“Doing Business with India”
Some Basic Facts about India
Did you know that India..... is the world's second largest small car market is one of only three countries that makes its own supercomputers is one of six countries that launches its own satellites one hundred of the Fortune 500 have R & D facilities in India has the second largest group of software developers after the U.S. lists 6,500 companies on the Bombay Stock Exchange (only the NYSE has more) is the world's largest producer of milk, and second largest producer of food, including fruits and vegetables is a world economic power, with growth over the past few years averaging 8% is the world's fourth largest economy, based on purchasing power parity sends more students to the U.S. A. colleges than any other country in the world (In 2007, over 84,000 Indian students enrolled in the U.S. A.) has the world's second largest pharmaceutical industry after China has a middle class estimated at 300 million out of a total population of 1 billion with its large base of English speaking skilled human resource, it is most sought after destination for business process outsourcing, Knowledge processing etc. is the second largest English-speaking scientific, technical and executive manpower in the world produces more than 900 movies a year - significantly more than the USA has become increasingly attractive to foreign investors in various sectors its low costs and huge, English-speaking, workforce have made it popular with multinationals for work including manufacturing and call centers. provides many tax exemptions to companies set up in Special Economic Zone provides many tax incentives available to IT companies, business process outsourcing and KPO companies has a stable political system based on parliamentary democracy has a common law legal system with English as a court language is emerging as a major market and investment destination.
India is the largest country in South Asia and the seventh largest in the world. China, Nepal and Bhutan are the neighboring countries in the north, Bangladesh and Burma in the east and Pakistan and Afghanistan in the west. In the south the country tapers off into the Indian Ocean. India is the second most populous country in the world, with over one billion people. India is the largest democracy in the world. English is extensively used for business and is understood almost all over India. The Indian Rupee (International symbol is INR) is the country’s currency. India is committed to a free economy after having an economy controlled by licensing until 1991. India has become a member of the WTO and is disbanding quantitative restrictions on imports.
FACTS ABOUT INDIA
Full name: Republic of India Population: 1.2 billion Capital: New Delhi Most-populated city: Mumbai (Bombay) Area: 3.1 million sq km (1.2 million sq miles) Major languages: Hindi, English and at least 16 other official languages Major religions: Hinduism, Islam, Christianity, Sikhism, Buddhism, Jainism Life expectancy: 62 years (men), 65 years (women) (UN) Monetary unit: 1 Indian Rupee = 100 paisa Main exports: Agricultural products, textile goods, gems and jewellery, software services and technology, engineering goods, chemicals, leather products GNI per capita: US $720 (World Bank, 2006) Internet domain: .in International dialing code: +91
Indian Legal System & Major Commercial Laws of India
India is a common law country with a written constitution which guarantees individual and property rights. There is a single hierarchy of courts. Indian courts provide adequate safeguards for the enforcement of property and contractual rights. However, case backlogs often result in procedural delays. Most of the laws are codified. Regulations and policies fill in the details. Major bodies of law in India affecting foreign investment are the Foreign Exchange management Act of 1999 ("FEMA"), the Companies Act of 1956, the Industries Act of 1951, the Competiton Act and the New Industrial Policy. Foreign collaboration and equity participation in India is regulated by the Foreign Exchange management Act of 1999. The Industries (Development Regulation) Act of 1951 governs industrial regulation. The Companies Act of 1956 regulates corporations and their management in India. The Competition Act 2002 governs restrictive and fair trade practices. The New Industrial Policy ("NIP") which lays down the policy and procedure for foreign investment has liberalized and simplified the investment procedures. The major changes introduced by NIP are as follow: 1. NIP brings about a streamlining of procedures, deregulation, de-licensing, a vastly expanded role for the private sector and an open policy towards foreign investment and technology. 2. Foreign investors are allowed to hold more than 50% equity ownership in most of the sectors, and 100% percent equity ownership in some sectors. 3. Foreign Institutional Investors ("FII's) from reputable institutions (like pension funds, mutual funds) may participate in the Indian capital markets. 4. Joint ventures with trading companies and imports of secondhand plants and machinery are allowed. 5. Monopoly and restrictive trade practice restraints (i.e., antitrust laws) have been eased. 6. Customs duties have been slashed considerably; duty-free imports are allowed in some cases. 7. The rupee is completely convertible; 100% of foreign exchange earnings can be converted at free market rates. 8. Export policies have been liberalized. 9. The Foreign Exchange Regulation Act has been amended to encourage foreign investments in India. 10. A tax holiday is available for a period of 5 continuous years in the first 8 years of establishing exporting units.
