Download General - Indo Italian Chamber Of Commerce

DOING BUSINESS
IN INDIA
May 2008
© Indo-Italian Chamber of Commerce & Industry
General
The FDI regulations in India have been progressively liberalized
over the last few years. Barring a few select sectors in which FDI is
altogether prohibited (e.g. agriculture, atomic energy, gambling
etc.), FDI is allowed in most other sectors.
FDI by foreign companies needs to have government approvals.
The approval may prior or subsequent. Where prior approvals are
not required, one invests and then seeks registration of the
investment with the RBI. This is called the ‘automatic route’ of FDI.
Where prior approvals are required, those are handled by FIPB,
Ministry of Finance. This is called the ‘non-automatic route’ of FDI.
General
A large majority of FDI investments today qualify for the
automatic route.
Important exceptions are:
 Manufacture of items reserved for the small-scale sector,
 Where automatic route investment is limited to 24%;
 Proposals where the foreign investor has an existing jointventure or technology transfer/trademark agreement in the
same field;
 Sectors where specific investment limits have been
prescribed.
Investing in India
Regulations 1
Foreign investments have to be authorized by public bodies,
either through the automatic route or not.
For new companies, automatic route applies to all kind of
FDI with exception to:
 production activities requiring industrial license;
 ventures in sectors where the foreign investor already has
a participation;
 ventures where the foreign investor acquires shares of an
existing Indian company;
 ventures in non-regulated sectors.
Investing in India
Regulations 2
For existing companies, automatic route also applies in
case foreign equity is added to the company’s capital. The
authorization is issued provided that:
 the increase in the share capital happens before the
acquisition of shares from the foreign company;
 the money to be invested is in foreign currency;
 the development plan for which the increase in capital is
needed has to be in the sectors in which the automatic route
applies.
Investing in India
Regulations 3
For companies with 100% FDI can benefit of the automatic
rout if they are active in sectors with high priority, namely:
 production and transmission of electric energy;
 distribution of electrical energy for domestic, industrial and
commercial use;
 construction and maintenance of roads, highways,
bridges, galleries and ports.
All the activities for which the automatic route does not apply
have to request the Government approval through the
Foreign Investment Promotion Board.
Business Presence in India
The Options
You may set up a business presence in India using any one
of the following options:
 Liaison/Representative Office
 Branch Office
 Technical collaboration
 Subsidiary/JV Company
Liaison/Representative Office
 It can carry out promotional activities without putting in any
trade transactions as a principal party;
 It cannot earn any income in India, or carry out any
income earning activity;
 It does not pay any Income tax;
 It is legally a part of its parent company.
To open a liaison office requires a limited investment and the
permit is normally granted for a period of three years
Branch Office
 It can carry out most activities except manufacturing and
processing;
 It can carry out trading activities on its own account and
also earn a profit;
 For the profit earned in India it has to pay Income tax as a
foreign enterprise;
 Foreign enterprises are subjected to higher tax rates on
their net profits compared to Indian companies;
They are not entitled to several of the tax concessions
available to an Indian company– including a foreign
subsidiary.
Technical Collaboration
This option suits well Italian companies willing to test the
Indian potential partner before establishing a joint-venture.
This form of collaboration implies the transfer of know-how,
engineering and services. The Indian counterpart can get the
automatic approval provided that:
 the forfait payment cannot exceed $2 billion;
 royalties must be paid on no more than 5% on domestic
market sales and 8% on exports;
 payments are subject to a cap of 8% on net total sales;
 the products do not have to be subject to industrial license
or being reserved to Small Industry;
 the foreign counterpart does not have similar agreements
in the same sector
Subsidiary or Joint Venture
 It will have a limited liability;
 It will be regarded for all regulatory purposes as an Indian
company.This means that it can do whatever an Indian
company can do;
 It pays tax at rates about 10% lower than that applicable to
foreign enterprises;
 It is legally independent of the holding company. This
means that the holding company is not liable for the liabilities
of the subsidiary company.
Setting Up A Business
Presence In India From Italy
Any of the above forms can be set up and all regulatory
approvals obtained without the foreign company personnel
visiting India.
The Indo-Italian Chamber’s consultants can handle the entire
process long-distance on behalf of the foreign company. This
enables faster and cheaper set-up.
Specific Sectors
Extent of Holding
In many sectors, a foreign company can hold upto 100% of the
equity share capital of an Indian company.
For some sectors, the current regulations provide different sectoral
caps, for instance:
 20% in Radio Transmissions
 26% in defence items, petrol refining, TV Transmissions, and
insurances;
 47% in satellite control;
 49% in Aerotransportation, infrastructures (transmissions);
 51% retail (monobrand);
 74% banking and telecommunications (services);
Specific Sectors
Extent of Holding
Sector
Maximum Holding
Permitted
FDI
Permission
IT/ITES
100%
Automatic
Engineering Manufacturing
100%
Automatic
100%
Automatic
Wine
Making
(“Alcohol
Distillation & Brewing”)
–
Specific Sectors
Extent of Holding
Sector
Maximum Holding
Permitted
FDI
Permission
Food Processing
100%
Automatic
Cultivation
of
vegetables,
mushrooms
under
controlled
conditions and services related to
Agro and Allied sectors
100%
Automatic
Agro Food
Specific Sectors
Extent of Holding
Sector
Maximum
Holding
Permitted
FDI
Permission
General
100%
Automatic
Courier services for carrying packages,
parcels and other items which do not
come within the ambit of the Indian Post
Act, 1989 (subject to existing laws and
exclusions of activity relating to
distribution of letters which is exclusively
reserved for the State)
100%
FIPB (Nonautomatic)
Transport And Logistics
Specific Sectors
Extent of Holding
Sector
Maximum Holding
Permitted
FDI Permission
Furniture
Furniture – Wooden
Furniture – Other
24%
Automatic
Over 24%
FIPB (NonAutomatic)
100%
Automatic
Manufacturing & Trading
 If a foreign company is looking at setting up a manufacturing, it
can have a wholly owned subsidiary. Generally, Automatic Route
will apply.
