During the last decade, the Indian economy has undergone a sea change. The government has introduced a number of significant economic reforms measures. Political parties across spectrum have virtually been unanimous to maintain the tenor of reforms and to continue strengthening the same further. The underlying philosophy behind the reforms is to (i) promote domestic de-regulation and trade liberalization; (ii) strengthen privatization; (iii) encourage and motivate FDI; (iv) alter production structure by increasing the role of the markets; and (v) achieve macroeconomic stabilization by reducing fiscal deficits with special emphasis on “ease of doing business in India”.
As per, Doing Business Report, 2019 released by World Bank, India is now placed at 77th rank among 190 countries assessed by the World Bank for ease of doing business. India's leap of 23 ranks is significant considering our last year’s improved performance by 30 places, a rare feat for any large and diverse country that is of the size of India. As a result of continued efforts by the regulators, India has improved its rank by 53 positions in the last two years and 65 positions in the last four years.
India, a union of 29 states and 7union territories, is one of the most exciting emerging markets in the world. Skilled managerial and technical manpower matches the best available in the world, cheaper work force along with vast and ever-expanding base of middle class provide India a distinct cutting-edge in global competition and offer investors a transparent and conducive environment that guarantees the security of their long-term investments. There are wide opportunities for joint ventures and collaborations with the country’s dynamic and highly competitive private sector.
We have developed this guide with the intent of giving stakeholders an overview of the demographic profile of India, key sectors, an insight into the regulatory framework, form of business enterprises, funding options and relevant tax regimes in India in a concise manner. The information provided in this guide has been validated up to 31 December 2018.
The companies that are doing business in India, or planning to do so, would be well advised to obtain current and detailed information from our experienced professionals.
– Rajiv Chugh, Partner and National Leader Policy Advisory & Speciality Services, EY India
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India: at a glance
|India's fact sheet|
|Geographical profile||Capital||New Delhi|
|Administration||29 states and 7 union territories|
|Neighboring countries||Afghanistan, Bangladesh, Bhutan, China, Myanmar, Nepal, Pakistan and Sri Lanka|
|Total area||3.29m sq km (90% land and 10% water)|
|Climate||Temperate in the north and tropical monsoon in the south|
|Natural resources||Coal (fourth-largest reserves in the world), iron ore, manganese, mica, bauxite and others|
|Demographic profile||Population (2017 estimates)||• 1.34b (urban: 33.6% and rural: 66.4%)|
• Population growth5: 1.13% (y-o-y)
|Sex ratio||1.085 males per female|
|Age structure||0-14 years (27.8%5), 15-64 years (66.2%) and 65 years+(6.0%)|
|Median age||Median age: 28.1 years (male: 27.5 years and female: 28.9 years)|
|Education and labor force||Literacy rate||• 71.2%7 (male: 81.3% and female: 60.6%)|
• India has one of the world’s largest school-age population and a well-developed education system
|Labor force||521.9m7 in 2017|
|Political profile||President||Ram Nath Kovind (tenure: Five years)|
|Prime Minister||Narendra Modi (tenure: Five years)|
|Economic profile||GDP||US$2.6t7 (current prices, FY18), GDP growth: 6.7% in FY18|
|Private consumption||US$1.5t in FY18|
|Trade (FY18)||• Merchandise imports: US$302.2b, Merchandise exports: US$461.0b, Merchandise trade deficit: US$158.8b|
|Financial market||Central bank||Reserve Bank of India, established in 1935|
|Capital markets regulator||Securities and Exchange Board of India, established in 1992|
|Major stock exchanges||• Bombay Stock Exchange established in 1875|
• National Stock Exchange established in 1992
3http://morth.nic.in/showfile.asp?lid=3100; includes 9 lakh Km of Rural roads constructed under Jawahar Rozgar Yojana
6World Population Prospects, 2017, United Nations
959% of 2.02t (total GDP); https://www.cia.gov/library/publications/the-world-factbook/geos/in.html
Key Sectors - Overview
Aerospace and defence
India has the third-largest armed forces in the world and has become one of the largest importer of defence goods and services in the world. Its defence budget is INR2.95 lakh crore which is around 1.58% of its GDP1
Government, as part of its “Make in India” program, has given a new impetus to development of defence production in the country. Several initiatives have been taken in the last three years to promote greater participation of industry. These include revision in Defence Procurement Procedures to introduce “Make-I” and “Make-II” processes, introduction of Strategic Partnership Model, increase in FDI through automatic route to 49%, restricting licensing requirements for critical items, denotifying several items previously produced only by OFBs for production by industry, etc. Also, as announced in Budget 2018, the government has placed a draft defence Production Policy 2018 on its web portal. In the draft policy2 , FDI up to 74% under automatic route is proposed to be allowed in niche technology areas.
Automotive industry in India is one of the prime drivers of the economy and is fourth largest in the world. Indian automotive industry (including component manufacturing) is expected to reach INR16.16-18.18 trillion (US$251.4-282.8 billion) by 20263. The Government of India encourages foreign investment in the automobile sector and allows 100 per cent FDI under the automatic route.
The Indian banking system consists of 27 public sector banks, 22 private sector banks, 44 foreign banks, 56 regional rural banks, 1,589 urban cooperative banks and 93,550 rural cooperative banks, in addition to cooperative credit institutions . The sector is regulated by the Reserve Bank of India (RBI). Key enactments governing this sector include the Banking Regulation Act, 1949; the RBI Act, 1934; and the Cos Act. The RBI regularly reviews and refines the regulatory and supervisory policies to enable a strong capital base, effective risk management and best corporate governance standards in the banking sector.
Foreign investment in private banks is capped to 49% of total equity under automatic route and maximum of 74 % under approval from the Government. Further at all times, at least 26 per cent of the paid-up capital will have to be held by residents, except in regard to a wholly-owned subsidiary of a foreign bank.5
The Indian capital markets have made significant progress which spans into several dimensions of development such as accessibility, regulatory framework, market infrastructure, transparency, liquidity and the types of instruments available. All these factors have culminated in the emergence of much deeper and resilient primary, as well as secondary capital market in India. SEBI, the capital markets regulator, is established to protect the interests of the investors in securities, as well as to promote the development of the capital market. It regulates all intermediaries of the capital market (such as stock brokers, merchant bankers, underwriters, etc.), as well as prohibiting unfair trade practices in the securities market.
The Indian life sciences industry is one of the largest and rapidly growing markets in the Asia-Pacific region. Healthcare comprises pharmaceutical, biotech, hospitals and medical equipment. Currently, FDI is permitted up to 100 percent under the automatic route in the hospital sector and manufacture of medical devices. For the pharmaceutical sector, foreign investment is permitted 100 % in greenfield projects and 74 % in brownfield projects under automatic route and beyond 74 % in such projects requires government approval.6
Information technology in India is an industry consisting of two major components: IT services and business process outsourcing (BPO). India IT and ITeS companies have set up over 1,000 global delivery centers in over 200 cities around the world. India’s highly qualified talent pool of technical graduates is one of the largest in the world and has a low-cost advantage by being 5-6 times inexpensive than US. The country's cost competitiveness in providing ITeS, which is approximately 3-4 times cheaper than the US, continues to be its Unique Selling Proposition (USP) in the global sourcing market.
The government had introduced the SEZ scheme, and provided fiscal and tax incentives to IT units operating out of such SEZs. Under Union Budget 2018-19, the Government has announced setting up of a national level program me that will enable efforts in Artificial Intelligence (AI) and will help in leveraging AI technology for development works in the country.
Insurance is the important sector in the Indian economy. The measure of insurance penetration and density reflects the level of development of the insurance sector. Insurance penetration is measured as a percentage of insurance premium to GDP and insurance density is calculated as ratio of insurance premium to total population.
The statistics published by the Insurance Regulatory and Development Authority of India (IRDA) indicate that insurance penetration had consistently gone up from 2.71% in 2001 to 5.20% in 2009. Since then the level of penetration was declining. However, there was a slight increase in the years 2015 (3.44%) and in 2016 (3.49%).7
In Insurance sector, FDI is allowed upto 49% under the automatic route. The insurance sector is regulated by the IRDA. IRDA has introduced a number of reforms for creating a level playing field for insurance companies in India.