11. A tax holiday for up to 5 to 8 years is available and 100% equity participation is allowed for the power projects in India. 12. Concessions in tax regime are available for foreign investors in high-tech areas.
Corporate Income Tax Rates
Revenue accruing to foreign companies (including royalty and technical services fees) from providing services concerning the exploration or production of petroleum or natural gas is subject to a maximum tax on a deemed profit of 10% of gross revenue. Foreign companies engaged in the execution of turnkey power project contracts approved by the government and financed by international programs are subject to a maximum tax on a deemed profit of 10% of gross revenue. The corporate income tax effective rate for domestic companies is 35% while the profits of branches in India of foreign companies are taxed at 45%. Companies incorporated in India even with 100% foreign ownership, are considered domestic companies under the Indian laws.
India offers a wide range of concessions to investors to provide incentives for economic and industrial growth and development. India's tax rates may not be one of the lowest in the world, but a careful tax planning keeping in mind the tax holidays and the following general tax incentives reduce the taxes considerably:
No corporate taxes are levied for a period of five years for projects set up for domestic power generation and transmission and also for projects in Electric Hardware Technology Park Schemes. Deduction of preliminary and preoperative expenses incurred in setting up a project Complete tax exemption on profits from exports of goods Full or partial exemption of foreign exchange earnings on construction projects, hotel and tourism related services, royalties, commission, etc. Liberal depreciation allowances Deduction of capital research and development expenditures New industrial undertakings may deduct 25% of their gross total income for eight years
Tax Incentives for Exporters
The New Export-Import Policy of 1992 provides substantial tax incentives for investments in Export Oriented Units ("EOU's") and industries located in the Export Processing Zones ("EPZ's"). Automatic approvals are given by the Secretariat for Industrial Approval for setting up 100%
Export Oriented Units ("EOU"). Incentives and facilities available under the EOU scheme include concessional rent for lease of industrial plots, preferential power allocation and supply, exemption from import duty for capital goods and raw materials for power sector industries as well as for trading companies primarily engaged in export activity. There are six EPZ's or free trade zones located in different parts of the country. These zones are designed to provide internationally competitive infrastructure facilities and duty-free and low cost environment. Various monetary and non-monetary incentives are granted which include import duty exemption, complete tax holiday, decentralized "single window clearance," etc. Twenty-five percent of goods manufactured in EPZ's are permitted to be sold in the domestic market. No excise duty is payable on such items and customs duties on imported components is 50% of normal rates. Major exporters are allowed to operate bank accounts abroad to facilitate trade. Companies that sell in the domestic market as well as international markets may deduct export earnings from their tax liabilities. Exporters and other foreign exchange earners have been permitted to retain 25% of their foreign exchange earnings in foreign currency. For 100% Export Oriented Units and units in Export Processing Zones, Electronic Hardware Technology Parks, retention up to 50% is allowed.
Other incentives include:
Duty-free imports of raw materials and components. Tax holiday for a period of 5 continuous years in the first 8 years from the year of commencement of production. Exemption from taxes on export earnings even after the period of tax holiday. Exemption from central and state taxes on production and sale. Permission to install machinery on lease. Freedom to borrow self-liquidating foreign currency loans at the prime rate of interest. Inter-unit transfers of finished goods among exporting units. Decentralized single-window clearance of proposals concerning units in Export Processing Zones. EOU/EPZ units may export through Export Houses, Trading Houses and Star Trading houses.
Double Taxation Treaty
India has entered into tax treaties with a number of countries including, Australia, Belgium, Canada, Denmark, France, Germany, Indonesia, Japan, Korea, Mauritius, Singapore, the United Kingdom and the United States. These treaties endeavor to avoid double taxation and attract know- how and technology. In many treaties the withholding tax on royalties and fees for technical services emanating from India is lower than the general tax rate. A careful planning and corporate structuring can reduce the tax obligations considerably. The following treaties have been successfully used by international investors to reduce their tax obligations in India and in their home countries:
(a) India - U.S.A. Tax Treaty
The Indo-U.S. tax treaty considerably reduces the withholding tax in India for royalties, fees for technical services, and for interest paid to the US banks and financial institutions. The withholding tax on dividends arising out of India is 15%, if the parent company owns at least 10% of the voting stock. The withholding tax on royalties and technical services fees is at the rate of 15%. The capital gains is taxed at a rate of 20%. The withholding tax on rental of equipment and
interest paid to U.S. banks and financial institutions is at the rate of 10%. All these rates are lower than the regular withholding tax rates.