 If a foreign company is looking at a trading operation, FDI in a
‘trading’ operation is not freely permitted.
 FDI in retail trading is not allowed, except for ‘single-brand’
retailing. This policy is likely to be further liberalized in future.
 Investment upto 100% under the automatic route is permitted
for:
• export-oriented trading;
• wholesale/cash-and-carry trading.
Royalty, Trademarks and Brands
Royalty
Current regulations allow royalty payment of upto USD $ 2
million lump sum, 8% on export sales and 5% on domestic
sales under the automatic approval route. The limits apply to
the net-of-tax amounts. The percentage applies, broadly, to
the value excluding import component in the product price.
Trademark/Brands
Current regulations allow royalty payment of 2% on export
sales and 1% on domestic sales for use of brand names or
trademarks.
Company Structure
A private limited company needs:
 a minimum authorized capital of INR 100,000 (appx. Euro 1750)
and The minimum paid-up capital in both cases is INR 100,000
(approx. Euro 1750).
 a minimum of two shareholders and two directors.
 a nominee shareholder is counted as a separate shareholder for
counting the legal minimum number required.
A public limited company needs:
 a minimum authorized capital of INR 500,000 (appx. Euro 8750);
 a minimum of seven shareholders and three directors.
Repatriability & Other Issues
Repatriability
Once the government permission for the investment is taken, the
investment is allowed on a repatriable basis i.e. the Indian
company can remit dividends to the foreign company. Also the
capital too is repatriable to the holding company in the event that
the holding company wishes to divest its holding.
Other issues
The overseas company is not forced to bring in a very large capital
into the subsidiary. It can inject money as and when required rather
than make a very large infusion at the beginning itself. The
subsidiary can borrow money from the Indian banks if it so desires.
Taxes & Benefits 1
An Indian company pays Income tax generally at the
effective rate of 33.99%of its taxable profits. The rate for
SME’s (taxable profit of less than INR.10.0 millions) is
30.90%.
The other major taxes in India are VAT on goods (residual
rate 12.5% for intra-state sale; for inter-state sale the uniform
rate is 4%, and will be 3% after the latest budget is passed),
Excise i.e. manufacturing tax (residual rate 16.0%), and
Service Tax (primary rate 12.36%).
Taxes & Benefits 2
The following tax advantages accrue to a subsidiary under certain
circumstances:
Profits of STPI units (for IT/ITES companies) are presently taxed
concessionally;
Profits of SEZ units are tax-exempt;
Service exports are exempt from service-tax subject to
prescribed conditions;
Exports are exempted from excise, octroi and VAT;
Units set up in backward areas enjoy some income-tax and VAT
concessions. However, these need to be evaluated against the
generally poor state of infrastructure in the backward areas;
Differences
Liaison Office, Branch, Subsidiary/J.V.
Liaison /
Represent.
Office (LO)
Branch
Office
(BO)
Joint-Venture or
Subsidiary
Company (JV)
PERMISSIBLE ACTIVITIES
1
Promotion
YES
YES
YES
2
Business Development
YES
YES
YES
3
Technical Support
YES
YES
YES
4
After-sales Service
YES
YES
YES
Differences
Liaison Office, Branch, Subsidiary/J.V.
LO
BO
JV
5
Purchase/Sales coordination on behalf of the
overseas parent (e.g.
Italian) company
YES
YES
YES
6
Earning Income
NO
YES
YES
7
Buying Products
NO
YES
YES
8
Selling Products
NO
YES
YES
9
Export
NO
YES
YES
Differences
Liaison Office, Branch, Subsidiary/J.V.
LO
BO
JV
10
Import
NO
YES
YES
11
Manufacturing
NO
NO
YES
LEGAL, FINANCIAL & TAX ISSUES
12
Opening A Bank Account
YES
YES
YES
13
Recruiting People
YES
YES
YES
14
Can It Repatriate Profit?
N.A.
YES
YES
Differences
Liaison Office, Branch, Subsidiary/J.V.
LO
BO
JV
15
Can It Repatriate Capital ?
N.A.
N.A.
YES
16
Can It Pay Royalty For
Designs/Brand Names ?
N.A.
N.A.
YES
(But subject to
regulations)
Differences
Liaison Office, Branch, Subsidiary/J.V.
17
Minimum Authorized Capital
Legally Required
LO
BO
JV
NIL
NIL
INR.100,000 for
a private limited
company
INR.500,000 for
a public limited
company
Minimum Paid-up Capital
Legally Required
INR.100,000 for
both.
NIL
NIL
Differences
Liaison Office, Branch, Subsidiary/J.V.
18
Maximum shareholding
that a foreign company
can have
LO
BO
JV
NA
NA
100% (Subject to
applicable
regulations)
REGULATORY PERMISSIONS/REGISTRATIONS
19
Required From
Reserve
Bank of
India
Reserve
Bank of
India
Registrar Of
Companies +
Reserve Bank of
India/ FIPB
(in some cases)
If you need any
information/support in connection
with your proposed Indian
activities, please contact:
The Indo-Italian Chamber of
Commerce and Industry
502, Bengal Chemicals
Compound, V.S. Marg,
Prabhadevi,
Mumbai – 400052, INDIA
Tel: +91.22. 2436 8186,
Fax: +91.22. 2436 8191
E.mail: [email protected],
Web: www.indiaitaly.com