;
b. the transfer does not fall within the purview of the provisions of
SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997; and
c. that the concerned parties adhere to pricing guidelines,
documentation and reporting requirements specified by RBI.
2.16 Conversion of ECB / Lumpsum Fee/Royalty/ Import of capital
goods by SEZs into Equity
2.16.1 An Indian company have been granted general permission for conversion of
External Commercial Borrowings (ECB) into shares/preference shares, subject to
the following conditions and reporting requirements -
i. The activity of the company is covered under the Automatic Route for FDI
or the company has obtained Government approval for foreign equity in
the company.
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ii.
iii.
iv.
The foreign equity after conversion of ECB into equity is within the sectoral
cap, if any,
Pricing of shares is as per SEBI regulations or erstwhile CCI guidelines in
the case of listed or unlisted companies respectively.
Compliance with the requirements prescribed under any other statute and
regulation in force.
2.16.2 The conversion facility is available for ECBs availed under the Automatic or
Approval Route. This would also be applicable to ECBs, due for payment or not, as
well as secured / unsecured loans availed from non-resident collaborators. General
permission is also available for issue of shares/preference shares against lump-sum
technical know-how fee, royalty, under automatic route or SIA / FIPB route, subject
to pricing guidelines of SEBI/CCI and compliance with applicable tax laws.
2.16.3 Units in Special Economic Zones (SEZs) are permitted to issue equity shares to nonresidents
against import of capital goods subject to the valuation done by a
Committee consisting of Development Commissioner and the appropriate Customs
officials.
2.17 Issue of shares by Indian companies - ADR/GDR
2.17.1 Depositary Receipts (DRs) are negotiable securities issued outside India by a
Depository Bank, on behalf of an Indian company, which represent the local Rupee
denominated equity shares of the company held as deposit by a Custodian bank in
India. DRs are traded in Stock Exchanges in the US, Singapore, Luxembourg, etc.
DRs listed and traded in the US markets are known as American Depository Receipts
(ADRs) and those listed and traded elsewhere are known as Global Depository
Receipts (GDRs). In the Indian context, DRs are treated as FDI.
2.17.2 Indian companies can raise foreign currency resources abroad through the issue of
ADRs/GDRs, in accordance with the Scheme for issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism)
Scheme, 1993 and guidelines issued by the Government of India thereunder from
time to time.
2.18 Investment in firm or proprietary concern in India
A Non-Resident Indian (NRI) or a Person of Indian Origin (PIO) resident outside India
can invest by way of contribution to the capital of a firm or a proprietary concern in
India on non-repatriation basis provided
i. Amount is invested by inward remittance or out of NRE / FCNR / NRO
account maintained with Authorised Dealers / Authorised banks.
ii.
The firm or proprietary concern is not engaged in any
agricultural/plantation or real estate business (i.e. dealing in land and
immovable property with a view to earning profit or earning income there
from) or print media sector.
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iii.
Amount invested shall not be eligible for repatriation outside India.
2.19 Establishment in India of a branch or Liaison office or project
offices in India
Companies incorporated outside India, desirous of opening a Liaison/Branch Office
in India may apply to the Authorized Dealer-Category I Bank subject to the
conditions prescribed by Reserve Bank of India.
2.19.1 Activities permitted in India to liaison office
i. Representing in India the parent company/group companies.
ii. Promoting export import from/to India.
iii. Promoting technical/financial collaborations between parent/group
companies and companies in India.
iv. Acting as a communication channel between the parent company and
Indian companies
2.19.2 Activities permitted in India to Branch office of a Foreign Company
i. Export/Import of goods.
ii. Rendering professional or consultancy services.
iii. Carrying out research work, in areas in which the parent company is
engaged.
iv. Promoting technical or financial collaborations between Indian companies
and parent or overseas group company.
v. Representing the parent company in India and acting as buying/selling
agent in India.
vi. Rendering services in Information Technology and development of
software in India.
vii. Rendering technical support to the products supplied by parent/group
companies.
2.19.3 Other key points regarding Branch office
i. Retail trading activities of any nature is not allowed for a Branch Office in
India.
ii. A Branch Office is not allowed to carry out manufacturing, processing
activities in India, directly or indirectly.
iii. Branch Offices are permitted to acquire property for their own use and to
carry out the permitted /incidental activities but not for leasing or renting
out the property. However, entities from Pakistan, Bangladesh, Sri Lanka,
Afghanistan, Iran or China are not allowed to acquire immovable property
in India even for a Branch Office. These entities are allowed to lease such
property for a period not exceeding five years.
iv. Entities from Nepal are allowed to establish only Liaison Offices in India.
v. Profits earned by the Branch Offices are freely remittable from India,
subject to payment of applicable taxes.
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vi.
Branch Offices have to submit Annual Activity Certificates from Chartered
Accountants to the Authorized Dealer - Category 1 bank.
2.19.4 Branch Office in Special Economic Zones (SEZs)
i. RBI has given general permission to foreign companies for establishing
branch/unit in Special Economic Zones (SEZs) to undertake
manufacturing and service activities. The general permission is subject to
the following conditions:
a. such units are functioning in those sectors where 100 % FDI is
permitted;
b. such units comply with part XI of the Companies Act (Section 592
to 602);
c. such units function on a stand-alone basis.
ii.
In the event of winding-up of business and for remittance of winding up
proceeds, the branch shall approach an AD Category – I bank with the
documents prescribed .
2.19.5 Branches of banks
Foreign Banks do not require approval under FEMA, if such Bank has obtained
necessary approval under the provisions of the Banking Regulation Act, 1949 from
the Reserve Bank.
2.19.6 Project Offices
Reserve Bank has granted general permission to foreign companies to establish
Project Offices in India, provided they have secured a contract from an Indian
company to execute a project in India, and
i. the project is funded directly by inward remittance from abroad; or
ii.
iii.
iv.
the project is funded by a bilateral or multilateral International Financing
Agency; or
the project has been cleared by an appropriate authority; or
a company or entity in India awarding the contract has been granted Term
Loan by a Public Financial Institution or a bank in India for the project.
However, if the above criteria are not met, the foreign entity has to approach the
Reserve Bank for approval.
2.19.7 Remittance of profit
Remittance of profit by a branch or remittance of surplus after completion of the
project by the project office will be allowed by the authorised dealer on submission
of documents specified in the regulation issued by RBI.
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3.0 EXTERNAL COMMERCIAL BORROWINGS (ECB)
External Commercial Borrowings (ECB) refer to commercial loans in the form of
bank loans, buyers’ credit, suppliers’ credit, securitised instruments such as floating
rate notes and fixed rate bonds availed from non-resident lenders with minimum
average maturity of 3 years.
ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval
Route.
3.1 Automatic Route
3.1.1 Eligible Borrowers
i. Corporates (registered under the Companies Act except financial
intermediaries such as banks, financial institutions, housing finance
companies and NBFCs) are eligible to raise ECB.
ii.
Units in Special Economic Zones (SEZ) are allowed to raise ECB for their
own requirement. However, they cannot transfer or on-lend ECB funds to
sister concerns or any unit in the Domestic Tariff Area.
Individuals, Trusts and Non-Profit making Organizations are not eligible to raise
ECB.
3.1.2 Recognized lenders
ECB can raise from internationally recognized sources such as
i. international banks;
ii. international capital markets;
iii. multilateral financial institutions (such as IFC, ADB, CDC, etc.);
iv. export credit agencies;
v. suppliers of equipment;
vi. foreign collaborators and;
vii. foreign equity holders (other than erstwhile OCBs).
“foreign equity holder” to be eligible as “recognized lender” under the automatic
route would require minimum holding of equity in the borrower company as set out
below:
i. For ECB up to US$ 5 million - minimum equity of 25 % held directly by the
lender,
ii. For ECB more than US$ 5 million - minimum equity of 25 % held directly by
the lender and debt-equity ratio not exceeding 4:1 (i.e. the proposed ECB
not exceeding four times the direct foreign equity holding).
3.1.3 ECB Amount and Maturity
i. The maximum amount of ECB which can be raised by a corporate is US$
500 million or equivalent during a financial year.
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ii. ECB up to US$ 20 million or equivalent in a financial year with minimum
average maturity of three years .
iii. ECB above US$ 20 million and up to US$ 500 million or equivalent with a
minimum average maturity of five years.
iv. ECB up to US$ 20 million can have call/put option provided the minimum
average maturity of three years is complied with before exercising call/put
option.
v. ECB up to US$ 100 million per financial year has been permitted to the
corporates in the Hotels, Hospitals and Software sectors, for foreign
currency and / or Rupee capital expenditure for permissible end-use.
However, the proceeds of the ECBs should not be used for acquisition of
land.
ECBs in excess of US$ 100 million for Rupee expenditure should have a minimum
average maturity period of 7 years. The requirement of minimum average maturity
period of 7 years for ECB more than US$ 100 million for Rupee capital expenditure
by the borrowers in the infrastructure sector has been dispensed with.
3.1.4 All-in-cost
Average Maturity Period
Three years and up to five years
More than five years
All-in-cost Ceilings over 6 month LIBOR
300 basis points
500 basis points
3.1.5 End-use
i. Investment e.g., import of capital goods (as classified by DGFT in the
Foreign Trade Policy), by new or existing production units, in real sector -
industrial sector including small and medium enterprises (SME) and
infrastructure sector - in India.
Infrastructure sector is defined as (i) power, (ii) telecommunication, (iii)
railways, (iv) road including bridges, (v) sea port and airport, (vi) industrial
parks, and (vii) urban infrastructure (water supply, sanitation and sewage
projects) and (viii) mining, exploration and refining.
ii.
iii.
Overseas direct investment in Joint Ventures (JV)/Wholly Owned
Subsidiaries (WOS) subject to the existing guidelines on Indian Direct
Investment in JV/WOS abroad.
Payment for obtaining license/permit for 3G Spectrum.
3.1.6 End-uses not permitted
Utilization of ECB proceeds is not permitted :
i. for on-lending or investment in capital market or acquiring a company (or
a part thereof) in India by a corporate,
ii. in real estate sector,
iii. for working capital, general corporate purpose and repayment of existing
Rupee loans.
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3.1.7 Guarantees
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, Financial Institutions and Non-Banking Financial Companies
(NBFCs) relating to ECB is not permitted.
3.1.8 Security
The choice of security to be provided to the lender/supplier is left to the borrower.
However, creation of charge over immoveable assets and financial securities, such
as shares, in favour of the overseas lender is subject to FEMA Regulations as
amended from time to time.
3.1.9 Parking of ECB proceeds
Borrowers are permitted to either keep ECB proceeds abroad or to remit these
funds to India, pending utilization for permissible end-uses. ECB proceeds parked
overseas can be invested in the following liquid assets (a)deposits or Certificate of
Deposit or other products offered by banks rated not less than AA(-) by Standard
and Poor/Fitch IBCA or Aa3 by Moody’s; (b)deposits with overseas branch of an
Authorised Dealer in India; and (c)Treasury bills and other monetary instruments of
one year maturity having minimum rating as indicated above. The funds should be
invested in such a way that the investments can be liquidated as and when funds are
required by the borrower in India.
ECB funds may also be remitted to India for credit to the borrowers’ Rupee accounts
with AD Category - I banks in India, pending utilization for permissible end-uses.
3.1.10 Prepayment
Prepayment of ECB up to USD 500 million may be allowed by AD banks without prior
approval of RBI subject to compliance with the stipulated minimum average
maturity period as applicable to the loan.
3.1.11 Refinancing of an existing ECB
The existing ECB may be refinanced by raising a fresh ECB subject to the condition
that the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the
original ECB is maintained.
3.1.12 Debt Servicing
The designated Authorised Dealer (AD bank) has the general permission to make
remittances of installments of principal, interest and other charges in conformity
with ECB guidelines issued by Government / Reserve Bank of India from time to
time.
3.1.13 Procedure
Borrowers may enter into loan agreement complying with ECB guidelines with
recognized lender for raising ECB under Automatic Route without prior approval of
RBI. The borrower must obtain a Loan Registration Number (LRN) from the Reserve
Bank of India before drawing down the ECB.
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3.2 Approval Route
3.2.1 Eligible Borrowers
i. Special Purpose Vehicles, or any other entity notified by the Reserve Bank,
set up to finance infrastructure companies / projects exclusively, will be
treated as Financial Institutions and ECB by such entities will be
considered under the Approval Route.
ii.
iii.
iv.
SEZ developers can avail of ECBs for providing infrastructure facilities
within SEZ, as defined in the extant ECB policy, viz. (i) power, (ii)
telecommunication, (iii) railways, (iv) road including bridges, (v) sea port
and airport (vi) industrial parks (vii) urban infrastructure (water supply,
sanitation and sewage projects) and (viii) mining, refining and exploration.
However, ECB will not be permissible for development of integrated
township and commercial real estate within SEZ.
Corporates which have violated the extant ECB policy and are under
investigation by Reserve Bank and / or Directorate of Enforcement, are
allowed to avail ECB only under the Approval route.
Cases falling outside the purview of the automatic route limits and more
than maturity period indicated.
3.2.2 Recognized Lenders
i. Borrowers can raise ECB from internationally recognized sources such
as
a. international banks,
b. international capital markets,
c. multilateral financial institutions (such as IFC, ADB, CDC etc.),
d. export credit agencies,
e. suppliers’ of equipment,
f. foreign collaborators, and
g. foreign equity holders (other than erstwhile OCBs).
ii.
From ‘foreign equity holder’ where the minimum paid up equity held
directly by the foreign equity lender is 25 % but ECBs: equity ratio exceeds
4:1 (i.e. the amount of the proposed ECB exceeds four times the direct
foreign equity holding).
3.2.3 Amount and Maturity
Corporates can avail of ECB of an additional amount of US$ 250 million with
average maturity of more than 10 years under the approval route, over and above
the existing limit of US$ 500 million under the automatic route, during a financial
year. Other ECB criteria, such as end-use, recognized lender, etc. need to be
complied with. Prepayment and call/put options, however, would not be permissible
for such ECB up to a period of 10 years.
3.2.4 All-in-cost ceilings
All-in-cost includes rate of interest, other fees and expenses in foreign currency
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except commitment fee, pre-payment fee, and fees payable in Indian Rupees.
Moreover, the payment of withholding tax in Indian Rupees is excluded for
calculating the all-in-cost.
The current all-in-cost ceilings are as under :
The following ceilings are valid till reviewed:
Average Maturity Period
Three years and up to five years
More than five years
All-in-cost Ceilings over 6 month LIBOR*
300 basis points
500 basis points
3.2.5 End Use
* for the respective currency of borrowing or applicable benchmark.
RBI has now decided to dispense with the requirement of all-in-cost ceilings on ECB
until 31 December 2009. Accordingly, eligible borrowers, proposing to avail of ECB
beyond the permissible all-in-cost ceilings specified above may approach the
Reserve Bank under the Approval Route. RBI has reinstated the all - in-costs ceiling
under the approval route.
i. Investment [such as import of capital goods (as classified by DGFT in the
Foreign Trade Policy), implementation of new projects,
modernization/expansion of existing production units] in real sector -
industrial sector including small and medium enterprises (SME) and
infrastructure sector - in India. Infrastructure sector is defined as (i) power,
(ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea
port and airport (vi) industrial parks and (vii) urban infrastructure (water
supply, sanitation and sewage projects) and (viii) mining, exploration and
refining.
ii.
iii.
iv.
Overseas direct investment in Joint Ventures (JV)/Wholly Owned
Subsidiaries (WOS) subject to the existing guidelines on Indian Direct
Investment in JV/WOS abroad.
Import of capital goods by corporates in the service sector, viz., hotels,
hospitals and software companies.
Development of integrated township permissible to corporate engaged in
development of integrated township. Integrated township includes
housing, commercial premises, hotels, resorts, city and regional level
urban infrastructure facilities such as roads and bridges, mass rapid
transit systems and manufacture of building materials. Development of
land and providing allied infrastructure forms an integrated part of
township’s development. The minimum area to be developed should be
100 acres for which norms and standards are to be followed as per local
bye-laws / rules. In the absence of such bye-laws/rules, a minimum of two
thousand dwelling units for about ten thousand population will need to be
developed. This permission is available up to 31 December 2009.
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3.2.6 End Use not permitted
i. Utilization of ECB proceeds is not permitted for on-lending or investment
in capital market or acquiring a company (or a part thereof) in India by a
corporate except specified banks and financial institutions .
ii.
iii.
3.2.7 Guarantee
3.2.8 Creation of charge on immovable assets
3.2.9 Prepayment
Utilization of ECB proceeds is not permitted in real estate excluding
development of integrated township
Utilization of ECB proceeds is not permitted for working capital, general
corporate purpose and repayment of existing Rupee loans.
Issuance of guarantee, standby letter of credit, letter of undertaking or letter of
comfort by banks, financial institutions and NBFCs relating to ECB is not normally
permitted. Applications for providing guarantee/standby letter of credit or letter of
comfort by banks, financial institutions relating to ECB in the case of SME will be
considered on merit subject to prudential norms.
With a view to facilitating capacity expansion and technological upgradation in
Indian Textile industry, issue of guarantees, standby letters of credit, letters of
undertaking and letters of comfort by banks in respect of ECB by textile companies
for modernization or expansion of textile units will be considered under the
Approval Route subject to prudential norms.
The ‘no objection’ for creation of charge on immovable assets may be conveyed
under FEMA, 1999 either in favour of the lender or the security trustee, subject to
the prescribed conditions.
i. Prepayment of ECB up to US$ 500 million may be allowed by the AD bank
without prior approval of Reserve Bank subject to compliance with the
stipulated minimum average maturity period as applicable to the loan.
ii. Pre-payment of ECB for amounts exceeding US$ 500 million would be
considered by the Reserve Bank under the Approval Route.
3.2.10 Refinancing of existing ECB
Existing ECB may be refinanced by raising a fresh ECB subject to the condition that
the fresh ECB is raised at a lower all-in-cost and the outstanding maturity of the
original ECB is maintained.
3.3 ECB under the erstwhile US$ 5 Million Scheme
Designated AD banks are permitted to approve elongation of repayment period for
loans raised under the erstwhile US$ 5 Million Scheme, provided there is a consent
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letter from the overseas lender for such reschedulement without any additional
cost. Such approval with existing and revised repayment schedule along with the
Loan Key/Loan Registration Number should be initially communicated to the Chief
General Manager-in-Charge, Foreign Exchange Department, Reserve Bank of India,
Central Office, ECB Division, Mumbai within seven days of approval and
subsequently in ECB - 2.
3.4 Trade Credits for imports into India
Trade Credits’ (TC) refer to credits extended for imports directly by the overseas
supplier, bank and financial institution for maturity of less than three years.
Depending on the source of finance, such trade credits include suppliers’ credit or
buyers’ credit. Suppliers’ credit relates to credit for imports in to India extended by
the overseas supplier, while buyers’ credit refers to loans for payment of imports in
to India arranged by the importer from a bank or financial institution outside India
for maturity of less than 3 years. It may be noted that buyers’ credit and suppliers’
credit for 3 years and above come under the category of ECB governed by ECB
guidelines.
3.4.1 Amount and Maturity
AD banks are permitted to approve trade credits for imports into India up to US$ 20
million per import transaction for imports permissible under the current Foreign
Trade Policy of the Directorate General of Foreign Trade (DGFT) with a maturity
period up to one year (from the date of shipment). For import of capital goods as
classified by DGFT, AD banks may approve trade credits up to US$ 20 million per
import transaction with a maturity period of more than 1 year and less than 3 years.
No roll-over/extension will be permitted beyond the permissible period. AD banks
shall not approve trade credit exceeding US$ 20 million per import transaction.
3.4.2 All-in-cost ceilings
The current all-in-cost ceilings are as under:
Maturity period
Up to three years
All-in-cost ceilings over 6 months LIBOR*
200bps
* for the respective currency of credit or applicable benchmark.
The all-in-cost ceilings include arranger fee, upfront fee, management fee,
handling/ processing charges, out of pocket and legal expenses, if any.
3.4.3 Guarantee
AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking
(LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial
institution, up to US$ 20 million per transaction for a period up to one year for
import of all non-capital goods permissible under Foreign Trade Policy (except gold)
and up to three years for import of capital goods, subject to prudential guidelines
DOING BUSINESS IN INDIA 79

