Doing Business in India
Some Basic Facts about India
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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 U.S.A.
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.
FACTS ABOUT INDIA
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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 paise
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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
In India, the following types of business entities are available:
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Private Limited Company
Public Limited Company
One person Company
Unlimited Company
Limited Liability Partnership (LLP)
Partnership
Sole Proprietorship
Liaison Office/Representative Office
Project Office
Branch Office
Joint Venture Company*
Subsidiary Company ++
Note :- * A Joint Venture Company is not a separate type of legal entity; it could be either a Private Limited
Company, a Public Limited Company, or an Unlimited Company.
++ A wholly owned Subsidiary of a foreign company in India could be either a Private Limited Company,
a Public Limited Company, an Unlimited Company, or a Branch Office.
Both the Indian promoters and the foreign promoters can form the business entities: Private Limited
Company, Public Limited Company, Limited Liability Partnership, Unlimited Company, Partnership and
Sole Proprietorship.
The foreign companies also have the options of forming business entities: Liaison Office/Representative
Office, Project Office, Branch Office, and Joint Venture Company.
For a foreign Investor in India it is very important to choose a right kind of business or corporate entity
which best suits its purposes and takes care of liability issues and tax planning issues. Foreign Companies
planning to do business in India should pay special attention to Entry Strategies in India for Foreign
Investors and corporate structuring to save taxes to the best extent allowed by laws and international tax
treaties.
It is also mandatory for foreign investors or foreign shareholders, both individuals and corporate
shareholders, to seek Government Approvals for Investing in India In some special cases Foreign
Investment Promotion Board, FIPB Approval for Foreign Investment in India is required. In other
cases Reserve Bank of India, RBI Approvals for Foreign Investment in India is required.
There are various steps required to establish a business in India, before and after incorporation, as mentioned
hereinafter. See also the Procedure for Formation of Company in India.
A Company in India can have foreign directors provided some conditions are fulfilled. The directors of an
Indian company, both Indian and foreigner directors, are required to obtain Director Identification Number DIN and Digital Signature Certificate - DSC
There are some restrictions regarding issuing sweat equity for a company incorporated in India.
Also see Annual Corporate Filings in India for corporate maintenance requirements in India.
Private Limited Company
A Private Limited Company is the most popular form of business entity used for Foreign Investors in India,
including USA investors in India. It takes some time to incorporate in India as there are various steps
required in forming a private limited company in India. There are various steps required to establish a
business in India, before and after incorporation.
Public Limited Company
A public company is defined as a company which is not a private company. The following conditions apply
only to a public company :
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It must have at least seven shareholders
A public company is not authorized to start business upon the grant of the certificate of
incorporation. In order to be eligible to commence business as a corporation, it must obtain another
document called "trading certificate"
It must publish a prospectus or file a statement in lieu of a prospectus before it can start transacting
business
A public company is required to have at least three directors.
It must hold statutory meetings and obtain government approval for the appointment of the
management
There are several other provisions contained in the Companies Act 1956 which are applicable only to public
companies and should be consulted.
One Person Company
An One person company is almost in same line of Private Company except here the company can be formed
by only one director.
Liaison Office/Representative Office
A Liaison Office could be established with the approval of the government of India. The role of Liaison
Office is limited to collection of information, promotion of exports/imports and facilitates technical/financial
collaborations.
Liaison office cannot undertake any commercial activity directly or indirectly.
Project Office
Foreign companies planning to execute specific projects in India can set up temporary project/site offices in
India for carrying out activities only relating to that project. The Government of India has now granted
general permission to foreign entities to establish project offices subject to specified conditions.
Branch Office
Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch
Offices in India for the following purposes:
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Export/Import of goods
Rendering professional or consultancy services
Carrying out research work, in which the parent company is engaged.
Promoting technical or financial collaborations between Indian companies and parent or overseas
group company.
Representing the parent company in India and acting as buying/selling agents in India.
Rendering services in Information Technology and development of software in India.
Rendering technical support to the products supplied by the parent/ group companies.
Foreign airline/shipping Company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to
subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI may remit
outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for
setting up branch offices is granted by the Reserve Bank of India (RBI).
Limited Liability Partnership (LLP)
A law to allow "Limited Liability Partnership" (LLP) in India has been enacted by the Parliament of India
recently. (Limited Liability Partnership (LLP) Act of 2008).
LLP is an alternative corporate business entity that provides the benefits of limited liability of a company but
allows its members the flexibility of organizing their internal management on the basis of a mutually-arrived
agreement,
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partnership
firm.
This format would be quite useful for small and medium enterprises in general and for the enterprises in
services sector in particular, including professionals and knowledge based enterprises.
As proposed in the Bill, LLP shall be a body corporate and a legal entity separate from its partners. It will
have perpetual succession. While the LLP will be a separate legal entity, liable to the full extent of its assets,
the liability of the partners would be limited to their agreed contribution in the LLP.
Further, no partner would be 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.
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. For more details check our Tax Rates
page .
Non-Export Incentives
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:
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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.
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.
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.