Media and entertainment
The Indian Media and Entertainment (M&E) industry is one of the fastest growing and best performing sectors in India. It reached INR1.5 trillion (US$22.7 billion) in 2017, a growth of almost 13% over 2016. With its current trajectory, we expect it to cross INR2 trillion (US$31 billion) by 2020, at a CAGR of 11.6 percent8.
Further, digital subscription made a strong impact in 2017, with a growth of 50%. As per industry estimates, there are around two million paid digital subscribers across application providers, and between one and a half million customers who have moved entirely to digital media consumption.9
Oil and gas
The oil and gas industry is among India’s eight core industries. India is the third largest consumer of crude oil and petroleum products in the world and second largest refiner in Asia. Oil and gas currently accounts for 34.4 % of India’s primary energy consumption.
The industry is under the administrative ambit of the Ministry of Petroleum and Natural Gas (MoPNG). FDI under the automatic route is permitted up to 100% in all activities and up to 49% in case of refining by public sector undertakings (PSUs).
India has a coastline of about 7,517 km, which encompasses 12 major and 64 non-major ports. During FY 16–17, major and non-major ports in India accomplished a total cargo throughput of 1065.83 Million Tonnes (MT)11.
In India, ports are under the administration of the concurrent list of the Indian constitution. The major ports are governed by the Government of India, while non-major ports are administered by state governments. Some of the key legislations formulated to govern Indian ports include the Major Port Trusts Act, 1963, the Tariff Authority for Major Ports and the Major Ports Regulatory Authority Act, 2009.
In Budget 2018-19 allocation to Ministry of Shipping stands at US$ 289 million. FDI of up to 100% is permissible in Indian ports under the automatic route.
Power and utilities
India’s installed capacity for power generation as on 31 March 2018 is estimated at around 344.02 Giga Watt (GW), with private sector’s contribution around 45 % of the installed capacity. Fuel based thermal power plants form a major portion (i.e., 64.50%) of the installed capacity, accounting for nearly 222.91 GW of the total installed capacity in the country12.
For developing an economy like India, power continues to be a valuable and an essential commodity. The country is experiencing continuous surge in demand for power. FDI of up to 100% is permissible in the power segments (excluding atomic energy).
The contribution of real estate sector to India’s GDP is estimated to be about 11% by 2020. The sector consisting of housing, retail, hospitality and commercial continues to play a critical role in building the requisite infrastructure for India to match its growth ambitions. The market size of Indian real estate sector is estimated to reach US$ 180 billion by 202013.
FDI is prohibited in real estate business however, “Real estate business” for such purposes does not include development of townships, construction of residential /commercial premises, roads or bridges and Real Estate Investment Trusts (REITs) registered and regulated under the SEBI (REITs) Regulations 2014.
Retail industry and consumer products
Indian retail industry accounts for more than 10% of country’s GDP and employs around 8% of working population. India is the world’s fifth-largest global destination in the retail space. Retail industry in India is expected to grow by 60% to reach US$ 1.1 trillion by 2020.14
Consumer product market consists of various subsectors - alcoholic drinks, beauty and personal care, consumer health, home care, hot drinks, packaged foods, soft drinks, tissue and hygiene, and tobacco products.
The government has allowed 51% FDI in multi-brand retail and 100% in single brand retail under the automatic route.
Roads and highways
India has the second-largest road network in the world, spanning a total of 5.5 m km . More than 65% of freight and 80% of passenger traffic in the country is handled by roads. As on 30 June 2017, India has 1,15,435 km of National Highways. 83,677 kms of highway sector projects proposed to be implemented with an overall cost of US$ 106 billion over the period 2017-18 to 2021-226
In budget 2018, US$ 10.92 billion has been allocated to Ministry of Road Transport and Highways. 100% FDI is allowed under the automatic route in the road and highways sector.
India has a fastest growing telecom market. India has the second largest subscriber base with 1.21 billion connections including fixed phone lines.17
FDI cap in the telecom sector has been increased to 100 per cent from 74 per cent. Also, the DoT has come up with the National Digital Telecom Policy 2018 with a view to cater modern needs of the digital communications sector of India.
Owing to the growth in internet penetration, smartphone users and digital payments options, India has been experiencing high growth in the e-commerce sector. According to India Brand Equity Foundation (IBEF), the Indian e-commerce market is expected to grow to US$200 billion by 2026 from US$38.5 billion as of 2017 . The business-to-business model in e-commerce marketplace allows upto 100% FDI, subject to certain operating conditions.
4 India Brand Equity Foundation - https://www.ibef.org/industry/banking-presentation
7IRDAI Annual Report for FY 2016-17
8Re-Imagining India’s M&E Sector – by EY and FICCI (March 2018)
9Re-Imagining India’s M&E Sector – by EY and FICCI (March 2018)
12Monthly Review of Power Sector Reports (Executive Summary), March 2018
13India Brand Equity Foundation- https://www.ibef.org/industry/indian-real-estate-industry-analysis-presentation
14India Brand Equity Foundation - https://www.ibef.org/industry/retail-india.aspx
15India Brand Equity Foundation
Investment climate and foreign trade
FEMA, as it stands today, encompasses of provisions relating to all such transactions which have international financial implications. FEMA envisages that the RBI will have a controlling role in the management of foreign exchange. Currently, the RBI has delegated majority of its powers to Authorized Dealer bankers who are required to exercise their jurisprudence and discretion to adhere to the given Regulatory framework.
Most of the changes made by the government commits towards making India an investor friendly destination, it also reflects a progressive movement towards Make in India initiative of the government. Make in India recognizes the ease of doing business as a key factor to promote entrepreneurship. The initiative is mainly to encourage companies to manufacture their products in India.
Components of foreign investment in India
Foreign investment in India can broadly be categorized as follows:
- Foreign Direct Investment
- Foreign investment under Portfolio Investment Scheme
- Investments on a non-repatriation basis by NRIs and PIOs
Total FDI equity inflow in India from various sectors has nearly doubled from US$22,423 million in 2012-13 to US$44,857 million in 2017-18. Top three countries investing in India amount to 62% of the total FDI. Highest inflow is from Mauritius, followed by Singapore and then Japan. The major sectors attracting investments includes service sector1 , computer software and hardware and telecommunications, receiving almost 34% of total FDI.2
Exports during 2017-18 are at US$478.15 billion, registering a growth of 9.78% in dollar terms vis-à-vis 2016-17. Non-petroleum and non-gems and jewelry exports in March 2018 were valued at US$22.42 billion as against US$21.44 billion in March 2017, an increase of 4.60%.3
Imports during 2017-18 were US$565.32 billion registering a growth of 19.59 %. Oil imports during April- March 2017-18 were valued at US$109.11 billion, which was 25.47 % higher than the oil imports of US$86.96 billion in the corresponding period last year. Non-oil imports during March 2018 were estimated at US$31.69 billion which was 4.96 % higher than non-oil imports of US$30.20 billion in March 2017.
1Services sector includes Financial, Banking, Insurance, Non-Financial / Business, Outsourcing, R&D, Courier, Tech. Testing and Analysis
3Press Information Bureau - India’s Foreign Trade: March 2018
Entry options in India
Every foreign investor planning to enter India should select an appropriate form of business presence, keeping in mind the business objective of the Foreign company (F Co) in India. The right selection is likely to go a long way to ensure efficiency (from an operational/ legal/ regulatory/ tax perspective) and ensure that the business can be financed and run efficiently.
Foreign entities can set up their business operations in India either as incorporated or unincorporated entities.
- Incorporated entities: Private Limited Company, Limited Liability Partnership (LLP), etc.
- Unincorporated entities: Liaison Office (LO), Branch Office (BO)1 , Project Office (PO), etc.