issued by Reserve Bank from time to time. The period of such Letters of credit /
guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned
from the date of shipment.
3.5 Time period for realization of Export payments
The present period of realization and repatriation of the amount to India of export
value of goods or software exported is 12 months.
However, no specific time period for realization and repatriation of the amount to
India of export value of goods or software exported by a unit situated in Special
Economic Zone (SEZ) has been specified. In case of exports made to warehouses,
established outside India, as soon as it is realized or in any case within 15 months
from the date of shipment of goods.
3.6 Time period for payment towards Import obligations
Remittances of payments against imports should be generally completed not later
than 6 months from the date of shipment, except in cases where amounts are
withheld towards guarantee of performance.
4.0 EXCHANGE CONTROL REGULATIONS - FOREIGN
TECHNOLOGY TRANSFER AND ROYALTY
PAYMENTS
A foreign investment is now no longer linked with the technical assistance. As such,
now, it is possible for foreign investor to either do equity investment or enter into
technology transfer agreement. It is also possible to do foreign investment as well
as technical collaboration. Technology transfer can take place in many forms and
methods. It comprises of various species of intellectual property like copy right,
patents, trade marks, designs, know how etc. Technology transfer agreement may
involve a one-time payment of fees or it may involve longer-term arrangements
with periodic royalty payments.
The remittance under technical agreements is a current account transaction and as
such is freely remittable.
The Government of India permits the payments for royalty, lump sum fee for
transfer of technology and payments for use of trademark/brand name on the
automatic route i.e. without any approval of the Government of India. In other
words, there shall be no restriction on limits of royalty payments from India and can
be remitted without any approval of Government or Reserve Bank of India
However, all such payments will be subject to Foreign Exchange Management
(Current Account Transactions) Rules, 2000 as amended from time to time. A
suitable post-reporting system for technology transfer/ collaborations and use of
trade mark/ brand name will be notified by the Government separately soon.
80
DOING BUSINESS IN INDIA

ANNEXURE - 1
Sectors prohibited for FDI
i. Retail Trading (except single brand product retailing)
ii. Atomic Energy;
iii. Lottery Business;
iv. Gambling and Betting;
v. Business of chit fund;
vi. Nidhi Company;
vii. Trading in Transferable Development Rights (TDRs);
viii. Activities/sector not opened to private sector investment;
ix. Agriculture (excluding Floriculture, Horticulture, Development of seeds, Animal
Husbandary, Pisciculture and cultivation of vegetables, mushrooms etc. under
controlled conditions and services related to agro and allied sectors) and
Plantations (Other than Tea Plantations);
x. Real estate business, or construction of farm houses.
FDI in manufacturing of 'cigars, cheroots, cigarillos and cigarettes, of tobacco or of
tobacco substitutes' has been prohibited vide Press Note 2 of 2010.
ANNEXURE - 2
SECTOR SPECIFIC GUIDELINES FOR FOREIGN DIRECT INVESTMENT
In the following sectors/activities, FDI up to the limit indicated below is allowed subject to
other conditions as indicated. In Sectors/Activities not listed below, FDI is permitted up to
100% on the automatic route subject to Sectoral rules/ regulations applicable.
Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
I
AGRICULTURE
1. F l o r i c u l t u r e ,
H o r t i c u l t u r e ,
Development of Seeds,
Animal Husbandry,
Pisciculture, Aquaculture
and Cultivation
o f V e g e t a b l e s &
M u s h r o o m s u n d e r
controlled conditions
and services related to
agro and allied sectors.
100% Automatic
---
NB: Besides the above,
FDI is not allowed in
any other agricultural
sector/activity
DOING BUSINESS IN INDIA 81

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
2. Tea Sector, including
tea plantation
NB: Besides the above,
FDI is not allowed in
any other plantation
sector/activity
100% FIPB Subject to divestment of
26% equity in favour of
Indian partner/Indian public
within 5 years and prior
a p p r o v a l o f S t a t e
Government concerned in
case of any change in future
land use.
II
II A
INDUSTRY
MINING
3. M i n i n g c o v e r i n g 100% Automatic Subject to Mines & Minerals
exploration and mining
(Development & Regulation)
of diamonds & precious
Act, 1957.
stones; gold, silver and
(www.mines.nic.in) Press
minerals.
Note 18 (1998) and Press
Note 1 (2005) are not
applicable for setting up
100% owned subsidiaries in
so far as the mining sector is
concerned, subject to a
d e c l a ra t i o n f r o m t h e
applicant that he has no
existing joint venture for the
same area and /or the
particular mineral.
4. Coal & Lignite mining
for captive consumption
by power projects, and
iron & steel, cement
production and other
e l i g i b l e a c t i v i t i e s
permitted under the
100% Automatic Subject to provisions of Coal
Mines (Nationalization) Act,
1973
www.coal.nic.in
C o a l M i n e s
(Nationalization) Act,
1973.
5. Mining and mineral
separation of titanium
bearing minerals and
ores, its value addition
a n d i n t e g r a t e d
activities.
100% FIPB S u b j e c t t o S e c t o r a l
NB: FDI will not be
allowed in mining of
“ p r e s c r i b e d
substances” listed in
regulations and the Mines
and Minerals (Development &
Regulation) Act, 1957 and the
following conditionsi.
value addition facilities
are set up within India along
with transfer of technology;
ii. disposal of tailing during
the mineral separation shall
be carried out in accordance
82
DOING BUSINESS IN INDIA

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
Government of India
notification No. S.O.
61(E) dated 18.1.2006
i s s u e d b y t h e
Department of Atomic
Energy.
with regulations framed by
t h e A t o m i c E n e r g y
Regulatory Board such
Atomic Energy (Radiation
Protection) Rules 2004 and
the Atomic Energy (Safe
Disposal of Radioactive
Wastes) Rules 1987.
II B
MANUFACTURING
6. Alcohol-
100% Automatic Subject to l i ce n se by
Distillation & Brewing
appropriate authority
7. Cigars & Cigarettes-
Manufacture
Nil FIPB FDI in manufacturing of
'cigars, cheroots, cigarillos
and cigarettes, of tobacco or
of tobacco substitutes' has
been prohibited vide Press
Note 2 of 2010.
8.
Coffee & Rubber
Processing &
warehousing
100%
Automatic
9. Defence production 26% FIPB Subject to licensing under
Industries (Development &
Regulation) Act, 1951 and
g u i d e l i n e s o n F D I i n
production of arms &
ammunition.
10. Hazardous chemicals,
viz., hydrocyanic acid &
its derivatives;
phosgene & its
derivatives; &
isocyanates &
diisocyantes of
hydrocarbon.
100% Automatic Subject to industrial license
u n d e r t h e I n d u s t r i e s
(Development & Regulation)
Act, 1951 and other Sectoral
regulations.
11. Industrial explosives-
Manufacture
100% Automatic Subject to industrial license
u n d e r I n d u s t r i e s
(Development & Regulation)
Act, 1951 and regulations
under Explosives Act, 1898
12. Drugs &
Pharmaceuticals
including those
involving use of
recombinant DNA
technology
100% Automatic
---
DOING BUSINESS IN INDIA 83

Sr.
No.
II C POWER
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
13. Power including
generation (except
Atomic energy);
transmission,
distribution and Power
Trading.
100% Automatic Subject to provisions of the
E l e c t r i c i t y A c t , 2 0 0 3
(www.powermin.nic.in)
III
SERVICES
14. CIVIL AVIATION SECTOR
a. Greenfield projects
100% Automatic S u b j e c t t o S e c t o r a l
regulations notified by
Ministry of Civil Aviation
(www civilaviation.nic. in)
b. Existing projects
100% FIPB
beyond
S u b j e c t t o S e c t o r a l
regulations notified by
74% Ministry of Civil Aviation
(www.civilaviation.nic.in)
i. Airportsii.
Air Transport Services including Domestic Scheduled Passenger Airlines; Non-
Schedules Airlines; Chartered Airlines; Cargo Airlines; Helicopter and Seaplane
Services
a. Scheduled Air
TransportServices/
Domestic Scheduled
Passenger Airline
49%-FDI;
100% for NRI
Investment.
Automatic Subject to no direct or
indirect participation by
foreign airlines and Sectoral
regulations.
(www.civilaviations.nic.in)
b. Non-Scheduled Air 74%-FDI; FIPB Subject to no direct or
Transport Service/ 100% for NRI beyond indirect participation by
Non-Scheduled
Investment. 74% foreign airlines in Nonairlines,
Chartered
Scheduled and Chartered
airlines, and Cargo
airlines. Foreign airlines are
airlines
allowed to participate in the
e q u i t y o f c o m p a n i e s
operating Cargo airlines. Also
s u b j e c t t o S e c t o r a l
regulations.(www.civilaviatio
ns.nic.in)
c. Helicopter
Services/Seaplane
services requiring
DGCA approval
100% Automatic Foreign airlines are allowed
to participate in the equity of
c o m p a n i e s o p e r a t i n g
Helicopter and seaplane
airlines. Also subject to
S e c t o r a l r e g u l a t i o n s .
(www.civilaviations.nic.in)
84
DOING BUSINESS IN INDIA

Sr.
No.
iii.
Sector/Activity
FDI Cap /
Equity
Other services under Civil Aviation Sector
Entry
Route
Remarks
a.
b.
G r o u n d H a n d l i n g
Services
Maintenance and
Repair organizations;
flying training
institutes; and
technical training
institutions
74%-FDI
100% for NRI
Invst.
100%
Automatic
Automatic
S u b j e c t t o S e c t o r a l
regulations and security
clearance.
15. Asset Reconstruction 49% FIPB W h e r e a n y i n d i v i d u a l
Companies
(only FDI)
investment exceeds 10% of
the equity, provisions of
S e c t i o n 3 ( 3 ) ( f ) o f
S e c u r i t i z a t i o n a n d
Reconstruction of Financial
Assets and Enforcement of
Security Interest Act, 2002
should be complied with.
(www.finmin.nic.in)
16.
Banking -
Private sector
17. Broadcasting
a.
b.
c.
d.
FM Radio
Cable network
Direct-To-Home
Headend-In-the-sky
(HITS) Broadcasting
service
74%
(FDI+FII)
Within this
limit, Fll
investment
not to
exceed 49%
FDI + FII
investment
up to 20%
49%
(FDI + FII)
49%
(FDI+FII).
Within this
limit, FDI
component
not to exceed
20%
49% FDI
up to 74 %
Automatic
FIPB
FIPB
FIPB
Automatic
under
approval
route
Subject to guidelines for
setting up branches /
subsidiaries of foreign
b a n k s i s s u e d by R B I .
(www.rbi.org.in)
S u b j e c t to G u i d e l i n e s
notified by Ministry of
Information & Broadcasting.
(www.mib.nic.in)
Subject to Cable Television
N e two r k R u l e s ( 1 9 94 )
Notified by Ministry of
Information & Broadcasting.
(www.mib.nic.in)
Subject to guidelines issued
by Ministry of Information &
Broadcasting.
(www.mib.nic.in)
DOING BUSINESS IN INDIA 85

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
e. Setting up hardware
facilities such as uplinking,
HUB, etc
49%
(FDI + FII)
FIPB Subject to Up-linking Policy
notified by Ministry of
Information & Broadcasting.
(www.mib.nic.in)
f. Up-linking a News & 26% FIPB Subject to guidelines issued
Current Affairs TV FDI+FII
by Ministry of Information &
Channel
Broadcasting.
(www.mib.nic.in)
g. Up-linking a Non-news &
Current Affairs TV
Channel
100% FIPB Subject to guidelines issued
by Ministry of Information &
Broadcasting.
(www.mib.nic.in)
18. Commodity Exchanges 49%
(FDI+FII)
FDI-26% FII-
23%
FIPB FII purchases shall be
restricted to secondary
market only. Subject to
regulations specified by
concerned Regulators.
19. C o n s t r u c t i o n
Development projects,
i n c l u d i n g h o u s i n g ,
commercial premises,
resorts, educational
i n s t i t u t i o n s ,
recreational facilities,
c i t y a n d r e g i o n a l
level infrastructure,
townships.
100% Automatic Subject to conditions notified
N ote : F D I i s n ot
allowed in Real Estate
Business
vide Press Note 2 (2005
Series) including:
a. Minimum capitalization of
US$ 10 million for wholly
owned subsidiaries and
US$ 5 million for joint
venture. The funds would
have to be brought
within six months of
c o m m e n c e m e n t o f
business of the Company.
b. Minimum area to be
developed under each
project- 10 hectares in
case of development of
serviced housing plots;
and built-up area of
50,000 sq. mts. in case of
construction development
project; and any of the
a b ove i n ca se of a
combination project.
Note 1: For investment
by NRIs, the conditions
mentioned in Press
Note 2 / 2005 are not
applicable.
Note 2: For investment in
S E Z s , H o t e l s &
Hospitals, conditions
mentioned in Press Note
2 ( 2 0 0 5 ) a r e n o t
applicable
86
DOING BUSINESS IN INDIA