(b) India - Mauritius Tax Treaty
The withholding tax rates for dividends and capital gains can be reduced further by a careful corporate structuring and tax planning. The Indo-Mauritius tax treaty offers reduced withholding taxes for companies incorporated in the island country of Mauritius. Recently some U.S. companies have invested in India through offshore subsidiaries incorporated in Mauritius. For companies incorporated in Mauritius there is no withholding tax on capital gains in India and the withholding tax on dividends is only 5%. The companies incorporated in Mauritius, at present, can opt not to pay any tax in Mauritius.
Transfer of Technology Agreements in India and Approvals
Approvals The Reserve Bank of India ("RBI") accords automatic permission for foreign technology agreements in high priority industries up to 5% royalty for domestic sales and 8% for exports, subject to total payment of 8% of sales over 10 year period from date of agreement or 7 years from commencement of production. In addition, lump-sum technology payments up to Rs. 1 crore, i.e., (Rs. 10 million) are permitted under the automatic approval system. The prescribed royalty rates are net of taxes and are calculated according to standard procedures. Subject to the aforesaid guidelines, automatic approval is available in non-high priority industries, if no foreign exchange is required for any payment.
Transfer of technology agreements must be subject to the laws of India. These agreements can be subject to arbitration under the rules of international institutions like the International Chamber of Commerce (the "ICC"). Arbitration can take place in India or abroad. India is a party to the 1958 New York Convention on Enforcement of Arbitration Awards. Foreign awards are, therefore, enforceable in India. Under Indian law, upon termination of the transfer of technology agreement after its 7-10 year period, the technology is deemed to be perpetually licensed to the Indian party for use in India. Special rules apply to the transfer of technology to Indian government companies.
Repatriation of Investments & Profits from India
One of the biggest concerns for foreign investors is how to get dollars out of India? Historically, it is not a problem to repatriate investments and profits from India. The Overseas Private Investment Corporation ("OPIC"), a U.S. government backed insurer of foreign commercial dealings, has never had to pay a claim due to India's failure to provide foreign exchange. Dividends, capital gains, royalties and fees can be repatriated easily with the permission of the Reserve Bank of India. In a short, specified list of consumer goods industries, dividend balancing is required against export earnings. In case of an exit decision, the overseas promoter can repatriate his share after discharging tax and other obligations. He can also disinvest his share either to his Indian partner, to another company, or to the public. Even during the so-called worst period no foreign company left India without proper and due compensation. Problems do arise when people and businesses try to go around the rules or from inexperience.
Rupee, the Indian currency, is convertible for the current account. It means that: Repatriation of foreign exchange at the existing market rates has become easier. Exporters can retain 25% of total receipts in foreign currency accounts to meet requirements such as travel, advertising, etc. Foreign exchange will be available at market rates for all imports except specified essential items. Foreign exchange requirements for private travel, debt servicing, dividend or royalty payments and other remittances may also be obtained from banks or exchange dealers at the current market rate. The system has the advantages of completely bypassing bureaucratic controls and freeing importers from delays and inefficiencies.
Privatization, Private & Public Sector in India
Almost all the agriculture sector in India is in private hands. Most of the industrial sector is open to private participation. The number of industries reserved for the public sector has been reduced to 6. The industries reserved for public sector are arms and ammunition, defense equipment, defense aircraft and warships, atomic energy, coal lignite, mineral oils, and sulfur and diamonds. All other areas are open to the private sector and private sector participation on a selective basis even in the still restricted areas is being considered. In practice railways, post and telegraph, shipbuilding, oil exploration and mineral industries are mostly government owned. A process of disinvestment of government holdings in selected public enterprises has been initiated. The government plans to form a new corporation, Indian Railways Catering Tourism Corporation (IRCTC). IRCTC will take over catering work and enter into tourism projects and trains in collaboration with private sector.
Litigation in India
India is a common law country. Most of the courts use English as the court language. There is single hierarchy of courts in India with the Supreme Court of India at the top.
Arbitration in India & International Commercial Arbitration
Recently India enacted the Arbitration and Conciliation Act, 1996 ("New Law"). The New Law is based on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration ("Model Law"). Among others, the objectives of the New Law are to harmonize the Indian arbitration law with the Model Law and establish an internationally recognized legal framework for arbitration, consolidate the laws on domestic and international arbitration and conciliation, and enforcement of foreign awards. Another important purpose of the New Law is to encourage arbitration as an alternate dispute resolution process and avoid prolonged judicial process.