Table below gives a snapshot of some of the commonly preferred business forms in India:
|Particulars||Liaison Office (LO)||Project Office (PO)/ Branch Office (BO)||Private Limited Company||Limited Liability Partnership (LLP)|
|Legal status||Represents the parent company and acts only as a communication channel of the foreign parent company||Extended arm of the parent, PO is generally set-up for specific projects, whereas a BO is set-up for carrying activities in the course of business||Independent status||Independent status|
|Approval for commencement||• Approval required from Authorized Dealer Bank of RBI (AD Bank), which is subject to fulfilment of prescribed conditions |
• Approval from RBI required in prescribed scenarios
|• Approval required from AD Bank, which is subject to fulfilment of prescribed conditions2 |
• Approval from RBI required in prescribed scenarios
|Company can be set up subject to FDI guidelines||LLP can be set up subject to FDI guidelines|
|Permitted activities||Liaison activities |
No commercial/ business activities are permitted
|Restricted scope |
Activities listed by the RBI are only allowed to be undertaken
|Activities specified in memorandum of association of the company, subject to FDI guidelines||LLP has to be engaged in sectors in which 100% FDI is allowed under automatic route and no FDI-linked conditions are applicable|
|Income-tax rate||LO is not subject to tax in India, since it is not permitted to undertake any business activity||Liable to tax on income earned in India @ 43.68%||• Liable to tax on global income @ 34.94%3 |
• Company is liable to Minimum Alternate Tax @ 21.55%3 on its book profits
|• Liable to tax on global income @ 34.94%3 |
• LLP is liable to Alternate Minimum Tax @ 21.55%3 on its book profits
|Repatriation||LO is not permitted to undertake any business activity; as such, may not be any repatriations from LO||BO/PO is permitted to remit post-tax profits outside India on satisfaction of the AD bank, filing of prescribed documents with AD Bank required||• Does not require any approval for remittance of post-tax profits. |
• Dividend declared will be subject to DDT @ 20.56% in India
|• Does not require any approval for remittance of post-tax profits|
• Unlike a company, LLP is not required to pay tax on withdrawal of profits from partners’ capital
|Ease of exit||Prior approval of AD Bank and ROC authorities required||Prior approval of AD Bank and ROCauthorities required||• Complex depending on the strategy adopted |
• Exit can be through sale of shares or liquidation
|• Complex depending on the strategy adopted|
• Exit can be through sale of interest or dissolution
1BOs are permitted to represent the parent and undertake activities in India such as export/ import of goods, rendering professional services, carrying out research work, etc.
2For setting up BO / LO, F Co should further have a financially sound track record and should satisfy profitability and net worth conditions and other conditions prescribed under Master Directions issued by RBI for Establishment of BO/LO)/PO or any other place of business in India by foreign entities dated 01 January 2016 (updated on 10 May 2018)
Funding of Indian business
Equity share capital
- Additional capital can be raised by any of the following modes subject to regulatory conditions:
- Rights issue: Issue of shares to existing shareholders in proportion of their shareholding
- Employee stock options: Issue of shares to employees under a stock option scheme
- Private placement of shares: Issue of shares to an identified group of persons/ entities
- Partly paid equity shares/ share warrants
- Issue and transfer of equity shares may be subject to pricing guidelines (according to IT Act, company law and foreign exchange regulations)
Preference Share Capital
- Preference shareholders are entitled to preferential right over equity shareholders with respect to dividend and repayment of capital
External Commercial Borrowings (ECB)
- ECBs are commercial loans raised by eligible resident entities from recognized non-resident entities and should conform to parameters such as minimum maturity, permitted and non-permitted end-uses, maximum all-in-cost ceiling, etc.
- ECBs can be availed under two routes — automatic route and approval route. A committee constituted by the RBI decides which cases are outside the purview of automatic route
- The framework for raising loans through ECB comprises the following three tracks:
|Particulars||Track I||Track II||Track III|
|ECB denomination||Medium-term foreign currency denominated ECB||Long-term foreign currency denominated ECB||Indian Rupee denominated ECB|
|Minimum average maturity||3/5 years||10 years||3/5 years|
- The ECBs under the abovementioned three tracks have different conditions with respect to eligible borrowers, eligible lenders, all-in-cost ceiling, end-use restrictions, etc.
Debentures and borrowings
- Companies can also raise funds by issuing debentures, bonds and other debt securities or by accepting deposits from the public. Debentures can be redeemable, bearer or registered, and convertible or non-convertible.
- Compulsorily fully convertible debentures are treated as equity under FDI Policy. Non-convertible/ optionally convertible debentures are construed as ECB and should conform to ECB guidelines (as discussed below).
- SEBI registered FIIs/ QFIs/FPIs are allowed to invest in listed debt securities, subject to regulatory conditions
ADRs, GDRs and FCCBs
- Qualifying Indian companies can raise equity capital overseas by issuing ADRs, GDRs or FCCBs (INR denominated equity shares/ bonds) which are subject to sectoral caps and end-use restrictions under FDI Regulations.
- The FCCBs need to conform to ECB guidelines as specified above.
Funding of LLP
- Investment in LLP is through capital contribution of partners and is subject to conditions under the FDI policy
- FDI in LLPs is permitted in sectors where 100% FDI is allowed under automatic route and there are no FDI-linked performance conditions
Repatriation of funds
Repatriation from an Indian company
Foreign capital invested in India is generally allowed to be repatriated along with capital appreciation, if any, after payment of taxes due. The repatriation is allowed provided the investment was made on a repatriation basis in terms of FDI/ FEMA regulations and is subject to any lock-in conditions that may be applicable under FDI/ FEMA regulations.
|Typical modes of repatriation by an Indian company|
|Dividend||Buy back||Capital reduction|
|► Profits earned by an Indian company can be repatriated as dividend subject to availability of sufficient free reserves after payment of DDT @ 20.56%1 without the RBI’s permission. The repatriation is also subject to compliance with other specified conditions |
► No further tax to be levied on corporate shareholders
► Repatriation can be completed within a week
|► Buy back restricted up to 25% of share capital and free reserves in a financial year subject to satisfaction of prescribed conditions |
► Company buying back shares liable to pay tax @ 23.30% (on consideration paid less amount received on issue of shares )
► No tax on shareholders in case of buy back of unlisted shares
► In case of buy back of listed shares, tax payable by shareholders is dependent on factors like payment of STT, period of holding, residency, etc.
► Buy back price to be subject to pricing conditions prescribed under FDI regulations in case of non-resident shareholders
► Generally, buy back of unlisted shares can be completed within six weeks
| ► NCLT driven process, subject to conditions prescribed under FDI regulations|
► Subject to DDT @ 20.56%1 in the hands of Indian company to the extent of accumulated profits
► Consideration in excess of accumulated profits subject to capital gains tax in the hands of shareholders
► Capital reduction can be completed within four to six months (subject to any NCLT vacations and protracted litigation)
► Capital reduction should be in compliance with the FEMA guidelines
Royalties and fee for technical services
Indian companies are permitted to make payments to foreign entities under foreign collaboration agreements, subject to certain prescribed conditions. The payment can be for:
- Royalties and technical know-how
- Fees for technical and management services
The companies need to substantiate genuineness of such payments.
Remittances to foreign companies in the nature of royalties, fees for technical services and consultancy services are subject to tax withholding at 10% (plus applicable surcharge and cess) as per section 115A of the IT Act subject to beneficial tax rates provided in the applicable treaty. Furthermore, the said payments will be subject to arm’s length test in case the transaction is between associated enterprises.
Profits earned by Indian branches of foreign companies (other than banks) can be repatriated to their head offices subject to payment of applicable taxes. Proceeds from the winding-up of a branch of a foreign company in India can also be repatriated.
Profit earned by LLPs can be repatriated by way of distribution of profits to partners/ withdrawal of capital.
1DDT rate to be applied on the net amount distributed to shareholders.