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
20. Courier services for
carrying packages,
parcels and other items
which do not come
within the ambit of the
Indian Post Office Act,
1898.
100% FIPB Subject to existing laws and
exclusion of activity relating
to distribution of letters,
which is exclusively reserved
for the State.
www.indiapost.gov.in
21. Infrastructure
companies in
49%
(FDI+FII)
FIPB FII purchases shall be
restricted to secondary
securities markets FDI-26%
m a r k e t . S u b j e c t t o
namely, stock
FII-23%
regulations specified by
exchanges,
concerned Regulators.
Depositories and
Clearing corporations
22. Credit Information
Companies (CIC)
49 %
(FDI+FII)
Within this
limit, FII
investment
not to exceed
24%
FIPB Foreign Investment in CIC will
b e s u b j e c t t o C r e d i t
Information Companies
(Regulation) Act, 2005.
Subject to regulations
specified by concerned
Regulations
23. Industrial Parks both
setting up and in
established Industrial
Parks
100% Automatic Conditions in Press Note
2(2005) applicable for
construction development
projects would not apply
provided the Industrial Parks
meet with the undermentioned
conditionsi.
it would comprise of a
minimum of 10 units and
no single unit shall occupy
more than 50% of the
allocable area;
ii The minimum percentage
of the area to be allocated
for industrial activity shall
not be less than 66% of
the total allocable area.
24. Insurance
26% Automatic Subject to licensing by the
Insurance Regulatory &
Development Authority
www.irda.nic.in
DOING BUSINESS IN INDIA 87

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
25. Investing companies
in infrastructure
/services sector
(except telecom
sector)
100% FIPB Where there is a prescribed
cap for foreign investment,
only the direct investment
will be considered for the
prescribed cap and foreign
investment in an investing
company will not be set off
against this cap provided the
foreign direct investment in
such investing company does
not exceed 49% and the
management of the investing
company is with the Indian
owners.
26.
Non Banking Finance Companies
i
Ii
iii
iv
v
vi
vii
viii
ix
x
xi
xii
xiii
xiv
Merchant Banking
Underwriting
Portfolio
Management Services
Investment
Advisory Services
Financial Consultancy
Stock Broking
Asset Management
Venture Capital
Custodial Services
Factoring
Credit Rating Agencies
Leasing & Finance
Housing Finance
Forex Broking
100% Automatic Subject to:
a. Minimum capitalization
norms for fund based
NBFCs - US$ 0.5 million to
be brought upfront for
FDI up to 51%; US$ 5
million to be brought
upfront for FDI above 51%
and up to 75%; and US$
50 million out of which
US$ 7.5 million to be
brought upfront and the
balance in 24 months for
FDI beyond 75% and up to
100%.
b. Minimum capitalization
norms for non-fund based
NBFC activities- US$ 0.5
million.
c. Foreign investors can set
u p 1 0 0 % o p e ra t i n g
subsidiaries without the
condition to disinvest a
minimum of 25% of its
equity to Indian entities
subject to bringing in US$
50 million without any
restriction on number of
operating subsidiaries
w i t h o u t b r i n g i n g
additional capital.
88
DOING BUSINESS IN INDIA

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
xv Credit card Business
xvi Money changing
business
xvii Micro credit
xviii Rural credit
d. Joint venture operating
NBFC’s that have 75% or
less than 75% foreign
investment will also be
a l l o w e d t o s e t u p
s u b s i d i a r i e s f o r
undertaking other NBFC
activities subject to the
s u b s i d i a r i e s a l s o
co m p l y i n g w i t h t h e
a p p l i ca b l e m i n i m u m
capital inflow
e. Compliance with the
guidelines of the RBI.
27. Petroleum & Natural Gas sector
a. Refining
49% in case
of PSUs
100% in case
of Private
companies
FIPB (in
case of
PSUs)
Automatic
(in case of
private
companies)
Subject to Sectoral policy
www.petroleum.nic.in and no
divestment or dilution of
domestic equity in the
existing PSUs.
b. Other than Refining
and including market
study and formulation;
investment/financing;
setting up infrastructure
for marketing
in Petroleum & Natural
Gas sector.
100% Automatic S u b j e c t t o S e c t o r a l
re g u l a t i o n s i ssued by
Ministry of Petroleum &
Natural Gas
www.petroleum.nic.in
28.
Print Media
a. Publishing of
newspaper and
periodicals dealing with
news and current
affairs
26% FIPB Subject to Guidelines notified
by Ministry of Information &
Broadcasting. www.mib.nic.in
b. Publishing of scientific
magazines/specialty
journals/periodicals
100% FIPB Subject to guidelines issued
by Ministry of Information &
Broadcasting.
www.mib.nic.in
DOING BUSINESS IN INDIA 89

Sr.
No.
29.
Sector/Activity
Telecommunications
FDI Cap /
Equity
Entry
Route
Remarks
a. Basic and cellular, 74%(Includin Automatic Subject to guidelines notified
Unified Access
gFDI, FII, NRI, up to 49%. in the Press Note 3(2007
Services,
FCCBs, ADRs,
Series) dated April 19, 2007
National/International GDRs, FIPB
Long Distance, V-Sat, convertible beyond
Public Mobile Radio preference 49%.
Trunked Services shares, and
(PMRTS), Global Mobile
Personal
Communications
Services (GMPCS) and
other value added
telecom services
proportionate
foreign
equity in
Indian
promoters/
Investing
Company)
b. ISP with gateways,
radio-paging, end-to-
74% Automatic
up to 49%.
Subject to licensing and
security requirements
end bandwidth.
FIPB notified by the Dept. of
beyond Telecommunications.
49%.
www.dotindia.com
c. (a) ISP without gateway, 100% Automatic Subject to the condition that
(b) infrastructure
up to 49%. such companies shall divest
provider providing dark
26% of their equity in
fibre, right of way, duct
FIPB favour of Indian public in 5
space, tower (Category
beyond years, if these companies
I);
49%. are listed in other parts of
(c) electronic mail and
the world. Also subject to
voice mail
licensing and security
requirements, where
required. www.dotindia.com
d.
Manufacture of telecom
equipments
100%
Automatic
S u b j e c t t o s e c t o r a l
requirements
www.dotindia.com
30.
Trading
a.
Wholesale/cash & carry
trading
100%
Automatic
b.
Trading for exports
100%
FIPB
c.
Trading of items
sourced from small
scale sector
100%
FIPB
90
DOING BUSINESS IN INDIA

Sr.
No.
Sector/Activity
FDI Cap /
Equity
Entry
Route
Remarks
d. Test marketing of such
items for which a
company has approval
for manufacture
100% FIPB Subject to the condition
that the test marketing
approval will be for a
period of two years and
Investment in setting up
manufacturing facilities
commences simultaneously
with test marketing.
e. Single Brand product
retailing
51% FIPB Subject to guidelines for
FDI in trading issued by
Department of Industrial
Policy & Promotion vide
Press Note 3 (2006 Series)
dated 10 February 2006.
31. Satellites -
Establishment and
operation
74% FIPB S u b j e c t t o S e c t o r a l
g u i d e l i n e s i s s u e d b y
Department of Space/ISRO
www.isro.org
32. S p e c i a l E c o n o m i c
Zones and Free Trade
Warehousing Zones
covering setting up
of these Zones and
setting up units in the
Zones
100% Automatic Subject to Special Economic
Zones Act, 2005 and the
Foreign Trade Policy.
www.sezindia.nic.in
33.
D r u g s a n d
P h a r m a c e u t i c a l s
i n c l u d i n g t h o s e
involving recombinant
DNA technology
100%
Automatic
Note:
All the above sector/activities are governed by the respective Press
Notes/Releases issued by the Government of India from time to time and are
subject to change.
DOING BUSINESS IN INDIA 91

Chapter 6
Taxation System
India Gate, New Delhi

1.0 INTRODUCTION
CHAPTER 6
TAXATION SYSTEM
The Income-tax Act, 1961 contains the law relating to Indian income tax and The
Wealth Tax Act, 1957 contains the law relating to taxation of certain specified wealth
(assets). Revisions in the tax rates and other duties are made through the annual
Finance Act or through specific amendments. The tax administrators are not
authorised to make changes in the tax legislation but are empowered by the
statutes to make rules to carry out the provisions of law. The Ministry of Finance
(Department of Revenue) through the Central Board of Direct Taxes (CBDT), an apex
tax authority, implements and administers direct tax laws in India.
2.0 INCOME TAX ON CORPORATIONS
2.1 General Structure and Scope
The companies are classified into ‘domestic companies’ and ‘foreign companies’
for tax purposes. The term ‘domestic company’ means an Indian company or any
other company, which in respect of its income liable to tax under the Income-tax Act,
has made the prescribed arrangement for the declaration and payment within India
of the dividends (including dividends on preference shares) payable out of such
income. The term ‘foreign company’ means a company, which is not a domestic
company.
A company is treated as ‘resident’ in India in any financial year, if:
i. it is an Indian company i.e. a company formed and registered in India under the
Companies Act, 1956 or
ii. during that year, the control and management of its affairs is situated wholly
in India.
In view of the above, an Indian company is always an Indian resident. Consequently,
an Indian company that is wholly owned by a foreign entity and managed from India
by foreign individuals or companies is also considered as a resident Indian company.
A foreign company is treated as resident only if it is wholly controlled and managed
from India during the relevant financial year.
2.2 Rates of Tax
2.2.1 The rates of tax for financial years 2009-10 & 2010-11 are inclusive of surcharge and
education cess as applicable thereon, as such the tax rates given herein below are
the effective tax rates.
2.2.2 The corporate tax year is the year ending 31 March and income of the same is taxed
in the assessment year commencing on the succeeding 1 April. The rates of tax for
the assessment year 2010-11 (financial year 2009-10) and for the assessment year
2011-12 (financial year 2010-11) in respect of taxable income (other than long term
capital gains) are:
DOING BUSINESS IN INDIA 93

Entity
Domestic Company
Financial year 2009-10
Financial year 2010-11
Foreign Company
Financial year 2009-10
Financial year 2010-11
Companies having
total income
above Rs. 1,00,00,000
33.99%
33.22%
42.23%
42.23%
Effective Tax Rates
Companies having
total income
up to Rs. 1,00,00,000
30.90%
30.90%
41.20%
41.20%
2.2.3 Minimum Alternate Tax (MAT)
For the Financial year 2010-11 if the income-tax payable as computed under the
provisions of the Income Tax Act is less than a certain specified percentage of the
book profits as referred in the table below, a special tax is levied on certain
companies known as the Minimum Alternate Tax (MAT). The applicable rates of MAT
for FY 2009-10 & FY 2010-11 are as below:
Entity
Domestic Company
Financial year 2009-10
Financial year 2010-11
Foreign Company
Financial year 2009-10
Financial year 2010-11
Companies having
total income
above Rs. 1,00,00,000
16.995%
19.9305%
15.836%
19.0035%
Effective Tax Rates
Companies having
total income
up to Rs. 1,00,00,000
15.45%
18.54%
15.45%
18.54%
MAT is not applicable to non-corporate entities. MAT paid can be set-off in any of the
subsequent 10 assessment years against the normal tax liability in excess of MAT
payable under section 115JB of the Act. Export oriented units, units set up in Free
Trade Zones / Software Technology Parks and Electronic Hardware Technology
Parks are also liable to MAT from the financial year 2007-08. However, under
section 10AA of the Income Tax Act, units set-up in Special Economic Zone (SEZ) are
not liable to pay MAT. Further under section 115JB, from 1 April 2005, SEZ
developers are also exempted from the payment of MAT.
2.2.4 Fringe Benefit Tax (FBT)
Fringe Benefit Tax has been abolished from 1 April 2009.
2.2.5 Dividend Distribution Tax (DDT)
DDT is a tax payable on the dividend declared, distributed or paid. Dividends paid by
an Indian company are currently exempt from income tax in the hands of the
recipient shareholders. However, for FY 2009-10 the company paying the dividends
is required to pay DDT on the amount of dividends, at the rate of 16.995%. An
exemption from this tax has been granted in case of dividends distributed on or
94
DOING BUSINESS IN INDIA

after 1 April 2006 out of current income of Special Economic Zone (SEZ)
developers. Specified mutual funds are also liable to dividend distribution tax at
specified rates. For the financial year 2010-11, the DDT rate in case of a domestic
company is 16.60875%.
In case a domestic company declares, distributes or pays dividend whether out of
current or accumulated profits, deduction will be available from the amount of any
dividend received by it from its subsidiary. The subsidiary, however, is required to
pay DDT on such dividend.
2.2.6 Income of a foreign company or non-resident (not being a company) from royalty,
technical fees, dividends, interest and income from units is taxed at the following
rates (in the absence of lower rates under Double Taxation Avoidance Agreement):
Type of Income
Royalty and fees for technical services
payable under an agreement approved by
the Government of India or in accordance
with new Industrial Policy *
% of Gross Amount
in case of payment
to foreign company
m o r e t h a n R s .
1,00,00,000 during
the FY
% o f G r o s s
Amount in case of
payment to foreign
company less than
Rs. 1,00,00,000
during the FY
10.558%** 10.30%**
Dividends Nil *** Nil ***
Interest on monies borrowed in foreign
currency
Income from units of notified Mutual Fund
purchased in foreign currency
21.115% 20.60%
Nil **** Nil ****
* Chargeable on net basis at normal tax rate specified for corporates above if
royalty or fees for technical services received from Government or an Indian
concern in pursuance of an agreement made by a non-resident (not being a
company) or a foreign company with Government or the Indian concern after
31 March 2003 where such non-resident or a foreign company carries on a
business in India through a permanent establishment situated therein or
performs professional services from a fixed place of profession situated
therein and the right, property or contract in respect of which the royalties or
fees for technical services are paid is effectively connected with such
permanent establishment or fixed place of business as the case may be.
* * Effective in respect of royalty or fees for technical services under agreements
entered into on or after 1 June 2005. The rate of 20% (Plus surcharge as
applicable) would apply in respect of agreement entered into between 1 June
1997 and 1 June 2005 (30% (Plus surcharge as applicable) for agreement
entered into prior to 1 June 1997). The effective rates as per the table above
shall be same in respect of financial year 2010-11.
*** Domestic companies are liable to pay additional DDT on the amount of
dividend distributed, paid or declared.
DOING BUSINESS IN INDIA 95

**** Mutual funds, other than equity oriented funds, are liable to DDT on the
amount of dividend distributed, paid or declared.
2.2.7 Capital gain may arise on transfer of a capital asset. The expression “capital asset”
means property of any kind. There are certain properties, which are excluded from
the definition of the capital assets such as stock in trade, personal effects (except
specified art works, jewellery, archaeological collections, drawings, paintings,
sculptures or any work of art), agricultural land and certain other investments.
There are two types of capital assets-long term capital assets and short-term capital
assets. “Short term capital asset” means a capital asset held by an assessee for not
more than 36 months, immediately prior to its date of transfer. In other words, if an
assessee holds a capital asset for more than 36 months, then it is known as “long
term capital asset”. However, in case of shares in a company or listed securities or
units of notified mutual funds if they are held for more than 12 months immediately
prior to the date of their transfer then such assets shall be classified as long-term
capital assets. The gain arising on transfer of “Long term capital asset” is called
Long Term Capital Gain and gain arising on transfer of “Short term capital asset” is
called “Short Term Capital Gain”. Long-term capital gain is generally taxable at
lower rates as compared to short-term capital gain.
Short-term capital gains are taxed at normal tax rates, except as stated in the below
paragraph.
2.2.8 The long-term capital gains, after indexation of cost (indexation available only to
residents), are subject to tax at the rate of 20% (plus surcharge plus education
cess). However, in the case of listed shares, listed securities and listed/unlisted units
of mutual funds on which securities transaction tax is not payable, tax payable on
long term capital gains computed without indexation of cost shall not exceed 10%
(plus surcharge plus education cess).
Long-term capital gains arising from transfer on or after 1 October 2004 of equity
shares of a company on a recognized stock exchange in India or a unit of an equity
oriented scheme of a specified mutual fund are exempt from tax provided that sale
of such shares or units are chargeable to Securities Transaction Tax (discussed
separately).
The gains in respect of depreciable assets shall be taxed as short-term capital gain.
Short term capital gain arising from transfer of shares of a company on a
recognized stock exchange in India or a unit of an equity oriented scheme of a
specified mutual fund are taxable at 15% (plus surcharge plus education cess)
provided that sale of such shares or units are chargeable to Securities Transaction
Tax. Other short-term capital gains are chargeable at normal income tax rates plus
surcharge and education cess at applicable rates.
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2.3 Taxable Income
An Indian company is taxed on income accruing or arising either in or outside India
and on income deemed to accrue or arise in India. The term ‘India’ to mean the
territory of India as referred to in article 1 of the Constitution, its territorial waters,
seabed and subsoil underlying such waters, Continental shelf, Exclusive Economic
Zone and other Maritime Zones Act, 1976 and the air space above its territory and
territorial waters. A non-resident company is taxed only on income accruing or
arising in India or income which is deemed to accrue or arise in India. Actual receipt
of income in India is taxable in either of the cases. Income from foreign branches is
taxable in India. Double taxation of foreign income of either of the entities is avoided
by means of double taxation treaties which also provide for tax relief in the
appropriate situation. Income of a subsidiary company is taxed separately as an
independent entity.
The following categories of income are deemed to accrue or arise in India for which
taxpayers in all categories (including companies) are liable to Indian tax:
All income accruing or arising, whether directly or indirectly, through or from
any business connection, property, asset or source of income in India or
through the transfer of a capital asset situated in India.
Income by way of interest payable by the government or in respect of any debt
incurred, or monies loaned and used for the purposes of a business or a
profession carried on in India.
Income by way of royalty payable by the government or in respect of any right,
property or information used or services utilized for the purposes of a
business or profession carried on in India except lump-sum payments for
computer software supplied with a computer or computer-based equipment.
Income by way of fees payable in respect of technical services by the
government or utilized in a business or profession carried on in India.
Taxation on income other than agricultural income is the province of the Central
Government. Taxation of agricultural income is determined by the states and
different rates are levied on such income by different states.
In order to compute the income of the company, first one has to ascertain the gross
total income under each head (ignoring the incomes which are exempted from the
tax) viz. rental income of property, income from business or profession, capital
gains and income from other sources such as interest, dividend etc. Then the
admissible deductions viz. donations, income from new industrial undertakings,
income from small-scale industries, export profits of units set up in special
economic zones, etc. have to be made to arrive at the taxable income.
2.3.1 Income from House Property
The annual value of property, consisting of any buildings or lands appurtenant
thereto, of which the assessee is owner, is chargeable to tax. If, however, a house
property is occupied by the assessee for the purpose of his business or profession,
carried on by him, annual value of such property is not chargeable to tax.
Assessee is allowed statutory deduction at the rate of 30% of such net annual value
of the property irrespective of the actual amount spent. In addition to above,
deduction is allowed for interest paid on borrowed capital. However, the amount of
DOING BUSINESS IN INDIA 97