Establishing Wholly-owned Subsidiary in India by Foreign Investors
India allows, in many sectors, setting up of subsidiaries in India which are wholly owned by foreign investor, including foreign companies. There are two ways to form subsidiaries in India: Automatic route; and Special Permission Route
In certain sectors such as information technology, development of integrated townships, mass rapid transport services, export oriented manufacturing, 100% ownership by foreign investors is allowed, subject to certain terms and conditions. However, they have to apply for and obtain permission from government authorities. In certain other sectors FDI up to a specified percentage is permitted under the automatic route, In certain other sectors FDI up to 100 is permitted with prior approval of the Foreign Investment Promotion Board (“FIPB”)/Secretariat of Industrial Approvals (“SIA). The obvious advantages of a subsidiary are total control over funding, management and profit share of the business. However, the flip side is that in a subsidiary where the total management is foreign, the advantage of local knowledge of customs and methods is lacking from very outset.
Joint Ventures in India by Foreign Investors
Joint Venture companies are the most preferred form of corporate entities for investment in India. There are no separate laws for joint ventures in India. The companies incorporated in India, even with up to 100% foreign equity, are treated the same as domestic companies. Foreign companies are also free to open branch offices in India. However, a branch of a foreign company attracts a higher rate of tax than a subsidiary or a joint venture company. The liability of the parent company is also greater in case of a branch office. The Government has outlined 37 high priority areas covering most of the industrial sectors. Investment proposals involving up to 74% foreign equity in these areas receive automatic approval within two weeks. An application to the Reserve Bank of India in the form FC (RBI) is required. The application can be made either by the Indian party or the foreign party. Existing companies having foreign equity holding and desiring to increase it to 74% can also obtain automatic approval if they are in priority areas. Besides the 37 high priority areas, automatic approval is available for 74% foreign equity holdings setting up international trading companies engaged primarily in export activities. Approval of foreign equity is not limited to 74% and to high priority industries. Greater than 74% of equity and areas outside the high priority list are open to investment, but government approval is required. For these greater equity investments or for areas of investment outside of high priority an application in the form FC (SIA) has to be filed with the Secretariat for Industrial Approvals. A response is given within 6 weeks. Full foreign ownership (100% equity) is readily allowed in power generation, coal washeries, electronics, Export Oriented Unit (EOU) or a unit in one of the Export Processing Zones ("EPZ's"). For major investment proposals or for those that do not fit within the existing policy parameters, there is the high-powered Foreign Investment Promotion Board ("FIPB"). The FIPB is located in the office of the Prime Minister and can provide single-window clearance to proposals in their totality without being restricted by any predetermined parameters.
Foreign investment is also welcomed in many of infrastructure areas such as power, steel, coal washeries, luxury railways, and telecommunications. The entire hydrocarbon sector, including exploration, producing, refining and marketing of petroleum products has now been opened to foreign participation. The Government had recently allowed foreign investment up to 51% in mining for commercial purposes and up to 49% in telecommunication sector. The government is also examining a proposal to do away with the stipulation that foreign equity should cover the foreign exchange needs for import of capital goods. In view of the country's improved balance of payments position, this requirement may be eliminated. Selection of a good local partner is the key to the success of any joint venture. Personal interviews with a prospective joint venture partner should be supplemented with proper due diligence. Once a partner is selected generally a memorandum of understanding or a letter of intent is signed by the parties highlighting the basis of the future joint venture agreement. Before signing the joint venture agreement, the terms should be thoroughly discussed to avoid any misunderstanding at a later stage. Negotiations require an understanding of the cultural and legal background of the parties.
Services Offered by Us
Mayur Batra & Co. has helped foreign companies in setting up there operations in India and other countries. A careful tax planning is required before opening a subsidiary, branch, joint venture, project office or liaison office in India. We can help you in corporate planning and setting up in India and other countries. We can help your firm or company in setting up in India and other countries.
Tax Rates in India Individual Income Tax Rates
Over Not Over
0 Rs. 150,001 Rs. 300,001 Rs. 500,001 Rs. 1 million
Rs. 150,000 1 Rs. 300,000 Rs. 500,000 above above
0 10% 20% 30% 30% 2
1. Rs. 180,000 for women and Rs. 225,000 for seniors. 2. A surcharge of 10% on income tax is levied where taxable income exceeds Rs. 1 million which makes it effective 33% including surcharge. Also the education cess of 3% is applicable. 3. (a) Tax exemption on interest in Non-Resident (external) Account and on interest payable by a scheduled bank to Non-Resident Indians (NRI's). (b) Tax exemption on the interest payable by a scheduled
bank to a non-resident or a person who is not ordinarily resident on deposits in foreign currency where the acceptance of such deposits by the bank is approved by the RBI. .