2Rule 40BB of the Income-tax rules states the provisions for calculation of ‘amount received on issue of shares’ in scenarios such as mergers, asset acquisition, ESOPs, etc
Forms of business enterprise
Sole proprietorships are businesses owned and managed by individuals. Its features are:
- Profits or losses borne by the owner solely
- No separate legal existence
- Unlimited liability of the proprietor
- NRI/PIO residing outside India eligible to carry business in India as sole proprietor
- NRI/PIO cannot invest in proprietary concern engaged in specified sectors
- Investments can be made through inward remittance or out of specified accounts held by NRI or PIO
Persons who have agreed to share the profits/ losses of a business conducted by them or any of them on their behalf is called Partnership. Main features are:
- Partner’s liability is unlimited
- Minimum two partners and maximum 50
- Firm and its partners are legally a single entity
- Partnership interest is non-transferable (except to existing partners)
- NRI/PIO residing outside India is allowed to invest in an Indian partnership firm on non–repatriable basis. Repatriation benefits available with prior RBI approval
- NRI or a PIO cannot invest in a partnership firm engaged in specified sectors
- A person resident outside India (other than NRIs or PIOs) can make investments in partnership firm after obtaining approval of the RBI or FIPB
Limited Liability Partnership
- Hybrid entity with the combined features of a company and a partnership firm
- Perpetual succession
- Legal identity separate from its partners
- Partner’s liability is limited to their contribution
- FDI into LLP – permitted under the automatic route subject to investment condition
- LLP which were earlier restricted from availing ECB will now be eligible to raise ECB,
- LLPs with FDI eligible to make downstream investments into company/LLP – such downstream company/LLP to satisfy investment condition1
- Conversion of a company with FDI into LLP permitted under automatic route – such company to comply with investment condition1
- Minimum two designated partners who are individuals, at least one being resident of India
- Designated partners responsible for the LLP complying with the provisions of LLP laws in India
- Where the LLP has a body corporate (BC) as partner, then the BC will have to nominate an individual to act as a designated partner (DP).
- An LLP incorporated in India is permitted to make outbound investments, subject to applicable Indian exchange management conditions
The Companies Act and sub-ordinate rules therein regulates incorporation of a company, manner of conducting the affairs of a company, responsibilities of its directors and dissolution of a company. The Ministry of Corporate Affairs has the responsibility of ensuring compliance with the provisions of the Companies Act through the offices of RoC and the RD. Compliance by listing companies is ensured by SEBI.
Types of companies
Companies in India can be broadly classified as public and private companies. A company can be registered with its liability as limited or unlimited. A company can also be registered as a company limited by guarantee.
- The Companies Act permits companies to issue two kinds of shares to its members:
- Equity shares (common stock)
- Preference shares (preferred stock)
- Equity share capital with differential rights as to dividend, voting or otherwise can be issued, subject to prescribed conditions and rules
Board of directors
- The management of a company is entrusted to its board of directors. The board acts on behalf of the company’s members and is entrusted with the overall responsibility for its business activities and day-to-day operations
- It seeks the confirmation and approval of the company’s members on major decisions, by way of passing resolutions at general meetings or by way of postal ballot
- The board may also delegate its powers to a committee of directors or managing director by passing resolutions to this effect
Director identification number (DIN):
Every individual, intending to be appointed as director of a company, is required to obtain a DIN, a unique number, by making an application to the central government.
Directors and key managerial personnel:
|Key managerial personnel||► Listed company and every other public company with a paid-up capital of INR100mn or more will mandatorily have the whole-time key managerial personnel|
|Resident director||► Mandatory requirement to have at least one resident director on the board being a person who has stayed in India for a total period of not less than 182 days|
|Managing director/ Whole-timedirector||► Certain specific condition to be adhered — key being the appointee is required to stay in India for a continuous period of not less than twelve months immediately preceding the date of appointment|
|Independent director||► Listed company - at least one-third of the board will consist of independent directors |
► Every public company with a paid-up capital of INR100mn or more or turnover of INR1,000mn or more or aggregate outstanding loan or deposits exceeding INR500mn — at least two independent directors on board
|Woman director||► Every listed company and every other public company with a paid-up capital of INR 1,000mn or more or turnover of INR3,000mn or more — at least one female director on board|
|Company secretary||► Every company with a paid-up capital of INR500m or more will mandatorily have a whole-time Company Secretary who is a member of the Institute of Company Secretaries of India|
All statutory filings, intimations to Registrar of Companies and Central Government and other service requests are required to be made online by submitting the eForms available on the MCA website using Digital Signature.
Corporate Social Responsibility (CSR)
Eligible Indian and foreign companies working in India are required to ensure that they spend, in every FY, at least 2% of the average net profits of the company, as calculated in accordance with the Cos Act towards the CSR activities specified in Schedule VII of the Cos Act.
Financial reporting and audit requirements
Financial reporting and auditing
- The government has notified Ind AS standard for application by Indian Companies other than in banking, insurance and NBFCs in the phased manner from 01 April 2016. Application of Ind AS is now mandatory for all listed companies, non-listed companies with net worth of INR2.5 billion and holding, subsidiaries, joint ventures or associates of these companies.
- Ind AS applies to both standalone financial statements and consolidated financial statements of the companies covered above. Companies not covered above can either apply Ind AS voluntarily or continue applying existing standards, i.e., accounting standards notified under the Companies (Accounting Standards) Rules, 2006. Any such company opting to apply Ind AS will need to prepare its financial statements according to Ind AS consistently. Once Ind AS are applied voluntarily, this option will be irrevocable and such companies will not be required to prepare another set of financial statements in accordance with existing standards.
- India has gone for the convergence approach instead of full adoption of IFRS (International Financial Reporting Standards) as issued by the IASB (International Accounting Standards Board). As a result, financial statements prepared in accordance with Ind AS may not be fully compliant with IASB IFRS.
Uniform financial year
Companies/ LLPs need to adopt uniform financial year ending 31 March.
All companies need to get their accounts audited by an auditor who is practicing member of the ICAI. Under the Cos Act, 2013 an auditor is appointed for a term of five years. However, the appointment needs to be ratified each year at the AGM. Furthermore, all listed companies and those belonging to the prescribed class cannot appoint or reappoint the auditor for more than two terms of five consecutive years, if the auditor is an audit firm or for more than one term of five consecutive years, if the auditor is an individual.
Every company needs to prepare financial statements for every financial year, which gives true and fair view of the state of affairs of the company. Financial statement in relation to company includes:
- Balance sheet at the end of the financial year
- Profit and loss account, or in the case of a company carrying on any activity not for profit, an income and expenditure account for the financial year
- Cash flow statement for the financial year
- A statement of changes in equity, if applicable
- Any explanatory note annexed to, or forming part of, any document referred to above
ICDS (Income Computation and Disclosure Standards) notified by the CBDT (Central Board of Direct Taxation) needs to be followed by all assessee following the mercantile system of accounting, for the purpose of computation of income chargeable to income tax in India.
ICDS are applicable to all taxpayers, including non-resident taxpayers (corporate or non-corporate), irrespective of turnover or quantum of income. As on date, 10 ICDSs have been notified by central government.
Separate maintenance of books is required for ICDS purpose however it may necessitate maintenance of memorandum records. Disclosures required under ICDS is to be included in annual TAR (Tax Audit Report) and ROI (Return of Income).
ICDS does not impact MAT for corporate taxpayers, which will continue to be based on “book profit” determined on basis of applicable accounting standards.
Economic laws and regulations
1. Indian Contract Act, 1872 (ICA)
The ICA governs the formation, implementation and conclusion of a contract. It also provides remedies for breach of contract. ICA defines contract as an agreement enforceable by law. To be enforceable by law, a contract must contain the following essential elements:
- Free consent of the parties
- Parties must be competent to contract
- Contract should be for a lawful consideration
- Contract must be with a lawful object
- Contract should not be expressly declared by the ICA to be void
Along with dealing in the general principles of law of contract, ICA also deals with special kind of contracts such as contract of indemnity and guarantee; contract of bailment and pledge; and contract of agency. However, it does not cover contracts covered in separate independent legislations such as contract of partnership, contract for sale of goods, etc.
2. Protection of intellectual property rights
India being a signatory to the GATT (General Agreement on Tariffs and Trade) and Trade Related Aspects of TRIPS (Trade-Related Aspects of Intellectual Property Rights) agreement, has complied with the obligations therein by enacting necessary statutes governing the following:
- Copyrights and other related rights
- Geographical indications
- Industrial designs
2.1 Copyright Act, 1957 and Copyright Rules, 1958
The Copyright Act read with the Copyright Rules governs the field of copyright protection in India. As per the said law, copyright subsists with the author of the original literary, dramatic, musical and artistic work, a cinematographic film or a sound recording. In India, copyright is an inherent right of the author in his creation and therefore the registration of copyright is not sine qua non.
The Copyright Act provides for both civil and criminal remedies for an infringement of a copyright. When an infringement is proved, the copyright owner is entitled to remedies by way of injunction, damages and order for seizure and destruction of infringing articles.