interest deductible is restricted to Rs. 1,50,000 (Rs. 30,000 in respect of specified
cases) in case of self-occupied residential house.
2.3.2 Income from Business or Profession
Net profit as shown in Profit and Loss account prepared in accordance with the
provisions of Parts II and III of the Sixth Schedule to the Companies Act, 1956 is the
starting point for computing taxable income. Net profit as above is to be increased
by the expenditure disallowable and is to be reduced by the expenditure allowable
as per the provisions of the Income-tax Act.
2.3.3 Capital Gains
Capital gains on corporate entities are taxed at the rates specified in Rates of Tax
section above. Capital gains are calculated by deducting the cost of acquisition, the
cost of any improvement to the asset and transfer expenditure from the
consideration received on transfer.
Cost of Acquisition
In case of a capital asset acquired before 1 April 1981 the cost of acquisition may be
taken as the fair market value of the asset as on 1 April 1981. In case of long-term
capital gains the indexed cost of acquisition and the indexed cost of improvement
would be deductible from the value of consideration for determining taxable capital
gains earned by residents.
Capital gains earned by non-residents on transfer of shares in or debentures of an
Indian company will be computed by converting the cost of acquisition,
improvement, or other expenses incurred on transfer and the sale price into the
same foreign currency as was initially utilized in the purchase of the shares or
debentures and reconverting the capital gain so determined in foreign currency to
Indian currency. In such a case, the benefit of indexation is not available to the nonresidents.
Long-term capital gains arising from transfer of equity shares of a company on a
recognized stock exchange in India or a unit of an equity oriented scheme of a
specified mutual fund are exempt from tax provided that sale of such shares or units
are chargeable to Securities Transaction Tax.
Short term capital gain arising from transfer of equity shares of a company on a
recognized stock exchange in India or a unit of an equity oriented scheme of a
specified mutual fund are taxable at 15% (plus surcharge plus education cess)
provided that sale of such shares or units are chargeable to Securities Transaction
Tax.
Gains arising on transfer of capital assets by a company are exempt from tax under
the following circumstances
i. transfer by a parent company to a wholly owned Indian subsidiary
company;
ii.
transfer by a wholly owned subsidiary company to its Indian holding
company;
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iii.
iv.
transfer, in a scheme of amalgamation, by an amalgamating company to
the amalgamated company if the latter is an Indian company;
distribution by a company of its assets to its shareholders in a liquidation;
v. transfer, in a scheme of amalgamation of shares held in an Indian company
by the amalgamating foreign company, to the amalgamated foreign
company if;
vi.
vii.
viii.
ix.
a. at least 25% of the shareholders of the amalgamating foreign
company remain shareholders of the amalgamated foreign
company; and
b. such transfer does not attract tax on capital gains in the country in
which the amalgamating company is incorporated.
any transfer, in a demerger, of a capital asset by the demerged company to
the resulting company, if the resulting company is an Indian company;
Any transfer in a demerger, of a capital asset, being a share or shares held
in an Indian company, if the resulting company is an Indian company, by
the demerged foreign company to the resulting foreign company, ifa.
the shareholders holding not less than three-fourths in value of the
shares of the demerged foreign company continue to remain
shareholders of the resulting foreign company; and
b. such transfer does not attract tax on capital gains in the country, in
which the demerged foreign company is incorporated;
any transfer or issue of shares by the resulting company, in a scheme of
demerger to the shareholders of the demerged company if the transfer or
issue is made in consideration of demerger of the undertaking; and
transfer of capital assets or intangible assets by a partnership firm to a
company or by a sole proprietary concern to a company, in the event of
succession of business subject to fulfillment of specified conditions.
x. any transfer of a capital asset or intangible asset by a private company or
unlisted public company (hereinafter in this clause referred to as the
company) to a limited liability partnership or any transfer of a share or
shares held in the company by a shareholder as a result of conversion of
the company into a limited liability partnership subject to the fulfilment of
specified conditions.
However, in cases (i) and (ii), if the transferee company converts such capital assets
into stock in trade or if the holding company or its nominees cease to hold the whole
of the share capital of the subsidiary company within eight years from the date of
such transfer, the capital gains exempted on the transfer will be taxed as income of
the year of transfer.
2.3.4 Income from Other Sources
A source of income, which does not specifically fall under any one of the other heads
of income, is to be computed and brought to charge under this head of income.
DOING BUSINESS IN INDIA 99

2.4 Tax Relief
In order to encourage industrial growth and development, the Government of India
offers several tax incentives to industrial units and foreign exchange earners in the
country. These incentives reduce the tax incidence substantially and are subject to
fulfillment of specified conditions.
2.4.1 Tax Benefits
The Income Tax Act, 1961 provides for far reaching tax holidays and other tax
incentives for businesses. We have enumerated, in brief, the significant tax holidays
and incentives available to businesses along with the nature of deductions,
eligibility criteria, quantum of deduction and period for which the deductions are
available. The tax holidays and incentives are subject to fulfillment of specified
conditions and those are available to enterprises engaged in certain specified
activities. The below table has been updated to cover the amendments as per the
Finance Act 2010 ('The Act') which shall be effective from financial year 2010-11.
These are summarized below:
Section
10A /
10B
Details of Exemption / Deduction
For newly established undertakings in Free
Trade Zones or 100% Export Oriented
Undertakings.
For any eligible undertaking set up in a
Special Economic Zone ('SEZ') after 1 April
2002 but before 31 March 2005.
Exemption is available for profits from
export of certain articles or things or
computer software, manufactured or
produced by an eligible undertaking.
The term 'computer software' includes
notified 'information technology enabled
services'.
The benefit is available to units engaged in
cutting and polishing of precious and semiprecious
stones.
The export proceeds must be realized
within specified time.
No deduction under these sections will be
allowed unless the assessee files the
return of income within prescribed time
limit.
The unit availing these deductions will
be subject to MAT @19.93% [(tax rate
18% plus surcharge 7.5%) plus
education cess 3% thereon] (having
book profit exceeding Rs. 1,00,00,000)
or 18.54% (in other cases).
The tax holiday available under sections
10A/10B to units in STPI, EHTP, FTZ and
EOU will be available upto 31 March 2011.
The Act has not extended such tax
holidays beyond 31 March 2011.
Period
First 10 years upto
financial year
2010-11.
First 5 years
Next 2 years
Next 3 years*
Quantum
of Deduction
100%
100%
50%
50%
100
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Section
Details of Exemption / Deduction
* The deduction is allowed only on creation of
a specified reserve, which is utilized for
specified purposes.
Period
Quantum
of Deduction
10AA
For any new eligible unit set up in a Special
Economic Zone ('SEZ') on or after 1 April
2005.
Exemption is available to the entrepreneur
as referred to in Section (2j) of SEZ Act,
2005 for profits derived from export of
a r t i c l e s o r t h i n g s o r s e r v i ces,
manufactured, or produced or provided
any services by an eligible unit.
There is no restriction on realisation of the
export proceeds within a particular time
frame for the purpose of claiming the
deduction.
The profits and gains derived from on-site
development of computer software
(including services for development of
software) outside India shall be deemed to
be the profits and gains derived from the
export of computer software outside India.
The term manufacturing includes
processing such as cutting, polishing and
as such cutting, polishing of precious and
semi-precious stones can be entitled to
this exemption.
As per amendment made by Finance (No.2)
Act, 2009, the deduction under this
section is to be computed in the same
proportion, which the export turnover of
the eligible unit bears with the total
turnover of the said unit with effect from
FY 2009-10. Now as per the Act, the
benefit will be available to the assessee
i n t h e s a i d p r o p o r t i o n , w i t h
retrospective effect from FY 2005-06.
The benefit under this section will be
available if :
the unit is not formed by splitting up
or reconstruction of a business
already in existence subject to
certain exceptions.
the unit is not formed by transfer of
machinery and plant previously used
for any purpose to the new business
subject to certain exceptions.
First 5 years
Next 5 years
Next 5 years+
100%
50%
50%
+ The deduction is allowed only on creation
of a specified reserve, which is required to
be utilized for specified purposes.
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Section
Details of Exemption / Deduction
Period
Quantum
of Deduction
33AB Tea / Rubber/ Coffee development allowance
Deduction is available to assessee
engaged in the business of growing and
manufacturing tea, coffee or rubber in
India.
Deduction equal to an amount deposited in
a special account with the National Bank
for Agriculture and Rural Development
('NABARD') or any Deposit Account
opened by the assessee and approved by
the Tea Board or Coffee Board or Rubber
Board from the profits is allowed.
The amount has to be deposited within
specified period from the end of the
financial year or before furnishing the
return of income, whichever is earlier.
The amount has to be utilised by the
assessee for specified purposes.
NA Upto 40%
of profits
or amount
deposited
in special
account,
whichever
is less
Section
32
35/35
(2AB)
Eligibility Criteria, Quantum and Period of Deduction
Additional Depreciation
General rate of depreciation for plant and machinery is 15% from FY 2005-
2006.
Additional depreciation of 20% is allowed for new plant and machinery
acquired and installed after 31 March 2005. Additional Depreciation is
available only in the year in which such machinery is first put to use.
Commercial vehicles acquired on or after 1 January 2009 but before 1 October
2009 and put to use before 1 October 2009 will be eligible for depreciation @
50%.
Expenditure on Scientific Research
Where any capital expenditure (other than expenditure on land and building)
is incurred on scientific research related to the business carried on by the
assessee, 100% of such expenditure can be claimed as deduction.
Where any expenditure (other than expenditure on cost of land and building),
on in-house research and development facility, as approved by the prescribed
authority, incurred by the assessee, engaged in the business of manufacture
or production of article or thing except those specified in the Eleventh
Schedule the deduction shall be one and one-half times (150%) of the
expenditure incurred up to 31 March 2012. The Act increased the deduction
from 150% to 200%.
Where amount is paid to a scientific research association, which has its object
of undertaking scientific research or to a university, college or other
institution to be used for scientific research, the deduction shall be one and
one-fourth times (125%) of the amount paid provided that such association,
university, college or institution is approved by the Central Government.
Similar deduction is available for amount paid to approved university, college
or other institution to be used for research in social science or statistical
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Section
35AD
Eligibility Criteria, Quantum and Period of Deduction
research. Vide Notifications, certain institutions have been approved in the
category of 'other institution' subject to fulfillment of certain conditions.
Section 35(1)(iii) has been amended to include an approved research
association which has as its object of undertaking research in social
science or statistical research.
Where the amount paid by a person to a company to be used for scientific
research, provided that the company complies with the specified conditions,
the weighted deduction shall be one and one-forth times (125%). The Act
increased the deduction from 125% to 175%. A company approved under
the provisions of the said section will not be entitled to
claim weighted deduction of 125% under section 35(2AB). However,
deduction to the extent of 100% of the sum spent as revenue expenditure on
scientific research, which is available under section 35(1)(ii) will continue to be
allowed.
The Act has replaced the word 'research association' for the word
'scientific research association' in section 35(1).
Expenditure on specified businesses
Any expenditure of capital nature incurred, wholly and exclusively, during the
year for specified business.
Specified business has been defined to mean the business of setting up and
operating of cold chain facilities for storage or transportation of agricultural
produce, dairy products and other related items. It would also include the
business of warehousing for storing agricultural produce and the business of
laying and operating a cross-country natural gas or crude or petroleum oil
pipeline network for distribution, including storage facilities being an integral
part of such network subject to fulfillment of specified conditions.
The Act has extended the benefit of specified business to cover the following
businesses:
1. To include the business of building and operating a new hotel of two star or
above category anywhere in India which starts functioning after 1 April
2010.
2. Business in the nature of building and operating, anywhere in India, a new
hospital with atleast 100 beds of patients.
3. Business in the nature of developing and building a housing project under
a scheme for slum redevelopment or rehabilitation framed by the Central
Government or a State Government, as the case may be, and which is
notified by the Board in this behalf in accordance with the guidelines as
may be prescribed.
100% deduction is allowed in respect of any capital expenditure incurred
(other than expenditure incurred on the acquisition of any land or goodwill or
financial instrument), during the year by the specified business subject to the
specified provisions contained in this section.
The assessee shall not be allowed any deduction in respect of the specified
business under the provisions of chapter VI A for the same or any other
assessment year. No deduction in respect of the expenditure in respect of
which deduction has been claimed shall be allowed to the assessee under any
other provisions of the IT Act.
The benefits shall be available
In a case where the business relates to laying and operating a cross
country natural gas pipeline network for distribution, if such business
commences its operations on or after 1 April 2007 and
DOING BUSINESS IN INDIA 103

Section
35
DDA
54G
54GA
54EC
10(34)
10(38)
115JB
(6)
115O
(6)
Eligibility Criteria, Quantum and Period of Deduction
In any other case, if such business commences its operation on or after
1 April 2009.
Any expenditure incurred by way of payment of any sum to employee in connection
with his voluntary retirement is eligible for amortization over 5 years, subject to
specified conditions. In case of conversion of private company or unlisted public
company to a LLP, unabsorbed expenditure incurred under voluntary
retirement scheme by the private company or unlisted public company will be
amortized for the remaining period.
Capital gains arising on transfer of plant, machinery, land, building or any rights in
land / building effected in course of or in consequence of the shifting of an
industrial undertaking situated in an urban area to any area (other than an urban
area), shall be exempt to the extent of the amount of capital gains utilized within a
period of 1 year before or 3 years after the date of transfer of the above assets, for
purchase of new plant and machinery, land and building and for shifting expenses,
subject to specified conditions.
Capital gains arising on transfer of plant, machinery, land, building or any rights in
land / building effected in course of or in consequence of the shifting of an
industrial undertaking situated in an urban area to any Special Economic Zone,
shall be exempt to the extent of the amount of capital gains utilized within a period
of 1 year before or 3 years after the date of transfer of the above assets, for
purchase of new plant and machinery, land and building and for shifting expenses,
subject to specified conditions.
Long-term capital gains shall be exempt from tax, if an assessee invests, within a
period of 6 months from the date of transfer of a long-term capital asset, the
capital gains in the specified assets. The specified asset must be held for a period
of 3 years from the date of its acquisition. This exemption is restricted to
investment in specified assets viz. bonds issued by National Highway Authority of
India and the Rural Electrification Corporation Ltd. The investment is restricted
up to Rs. 50,00,000 per assessee per financial year for investment made on or
after 1 April 2007.
Dividend referred to in section 115-O shall not be included in the total income of
assessee.
Capital gain arising from transfer of long term capital asset being an equity share
in a company or a unit of an equity oriented fund, on which securities transaction
tax is charged, is exempt from tax. However, this exemption is not available for
computation of MAT.
The provisions of the section 115 JB will not apply to income accruing or arising on
or after 1 April 2005 from a business carried on, or services rendered, by an
entrepreneur or a Developer, in a unit or SEZ.
The undertaking or enterprise engaged in developing or developing and
operating or developing, operating and maintaining a SEZ will not be liable to pay
DDT on dividend declared, distributed and paid, out of current income, on or after
1 April 2005.
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80 IA / 80
IB / 80 IC /
80 IAB / 80
ID/ 80 IE /
80 LA
Sr.
No.
i.(a)
Deductions of Profits derived by Newly Established Industrial
Undertakings / Infrastructure Projects / Facilities / Developers of
SEZs / Banking units, etc.
Nature of activity and location
Industrial undertaking located in
notified industrially backward
states.
Manufacturing or producing any
articles or things or operating cold
s t o r a g e p l a n t w h i c h h a s
commenced operations during 1
April 1993 to 31 March 2004 (31
March 2012 for state of Jammu and
Kashmir).
Industrial undertaking deriving
profit from the business of setting
up and operating cold chain facility
for agricultural produce which has
begun to operate such facility on or
after 1 April 1999 but before 31
March 2004.
A negative list is provided to
specify the commodities, which
should not be manufactured or
produced by such undertakings.
The deduction of 100% of the
profits hitherto available under
Section 80IB for a period of ten
assessment years to notified
industries set up in North-Eastern
Region, will be available under
Section 80IC only, from FY 2003-
04.
Type of Quantum of
organization exemption
Company 100%
30%
Co-operative
Society
Others 100%
25%
Indian
Company
100%
25%
Number of
years
First 5 years
Next 5 years
First 5 years
Next 7 years
First 5 years
Next 5 years
100% Any 10
consecutive
years out of
first 15 years
i.(b) Undertaking set up in any part of All 100% Any 10
India for the generation or
consecutive
generation and distribution, of
years out of
power, which has commenced
first 15 years
operations during 1 April 1993 to 31
March 2011.
U n d e r t a k i n g w h i c h s t a r t s
transmission or distribution by
l a y i n g a n e t w o r k o f n e w
transmission or distribution lines
between 1 April 1999 and 31 March
2011.
Undertaking which undertakes
substantial renovation and
modernization of the existing
network of transmission or
distribution lines between 1 April
2004 and 31 March 2011.
DOING BUSINESS IN INDIA 105