Domestic Corporate Income Taxes Rates
Domestic Corporations 30%
Effective Tax Rate with surcharge
1. A surcharge of 10% of the income tax is levied, if the taxable income exceeds Rs. 1 million.
2. All companies incorporated in India are deemed as domestic Indian companies
for tax purposes, even if owned by foreign companies.
Foreign Companies Tax Rates
Withholding Tax Rates for the USA Companies Doing Business in India under the India USA Tax Treaty
15% 1 15% 2 20% 2 20% 2 55%
Withholding Tax Rate for non-treaty foreign companies
Dividends Interest Income Royalties Technical Services Other income 20% 20% 30% 30% 55%
1. Inter-corporate rates where there is minimum holding. There tax rates are applicable under the India USA Tax Treaty. For other countries the tax rates are different under the tax treaties between India and other countries, including Australia, Austria, Bangladesh, Belgium, Brazil, Belarus, Bulgaria, Canada, China, Cyprus, Czechoslovakia, Denmark, Finland, France, Germany, Greece, Hungary, Indonesia, Israel, Italy, Japan, Jordan, Kazakhstan, Kenya, Libya, Malta, Malaysia, Mauritius, Mongolia, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland , Qatar , Romania, Singapore, South Africa , South Korea , Spain , Sri Lanka , Sweden, Switzerland, Syria, Tanzania, Thailand, Trinidad & Tobago, Turkmenistan, Turkey , U.A.E. , U.A.R., U.K.,
U.S.A., Russian Federation, Uzbekistan, Vietnam and Zambia 2. 10% or 15% in some cases. 3. Withholding tax is charged on estimated income, as approved by the tax authorities. 4. There are other favorable tax rates under various tax treaties between India and other countries..
Net Taxable Wealth
Over Not Over
Wealth tax is levied on non-productive assets whose value exceeds Rs.1.5 million. Productive assets like shares, debentures, bank deposits and investments in mutual funds are exempt from wealth tax. The non-productive assets include residential houses, jewelry, bullion, motor cars, aircraft, urban land, etc. Foreign nationals are exempt from wealth tax on non-Indian assets. In arriving at the net taxable wealth, any debt incurred in acquiring specified assets is deductible.
Net Taxable Gift
Over Not Over
Gifts to dependent relatives at the time of marriage are exempt upto Rs.100,000. Foreign nationals are exempt from gift tax on non-Indian assets.
Tax on cash withdrawal from banks
Withdrawn in the 2008 Budget. [0.1% tax used to be levied on cash withdrawals of over Rs 25,000 from banks on a day. (Yes, this is true)]
US$1=Indian Rs. 40 app. All rates as per on the date of update. For Updated Tax Rates and International Tax Treaties Contact us
Corporate Income Tax in India For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%. An education cess of 3% (on both the tax and the surcharge) is payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies. From the tax year 2005-06, electronic filing of company returns is mandatory.
Fringe Benefit Tax Fringe Benefit Tax is a tax payable by companies against benefits that are seen by employees but cannot be attributed to them individually. This tax is paid as 33.99% of the benefit, which is only a percentage of the actual amount paid. Some fringe benefits and their taxable rates are mentioned: Fringe Benefit Medical reimbursements Telephone bills Employee Stock Options (Difference between market value and purchase price on vesting date) Taxable percentage 20% 20% Effective Tax Rate 6.8% 6.8%
From April 1, 2007 , Employees Stock Option Plan (ESOP) or Sweat Equity has also been brought within ambit of fringe benefit tax. Section 115WB(1)(d) specifies that any ESOP will attract Fringe Benefit Tax, and the benefit is equal to the difference between the price paid and the fair market value of the share, as determined by the Board. Tax is levied on the date of vesting of such options. "Fair Market Value" is not yet defined by the Income Tax Department.