2.2 Trade Marks Act, 1999 (TM) and Trade Marks Rules, 2017 (TM Rules)
The TM and TM Rules provides for protection of trademarks for services and goods, including collective marks and for the assignment and transmission of trademarks. The registration of the trademark is sine qua non for a person claiming to be the proprietor of a trademark. Wherein, the prior use of the trademark is not a pre-requisite for its registration.
2.3 Geographical Indications of Goods (Registration and Protection) Act, 1999 (GI Act) and Geographical Indication of Goods (Regulation and Protection) Rules, 2002 (GI Rules)
In compliance with the obligations in the TRIPS Agreement and the Paris Convention for the Protection of Industrial Property, India enacted the GI Act along with the GI Rules that governs the present geographical indications regime in India. As per the GI Act “Geographical Indication”, means an indication which identifies particular goods as agricultural, natural or manufactured goods that are originating, or are manufactured in the territory of a country, or a region or locality in that territory, where a given quality, reputation or other characteristic of such goods is essentially attributable to its geographical origin.
2.4 Indian Patents Act, 1970
The Patents Act provides for the grant, revocation, registration, license, assignment and infringement of patents in India. Any infringement of a patent is punishable under the Patents Act.
2.5 Designs Act, 2000 (Designs Act) and Design Rules, 2001 (Design Rules)
The Designs Act and the Design Rules were enacted to fulfill India’s obligations under WTO agreements. The Designs Act protects novel designs formulated by the owner with the object of applying them to specific articles, to be manufactured and marketed commercially for a specific period of time.
3. Labor laws
India is a member of the ILO (International Labour Organization) and complies with the conventions it has ratified. The key labor laws applicable are outlined below.
Details of the legislation
Industrial Disputes Act, 1947
Provides for the investigation and settlement of industrial disputes, between employers and employees relating to employment or non-employment, the terms of employment, or conditions of labor.
Trade Unions Act, 1926
Provides for registration of trade unions of workers, and is administered by state governments. It confers legal and corporate status on registered trade unions and promote civil and political interest of its members.
Plantation Labour Act, 1951
The Plantation Labour Act, 1951 provides for the welfare of plantation labour and regulates the conditions of work in plantations. According to the Act, the term “plantation' means” any plantation to which this Act, whether wholly or in part, applies and includes offices, hospitals, dispensaries, schools, and any other premises used for any purpose connected with such plantation, but does not include any factory on the premises to which the provisions of the Factories Act,1948 apply
Payment of Bonus Act, 1965
Provides for payment of bonuses to persons employed in certain establishments on the basis of profits or on production or productivity, as well as for matters connected therewith. Applicable to every factory and establishments employing 20 or more persons
Payment of Gratuity Act, 1972
Provides a scheme for the payment of gratuity to all employees (whether or not employed in a managerial or administrative capacity) engaged in factories, shops and other establishments
Employees Compensation Act, 1923
Its objective is to compensate employees or their survivors in the event of accidents resulting in disablement or death during the course of employment
Industrial Employment (Standing Orders) Act, 1946
Provides for the employers to define the conditions of employment of the workers by issuing standing orders or implementing service rules with respect to classification of workmen, payment of wages, termination of service, etc.
Minimum Wages Act, 1948
Seeks to determine the minimum rates of wages in certain employments specified in the schedule to the MWA
Payment of Wages Act, 1936
Seeks to regulate the payment of wages to certain classes of employees in an industry such that wages are disbursed within the prescribed time limit and without any unauthorized deductions
Factories Act, 1948
It governs the health, safety and welfare of factory workers. It also comprises regulation for the functioning of factories and detailed procedures related to the inspection, registration and licensing of factories
Employees’ Provident Fund and Miscellaneous Provisions Act, 1952
Seeks to ensure financial security of employees by providing compulsory savings through contributory fund payable at retirement. Applicable to international workers subject to exemptions given in Act
Maternity Benefit Act, 1961
Regulates the employment of women in certain establishments for a prescribed period before and after childbirth, abortion or surrogacy. The Ministry of Law and Justice has recently vide notification dated 27 March 2017, extended the maximum period for which any woman would be entitled to maternity leave to 26 weeks from the earlier 12 weeks
Employees’ State Insurance Act, 1948
Provides for health care and cash benefits to employees in the event of sickness, maternity or injury suffered during employment and for other matters relating thereto. The Ministry of Labour and Employment has vide notification dated 22 December 2016, increased the wage limit to INR21,000 from the earlier INR15,000
Contract Labor (Regulation and Abolition) Act, 1970
The Act was promulgated to regulate the employment of contractual labor. The establishments covered under the CLRA are required to be registered as principal employers with appropriate authorities. Every contractor is required to obtain a license and is not to undertake or execute any work through contract labor, except in accordance with the license issued by the licensing officer
Shops and Establishment Act, 1954
Regulate working hours, prescribe minimum standards of working conditions and overtime leave-salary payments to workers in certain categories of shops and other establishments
4. Anti-trust regulation
In line with the global norms to prevent monopolies from creating trade barriers and reducing competition in India, the government has evolved an anti-trust regulatory framework that principally relates to the following legislations:
4.1 The Competition Act, 2002
Enacted to achieve objectives such as promote and sustain competition in markets, protect the interest of consumers, ensure freedom of trade carried on by participants and prevent practices having an appreciable adverse effect on competition. In terms of the Competition Act, Competition Commission of India was established, for adjudication on any anticompetitive practice, along with giving scrutinizing combinations which have an effect on relevant markets in India.
4.2 Consumer Protection Act, 1986
Enacted for the protection of consumer interest against manufacturers or service providers providing defective goods or deficient services or undertaking any trade practice that is likely to be classified as “unfair” or “restrictive” under the CP Act.
4.3 Negotiable Instruments Act, 1881
The NI Act, governs the law relating to the promissory notes, bills of ex-change and cheques. The NI Act prescribes the liabilities of a drawer, a drawee and a holder in due course. The NI Act provides for criminal prosecution, which may extend up to a period of one year and/or a fine which may extend to twice the amount of the negotiable instrument for any default in encashment of any negotiable instrument in India.
4.4 Sale of Goods Act, 1930
The SG Act is complimentary to the ICA. Basic provisions of ICA, i.e., offer and acceptance, legally enforceable agreements, mutual consent, parties competent to contract, free consent, lawful object, consideration etc., apply to every contract of sale of goods also.
4.5 Arbitration and Conciliation Act, 1996
In India, the law relating to Arbitration and Conciliation is embodied in A&C Act that provides, inter alia, for a mechanism for appointment of arbitrators, objections against an arbitral award as well as enforcement of arbitral award. Unless the parties otherwise agree, the provisions of the A&C Act will govern every agreement containing arbitration clause.
Mergers and Acquisitions
|Mode||Merger||Demerger||Slump sale||Share acquisition|
|Nature||Consolidation of businesses/ entities by pooling of all financial and other resources||Segregation of one business from other business inter-alia with the objective of value appreciation||Lock, stock and barrel transfer of a business undertaking for a lump sum consideration||Gaining direct/ indirect control over a company, by acquiring shares with voting rights|
|Ideal for||Group reorganization||Third-party acquisition|
|Implementation||Vide a Scheme to be approved by jurisdictional NCLT (National Company Law Tribunal)||Vide a BTA/ Scheme approved by jurisdictional NCLT||Vide a Share Purchase Agreement|
|Regulatory considerations||Approvals of shareholders, creditors, NCLT and various regulatory bodies (RBI, SEBI, CCI, stock exchanges, corporate law authorities and ITA) required||Approval required from shareholders and IT Act, and further sectoral caps under FDI Regulations will apply||Subject to sectoral caps and pricing conditions prescribed under FDI regulations|
|Relaxations under Cos Act, 2013||NCLT approval not mandatory for merger/ demerger between small companies and between wholly owned subsidiary and its parent, approval from corporate law authorities required |
NCLT may allow unlisted transferee company to remain unlisted post-merger/ demerger of a listed company
Cross-border mergers undertaken in accordance with prescribed regulations to be deemed to be approved by the RBI
|Not applicable||Recognizes enforceable contracts among shareholders such as right of first refusal, liquidation preference, tag/ drag along rights, etc.|
|Mode||Merger||Demerger||Slump sale||Share acquisition|
|Taxation||Generally, tax neutral for shareholders and companies, subject to fulfilment of prescribed conditions||Gains on transfer subject to capital gains tax||Gains on transfer subject to capital gains tax |
Indirect transfer of shares subject to capital gains tax in India if prescribed conditions are met
|Carry forward of losses||Available subject to fulfilment of prescribed conditions||Not available||Available in certain scenarios|
|Trigger of Takeover code (SEBI)||Exemption available to merger/ demerger subject to fulfilment of prescribed conditions||Possible only if shares of listed company are issued as consideration||Possible if prescribed limits are breached in case of acquisition (direct/ indirect) of shares of listed company through transfer/ issue|
|Competition Commission approval||Approval required if prescribed thresholds are breached|
|Time limit(months) (approximate time limit)||Six to seven in case of unlisted companies Eight to 10 in case of listed companies||One to two through BTA |
Same timeline as merger/ demerger if undertaken through scheme
|One to two|
1As per newly introduced provisions under Foreign Exchange Management (Cross Border Merger) Regulations, 2018 dated March 20, 2018
2Capital gains tax rate may vary between 20% - 40%, depending upon the period of holding and the residency status. The above mentioned rates exclude a maximum surcharge of 5% in case of foreign entities, and 12% in case of domestic companies, and educational cess (of 4%).
