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India is a common law country with a
written constitution which guarantees individual
and property rights. There is a single hierarchy
of courts, with the Supreme Court of India at the
top. 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.
The major bodies of law in India affecting
foreign investment includes the following:
- The
Foreign Trade (Development and
Regulation) Act, 1992
- The
Industries Act, 1951
- The
Indian Contract Act, 1872
- The
Sales of Goods Act, 1930
- The
Partnership Act, 1932
- The
Negotiable Instruments Act, 1881
- The
Consumer Protection Act, 1986
- The
Monopolies and Restrictive Trade
Practices Act, 1969
- The
Copyright Act, 1957
- The
Trade and Merchandise Mark Act,
1958
- The The
Trade Marks Act, 1999
- The
Information Technology Act, 2000
- The
Company Act, 1956
- The
Income Tax Act, 1961
- The
Customs Act, 1962
- The
SEBI Act, 1992
- Air
(Prevention and Control of Pollution)
Act,1981
- The
Industrial Disputes Act, 1947
- The
Factories Act, 1948
- The
Benami Transactions (Prohibitions) Act,
1988
The Foreign Trade (Development and Regulation)
Act of 1992 ("FTA"), the Industries Act
of 1951, the Companies Act of 1956, the
Monopolies and Restrictive Trade Practices Act of
1969 and the Industrial Policies issued from time
to time are the major statutes and regulations
governing foreign investment in India. Foreign
collaboration and equity participation in India
is regulated by the Foreign Trade (Development
and Regulation) Act, 1992. The Industries
(Development Regulation) Act of 1951 governs
industrial regulation. The Companies Act of 1956
regulates corporations and their management in
India. The Monopolies and Restrictive Trade
Practices Act of 1969 ("MRTP") governs
restrictive and fair trade practices. The New
Industrial Policy of 1991 ("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:
(i) 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.
(ii) Foreign investors are allowed to
hold more than up to 76% equity ownership
in most of the sectors, and 100% percent
equity ownership in some sectors.
(iii) Foreign Institutional Investors
("FII's) from reputable institutions
(like pension funds, mutual funds) may
participate in the Indian capital
markets.
(iv)
Joint ventures with trading companies and
imports of secondhand plants and
machinery are allowed.
(v) Monopoly and restrictive trade
practice restraints (i.e., antitrust
laws) have been eased.
(vi) Customs duties have been slashed
considerably; duty-free imports are
allowed in some cases.
(vii) The rupee is completely
convertible; 100% of foreign exchange
earnings can be converted at free market
rates.
(viii) Export policies have been
liberalized.
(ix) The Foreign Trade Act of 1992 has
been enacted to encourage foreign
investments in India.
(x) Tax holidays are available for a
period of 5 continuous years in the first
8 years of establishing exporting units.
(xi) A tax holiday for up to 5 to 8
years is available and 100% equity
participation is allowed for the power
projects in India.
(xii) Concessions in tax regime are
available for foreign investors in
high-tech areas.
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. Click
here for Types of companies and corporations in
India.
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.
Joint Ventures in India
Click
here for Types of Companies and corporations in
India
Click
here for Incorporating a company in India
There are following type of
business entities in India:
Private Limited
Company
–is not open to public and it has
from 2 to 50 shareholders whose liability
is limited
Public Limited Company
–is open to public and it has 7 or
more shareholders, whose liability is
limited, and at least 3 directors
Unlimited Company
–does not restrict the liability of
its shareholders
Partnership
–has 2 or more members whose
liability is not limited
Sole Proprietorship
–has 1 member whose liability is not
limited
In addition to the above,
the following types of business entities are
available for foreign investors doing business in
India:
Click
here for more details on types of companies and
corporations in India
Click
here for Incorporating a company in India
India permits
Foreign Direct Investment (FDI) or collaborations
in almost all sectors except the following:
Atomic Energy
Arms and ammunition
Railway Transport
Coal and lignite
Mining of iron,
manganese, chrome, gypsum, gold,
diamonds, copper and zinc
A prior government approval is
required for every foreign Investment or
collaboration/joint venture in India in most
cases. The approval may be automatic or special,
as mentioned below.
FDI in India Sector wise Guide
Click here for More
Information on Obtaining Approvals for Investing
In India
A prior government
approval is required for every foreign Investment
in India in most cases.
Kind of Approvals
1. Automatic Approvals are
granted by the Reserve Bank of India in
sectors where up to 100%, 74%, 51%, 40%
or 26% foreign equity is allowed as a
rule
2. Special Approvals are
granted by Foreign Investment Promotion
Board (FIPB) in New Delhi, where a
foreign equity is proposed to be above
the automatic rule limits
Click here for More
Information on Obtaining Approvals for Investing
In India
The major kinds of
Offshore Outsourcing are as follows:
Direct
Off-shore
Indirect
Off-shore
BOT
Captive
Special attention should be paid
in having comprehensive service agreements
between the parties and local laws should be
complied with. The following are the standard
steps in an outsourcing agreement:
Outsourcing
to India Free Guide |
Legal Services Outsourcing to India
Contact us for Setting
up BPO in India
SEZ's are duty free enclaves and are treated as
foreign territory for trade operations &
duties and tariffs. SEZ's provide internationally
competitive & hassle free environment for
exports, units may be set up in SEZ’s for
manufacture of goods, rendering of services &
trading. Up to 100% Foreign Direct
Investment (FDI) in manufacturing sector is
allowed through automatic route barring a few
sectors. Units in SEZ’s have to be net
foreign exchange earners within 3 years.
Other benefits of SEZ's
Exemption from customs
duty on import of capital goods, raw
materials, consumables & spares
Exemption from Central
Excise duty on procurement of capital
goods, raw materials, consumables,
spares, etc. from the domestic market
100% income tax exemption
for a block of five years;
50% tax exemptions for
two years; &
Up to 50% of the Profits
ploughed back for next 3 years under
S.10-A of Income Tax Act
Reimbursement of Central
Sales Tax paid on domestic purchases
Contact us for Setting
up SEZ in India
EOU program is similar to
SEZ program
But there is no need to
be physically located in a SEZ; EOU can
be established anywhere in India
All other incentives are
same as provided to SEZ units
Up to 100% FDI is allowed
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 36.75% while the profits of
branches in India of foreign companies are taxed
at 42%. Companies incorporated in India even with
100% foreign ownership, are considered domestic
companies under the Indian laws.
For
Individual tax rates, Wealth tax rates, gift tax
rates click here
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 provides substantial tax
incentives for investments in Export Oriented
Units ("EOU's") and industries located
in the Special Economic Zones
("SEZ'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 seven major SEZ's and
27 other SEZ'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.
For
More Information on Special Economic Zones (SEZ)
click here
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)Indo-U.S.
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)Indo-Mauritius
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.
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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.
Governing
Laws
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.
For
Intellectual property laws in India click here
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.
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.
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.
For More on ARBITRATION
IN INDIA click here
For More on
INTERNATIONAL COMMERCIAL ARBITRATION click here
Contact
us to obtain the names of arbitrators in India
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