Tax Penalties "If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income"
Withholding Tax Rates for Foreign Companies Doing Business in India under the Tax Treaties
Section 90 of the Indian Income Tax Act authorizes the government of India to enter into Double Tax Avoidance Agreements (tax treaties) with other countries. The object of such agreements is to evolve an equitable basis for the allocation of the right to tax different types of income between the 'source' and 'residence' states ensuring in that process tax neutrality in transactions between residents and non-residents. A non-resident, under the scheme of income taxation, becomes liable to tax in India in respect of income arising here by virtue of its being the country of source and then again, in his own country in respect of the same income by virtue of the inclusion of such income in the 'total world income' which is the tax base in the country of residence. Tax incidence, therefore, becomes an important factor influencing the non-residents in deciding about the location of their investment, services, technology etc. Tax treaties serve the purpose of providing protection to tax payers against double taxation and thus preventing the discouragement which taxation may provide in the free flow of international trade, international investment and international transfer of technology. These treaties also aim at preventing discrimination between the tax payers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. In addition, such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure.
Double Taxation Avoidance Treaties India has entered into Double Taxation Avoidance Treaties with the following Countries:
S.No. Name of the Country Effective from Assessment Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Australia Austria Bangladesh Belgium Brazil Belarus Bulgaria Canada China Cyprus Czechoslovakia Denmark Finland France F.R.G F.R.G. D.G.R. F.R.G. 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 Greece Hungary Indonesia Israel Italy Japan Jordan Kazakhstan Kenya Libya Malta Malaysia Mauritius Mongolia Namibia Nepal Netherlands 1993-94 1963-64 1993-94 1989-90; 1999-2000 (Revised) 1994-95 1999-2000 1997-98 1987-88; 1999-2000 (Revised) 1996-97 1994-95 1986-87; 2001-2002 (Revised) 1991-92 1985-86; 2000-2001 Amending protocol 1996-97 1958-59 1984-85 1985-86 1998-99 1964-65 1989-90 1989-90 1995-96 1997-98 1991-92 2001-2002 1999-2000 1985-86 1983-84 1997-98 1973-74 1983-84 1995-96 2000-2001 1990-91 1990-91 (Revised) (Revised) (Revised) (Revised) (Original) (Protocol)
33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60
New Zealand Norway Oman Philippines Poland Qatar Romania Singapore South Africa South Korea Spain Sri Lanka Sweden Switzerland Syria Tanzania Thailand Trinidad & Tobago Turkmenistan Turkey U.A.E. U.A.R. U.K. U.S.A. Russian Federation Uzbekistan Vietnam Zambia
1988-89 1988-89 1999-2000 1996-97 1991-92 2001-2002 1989-90 1995-96 1999-2000 1985-86 1997-98 1981-82
(1999-2000 amending notification) (2001-2002 Supp. Protocal)
1990-91; 1999-2000 (Revised) 1996-97 1983-84 1983-84 1988-89 2001-2002 1999-2000 1995-96 1995-96 1970-71 1995-96 1992-93 2000-2001 1994-95 1997-98 1979-80 (Revised)
Sector Specific Foreign Direct Investment in India
Hotel & Tourism: FDI in Hotel & Tourism sector in India 100% FDI is permissible in the sector on the automatic route. The term hotels include restaurants, beach resorts, and other tourist complexes providing accommodation and/or catering and food facilities to tourists. Tourism related industry include
travel agencies, tour operating agencies and tourist transport operating agencies, units providing facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment, amusement, sports, and health units for tourists and Convention/Seminar units and organizations. For foreign technology agreements, automatic approval is granted if i. ii. up to 3% of the capital cost of the project is proposed to be paid for technical and consultancy services including fees for architects, design, supervision, etc. up to 3% of net turnover is payable for franchising and marketing/publicity support fee, and up to 10% of gross operating profit is payable for management fee, including incentive fee.