3Capital gains tax rate may vary between 5% - 40%, depending upon the period of holding and the residency status. The above mentioned rates exclude a maximum surcharge of 5% in case of foreign entities, and 12% in case of domestic companies, and educational cess (of 4%).
4Indirect transfer tax implications are required to be evaluated basis separate mechanism and computation.
5Applicable to listed companies only
6Subject to any NCLT vacations and protracted litigations
1. Visa and registration requirements
A foreign national visiting India needs to obtain the appropriate visa before entering India. Type of visa to be obtained depends upon the purpose of the visit to India. Below are few types of Indian visas available to foreigners.
|Visa type||Purpose of visit|
|Business visa||Establishing or exploring the possibility of set-up of businesses, attending meetings, liaising with potential business partners or function as partner/ director, negotiate supplies, conduct trade of goods and provide high-level technical guidance on ongoing projects and more.|
|Employment visa||Employment in India, executing projects or contracts, providing technical support or services, transfer of know-how for which royalty is paid and consulting on contract basis in highly skilled services.|
|Project visa||Execution of projects in the power and steel sectors.|
|Intern visa||Pursuing internship in Indian companies, educational institutions and non-governmental organizations (NGOs), subject to certain checks and conditions specified.|
|Tourist visa||Recreation, sightseeing, casual visit to meet friends and relatives etc.|
|e-Visa||Sub-divided into three categories: e-Tourist Visa, e-Business Visa and e-Medical Visa. Applicable for travelling for a period not exceeding 60 days from the date of arrival in India.|
Others: Other types of visas issued in India include transit, medical, entry (X), student, conference, journalist, research, yoga, missionary, sports, mountaineering and film Visa etc.
2. Residential permit
Foreign nationals must register with the local FRRO/ FRO within fourteen days from their date of arrival in India if their visa is valid for longer than 180 days or if the visa stamp specifically requires this registration. Certain categories of visitors are also required to register with the police authorities.
3. Family and personal considerations
Accompanying legal spouses and dependent children of individuals visiting India on business or for employment are required to apply the visa type - Employment Visa–Dependent/ Business Visa-Dependent. Spouses or dependents of working expatriates must obtain separate work permits to be employed in India.
4. Social security
Social security in India is governed by the EPF Act. The EPF Act applies to the following establishments:
- An establishment employing 20 or more persons engaged in a specific industry or an establishment or class of establishments notified by the government
- An establishment employing less than 20 persons that voluntarily opts to be covered by the EPF
Covered employers must contribute towards the Provident Fund and Pension Scheme for their employees, including employees who are International Workers.
Liability for income tax
Liability for income tax is governed by the residential status of individuals during the tax year. Residential status of an individual is determined based on the conditions prescribed in the table below:
|Period of stay in India||Residential status|
|> 182 days in the tax year (1 April to 31 March)||Satisfies none||Satisfies any one|
|> 60* days in the tax year and 365 days in four years immediately preceding the tax year|
|NR as per basic conditions in at least 9 out of 10 immediately preceding tax years||Satisfies one or both||Does not satisfy both|
|<729 days in India in seven years immediately preceding tax years|
*60 days is substituted by 182 days for:
- An Indian Citizen or a person of Indian origin who comes on a “visit” to India in any tax year Or
- An Indian Citizen who being in India, leaves India in any tax year for the purpose of employment outside India
Rates of income tax for year 2018-19
|Income levels (INR)||Income tax|
|250,001–500,000||5% of income in excess of INR250,000*|
|500,001–1,000,000||INR12,500 plus 20% of income in excess of INR500,000|
|1,000,001 upward||INR112,500 plus 30% of income in excess of INR1,000,000|
Surcharge of 10% of total tax liability is applicable where the total income is between INR5,000,000 and 10,000,000. Surcharge of 15% of the total tax liability is applicable where the total income exceeds INR10,000,000. This is further increased by an education cess at 4%.
Long-term capital gains are not taxed according to the above slab rates, but at a base rate of 20%, plus applicable surcharge and cess Long term capital gains from listed equity shares and equity oriented mutual funds are taxed at 10% subject to conditions, however, such capital gain is not taxable if the gain does not exceed INR100,000.
*INR300,000 for resident individuals over 60 years and under 80 years of age and INR500,000 in the case of resident individuals of 80 years of age or more. A rebate of INR2,500 or actual tax payable, whichever is less, is available for resident individuals with total income up to INR350,000.
6. Income tax filing
All taxpayers, including non-residents, must file a ROI if their income exceeds the maximum amount that is not liable to tax. Residents (excluding not ordinary residents), who hold foreign assets or income from any source outside India are required to furnish ROI even if the income does not exceed the maximum amount that is liable to tax.
ROI for salary income needs to be filed by 31 July. ROIs for self- employment or business income must also be filed by 31 July or, if accounts are subject to a tax audit, by 30 September every year. Return forms are notified by the tax authorities on a year-on-year basis.
Direct tax by way of Income tax is levied by the central government. Administration, supervision and control in the area of direct taxes lie with the CBDT.
The Indian tax year extends from 1 April of a year to 31 March of the subsequent year. The due date for filing ROI for corporations is as follows:
|Categories||Date of filing of return|
|Company required to submit a transfer pricing certificate in Form 3CEB (with respect to international transactions)||30 November|
|Other companies||30 September|
Non-resident corporations are also required to file a ROI in India if they earn income in India or have a physical presence or economic nexus with India.
Corporate tax liability needs to be estimated and discharged by way of advance tax on quarterly basis.
Late filing of a ROI and delays in payment or shortfall in taxes attract penalty/ interest.
3. Corporate income tax
For Indian income tax purposes, a corporation’s income comprises of the following heads of income:
- Income from house property
- Income from business
- Capital gains on disposition of capital assets
- Residual income arising from non-business activities (i.e., income from other sources)
Corporations resident in India are taxed on their worldwide income arising from all sources.
Non-resident corporations are taxed on the income earned through a business connection in India or any source in India or transfer of a capital asset situated in India.
The term “business connection” is used in Indian IT Act instead of PE, as in tax treaties, to tax profits from business. The term business connection is considered wider in its scope than PE and also includes the significant economic presence (i.e., conducting business through digital means and without a physical presence) of a non-resident company.
Double Taxation Avoidance Agreement (DTAA)
Provisions of the IT Act or the DTAA, whichever is more beneficial are applicable, accordingly, the taxability is likely to be restricted or modified.
4. Rate of Corporate tax
Domestic and foreign corporations are subject to tax at a specified basic tax rate and depending upon the total income, the basic rate is increased with a surcharge. There is an additional levy of health and education cess at the rate of 4% of the tax payable.