Sr.
No.
Nature of activity and location
The renovation / modernization
should result into increase in plant
and machinery by at least 50% of
the book value of such plant and
machinery as on 1 April 2004.
Type of Quantum of
organization exemption
Number of
years
i.(c) Undertaking owned by Indian Indian 100% Any 10
Company (formed before 30 Company
consecutive
N ove m b e r 20 0 5 ) s e t u p fo r
reconstruction or revival of a power
years out of
first 15 years
generating unit, which has commenced
operations in power before 31 March
2011.
i.(d)
Industrial undertaking located in
industrially backward districts of
categories A and B notified by Central
Government, manufacturing or
producing articles or things (except
specified low priority items) or to
operate its cold storage plant or plants
which has commenced operations
during 1 October 1994 to 31 March
2004.
A. Set up in category 'A' districts for all
the assesses:
Company
Co-operative
Society
Others
100%
30%
100%
25%
100%
25%
First 5 years
Next 5 years
First 5 years
Next 7 years
First 5 years
Next 5 years
B. Set up in category 'B’ districts for all
the assesses:
Company 100%
30%
Co-operative
Society
100%
25%
Others 100%
25%
First 3 years
Next 5 years
First 3 years
Next 9 years
First 3 years
Next 5 years
ii. Industrial undertaking other than (i) Company 30% First 10 years
above, manufacturing or producing
articles or things (except specified low Co-operative 25% First 12 years
priority items) or operating cold Society
storage plant which has commenced its
operations during 1 April 1991 to 31
March 1995. However, a small scale
industrial undertaking manufacturing Others 25% First 10 years
and producing any article or thing and
c o m m e n c i n g m a n u f a c t u r i n g
operations or operating cold storage
plant from 1April 1995 to 31 March 2002
is eligible.
106
DOING BUSINESS IN INDIA

Sr.
No.
Nature of activity and location
Type of Quantum of
organization exemption
Number of
years
iii. Enterprise being company or Company /
consortium of companies registered any other
in India or any authority or board or body
a corporation or any other body established
established or constituted under or
any Central or state Act, for carrying constituted
on business of (i) developing or under any
(ii) operating and maintaining or Central or
(iii) developing, operating and State
maintaining of a new infrastructure Act
facility like road including toll road,
bridge, rail system, highway project,
water supply project, water treatment
system, irrigation project, sanitation
and sewage system or solid waste
management system, airport, port,
inland waterways and inland ports,
commencing its operations on or after 1
April 1995. For navigational channel in
the sea, the benefit will be available
from 1 April 2007.
iv.
Approved Hotel located in hilly or rural
area or place of pilgrimage, which has
started functioning during 1 April 1990
to 31 March 1994 or during 1 April 1997
to 31 March 2001.
Indian
company
with a
minimum
paid up
capital of
Rs. 5,00,000
v. Hotel located in any place other than a Indian
hilly or rural area or place of pilgrimage
which has started functioning during
1 April 1991 to 31 March 1995 or during
1 April 1997 to 31 March 2001. Section
80 IB(7)(b)
(However, for both (iv) & (v), hotel
located at a place within the municipal
jurisdiction of four metro cities of
Kolkata, Chennai, Delhi and Mumbai
are not eligible if they start functioning
during 1 April 1997 to 31 March 2001)
company
with a
minimum
paid up
capital of
Rs. 5,00,000
100% For 10
consecutive
years out of
first 15 years
(20 for road,
bridge, rail
system,
highway
project, water
supply project,
water
treatment
system,
irrigation
project,
sanitation and
sewerage
system or solid
waste
management
system)
50% First 10 years
30% First 10 years
vi. Any company registered in India with
its main object being scientific and
industrial research and development
Company 100% For first 10
years (5 years
if approved
which is for the time being approved by
before 1 April
the Department of Scientific and
1999).
Industrial Research at any time after
31 March 2000 but before 1 April 2007.
DOING BUSINESS IN INDIA 107

Sr.
No.
Nature of activity and location
Type of Quantum of
organization exemption
vii. Any undertaking which starts
providing tele-communication
services, whether basic or cellular,
including radio paging, domestic
satellite service or network of
trunking, broadband network and
internet services on or after 1 April
1995 but before 31 March 2005.
The restrictions on transfer of old
p l a n t a n d m a c h i n e r y a n d
reconstruction of business are
made applicable to the telecom
sector with effect from 1 April
2004.
All 100%
30%
viii. Any undertaking which begins to
develop or develops and operates or
maintains and operates an industrial
park or SEZ notified by the Central
Government which has commenced
operations during 1 April 1997 to 31
#
March 2009 .
# - As per amendments by The Special
Economic Zones Act 2005, the
exemption will not be available for
SEZs notified after 1 April 2005.
Exemption will now be available under
a new section 80 IAB.
All 100%
Number of
years
First 5 years
Next 5 years
The above 10
years shall be
consecutive
assessment
years out of
first 15 years.
10 years out of
first 15
assessment
years
ix. Any assessee being developer of a SEZ All 100% 10 years out of
notified by the Central Government after
first 15 years
1 April 2005.
x. Any undertaking, which begins All 100% First 7 years
commercial production of mineral oil in
any part of India on or after 1 April 1997
and for refining of mineral oil on or
after 1 October 1998 but not later than
31 March 2012 subject to certain
conditions.
The tax holiday is also available in
respect of profits arising from the
commercial production of natural gas
from blocks which are licensed under
the VIII Round of bidding for award of
exploration contracts under the New
E x p l o ra t i o n L i ce n c i n g Po l i c y
announced by the Government of India
and IV Round for the Coal Bed Methane
and begins commercial production of
natural gas on or after 1 April 2009.
xi. Any undertaking engaged in All 100% Not applicable
developing and building housing
projects approved by a local
authority before 31 March 2008
108
DOING BUSINESS IN INDIA

Sr.
No.
Nature of activity and location
In case of projects approved on or
after 1 April 2004, it should be
completed within 4 years from the
end of the financial year in which it
is approved.
In case of projects approved on or
after 1 April 2005, it should be
completed within 5 years from
the end of the financial year in
which it is approved. This
amendment will take effect from
AY 2010-11.
In other cases it should be
completed before 31 March 2008.
The deduction is allowed subject to
fulfillment of various other
conditions like minimum area of
the land, maximum built-up area of
residential and commercial units
etc.
In case of multiple approvals from
the local authority, the date of first
approval will be considered for the
calculation of time limit of
completion.
With retrospective effect from
financial year 2000-01, nothing
contained in the said sub-section
shall apply to any undertaking
which executes the housing project
as a works contract awarded by any
person (including Central or State
Government).
The above deduction is subject to
condition that not more than one
residential unit is allotted to any
person not being an individual and
in a case where a residential unit in
the housing project is allotted to a
person being an individual, no
other residential unit in such
housing project is allotted to any of
the following persons
Type of Quantum of
organization exemption
Number of
years
i. the spouse or minor children of
such individual,
ii. the HUF in which such
individual is the karta,
iii. any person representing such
individual, the spouse or the
minor children of such
individual or the HUF in which
such individual is the karta.
DOING BUSINESS IN INDIA 109

Sr.
No.
Nature of activity and location
Type of Quantum of
organization exemption
xii An undertaking deriving profit Company 100%
from the integrated business of
30%
h a n d l i n g , s t o r a g e a n d
transportation of food grains
subject to such business beginning
Others 100%
its operations on or after 1 April
2001.
25%
The benefit is extended to
undertakings engaged in the
b u s i n e s s o f p r o c e s s i n g ,
preservation and packaging of
fruits and vegetables with effect
from 1 April 2004.
Further, the benefit is extended to
the undertakings engaged in the
business of meat and meat
products or poultry or marine or
dairy products which begin to
operate such business after 1 April
2009.
Number of
years
First 5 years
Next 5 years
First 5 years
Next 5 years
xiii. Any undertaking engaged in the All 50% First 5 years
business of building, owning and
operating a multiplex theater located
at any place other than a place within
the municipal jurisdiction of four metro
cities i.e., Kolkata, Chennai, Delhi and
Mumbai and constructed at any time
during the period of 1 April 2002 to 31
March 2005.
xiv Any undertaking engaged in the
business of building, owning and
operating a convention center
constructed at any time during the
period of 1 April 2002 to 31 March
2005.
All 50% First 5 years
xv. Any undertaking engaged in the
business of operating and
maintaining a hospital in a rural
area.
The undertaking shall be eligible
for the deduction if such hospital is
constructed in accordance with the
local regulations in force, and has
at least 100 beds for patients.
The hospital should be constructed
during the period beginning on
1 October 2004 and ending on
31 March 2008.
The deduction is also available to
hospitals located anywhere in India
other than excluded areas viz.
areas comprising the urban
All 100% First 5 years
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Sr.
No.
xvi
Nature of activity and location
agglomerations of Greater
Mumbai, Delhi, Kolkata, Chennai,
Hyderabad, Bangalore and
Ahmedabad, the districts of
Faridabad, Gurgaon, Ghaziabad,
Gautam Budh Nagar, Gandhinagar
and the city of Secunderabad.
The said tax benefit is available to a
hospital, which is constructed and
has started or starts functioning at
any time during the period
beginning 1 April 2008 and ending
on 31 March 2013.
New undertakings and enterprises,
which begins to manufacture or
produce any article or commences any
operation specified or undertakes
substantial expansion of existing
undertakings and enterprises located
in the states of
I f l o c a te d i n S i k k i m , t h e
undertaking, which begins to
manufacture or produce any
article or commences any
o p e r a t i o n o r u n d e r t a k e s
substantial expansion during the
period beginning from 23
December 2002 to 31 March 2007.
If located in Himachal Pradesh and
Uttaranchal, the undertaking,
which begins to manufacture or
produce or undertakes substantial
expansion during the period
beginning from 7 January 2003 to
31 March 2012.
If located in North Eastern States*,
the undertaking, which begins to
manufacture or produce or
undertakes substantial expansion
during the period beginning from
24 December 1997 to 31 March
2007.
List of articles and products
entitled / not entitled for such
deduction have been prescribed.
* - States of Assam, Tripura,
Meghalaya, Mizoram, Nagaland,
Manipur and Arunachal Pradesh
Type of Quantum of
organization exemption
Others 100%
25%
Number of
years
All 100% First 10 years
Company 100%
30%
First 5 years
Next 5 years
First 5 years
Next 5 years
All 100% First 10 years
DOING BUSINESS IN INDIA 111

Sr.
No.
xviii
Nature of activity and location
Offshore banking unit in SEZ.
From the business referred to in
section 6(1) of the Banking
Regulation Act, 1949.
From any unit of the International
Financial Services Center from
approved business.
Type of Quantum of
organization exemption
Scheduled
Bank or any
bank incorporated
by
or under the
law of a
country
outside India.
Or a unit of
an
International
Financial
Services
Center.
Number of
years
xvii New undertakings and enterprises,
which begins to manufacture or
produce any eligible article or thing or
provide any services or undertakes
substantial expansion or carry on any
eligible business in any of the Northern
Eastern states beginning from 1 April
2007 to 31 March 2017.
The eligible business for this purpose
a re h o te l (n o t b e l ow 2 sta r
category),adventure and leisure sports
including ropeways, providing medical
and health services in the nature of
nursing home with a minimum capacity
of 25 beds; running an old-age home;
operating vocational training institute
for hotel management, catering and
fo o d c ra f t , e n t re p re n e u rs h i p
development, nursing and paramedical,
civil aviation related training,
fashion designing and industrial
training; running information
technology related training centre;
manufacturing of information
technology hardware; and biotechnology.
All 100% First 10 years
100% First 5 years
(beginning with
the year in
which
prescribed
permissions
are obtained)
50% Next 5 years
xix Any undertaking engaged in business
of convention centers or hotels in
specified area of the National Capital
Territory subject to fulfillment of
certain conditions.
The said deduction has been extended
to new two star, three star or four star
hotels located in specified districts
having UNESCO-declared 'World
Heritage Sites'. Such hotels are
required to be constructed and start
functioning at any time during the
period beginning 1 April 2008 and
ending on 31 March 2013.
All 100% First 5 years
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DOING BUSINESS IN INDIA

Significant Conditions for Eligibility for Deduction under section 80IA / 80IB / 80IAB /
80IC / 80ID / 80IE / 80LA
An eligible industrial undertaking is one, which fulfils all of the following conditions
i. It manufactures or produces any article or thing other than any non-priority
article or thing (as specified in the Eleventh Schedule) or operates one or more
cold storage plant or plants in any part of India. However, restriction regarding
manufacture of non-priority article specified in eleventh schedule is not
applicable to small-scale industrial undertakings and industrial undertakings
located in backward states.
ii.
iii.
It employs (a) 10 or more workers in a manufacturing process carried on with the
aid of power or (b) 20 or more workers in a manufacturing process carried on
without the aid of power.
It is not formed by splitting up, or reconstruction, of a business already in
existence or by transfer to a new business of machinery previously used for any
purpose (except under certain circumstances).
The profits and gains of an eligible business for the purpose of determining the
quantum of deduction under this section for the assessment year is to be computed as if
such eligible business were the only source of income of the assessee during the
previous year relevant to the assessment year for which the deduction is to be made.
An eligible enterprise engaged in development, operation and maintenance of any
infrastructure facility should have entered into an agreement with the Central
Government / State Government / local authority / other statutory body for developing
or operating and maintaining or developing, operating and maintaining a new
infrastructure facility.
The exemption is also available to profits and gains derived from ships and approved
hotels subject to fulfillment of certain conditions. In the case of a hotel, a significant
condition is that the business of the hotel should be owned and carried on by a company
registered in India with a paid up capital of Rs. 5,00,000 or more.
For the enterprise, where housing or other activities are an integral part of the highway
project, then the exemption is available to profits and gains derived from such project
subject to condition that the profit has been transferred to a special reserve account
and the same is actually utilized for the highway project excluding housing and other
activities before the expiry of three years following the year in which such amount was
transferred to the reserve account and the amount remaining unutilized shall be
chargeable to tax as income of the year in which transfer to reserve account took place.
Where any amount of profits and gains of an industrial undertaking or of a hotel in the
case of an assessee is claimed and allowed under this section for any assessment year,
deduction to the extent of such profits and gains shall not be allowed under any other
provision of the Act and shall in no case exceed the profits and gains of the undertaking
or hotel as the case may be.
Any undertaking claiming deduction under this section must furnish a report of audit in
the prescribed form duly signed and verified by an accountant.
DOING BUSINESS IN INDIA 113