Private Sector Banking: Non-Banking Financial Companies (NBFC) 49% FDI is allowed from all sources on the automatic route subject to guidelines issued from RBI from time to time. a. FDI/NRI/OCB investments allowed in the following 19 NBFC activities shall be as per levels indicated below: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix. Merchant banking Underwriting Portfolio Management Services Investment Advisory Services Financial Consultancy Stock Broking Asset Management Venture Capital Custodial Services Factoring Credit Reference Agencies Credit rating Agencies Leasing & Finance Housing Finance Foreign Exchange Brokering Credit card business Money changing Business Micro Credit Rural Credit
b. Minimum Capitalization Norms for fund based NBFCs: i) For FDI up to 51% - US$ 0.5 million to be brought upfront ii) For FDI above 51% and up to 75% - US $ 5 million to be brought upfront
iii) For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million to be brought upfront and the balance in 24 months c. Minimum capitalization norms for non-fund based activities: Minimum capitalization norm of US $ 0.5 million is applicable in respect of all permitted nonfund based NBFCs with foreign investment. d. Foreign investors can set up 100% operating subsidiaries without the condition to disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in US$ 50 million as at b) (iii) above (without any restriction on number of operating subsidiaries without bringing in additional capital) e. Joint Venture operating NBFC's that have 75% or less than 75% foreign investment will also be allowed to set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capital inflow i.e. (b)(i) and (b)(ii) above. f. FDI in the NBFC sector is put on automatic route subject to compliance with guidelines of the Reserve Bank of India. RBI would issue appropriate guidelines in this regard. Insurance Sector: FDI in Insurance sector in India FDI up to 26% in the Insurance sector is allowed on the automatic route subject to obtaining licence from Insurance Regulatory & Development Authority (IRDA) Telecommunication: FDI in Telecommunication sector i. In basic, cellular, value added services and global mobile personal communications by satellite, FDI is limited to 49% subject to licensing and security requirements and adherence by the companies (who are investing and the companies in which investment is being made) to the license conditions for foreign equity cap and lock- in period for transfer and addition of equity and other license provisions. ISPs with gateways, radio-paging and end-to-end bandwidth, FDI is permitted up to 74% with FDI, beyond 49% requiring Government approval. These services would be subject to licensing and security requirements. No equity cap is applicable to manufacturing activities. FDI up to 100% is allowed for the following activities in the telecom sector : a. ISPs not providing gateways (both for satellite and submarine cables); b. Infrastructure Providers providing dark fiber (IP Category 1); c. Electronic Mail; and d. Voice Mail The above would be subject to the following conditions: e. FDI up to 100% is allowed subject to the condition that such companies would divest 26% of their equity in favor of Indian public in 5 years, if these companies are listed in other parts of the world. The above services would be subject to licensing and security requirements, wherever required.
Proposals for FDI beyond 49% shall be considered by FIPB on case to case basis. Trading: FDI in Trading Companies in India Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/trading house/super trading house/star trading house. However, under the FIPB route:i.
100% FDI is permitted in case of trading companies for the following activities: exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading; other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.
ii. The following kinds of trading are also permitted, subject to provisions of EXIM Policy: a. Companies for providing after sales services (that is not trading per se) b. Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manufactured products on behalf of their joint ventures in which they have equity participation in India. c. Trading of hi-tech items/items requiring specialized after sales service d. Trading of items for social sector e. Trading of hi-tech, medical and diagnostic items. f. Trading of items sourced from the small scale sector under which, based on technology provided and laid down quality specifications, a company can market that item under its brand name. g. Domestic sourcing of products for exports. h. Test marketing of such items for which a company has approval for manufacture provided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing. FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the Indian public in five years, if these companies are listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.
Power: FDI In Power Sector in India Up to 100% FDI allowed in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power plants. There is no limit on the project cost and quantum of foreign direct investment. Drugs & Pharmaceuticals
FDI up to 100% is permitted on the automatic route for manufacture of drugs and pharmaceutical, provided the activity does not attract compulsory licensing or involve use of recombinant DNA technology, and specific cell / tissue targeted formulations. FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology, and specific cell / tissue targeted formulations will require prior Government approval. Roads, Highways, Ports and Harbors FDI up to 100% under automatic route is permitted in projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors. Pollution Control and Management FDI up to 100% in both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic route. Call Centers in India / Call Centres in India FDI up to 100% is allowed subject to certain conditions. Business Process Outsourcing BPO in India FDI up to 100% is allowed subject to certain conditions. Special Facilities and Rules for NRI's and OCB's NRI's and OCB's are allowed the following special facilities: 1. Direct investment in industry, trade, infrastructure etc. 2. Up to 100% equity with full repatriation facility for capital and dividends in the following sectors: i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii. xiii. 34 High Priority Industry Groups Export Trading Companies Hotels and Tourism-related Projects Hospitals, Diagnostic Centers Shipping Deep Sea Fishing Oil Exploration Power Housing and Real Estate Development Highways, Bridges and Ports Sick Industrial Units Industries Requiring Compulsory Licensing Industries Reserved for Small Scale Sector