Tax rates for a company and an LLP:
|A. Where total turnover or gross receipts in tax year 2016-17 <= INR 2500m||Income > INR10m but < INR100m||27.82%|
|Income > INR100m||29.12%|
|B. Where total turnover or gross receipts is > INR2500m||Income > INR10m but < INR100m||33.38%|
|Income > INR100m||34.94%|
|C. Optional tax rate for new manufacturing companies set up/ registered on or after 1 March 2016||Income > INR10m but < INR100m||27.82%|
|Income > INR100m||29.12%|
|Company other than domestic company:||Income > INR10m but < INR100m||42.43%|
|Income > INR100m||43.68%|
|DDT on deemed dividend by way of loan or advance paid by closely held company||34.94%|
|DDT on normal dividend||20.56%|
|LLP||Income > INR10m||34.94%|
|Income < INR10m||31.20%|
|Status||Income from INR 10mn to INR100mn||Above INR 100mn|
There is no repatriation tax cost while profits are distributed by an LLP, as the share of such profits in the hands of the partner(s) is exempt.
Withholding tax rates
|Withholding tax rates||Tax rates % (corresponding note)|
|Paid to domestic company||Paid to foreign company|
|Dividends||Nil (d)||Nil (d)|
|Interest||10 (e)||20/5 (a)(b)(e)|
|Royalty from patents, know-how etc.||10 (e)||10 (a)(c)(e)|
|Fee for Technical Services (FTS).||10 (e)||10 (a)(c)(e)|
- The rates listed above for withholding tax must be increased by applicable surcharge with reference to the income slabs as indicated in the surcharge table above and health and education cess of 4%
- This rate of 5% only applies to interest on foreign currency loans. Any other interest is subject to tax at normal rates applicable to foreign corporations of 20%
- Royalty or FTS: Foreign corporations are taxed with respect to royalties or FTS at the rate of 10% on gross basis
- Dividend income: Dividend income distributed by domestic corporations (on which DDT has been paid by the company distributing the dividend) is exempt from tax in the hands of domestic company (including foreign company)
- If the PAN of the payee is not available, tax will be withheld at an applicable rate or at a penal rate of 20%, whichever is higher
5. Books of accounts and tax audit
Every company engaged in a business and profession is required to maintain books of accounts and get them audited by an accountant if its total sales, turnover or gross receipts exceed INR10m during the year.
Depreciation of capital assets is allowed on the basis of the reducing balance method using varying rates, depending on the nature of assets.
7. Restrictions on interest deductions
In line with the OECD‘s BEPS project, India has introduced a thin capitalization rule. Deduction of interest payment to overseas related parties is capped at 30% of EBITDA. Excess interest disallowed in a year will be eligible for carry forward up to eight consecutive years.
8. Relief for losses
Business losses, other than from speculation business, are permitted to be set off against income from any other source (except income from employment, i.e., salary income) in the same year. Business losses, which could not be so set off, are permitted to be carried forward for setting off against business profits arising in the eight subsequent years. Unabsorbed depreciation is permitted to be carried forward for an unlimited period.
9. Indirect transfer of shares of domestic corporations
Non-residents are also taxed on capital gains arising on any share or interest in a company or entity registered or incorporated outside India, deriving its value substantially from assets located in India, where the FMV of Indian asset on a specified date exceeds INR100mn and represents at least 50% of the value of all assets owned by the foreign corporation.
Small shareholders holding 5% or less of the total voting power/ share capital, in the foreign corporation or entity directly holding the Indian assets are exempted from indirect transfer tax.
Moreover, indirect transfer of shares of an Indian corporation pursuant to merger/ demerger of foreign corporations, subject to satisfaction of specified conditions is not taxable.
Indian tax law requires MAT to be paid by corporations on the basis of profits disclosed in their financial statements where the tax payable according to regular tax provisions is less than 18.5% of their book profits.
The credit for such tax paid is allowed to be carried forward for 15 years and set off against income tax payable under the normal provisions of the IT Act to the extent of the difference between tax according to normal provisions and tax according to MAT.
11. Equalization Levy
In line with OECD’s BEPS project Action Plan 1 (Digital Economy), India has introduced an Equalization Levy of 6% is applicable on payment made by a resident carrying on business or profession or the Indian PE of a non-resident to a non-resident providing specified services. A “specified service” has been defined as an online advertisement, or provision for digital advertising space or any other facility or service for the purpose of online advertisement, and also includes any other service notified by the central government.
12. Foreign tax relief
DTAAs entered into by India with several other countries govern foreign tax relief to avoid double taxation. If there is no such agreement, resident corporations can claim a foreign tax credit for the tax paid by them in other countries subject to meeting certain requirements. The credit amount is the lower of Indian rate of tax or the tax rate of the said country on the doubly taxed income.
13. Authority for advance ruling (AAR)
In order to provide the facility of achieving certainty on the income tax liability of eligible tax payers (including non-residents), to plan their income tax affairs well in advance and to avoid lengthy and expensive litigation, a scheme of advance rulings was introduced under the IT Act.
A ruling can be obtained by an applicant (resident or non-resident) with respect to any question of law or fact in relation to the tax liability of the non-resident arising out of a transaction undertaken or proposed to be undertaken. Additionally, a resident applicant can also approach AAR for determining his tax liability arising out of a transaction undertaken or proposed to be undertaken with a non-resident valuing INR1000 million or more in aggregate.
14. General Anti-Avoidance Rule (GAAR)
The IT Act contains anti-avoidance provisions in the form of GAAR, which provides extensive powers to the Tax Authority to declare an “arrangement” entered by a taxpayer to be an Impermissible Avoidance Arrangement (IAA). The consequences include denial of the tax benefit either under the provisions of the IT Act or the applicable tax treaty. The provisions can be invoked for any step in or part of an arrangement entered, and the arrangement or step may be declared an IAA. However, these provisions only apply if the main purpose of the arrangement or step is to obtain a tax benefit.
The provisions of GAAR will not apply where the tax benefit (for all parties) from an arrangement in a relevant tax year does not exceed INR30 million.
The central government vide a notification has made it clear that GAAR will apply to all tax benefits obtained on or after 1 April 2017 irrespective of the date of arrangement.
1With applicable surcharge and 4% Health and Education cess
2Notification No. 49/2016/ F. No. 370142/10/2016-TPL dated 22nd June 2016
TP provisions in India are in line with the TP guidelines for MNCs and tax administrators issued by the OECD, except with certain noteworthy differences.
Under TPRs, any ITN and SDT between two or more AEs (including PEs) must be conducted at ALP. Relevant provision regarding TPR are under:
1. Income Tax New Series
TPRs define ITN as a transaction between two or more AEs, either or both of whom are non-residents and have a bearing on the profits, income, losses or assets of such enterprises. Furthermore, a transaction with a non-AE may also be deemed as an ITN if a prior agreement or arrangement pertaining to such transaction exists between the non-AE and the taxpayer’s AE.
2. Specified Domestic Transactions
Where the aggregate value of SDT exceeds INR200mn, within the ambit of TPRs, the same shall be computed having regard to ALP. The transactions covered under TPR(s) include transactions with related domestic companies or units eligible for tax holiday.
3. Safe Harbor Rule
SHR indicates circumstances under which tax authorities accept a transfer price declared by a taxpayer to be at arm’s length. SHR will be applicable for a maximum period of three years, beginning from FY 2016-17 (AY 2017-18) and two years immediately following that year.
4. Advance Pricing Agreement
There is an APA program available in India, wherein the transfer price of goods and services transacted between group entities is determined in advance by the tax authorities (i.e., CBDT in India) and the taxpayers, so as to prevent any dispute arising from such transfer pricing. Application can be for Unilateral/ Bilateral/ Multilateral APA.
5. Master File requirements
The Indian Government has adopted a three-tiered documentation structure, laying down provisions for additional transfer pricing (TP) documentation and Country-by-Country (CbC) reporting to implement the recommendations contained in the OECD’s BEPS report on Action 13.
6. Secondary Adjustment
Where, as a result of primary adjustment to the transfer price, there is an increase in the total income or reduction in the loss, as the case may be, of the Assessee, the excess money which is available with its AE, if not repatriated to India within the prescribed time, shall be deemed to be an advance made by the Assessee to such AE and the interest on such advance, shall be computed in the prescribed manner.