No deduction under 80IA, 80IB, 80IAB, 80IC, 80ID, 80IE will be allowed unless the
assessee files return of income within the due date specified under section 139(1).
With retrospective effect from FY 2002-03
Deduction in respect of profits and gains shall not be allowed under any
provisions of section 10A or section 10AA or section 10B or section 10BA of the IT
Act or under any provisions of Chapter VIA under the heading "C.-Deductions in
respect of certain incomes" in any assessment year, if a deduction in respect of
same amount is claimed and allowed under the various provisions referred above
in such assessment year;
The aggregate of the deductions under the various provisions referred above,
shall not exceed the profits and gains of the undertaking or unit or enterprise or
eligible business, as the case may be;
No deductions under the various provisions referred above, shall be allowed if the
deduction has not been claimed in the return of income.
With retrospective effect from FY 2008-09, the transfer price of goods and services
between the undertaking or unit or enterprise or eligible business and any other
undertaking or unit or enterprise or business of the assessee shall be determined at the
market value of such goods or services as on the date of transfer.
As per Finance Act 2010, no deduction, claimed and allowed in respect of any of the
specified business referred to in 35AD(8)(c) for any AY, shall be allowed under chapter
VI A under the heading 'C-Deduction in respect of certain income' for the same or any
other AY.
2.4.2 Tonnage tax on shipping companies
Indian shipping companies are taxed on a presumptive basis. Tax is levied on the
notional income of the shipping company arising from the operation of ships at
normal corporate tax rates. The notional income is determined in a prescribed
manner on the basis of the tonnage of the ship. Tax is payable even in the case of
loss. The scheme is applicable to the shipping companies that are incorporated
under the Indian Companies Act (with its effective place of management in India)
with at least one ship with minimum tonnage of 15 tonnes and holding a valid
certificate under the Merchant Shipping Act, 1959. Shipping companies have an
option to opt for the scheme or for taxation under normal income-tax provisions.
Once the scheme has been opted for, it would apply for a mandatory period of ten
years and other income-tax provisions would not apply.
2.5 Transfer Pricing Regulations
The Finance Act, 2001 (effective from 1 April 2001) has inserted new sections 92 to
92F in the Income-tax Act, 1961 to facilitate determination of the proper taxation
methodology of the international transactions between ‘associated enterprises’
having regard to arm’s length principles. As per the transfer pricing regulations, it is
required that any income arising from an international transaction is to be
computed at the arm’s length price. It is also provided that to arrive at such income,
114
DOING BUSINESS IN INDIA

the deductible expenses or interest is also to be computed at the arm’s length price.
Further, it is provided that when any allocation or apportionment of or any
contribution to any cost or expenses between two or more associated enterprises,
in international transaction, is required, in connection with a benefit, service or
facility provided by one or more enterprise, then the same is to be determined at
arm’s length price.
Arm’s length price means a price that would be obtainable had the transaction
taken place between independent parties in uncontrolled conditions. The methods
prescribed for computing arm’s length price in transfer pricing regulations are as
follows:
i. Comparable uncontrolled price method;
ii. Resale price method;
iii. Cost plus method;
iv. Profit split method;
v. Transactional net margin method.
Further, transfer pricing regulations provide for the record keeping regarding
international transactions with associated enterprises and obtaining of certificate
from the Chartered Accountant. The penalties for non-disclosure of the
international transactions could be 2% of the transaction value apart from
penalties for concealment which range from 100% to 300% of the tax sought to be
evaded.
2.6 Relief for Tax Losses
Business loss incurred in a tax year and not adjusted against other income can be
carried forward for 8 years, and set off against future business profit provided the
income tax return for the year of loss is filed timely. Losses from a speculation
business (as defined) can be set off only against gains from speculation business for
a maximum of four years. For private companies, a 51% continuity of ownership test
must also be satisfied. Carry back of losses is not permitted. Further, the benefit of
carry forward of losses and unabsorbed depreciation is allowed in cases of
amalgamation of a company owing an ‘industrial undertaking’ or a ship, with
another company or an amalgamation of a banking company with a banking
institution sanctioned and bought into force by the central government under the
Banking Regulation Act.
Unabsorbed depreciation can be carried forward indefinitely and can be set off
against any income under any head of subsequent years. Short-term capital loss
also can be carried forward for eight years, and set off against future capital gains
only. However, long-term capital gain can be set-off only against long-term capital
gain.
2.7 Returns and Payment of Taxes
The companies are liable to submit their tax returns of the relevant financial year
(i.e. year ending 31 March) on or before the immediately succeeding 30 September.
DOING BUSINESS IN INDIA 115

Tax is payable in advance on income, including capital gains, if the tax computed as
payable for any year is Rs. 10,000/- or more. Advance tax is payable on specified
dates during the financial year in the manner set out below. The advance tax
payable is determined by estimating the total income (including capital gains) for
the year. Tax is to be calculated at the rates applicable for the financial year and is to
be reduced by the amount of withholding tax deductible or collectible in terms of
any provision of the Act. While shortfalls or excess payments, consequent upon
errors in estimation, may be adjusted in subsequent installments, shortfalls vis-àvis
specified percentages would attract interest. All taxes must be paid before filing
return of income.
The due dates for payment of advance tax and the amounts payable are:
Due Date
On or before 15 June
On or before 15 September
On or before 15 December
On or before 15 March
Amount Payable
Not less than 15% of advance tax
Not less than 45% of advance tax
less earlier installment
Not less than 75% of advance tax less earlier
installments
Whole of advance tax less earlier installments
In case of non-payment of specified percentages of advance tax by specified dates,
interest @ 1% per month or part thereof is payable on the shortfall.
The unpaid balance of tax is payable before filing the return of income with interest
thereon @ 1% per month. Further, interest @ 1% per month or part thereof is payable
on such balance tax, if the return is not filed within the specified time.
3.0 INCOME TAX ON NON-CORPORATES
3.1 Residential Status
3.1.1 Individuals
Individuals are classified into ‘residents’, ‘non-residents’ and ‘residents but not
ordinarily residents’. The gamut of income subject to tax is dependent on the
residential status irrespective of the nationality of the individual. The residential
status of an individual can be determined using the chart given on the next page
116
DOING BUSINESS IN INDIA

IDENTIFYING THE RESIDENTIAL STATUS OF AN INDIVIDUAL
Individual
Stay
In India for 182 days or more in a financial year; or
In India for 60* days or more in a financial year and 365 days or more in
preceding 4 years
No
Yes
NR
Resident
Has been a non-resident in India in 9 out of 10 preceding years ; or
Has been in India for 729 days or lesser in the preceding 7 years
No
Yes
ROR
RNOR
* 182 days for an individual who leaves India as a member of the crew of an Indian
Ship or for the purposes of employment outside India.
DOING BUSINESS IN INDIA 117

3.1.2 Other Non-corporate Entities
There are certain other non-corporate entities recognized by the Income-tax law viz
partnerships, trusts, Hindu Undivided Families (HUFs) etc. These entities are treated
as ‘resident’ in India in any financial year, unless the control and management of
their affairs are situated wholly outside India, during the year. Limited Liability
Partnership (LLP) is introduced as a form of entity and has been accorded the same
tax treatment as a general partnership firm.
3.2 Rates of Tax
Income-tax rates for individuals and HUFs regardless of their residential status are
as follows
Income Slabs(Rs.)
For 2009-10
Tax Rates*
Income Slabs(Rs.)
For 2010-11
Tax Rates*
0 - 1,60,000#
Nil
0 - 1,60,000#
Nil
1,60,001# - 3,00,000
10.30% of income
exceeding
Rs. 1,60,000
1,60,001# - 5,00,000
10.30% of income
exceeding
Rs. 1,60,000
3,00,001 - 5,00,000
Rs. 14,420 plus
20.60% of income
exceeding
Rs. 3,00,000
5,00,001 - 8,00,000
Rs. 35,020 plus
20.60% of income
exceeding
Rs. 5,00,000
5,00,001 and above
Rs. 55,620 plus
30.90% of income
exceeding
Rs. 5,00,000
8,00,001 and above
Rs. 96,820 plus
30.90% of income
exceeding
Rs. 8,00,000
* The tax rates are inclusive of education cess of 3%.
# In case of a resident woman below 65 years of age at any time during the previous year,
the basic exemption income slab is Rs. 1,90,000 for FY 2009-10 and in case of a
resident individual of the age of 65 years or more (senior citizen) at any time during
the previous year, the basic exemption income slab is Rs. 2,40,000 for FY 2009-10. The
tax for other slabs will change accordingly.
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3.2.1 Tax incidence
The incidence of income tax for individuals, women and senior citizens, for
FY 2010-11, having different income levels can be exemplified as follows
Income (Rs.)
Tax Liability (Rs.)
Individuals* Women Senior Citizens
1,60,000 - - -
1,90,000 3,090 - -
2,40,000 8,240 5,150 -
3,00,000 14,420 11,330 6,180
4,00,000 24,720 21,630 16,480
5,00,000 35,020 31,930 26,780
* The tax incidence for HUFs, AOPs and BOIs will be same as that of individuals.
3.3 Taxable Income
The provisions relating to determination of taxable income are as follows:
i. Residents are liable to tax on their worldwide income.
ii.
iii.
iv.
Non-residents are liable to tax on income, which accrues or arises or is
deemed to accrue or arise in India as well as income, which is received or
deemed to be received in India.
‘Resident but not ordinarily resident’ persons are liable to tax on income
specified in (b) above and income derived from a business controlled from or
profession set up in India.
As per the Finance Act 2010, in respect of income earned by non-residents in
the form of interest, royalty and fees for technical services, such income shall
be deemed to accrue or arise in India whether or not, the non-resident has a
residence or place of business or business connection in India or whether the
services are rendered in India or not.
3.4 Gross Income
An individual’s gross income includes salary, income from house property, profits
and gains of business or profession, capital gains and income from other sources.
3.4.1 Gift received liable to income tax
Any sum of money received on or after 1 September 2004 exceeding Rs. 50,000
(about US$ 1,111)* in a financial year without consideration by an individual or Hindu
Undivided Families shall be included in the total income of such individual or Hindu
Undivided Family. The purview of the provision has been extended with effect from 1
October 2009 to include any sum of money as well as specified properties. The term
property includes immovable properties, shares and securities, jewellery, drawings,
painting, sculptures, archaeological collections and any other work of art. As per
DOING BUSINESS IN INDIA 119

the Finance Act 2010, 'bullion' is included within the meaning of property.
Further included within its ambit are transactions undertaken in respect of shares
of closely held company either for inadequate consideration or without
consideration where the recipient is a firm or a closely held company.
However, the following gifts shall continue to be excluded:
i. Received from Relatives as defined in the explanation to the above provisions
in the Income-tax Act.
ii.
iii.
Received on the occasion of marriage of the individual.
Received under a will or by an inheritance or in contemplation of death of the
payer.
iv. Received from any local authority as defined in the Explanation to clause (20)
of section 10 or from any fund or foundation or university or other educational
institution or hospital or other medical institution or any trust or institution
referred to clause (23C) of section 10.
v. Received from any trust or institution registered under section 12AA.
3.5 Capital Gains Tax
The provisions relating to computation of capital gains tax applicable to corporate
entities are equally applicable to non-corporate entities. In addition to that
following exemptions are available.
Long term Capital Gains - Exemptions
Individuals and Hindu undivided families are also entitled to claim exemption from
long-term capital gains under the following circumstances in accordance with the
relevant provisions:
i. Reinvestment of long term capital gain arising from sale of residential house
for acquisition of another residential house.
ii.
iii.
iv.
Reinvestment of sale proceeds arising from sale of a capital asset (other than
a residential house) for acquisition of a residential house subject to
fulfillment of certain conditions.
Reinvestment of capital gain arising from sale of a capital asset for
investment in specified bonds.
Reinvestment of long term capital gains arising from sale of listed securities
or unit of a mutual fund for investment in equity shares forming part of an
eligible issue of capital.
3.6 Deductions and Reliefs
Donations within limits, to approved charities qualify for deduction of 100% or
50%.
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The reliefs available to corporate entities discussed above are generally available to
non-corporate entities unless specifically excluded.
3.6.1 Deductions/ Tax Relief
For the financial year 2009-10, individuals and HUFs are entitled to deduction in
respect of certain specified savings/investments/expenditure.
3.7 Clubbing of Minor’s Income
Income of minor children, other than income earned through personal endeavours
is generally attributable to the parent that has the higher income for tax purposes.
However, income of a minor child suffering from a prescribed disability is not
aggregated but is taxable separately.
3.8 Relief for Tax Losses
The provisions relating to carry forward of losses and depreciation applicable to
corporate are equally applicable to non-corporate entities.
3.9 Returns and Payments of Taxes
The due dates for furnishing of tax returns in case of non corporate entities are as
follows
In a case where the accounts of the assessee are required to
be audited or report of an accountant is required to be
submitted under specified provisions
In other cases
30 September
31 July
The due dates for payment of advance tax are as follows
Due Date
On or before 15 September
On or before 15 December
On or before 15 March
Amount Payable
Not less than 30% of advance tax
Not less than 60% of advance tax less
earlier installment
Whole of advance tax less earlier
installment
The employer at his option can submit return of income to his employer in
accordance with the notified scheme and such employer shall furnish all return of
income received on or before due date in such form as may be prescribed in the
scheme.
The method of computation of advance tax is discussed in the earlier part of this
chapter.
3.10 Presumptive tax scheme for small businesses
A new presumptive taxation scheme has been introduced with effect from financial
year 2010-11 for any business having a maximum turnover / gross receipts up to
DOING BUSINESS IN INDIA 121

Rs. 40,00,000. The scheme is applicable to individuals, HUFs, Partnership firms
excluding LLPs. The presumptive rate of tax is prescribed at 8% of turnover / gross
receipts. The assessee opting for the above scheme shall be exempted from
payment of advance tax and maintaining books of accounts. An assessee with
turnover up to Rs . 40,00,000 (about US$ 88,909), who shows an income below the
presumptive rate prescribed under these provisions, will, in case his total income
exceeds the taxable limit, be required to maintain books of accounts and also get
them audited. The Finance Act 2010 increased the turnover / gross receipt limit for
a p p l i c a b i l i t y o f t h e p r e s u m p t i v e t a x a t i o n s c h e m e f r o m
Rs. 40,00,000 to Rs. 60,00,000 (about US$ 133,363) from the financial year 2010-11.
4.0 SPECIAL PROVISIONS FOR COMPUTATION OF
TAXABLE INCOME OF NON-RESIDENTS
4.1 Non-residents Engaged in Specified Business
Taxable income of non-resident individuals and foreign companies is computed at a
flat rate varying from 5% to 10% of the amount paid or payable (whether in or
outside India) or an amount received or deemed to be received in India by or on
behalf of the taxpayer on account of the following:
Business of Exploration for Mineral Oils
Business of Operations of Aircraft
Shipping Business
Business of Civil Construction for Turnkey Power Projects
Income from prospecting for Mineral Oils is, subject to certain conditions, eligible
for special allowances in addition to permissible deductions available under the Act.
4.2 Others
Interest income on specified securities / bonds is exempt from tax in case of nonresidents.
4.3 Income of Non Resident Indians
Non-Resident Indians (NRIs) have been offered a separate concessional tax of 20%
(10% for long term capital gains) plus surcharge at applicable rates in respect of
investment income. Also, specific provision is there in the Income-tax Act to
safeguard interest of non-residents against devaluation of rupee in computing
capital gains from the specified assets acquired out of convertible foreign
exchange. However, the benefit of cost inflation index is not available to NRIs.
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4.4 Income of Foreign Institutional Investors
The taxation of FIIs is governed by Section 115AD of the Income tax Act, 1961 (‘the
Act’). The significant provisions of this section are discussed below. The tax rates
discussed below are exclusive of surcharge and cess.
4.4.1 Interest earned by a registered FII or sub-account from its investments in debt
securities of Indian companies will be taxed at the rate of 20%.
4.4.2 The tax on dividend income is nil. However, the company declaring dividend is liable
to pay Dividend Distribution Tax (‘DDT’) @ 18% (plus surcharge and cess).
4.4.3 Long-term capital gains earned by registered FII or sub-account from sale of listed
debt securities of Indian Companies would be taxed at the rate of 10% and shortterm
capital gain would be taxed at the rate of 30% in terms of section 115AD of the
Act.
4.4.4 Long-term capital gains earned by registered FII or sub-account from sale of listed
equity or a unit of an equity oriented fund would be exempt from tax and short-term
capital gain would be taxed at the rate of 15%, provided that such transaction is
chargeable to Securities Transaction Tax (STT).
4.4.5 To summarize, Registered FIIs / sub accounts registered with the SEBI are subject to
tax, as per beneficial regime, as under
Tax Rates Excluding Surcharge and Cess
(Refer Note 1)
Particulars
Dividend
Interest
On Long Term
Capital Gains
(Refer Note 2)
On Short
Term Capital
Gains(Refer
Note 2)
On Other
Income ***
Listed
Securities*
Unlisted
Securities
0% 20%
0%
10%**
15%**
30%**
40% for
corporates
30% for
other entities
* - Tax benefits for capital gains are available only if such transaction is chargeable
to STT.
** - Nil if an FII is registered in Mauritius and is a tax resident of Mauritius, as per the
Double Taxation Avoidance Agreement (DTAA) entered into between India and
Mauritius. The Capital Gain provisions may need to be analysed based on the
treaty between India and the country of residence of FII/sub-accounts.
***- Nil if the income of an FII is not taxable in India under a tax treaty and if that FII
does not have a Permanent Establishment (PE) in India.
Notes –
1. Surcharge and education cess as discussed in para on Rates of Tax will be
applicable.
2. Capital gains earned by an FII are not subject to withholding tax in India.
DOING BUSINESS IN INDIA 123