3. Up to 40% Equity with full repatriation: New Issues of Existing Companies raising Capital through Public Issue up to 40% of the new Capital Issue. 4. On non-repatriation basis: Up to 100% Equity in any Proprietary or Partnership engaged in Industrial, Commercial or Trading Activity. 5. Portfolio Investment on repatriation basis: Up to 1% of the Paid up Value of the equity Capital or Convertible Debentures of the Company by each NRI. Investment in Government Securities, Units of UTI, National Plan/Saving Certificates. 6. On Non-Repatriation Basis: Acquisition of shares of an Indian Company, through a General Body Resolution, up to 24% of the Paid Up Value of the Company. 7. Other Facilities: Income Tax is at a Flat Rate of 20% on Income arising from Shares or Debentures of an Indian Company. Certain terms and conditions do apply. Foreign Direct Investment in Small Scale Industries (SSI's) in India Recently, India has allowed Foreign Direct Investment up to 100% in many manufacturing industries which were designated as Small Scale Industries. India further ended in February 2008 the monopoly of small-scale units on 79 items, leaving just 35 on the reserved list that once had as many as 873 items. While industrial policy reforms began with the new industrial policy statement of 1991, India remained wary of intruding on the politically sensitive issue of reservation for small-scale industry till the end of the 1990s. Thus, while at the turn of the millennium the number of items reserved for SSI units had come down from its peak of 873 in 1984, well over 800 items remained on the list. Since 2002, the scenario has changed dramatically. In these last seven years, around 790 items including things like farm equipment, toothpaste, ice cream, footwear, detergents and even garments - have been knocked off the list. Thus, for the first time in over 40 years, there are today as few as 35 items reserved for SSI units. When the policy of reservation was first introduced in 1967, there were just 47 items reserved for small-scale manufacturers. However, what was till then an administrative decision was given legal backing by an amendment enacted in 1984 to the Industries (Development and Regulation) Act, 1951. That year also saw the number of items reserved reaching a peak of 873. Reservation means that units producing the reserved items cannot go beyond a stipulated cap on investment in plant and machinery. Moreover, FDI was allowed on a limited basis in SSI's. In the old days, therefore, it was standard practice for mass consumption items covered by the reserved list to be farmed out by large marketing companies to dozens of small units, thereby negating economies of scale. What it also meant was that some companies resorted to manufacturing completely new class of products. So, if ice cream was reserved for small scale units, a large player could always produce, say, 'frozen desserts'.
Apart from the steady trickle of de-reservation over the last decade, one of the measures taken to get over this problem without confronting the political problems involved was to allow foreign investment even in reserved items with the caveat that such units would have to fulfill an export obligation. For players who were already manufacturing items that were suddenly reserved in 1967, the government came up with what was carry-on-business license which capped their capacity, and fixed the location of the plant and the goods produced. The latest de-reservation means that pastries, hard boiled sugar candy and tooth powder can be manufactured by large units too. Similarly, buckets, paper bags, paper cups, envelopes, letter pads, paper napkins might not be manufactured only in small units but also in specialized factories. The same for sesame and rapeseed oil, which are not solvent extracted, a host of chemicals and dyes paints be it distempers. Electrical goods, which include geysers, hot air blowers and toasters, too are out of the reserved list, as are ballpoint and fountain pens. The remaining 35 items that would be produced by the SSI sector are food and allied items, wood, wood products, paper, paper products, plastic products, organic chemicals, drugs, drug intermediates, other chemicals, chemical products, glass, ceramics, mechanical engineering and electrical machines, appliances and apparatus. In a nutshell, only 35 items remain reserved for the small scale industries sector. For foreign investors, it means that in those 35 reserved sectors foreign investment is allowed on a limited basis, except where certain conditions are met. India Further Opens up Key Sectors for Foreign Investment India has liberalized foreign investment regulations in key sectors, opening up commodity exchanges, credit information services and aircraft maintenance operations. The foreign investment limit in Public Sector Units (PSU) refineries has been raised from 26% to 49%. An additional sweetener is that the mandatory disinvestment clause within five years has been done away with. FDI in Civil aviation up to 74% will now be allowed through the automatic route for nonscheduled and cargo airlines, as also for ground handling activities. 100% FDI in aircraft maintenance and repair operations has also been allowed. But the big one, allowing foreign airlines to pick up a stake in domestic carriers has been given a miss again.
India has decided to allow 26% FDI and 23% FII investments in commodity exchanges, subject to the proviso that no single entity will hold more than 5% of the stake. Sectors like credit information companies, industrial parks and construction and development projects have also been opened up to more foreign investment.
Also keeping India's civilian nuclear ambitions in mind, India has also allowed 100% FDI in mining of titanium, a mineral which is abundant in India. Sources say the government wants to send out a signal that it is not done with reforms yet. At the same time, critics say contentious issues like FDI and multi-brand retail are out of the policy radar because of political compulsions. (Jan 2008)