Free Guide for Foreign Companies & NRI’s: Investing, Trading, Outsourcing & Doing Business with India

• Fact sheet of India: Mind boggling !
• Legal System and Laws in India
• Joint Ventures in India
• Corporate Taxes in India
• Double Taxation Treaties
• Transfer of Technology
• Repatriation
• Privatization in India
• Litigation in India and Dispute Resolution in India
• Arbitration in India

Some Facts about India: Amazing But True

• 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 5,000 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
• India has become a world economic power, with growth over the past few years averaging 8%

• Based on purchasing power parity, India is the world’s fourth largest economy
• A middle class estimated at 300 million out of a total population of 1 billion
• Has 100000 millionaires
• With its large base of English speaking skilled human resource, it is most sought after destination for business process outsourcing, Knowledge processing etc.
• The second largest English-speaking scientific, technical and executive manpower in the world
• More than 900 movies are made a year - significantly more than the USA
• Since India began to open up to the outside world in the early 1990s, it has become increasingly attractive to foreign investors
• Its low costs and huge, English-speaking, workforce have made it popular with multinationals for work including manufacturing and call centers.
• Many tax exemptions available to the company set up in Special Economic Zone
• Many tax incentives available to IT companies
• A stable political system based on parliamentary democracy
• A common law legal system with English as a court language
• India 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 paise
• 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

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

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.