4.5 Income of Offshore Funds
Income of approved offshore funds from units of specified mutual funds and long
term capital gains on their transfer are taxed @ 10% plus surcharge at applicable
rates if the units are purchased in foreign currency.
5.0 WITHHOLDING TAXES
Every person, other than an individual and Hindu Undivided Family whose turnover
is below Rs. 40,00,000 in case of business entities and Rs. 10,00,000 in case of
profession, making certain specified payments including, interest, rent, fees for
professional and technical services rendered, brokerage and commission, contract
payments is required to deduct tax at source (TDS) at prescribed rates. From salary
payment, every person is required to deduct tax at source. In the case of nonresidents,
tax is required to be withheld as per the provisions of income-tax law as
modified by applicable double tax treaty provisions.
T h e F i n a n c e A c t , 2 0 1 0 i n c r e a s e d t h e t u r n o v e r l i m i t f r o m
Rs. 40,00,000 to Rs. 60,00,000 in case of business entities and Rs. 10,00,000 to
Rs. 15,00,000 in case of professions, which is applicable from financial year 2010-11.
Withholding taxes are normally payable within seven days of the end of the month in
which the tax is deducted / collected. However, tax on salary is payable within seven
days of payment of salary.
The person responsible for deducting tax at source is required to file annual return
of TDS before the specified dates. The non-filing of annual return of TDS or failure to
issue certificate within the prescribed period will attract penalty as specified in the
Act.
In case the income of a non-resident is not chargeable to tax in India or is taxable at
rates lower than that prescribed for withholding taxes, an application can be made
to the tax authorities for permission to deduct withholding taxes at a lower rate
than those prescribed under the Act.
The domestic rate of Tax Deduction at Source (TDS) for financial year 2010-11 as per
by the Finance Act 2010 is as per Annexure II.
6.0 DOUBLE TAX TREATIES
The Government of India has entered into comprehensive Double Tax Avoidance
Agreements (DTAA) with about 78 countries to avoid double taxation of income.
Certain other limited agreements are entered into by India to avoid double taxation
of income only from shipping and air transport.
For countries with no DTAAs with India, a unilateral tax credit for tax paid in foreign
countries is available under Indian domestic law to a resident tax payer. This relief is
by way of deduction from the Indian income tax of a sum which is calculated on the
double taxed income at the lower of Indian rate of tax or the rate of tax of the other
country where tax has been paid. The list of the countries with which India has
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entered into Double Tax Treaties and the rates applicable under the treaties is given
in Annexure I.
7.0 OTHER ADMINISTRATIVE ASPECTS
7.1 Audit Reports
7.1.1 In addition to get the accounts audited, as per Companies Act for corporate entities,
all entities are required to get their accounts audited for tax purposes in case of
following:
i. A person carrying on business, if total sales, turnover or gross receipt in
business for the accounting year or years relevant to the assessment year
exceed or exceeds Rs. 40,00,000 (about US$ 88,909).
ii.
A person carrying on profession, if his gross receipts in profession for an
accounting year or years relevant to any of the assessment year exceeds
Rs. 10,00,000 (about US$ 22,227).
The tax audit reports in cases referred above are to be obtained and filed with the
Income-tax authorities within a specified due date for filing return of income.
However, with respect to the financial ear 2010-11, the Finance Act, 2010 increased
t h e t u r n o v e r / g ro s s re c e i p t l i m i t f ro m R s . 4 0,0 0,0 0 0 t o
Rs. 60,00,000 (about US$ 133,363) in case of business entities and in respect of a
person carrying on profession from Rs. 10,00,000 to Rs. 15,00,000 (about US$
33,341).
7.1.2 For claiming deductions from certain export incomes, it is compulsory to obtain
audit reports with effect to the same. One of the conditions for claiming exemption
on export profits is that within specified period from the close of the accounting
year, exchange earnings must be remitted to India.
For claiming deductions by newly established industrial undertakings /
infrastructure projects, such entities are required to obtain specific audit report
relevant for deduction.
7.2 Assessment Procedure
As per the provision of the Income-tax Act, the assessee has to self assess his
income and pay taxes accordingly and file proof of payment of tax along with the
return of income. If any interest is due for deferment of advance tax or non payment
of advance tax or for late filing of return of income then the same also has to be paid
with the self-assessment tax. Concealment of income and furnishing of inaccurate
particulars may result in imposition of penalty of upto 3 times the tax sought to be
evaded.
The assessing officer may select the return of income for scrutiny in which case an
assessment order is passed. In cases where the returns of income are not selected
for scrutiny, intimation is sent after adjusting the apparent errors, omissions and
mathematical errors. An appeal may be preferred if the assessee does not agree
with the assessment made. Special provisions apply for rectification of mistakes,
revision of orders and income escaping assessment.
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7.3 Advance Rulings
The Indian government has constituted an “Authority for Advance Ruling”. Nonresident
taxpayers can obtain rulings in advance from the said authority on
questions of law or fact, in relation to a transaction undertaken or proposed. A time
limit of six months has been provided for the pronouncement of an advance ruling.
The advance ruling once pronounced is binding on the applicant and on the income
tax authorities in respect of the specific transaction for which advance ruling was
sought. The advance ruling is not appealable.
From 1 October 1998, the concept of advance ruling is extended to a resident in India
falling within such class or category of persons as the Central government may by
notification in the Official Gazette, specify in this behalf. The authority shall give a
decision in relation to an assessment which is pending before any income-tax
authority, or the Tribunal in case of resident applicant. The decision shall include the
decision on question of law or fact arising out of the orders of assessment in respect
of which application has been made by resident applicant.
8.0 OTHER DIRECT TAXES
8.1 Securities Transaction Tax (STT)
Sr.
No.
STT shall apply to taxable securities transactions entered into on or after 1 October
2004 entered into through recognized stock exchanges in India. The taxable
securities transaction shall attract STT with effect from 1 June 2006 at the rates
specified below
Type of transactions
1. Delivery based on purchase of an equity share in a company
or a unit of an equity oriented fund, entered in a recognized
stock exchange
2. Non-delivery based on sale of an equity share in a company
or a unit of an equity oriented fund entered in a recognized
stock exchange
Payable by
buyer / seller
Both buyer &
seller
STT rate
0.125%
Seller 0.025%
3. a. Sale of an option in securities
b. Sale of an option in securities, where option is
exercised
c. Sale of futures in securities
4. Sale of units of an equity oriented fund to the mutual
fund
Seller
Purchaser
Seller
Seller
0.017% on
option
premium
0.125% on
the settlement
price
0.017%
0.25%
“Taxable securities transaction” means a transaction of (a) purchase or sale of an
equity share in a company or a derivative or a unit of an equity oriented fund,
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entered into in a recognized stock exchange; or (b) sale of a unit of an equity
oriented fund of specified mutual fund. The value of taxable securities transaction
shall be:
i. the aggregate of the strike price and the option premium, in case of taxable
securities transaction relating to derivative being “option in securities”;
ii. the price at which “futures” is traded, in case of taxable securities transaction
relating to derivative being “futures”; and
iii. the price at which securities are purchased or sold, in case of any other taxable
securities transaction.
Every recognized stock exchange shall collect the securities transaction tax from
every person being a purchaser or a seller who enters into a taxable securities
transaction in that stock exchange.
8.2 Wealth Tax
Wealth-tax in India under the Wealth-tax Act is payable each year on the taxable
wealth and depends upon residential status and on citizenship.
Taxable wealth includes residential house (other than residential house let out for a
minimum period of 300 days during the year) and farm houses, motor cars,
jewellery, bullion, yachts, aircrafts, urban land, cash exceeding specified limits as
reduced by debts owed and incurred in relation to such assets.
However, exemption is available to individuals and HUFs for one house or part of a
house or plot of a land comprising an area of five hundred square meters or less.
A resident Indian citizen pays tax on his global wealth. If he is a “resident but not
ordinarily resident” or a non-resident or a foreign citizen, then his Indian wealth is
charged to tax at normal rates and foreign wealth is totally exempt.
Wealth-tax in case of individual and companies for the financial year 2009-10 will be
charged @ 1% of the net taxable wealth exceeding Rs. 30,00,000.
The due dates for filing wealth-tax returns are same as for filing Income-tax returns.
8.3 Gift Tax
Gift tax has been abolished with effect from 1 October 1998.
8.4 Estate Duty
Estate duty has been abolished since 16 March 1985.
8.5 Interest Tax
Interest-tax has been abolished with effect from 1 April 2000.
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9.0 INDIRECT TAXES
9.1 Goods and Services Tax ('GST')
Goods and Services Tax is a comprehensive indirect tax operating on the principle of
tax on economic value addition involved in the provision of economic activities
consisting both goods and services. After the introduction and successful
implementation of Value Added Tax (VAT), introduction of Goods and Services Tax
(GST) would further be a logical step towards reforming the existing Indirect tax
structures governed by various regulations.
The proposed GST model would be a dual model and the charge of GST would
consist of two components namely CGST (levied by the Centre) and SGST (levied by
the states). GST would subsume several central taxes namely Central Excise duty,
Additional Excise duty, Service Tax, Additional Customs Duty, Special Additional
duty of Customs, etc and also several state taxes namely Vat / Sales tax,
Entertainment Tax, Luxury tax etc.
The Finance Minister in his budget 2010 speech has proposed to implement Goods
and Services Tax with effect from 1 April 2011 Post implementation of the GST, it will
be a significant step towards a comprehensive indirect tax reforms in India.
9.2 Central Value Added Tax ('CENVAT')
Excise duty is levied, mainly on an ad valorem basis, on the manufacture of excisable
goods within India, and is payable by the manufacturer. For the purpose of levying
excise duty, manufacture has been interpreted to mean any process, which brings
into existence a new commodity having a distinct name, character, use and
marketability.
Peak rate of excise duty is 10% (plus applicable Education Cess and Higher
Secondary Education Cess) on most of the items. CENVAT credit is allowed against
CENVAT payable in respect of certain inputs and capital goods purchased. The
assessee is required to maintain prescribed records for availing of CENVAT credit.
Excise duty is levied on specified goods with reference to maximum retail price. The
provision for cost auditing of accounts is provided in CENVAT Law in case of misuse
of CENVAT credit scheme.
9.3 Customs Duty
Customs duty at varying rates is charged on goods imported into India. The general
peak rate of customs duty has been reduced to 10%.
Further, countervailing customs duty is levied which is equivalent to the excise duty
which would have been chargeable had the item been manufactured in India. In
respect of such countervailing duty paid, equivalent CENVAT credit is available in
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certain cases. The customs duties are generally chargeable on ad valorem basis i.e.
based on value of imported goods.
In addition to the above, additional duty of customs not exceeding 4% is also levied
in order to counter balance various internal taxes like sales tax/value added tax and
to provide a level playing field to indigenous goods which have to bear these taxes.
The Central Government can also impose anti-dumping duty if manufacturers from
abroad export goods in India at very low prices compared to prices in their domestic
market.
9.4 Service Tax
9.4.1 Ambit of Service Tax
Service tax @ 10.30% (service tax @ 10% plus education cess @ 2% and secondary
and higher education cess @1% thereon) is levied on more than 100 specified
services. Some of the specified services are advertising agency, consulting
engineers, architects, management and business consultants, real estate agents
and consultants, construction services, intellectual property services, business
auxiliary/support services, renting of immovable property etc.
9.4.2 Export of services
The Government has prescribed Export of Services Rules, 2005. The Rules provides
that any taxable service may be exported without payment of service tax i.e. it
grants exemption from levy of service tax on “export of services”. For
determination of “export of service”, the specified taxable services in force have
been categorized in three categories, which provides for certain conditions in order
for the services to be treated as export of services.
9.4.3 Import of Services
Services received (in India) by a person situated in India from a person outside India
is liable to service tax as “import of services”. Further, for the said purpose, it is
provided that the service recipient shall be deemed to be the service provider and
shall comply with all the service tax regulations. The Government has also
prescribed Taxation of Services (Provided from Outside India and Received in India)
Rules, 2006". The Rules provide for criteria for the determination of taxable service
received in India. Similar to the Export of Service Rules, 2005, for determination of
“import of service”, the specified taxable services in force have been categorised in
three categories, which provides for certain conditions in order for the services to
be treated as import of services.
9.4.4 CENVAT Credit Rules, 2004
The CENVAT Credit Rules, 2004 provide for a mechanism for allowing inter-sectoral
credit between goods and services. Specified input service tax paid is made eligible
for credit against service tax chargeable on output services and excise duty leviable
DOING BUSINESS IN INDIA 129

on goods manufactured and vice versa. Further, education cess (including
secondary and higher education cess) paid on input services is available as credit
for payment of education cess (including secondary and higher education cess) on
output services.
Credit in respect of capital goods is allowed at the rate of 50% in the financial year
of receipt of capital goods in premises of output service provider and 50% in the
subsequent financial year. Credit is not allowed on input services used in providing
exempted services.
9.4.5 Rebate/Refund for input services and inputs used in providing taxable services
The Export of Services Rules, 2005 provides for rebate of service tax paid on
taxable service or service tax or duty paid on input services or inputs, as the case
may be, used in providing taxable service, subject to specified conditions or
limitations.
Further, the Cenvat Credit Rules 2004, also provide for claiming refund of unutilized
Cenvat Credit used for providing output services, which are exported as per the
Export of Services Rules, 2005.
9.4.6 Threshold Limits
Small service providers whose aggregate value of taxable services provided during
the preceding financial year does not exceed Rs. 10,00,000 have been given an
option to claim exemption from service tax up to an aggregate value of taxable
services of Rs. 10,00,000 in a financial year, subject to certain conditions as
prescribed. Benefit of this exemption scheme is not available wherever service tax
is payable by a person other than the service provider or the taxable services are
provided by a person under a brand name or trade name, whether registered or not,
of another person. Threshold limit for obtaining service tax registration is
Rs. 9,00,000.
10.0 DIRECT TAX CODE ('DTC')
The Finance Minister of India presented the Direct Taxes Code Bill 2010, in Lok Sabha
on 30 August 2010. The purpose of introducing DTC Bill, which is proposed to be
effective from 1 April 2012, is to completely overhaul the existing complexities of the
Income Tax Act, 1961. DTC would eventually replace the present Income-tax Act,
1961 (“IT Act”) and the Wealth-tax Act, 1957 (“WT Act”) and would consolidate both
the Acts. The present IT Act, is about 50 years old and it was high time to replace it in
view of innumerable amendments to it over a period of time. The primary thrust of
DTC is on certainty and continuity and DTC in its present structure has chosen the
path of stable reforms rather than indulging in path breaking radical reforms.
Initially, the Draft DTC along with the Discussion Paper was released by Ministry of
Finance on 12 August, 2009 for public comments. In response to the same, a number
of valuable inputs on the proposals outlined in the draft DTC were received from a
large number of various organizations and individuals. The Ministry of Finance
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examined and identified the major issues in response to the comments received
from the Public and most of the concerns were addressed in the Revised Discussion
Paper on the DTC issued on 15 June 2010 for the purpose of final discussion. Based
on the additional suggestions and responses from the general public, the final DTC
Bill was framed and placed before the Parliament.
11.0 I N T E R N AT I O N A L F I N A N C I A L R E P O RT I N G
STANDARD ('IFRS')
India has set a roadmap for convergence with International Financial Reporting
Standards (IFRS) commencing from 1 April, 2011. The convergence with IFRS
standards is set to change the landscape for financial reporting in India.
With the growth of Indian Economy and increasing integration with the global
economies, Indian corporates are raising capital globally. Under the circumstances,
it would be imperative for Indian corporates to adopt IFRS for their financial
reporting. The Core Group of Ministry of Corporate Affairs (MCA) has recommended
convergence to IFRS in a phased manner from 1 April, 2011, the roadmap of which is
as below:
- Phase I (opening balance sheet as at 1 April 2011)*
1. Companies which are part of BSE Sensex 30 and NSE Nifty 50;
2. Companies whose shares or other securities are listed outside
India;
3. Companies whether listed or not, having net worth of more than
Rs. 1,000 crores.
- Phase II (opening balance sheet as at 1 April 2013)*
Companies not covered in Phase 1 and having net worth exceeding
Rs. 500 crores.
- Phase III (opening balance sheet as at 1 April 2014)*
Listed companies not covered in earlier phases.
*If the financial year of a company commences at a date other than 1 April, then it
shall prepare its opening balance sheet at the commencement of immediately
following financial year.
The above would not be applicable in case of banking and insurance companies and
separate road map would be prepared for them.
DOING BUSINESS IN INDIA 131

Annexure I
Double Taxation Avoidance
Agreements (’DTAA’) Rates
Brihanmumbai Municipal Corporation Headquarters, Mumbai

ANNEXURE I:
DOUBLE TAXATION AVOIDANCE AGREEMENTS
('DTAA') RATES
List of countries with which India has entered into Double Tax Treaties
Sr.
No.
Country
Dividend
[Note 1]
Tax rate
Interest Royalty Fees for
Technical
Service
('FTS')
Tax rate Tax rate Tax rate
1. Armenia 10% 10% [Note 4] 10% 10%
Remarks
2. Australia 15% 15% Note 5 No
Separate
Provision
3. Austria 10% 10% [Note 4] 10% 10%
4. Bangladesh 10% / 15% 10% [Note 4] 10% No 10% tax on dividends if at least 10% of
separate the capital is owned by company; in
provision other cases 15%.
5. Belarus 10% / 15% 10% [Note 4] 15% 15% 10% tax on dividends if at least 25% of
the capital is owned by company; in
other cases 15%.
6. Belgium 15% 15% / 10% 10% 10% Interest taxable at 10% if recipient is
bank; in other cases 15%.
7. Botswana 7.5% / 10% 10% [Note 4] 10% 10% 7.5% tax on dividends if at least 25% of
the capital is owned by company; in
other cases 10%.
8. Brazil 15% 15% [Note 4] 15% No 15% tax on dividends if paid to a
(25% for separate company; otherwise as per local tax
trademark) provision laws.
9. Bulgaria 15% 15% [Note 4] 15% / 20% 20% 15% tax on royalties if relating to
copyrights of literary, artistic or
s c i e n t i f i c w o r k s, o t h e r t h a n
cinematograph films or films or tapes
u sed fo r ra d i o o r te l ev i s i o n
broadcasting; in any other case 20%.
10. Canada 15% / 25% 15% [Note 4] Note 5 Note 5 15% tax on dividends if at least 10% of
the capital is owned by company; in any
other cases 25%.
11. China 10% 10% [Note 4] 10% 10%
12. Cyprus 10% / 15% 10% [Note 4] 15% 15% 10% tax on dividends if at least 10% of
the capital is owned by company; in
other cases 15%.
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Sr.
No.
Country
Dividend
[Note 1]
Tax rate
Interest Royalty Fees for
Technical
Service
('FTS')
Tax rate Tax rate Tax rate
13. Czech Republic 10% 10% [Note 4] 10% 10%
Remarks
14. Denmark 15% / 25% 15% / 10% 20% 20% 1. 15% tax on dividends if at least
[Note 4] 25% of the capital is owned by
company; in any other cases 25%.
2. Interest taxable at 10% if recipient
is bank; in other cases 15%.
15. Finland 15% 10% [Note 4] 10% / 15% Note 5 In case royalty is paid for industrial,
[Note 6]
commercial or scientific equipment
then 10%; in other cases 15%.
16. France 10% 10% [Note 4] 10% 10%
17. Germany 10% 10% [Note 4] 10% 10%
18. Greece Taxable as per domestic laws No Source country has right to tax.
separate
provision
19. Hungary 10% 10% [Note 4] 10% 10%
20. Indonesia 10% / 15% 10% [Note 4] 15% No 10% tax on dividends if at least 25% of
separate the capital is owned by company; in
provision other cases 15%.
21. Ireland 10% 10% [Note 4] 10% 10%
22. Iceland 10% 10% [Note 4] 10% 10%
23. Israel 10% 10% [Note 4] 10% 10%
24. Italy 15% / 25% 15% [Note 4] 20% 20% 15% tax on dividends if at least 10% of
the capital is owned by company; in any
other cases 25%.
25. Japan 10% 10% [Note 4] 10% 10%
26. Jordan 10% 10% [Note 4] 20% 20%
27. Kazakhstan 10% 10% [Note 4] 10% 10%
28. Kenya 15% 15% [Note 4] 20% No 17.5% tax in case of management and
separate professional fees.
provision
for FTS
29. Korea 15% / 20%. 15% / 10% 15% 15% 1. 15% tax on dividends if at least
[Note 4] 20% of the capital is owned by
company; in any other cases 20%.
2. Interest taxable at 10% if recipient
is bank; in other cases 15%.
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Sr.
No.
Country
Dividend
[Note 1]
Tax rate
Interest Royalty Fees for
Technical
Service
('FTS')
Tax rate Tax rate Tax rate
30. Kuwait 10% 10% [Note 4] 10% 10%
Remarks
31. Kyrgyz Republic 10% 10% [Note 4] 15% 15%
32. Libya Taxable as per domestic laws No Source country has right to tax.
Separate
Provision
33. Luxembourg 10% 10% [Note 4] 10% 10%
34. Malaysia 10% 10% [Note 4] 10% 10%
35. Malta 10% / 15% 10% [Note 4] 15% 10% 10% tax on dividends if at least 25% of
the capital is owned by company; in
other cases 15%.
36. Mauritius 5% / 15% Taxable as per 15% No 5% tax on dividends if at least 10% of
domestic laws separate the capital is owned by company; in
[Note 4] provision other cases 15%.
37. Mongolia 15% 15% [Note 4] 15% 15%
38. Montenegro 5% / 15% 10% [Note 4] 10% 10% 5% tax on dividends if at least 25% of
the capital is owned by company
(other than a partnership); in other
cases 15%.
39. Morocco 10% 10% [Note 4] 10% 10%
40. Myanmar 5% 10% [Note 4] 10% No
separate
provision
41. Namibia 10% 10% [Note 4] 10% 10%
42. Nepal 10% / 15% 15% / 10% 15% No 1. 10% tax on dividends if at least
[Note 4] separate 10% of the capital is owned by
provision company; in other cases 15%.
2. Interest taxable at 10%, if recipient
is bank; in other cases 15%.
43. Netherlands 10% 10% [Note 4] 10% 10%
44. New Zealand 15% 10% [Note 4] 10% 10%
45. Norway 15% / 25% 15% [Note 4] 10% 10% 15% tax on dividends if at least 25% of
the capital is owned by company; in any
other cases 25%.
46. Oman 10% / 12.5% 10% [Note 4] 15% 15% 10% tax on dividends if at least 10% of
the capital is owned by company; in any
other cases 12.5%.
DOING BUSINESS IN INDIA 135

Sr.
No.
Country
Dividend
[Note 1]
Tax rate
Interest Royalty Fees for
Technical
Service
('FTS')
Tax rate Tax rate Tax rate
47. Philippines 15% / 20% 15% / 10% 15% No 1. 15% tax on dividends if at least 10%
[Note 4] separate of the capital is owned by company;
provision in any other cases 20%.
2. Interest taxable at 10% if recipient
is insurance company or similar
financial institution and also in case
of p u b l i c i ssues of b o n d s,
debentures etc.; in other cases 15%.
3. Royalty taxable @ 15% if it is
payable in pursuance of any
collaboration agreement approved
by the Government of India. No
rates prescribed in other cases.
48. Poland 15% 15% [Note 4] 22.5% 22.5%
49. Portuguese 10% / 15% 10% [Note 4] 10% 10% 10% tax on dividends if at least 25% of
Republic
the capital is owned by company; in
other cases 15%.
50. Qatar 5% / 10% 10% [Note 4] 10% 10% 5% tax on dividends if at least 10% of
the capital is owned by company; in any
other cases 10%.
51. Romania 15% / 20% 15% [Note 4] 22.5% 22.5% 15% tax on dividends if at least 25% of
the capital is owned by company; in any
other cases 20%.
52. Russian Federation 10% 10% [Note 4] 10% 10%
53. Saudi Arabia 5% 10% [Note 4] 10% No
separate
provision
Remarks
54. Serbia 5% / 15% 10% [Note 4] 10% 10% 5% tax on dividends if at least 25% of
the capital is owned by company; in
other cases 15%.
55. Singapore 10% / 15% 10% / 15% 10% 10% 1. 10% tax on dividends if at least
[Note 4]
25% of the capital is owned by
company; in other cases 15%.
2. Interest taxable at 10% if recipient
is bank, insurance company or
similar financial institution; in other
cases 15%.
56. Slovenia 5% / 15% 10% [Note 4] 10% 10% 5% tax on dividends if at least 10% of
the capital is owned by company; in
other cases 15%.
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Sr.
No.
Country
Dividend
[Note 1]
Tax rate
Interest Royalty Fees for
Technical
Service
('FTS')
Tax rate Tax rate Tax rate
57. South Africa 10% 10% [Note 4] 10% 10%
Remarks
58. Spain 15% 15% [Note 4] 20% / 10% 20% 10% tax on royalties if paid for
industrial, commercial or scientific
equipment; in any other case 20%.
59. Sri Lanka 15% 10% [Note 4] 10% No
Separate
Provision
60. Sudan 10% 10% [Note 4] 10% 10%
61. Sweden 10% 10% [Note 4] 10% 10%
62. Swiss 10% 10% [Note 4] 10% 10%
Confederation
63. Syria 5% / 10% 10% [Note 4] 10% No 5% tax on dividends if at least 10% of
separate the capital is owned by company
provision (other than a partnership); in other
cases 10%.
64. Tanzania 10% / 15% 12.5% 20% No 10% tax on dividends if at least 10% of
[Note 4] separate the capital is owned by company; in
provision other cases 15%.
65. Thailand 15% / 20% 25% / 10% 15% No 1. 15% tax on dividends if at least 10%
[Note 4] separate of the capital is owned by company;
provision 20% if company paying dividend is
engaged in industrial undertaking
or company owns 25% of the
company paying the dividend.
2. Interest taxable at 10% if recipient
is insurance company or similar
financial institution; in other cases
25%.
66. Trinidad and 10% 10% [Note 4] 10% 10%
Tobago
67. Turkey 15% 10% / 15% 15% 15% Interest taxable at 10% if recipient is
[Note 4] bank, insurance company or similar
financial institution; in other cases
15%.
68. Turkmenistan 10% 10% [Note 4] 10% 10%
69. Tajikistan 5% / 10% 10% [Note 4] 10% No 5% tax on dividends if at least 25% of
separate the capital is owned by company; in
provision other cases 10%.
DOING BUSINESS IN INDIA 137

Sr.
No.
Country
Dividend
[Note 1]
Tax rate
Interest Royalty Fees for
Technical
Service
('FTS')
Tax rate Tax rate Tax rate
70. Uganda 10% 10% [Note 4] 10% 10%
Remarks
71. Ukraine 10% / 15% 10% [Note 4] 10% 10% 10% tax on dividends if at least 25% of
the capital is owned by company; in
other cases 15%.
72. United Arab 10% 12.5% / 5% 10% No Interest taxable at 5% if recipient is
Emirates separate bank or similar financial institution; in
provision other cases 12.5%.
73. United Arab For rate of tax and basis of taxation, No Source country has right to tax.
Republic (Egypt) refer to DTAA provision separate
provision
74. United Kingdom 15% 15% / 10% Note 5 Note 5 Interest taxable at 10% if recipient is
[Note 4] bank; in other cases 15%.
75. United States of 15% / 25% 10%/15% Note 5 Note 5 1. 15% tax on dividends if at least 10%
America
of the capital is owned by company;
in any other cases 25%.
2. Interest taxable at 10% if recipient
is bona fide bank or financial
institution, in other cases 15%.
3. Fees for Technical Services have
been referred as 'Fees for Included
Services'.
76. Uzbekistan 15% 15% [Note 4] 15% 15%
77. Vietnam 10% 10% [Note 4] 10% 10%
78. Zambia 5% / 15% 10% [Note 4] 10% No 5% tax on dividends if at least 25% of
separate the capital is owned by company; in
provision other cases 15%.
Notes
1. As per section 115-O of the Income Tax Act, 1961, subject to certain exceptions, any
amount declared, distributed or paid by a domestic company by way of dividend shall be
chargeable to Dividend Distribution Tax @ 16.60875%. In such cases, dividend
distributed (which is subject to DDT) is not subject to any withholding tax. The rates
mentioned in the Table are limited to dividend other than the dividend declared,
distributed or paid by Indian companies (such as deemed dividend etc.).
2. Unless otherwise provided in 'Remarks' Column, both States have right to tax.
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3. In case of Agreements made after 1 June 2005, the rate of tax under the IT Act on
Royalty and/or Fees for Technical Services receivable by a non-resident is reduced to
10% (plus Surcharge and Education Cess) by the Finance Act, 2005. As per section
90(2) of the IT Act, rate as per the provisions of DTAA or the IT Act, whichever is
beneficial, shall apply.
4. Interest earned by the Government and certain institutions like the Reserve Bank of
India or Central Bank of other State is exempt from taxation in the country of source.
5. In case of Royalties, rate of tax is 15% (for first 5 years of the agreement- 20% in case of
payer other than government or specified institution and 15% in case of government or
specified institution); 10% for equipment rentals and for services ancillary or subsidiary
thereto.
6. The Government of India has agreed to revise the DTAA with Finland vide press release
no. 402/92/2006-MC (03 of 2010), dated 15 January 2010; however the same has not
been notified till date. As per the proposed revision to DTAA, the rate of tax on Dividend,
Royalties and Fees for technical services has been reduced from 15% to 10%.
7. The aforesaid chart is updated till 26 February 2010.
DOING BUSINESS IN INDIA 139

ANNEXURE II:
TAX DEDUCTION AT SOURCE ('TDS') RATES
The domestic rates of TDS for financial year 2010-11 as per the Finance Act 2010 are as under
Sr.
No.
Nature of Payment
Section
Existing
From
1 July 2010
Rate at
which tax to
be deducted
(%)
1 Salary 192 As per slab rates prescribed for women, senior citizens
and other individuals
Note-8
2 Interest other than interest 194A Payment in excess of Rs.5,000 p.a. 10
on securities
Note-9
Threshold For Deduction
3 Winning from lottery or 194B Payment in excess Payment in excess 30
crossword puzzle or of Rs. 5,000 of Rs. 10,000
card game or other game
4 Winnings from horse race 194BB Payment in excess Payment in excess 30
of Rs. 2,500 of Rs. 5,000
5 Payments to 194C Payment in excess of Payment in excess of 1 (2 for
Contractors
Note-9
Rs. 20,000 per Rs. 30,000 per companies
contract or contract or and firms)
Rs. 50,000 p.a. Rs. 75,000 p.a.
in aggregate
in aggregate
6 Insurance Commission 194D Payment in excess Payment in excess 10
of Rs. 5,000 of Rs. 20,000
7 Commission or 194H Payment in excess Payment in excess 10
Note-9
Brokerage of Rs. 2,500 p.a of Rs. 5,000 p.a
8a Rent of Land / Building / 194I Payment in excess Payment in excess 10
Note-9
Furniture of Rs. 1,20,000 p.a of Rs. 1,80,000 p.a
8b Rent of Plant, Machinery or 194I Payment in excess Payment in excess 2
Note-9
Equipment of Rs. 1,20,000 p.a of Rs. 1,80,000 p.a
9 Fees for Professional & 194J Payment in excess Payment in excess 10
Technical Services / of Rs. 20,000 p.a of Rs. 30,000 p.a
Note-9
Royalty
Notes
1. Time of deduction of tax: Except in case of salary (wherein tax is to be deducted at the
time of payment), tax is to be deducted at the time of payment or credit, whichever is
earlier.
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2. Time of deposit of tax: In all other cases, except in case of salary, where amount is
credited to the account of the payee as on the date up to which accounts of the payer are
made, the tax is required to be deposited with the Government within 2 months from
the month in which the income is credited. In all other cases, the tax is required to be
deposited within 7 days from the end of the month in which deduction is made.
3. TDS return: Person deducting the tax is required to file quarterly statements for the
quarter ending on 30 June, 30 September, 31 December and 31 March in each financial
year, in Form 26Q ( Form 24Q for Salary) along with Form 27A, on or before 15 July,
15 October, 15 January and 15 June respectively.
4. Certificate for tax deduction in case of non-salary payments: TDS certificate in Form
16A is required to be issued within 1 month from the end of the month during which the
credit has been given or the sums have been paid (except in case of Insurance
commission where Form 16A is to be issued by 30 April). However, if amount is credited
by a person to the payee's account as on the date up to which accounts of such persons
are made, then such certificate may be issued within a week after expiry of 2 months
from the month in which the amount is credited.
5. Issue of TDS certificates: Where more than 1 certificate is required to be furnished to a
payee during the financial year and if the payee desires, a consolidated certificate
covering all the deductions during the financial year can be issued within
1 month from the close of that financial year.
6. Certificate for tax deduction in case of salary payments : TDS certificate in Form 16
(Form 16AA in case salary does not exceed Rs. 1,50,000 before deductions under
Section 16) is required to be issued by 30 April.
7. Higher TDS rate of 20% for not furnishing correct PAN: In case the payee is not able
to furnish the PAN to the payer, tax shall be deducted at higher of the rate specified in
the relevant provisions of the Act or at the rate or rates in force or at the rate of 20%
w.e.f. 1 April 2010.
8. Under section 194A, the threshold limit is Rs. 10,000 where the payer is a banking
company or a co-operative society engaged in banking business, or in case of deposits
with post office under a scheme notified by Central Government. Further, tax is not to be
deducted if the payee furnishes to the payer a declaration in writing in duplicate in Form
No.15G or 15H, as the case may be.
9. In the case of an individual or HUF or AOP or BOI, who are liable to tax audit under
section 44AB during the financial year immediately preceding the financial year in
which sum is credited or paid, shall be liable to deduct tax under section 194A, 194C,
194H, 194I and 194J, as the case may be.
10. Above rates are not applicable in case of payments made to foreign companies and
non-residents.
DOING BUSINESS IN INDIA 141

NOTES
142
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NOTES
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NOTES
144
DOING BUSINESS IN INDIA

NOTES
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NOTES
146
DOING BUSINESS IN INDIA

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