7. Interest limitation rules
These provisions limit the amount of deductible interest expenditure (in respect of amount lent by a non-resident AE or a third-party debt guaranteed by an AE) to 30% of EBITDA. Excess interest, if any, shall be allowed to be carried forward up to 8 successive years.
India’s biggest indirect tax reform in the form of GST was introduced in India from 1 July 2017. GST has been a major transition in the Indian tax framework. It has evolved significantly from the time of its inception. It is expected that government’s proactive measures and industry’s active participation, will make it a truly “Good and Simple Tax” in the times to come.
- GST is a destination-based tax that replaces the earlier central taxes and duties such as Central Excise and a multitude of state levies like VAT/CST on majority of the goods, entry tax, purchase tax, octroi, etc. GST has been envisaged as a more efficient tax system, neutral in its application and attractive in distribution.
- The GST structure would follow the destination principle which is based on a dual levy model. Both the center and the state are empowered to levy equal amount of tax (in the form of CGST and SGST) on the same taxable base (supply of goods and services). In case of inter-state transitions, center has the authority to levy IGST, a part whereof is transferred by the central government to the destination State.
Further, imports would be subject to IGST, while exports would continue to be zero-rated.
Rate classification for goods
|Exempt||5%||12%||18%||28%||28% + Cess|
|Electrical energy,newspapers, milk, duty, credit scrips, food grains||Apparels valued less than INR1,000, fly ash fishing net and fishing hooks, aircraft engines, bio-gas||Articles of apparels exceeding INR1,000,bio-diesel, printing ink, specified parts of sewing machine, furniture wholly made of bamboo or cane||Fork lifts, lifting and handling equipment, electrical apparatus for radio and television broadcasting, chocolates,slabs of marbles and granite||Air-conditioners, digital cameras,transmission apparatus for radio-broadcasting||Cars,pan masala, cigars|
Rate classification for services
|• Education |
• Residential accommodation
• Hotel/ Lodges with tariff below INR1000
| • Goods transport |
• Rail tickets (other than sleeper class)
• Economy class air tickets
|• Works contract |
• Business Class air travel
• Telecom services
• Financial services
• Hotel/ Lodges with tariff between INR1000 and 7500
| • Betting |
• Hotel/ Lodges with tariff above INR7500
Taxes to be subsumed
GST would replace most indirect taxes currently in place such as:
|Central taxes||State taxes|
|• Central Excise Duty [including additional excise duties, excise duty under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955] |
• Service tax
• Additional Customs Duty
• Special Additional Duty of Customs
• Central Sales Tax (levied by the center and collected by the states)
• Central surcharges and cesses (relating to supply of goods and services)
|• Value Added Tax|
• Octroi and Entry Tax
• Purchase Tax
• Luxury Tax
• Taxes on lottery, betting and gambling
• State cesses and surcharges
• Entertainment tax (other than the tax levied by the local bodies)
• Central Sales Tax (levied by the center and collected by the states)
Other indirect taxes
Other than GST, the central government levies indirect taxes comprising customs duty, stamp duty, profession tax, property tax and entertainment tax. Post the implementation of GST w.e.f. 1 July 2017, the states continue to have the authority to levy profession tax and State Value Added Tax only on selected items like petroleum products alcohol, etc. Various other taxes that were hitherto leviable by the states like entry tax, octroi, etc. have been subsumed with GST.
|1. Customs duty||• 29.44% on inputs |
• 26.43% on capital goods
(actual rate varies depending on classification under the customs tariff, which is aligned with the International Harmonized System of Nomenclature)
|Customs duty is levied on import of goods into India and is typically payable by the importer.|
Components of customs duty:
• Basic customs duty
• IGST leviable under Customs Tariff Act, 1975
• Education cess/secondary and higher education cess
|2. Stamp duty||Varies across states||It is a tax on transactions in the form of stamps on instruments affecting such transactions.|
|3. Profession tax||Varies across states||It is a state levy on persons engaged in any profession, trade, or employment in a state.|
|4. Property tax||Varies with each municipal authority||It is a municipal tax imposed on the owner of the property (usually real estate) for the maintenance of basic civic services in a city. The amount of tax is calculated on the value of the property that is sought to be taxed (ad valorem basis) as prescribed by each municipal authority.|
|5. Entertainment tax||Varies across states||Local governments, with the authority of the respective state government can levy entertainment tax on various entertainment and amusement activities such as exhibitions, cable or DTH subscriptions, video games, amusement parks and events.|
Tax incentives in India
1) Make in India scheme
On 25 September 2014 the Indian Prime Minister, Narendra Modi unveiled the ambitious Make in India campaign with an aim to turn India into a global manufacturing hub. The campaign is a major national program designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure.
The government has come out with several policy initiatives such as rationalizing duty structure for a wide range of products, extending differential duty structure to components, corporate tax exemptions, increasing ease of doing business, focus on start-ups, promoting skill development, R&D and innovation. These announcements have been well-received by industry partners and manufacturers.
In order to resonate well with the Make in India program, various tax incentives are available for existing and newly setup companies in India and are broadly divided into four categories:
Some of the recent tax deductions and incentives have been highlighted below:
|Activity||Benefits (subject to specified conditions)|
|All taxpayers, whose total sales, turnover or gross receipts exceed INR10 million||Additional deduction of 30% of the cost incurred on a new employee|
|Scientific research and development||Weighted deduction of 150% of the expenditure|
|Deduction in respect to specified business categories such as cold chain facilities; warehousing facilities for storage of agricultural produce; cross-country natural gas oil/distribution, infrastructure facilities, etc.||100% deduction on capital expenditure|
|Expenditure on skill development project||Weighted deduction of 150% on expenditure incurred on a notified skill development project by a company|
|Start-up businesses engaged in innovation, development, deployment or commercialization of new technology- or intellectual property-driven products, processes or services||100% tax holiday for three consecutive years out of seven years, deduction to eligible start-ups set-up by 1 April 2021 with a turnover of less than INR250 million|
|Companies located in International Financial Service Centers (IFSCs)||• Exemption from paying Dividend Distribution Tax|
• Relaxation in levy of Minimum Alternate Tax from 18.5% to 9%
• Specified relaxation from Securities Transaction Tax, Long-term Capital Gains Tax and Commodities Tax
2) Special Economic Zones (SEZ’s) in India
SEZ’s are specifically delineated duty-free enclaves deemed to be a foreign territory for the limited purpose of trade operations, duties/ tariffs. With the SEZ scheme, the government aims to create hassle free environment for exports, supported by an integrated simplified infrastructure and a package of incentives to attract foreign and domestic investment.
a) Direct tax incentives for SEZ:
|Nature of business||Quantum of deduction|
|Undertakings/Units located in SEZ’s and engaged in the manufacture or production/ provision of services||Deduction is available to units setup in a SEZ in a phased manner as under:|
• 100% deduction in respect of export profits for first five years
• 50% deduction in respect of export profits next five years
• 50% of export profits, provided that the profits are transferred to a Special Economic Zone Reinvestment
Reserve Account for the purpose of acquiring plant or machinery within three years
(The aforesaid tax holiday is only available for SEZ units approved and which commence operation by 31 March 2020)
MAT/ AMT of 18.5% (plus surcharge and cess) is applicable on book profits/ taxable income of the SEZ unit. However, MAT/ AMT credit can be carried forward for 15 years and set-off against tax liability in future.
b) Indirect tax benefits available to SEZ Developers/ Units
Import of goods and services
Exemption: Import of goods and services has been specifically exempted from levy of Integrated Goods and Service Tax (IGST). However, the SEZ developer/ unit shall be required to execute a bond cum legal undertaking for claiming an upfront custom duty exemption on import of goods.
Domestic procurement of goods and services
SEZ developer/SEZ unit shall be eligible to avail tax benefit on domestic procurements from a registered service provider under the following options:
- Upfront exemption by way of execution of bond or legal undertaking
- Goods and services tax paid by registered dealer/ service provider and refund shall be claimed subsequently by the registered dealer/ service provider
- In the FTP 2015-2020 announced on 1 April 2015, SEIS replaces the erstwhile Served From India Scheme (SFIS).
- Objective of the SEIS is to encourage export of notified services from India.
- Under SEIS, rewards for notified services shall be available as per notified percentage of Net Foreign Exchange earned in the form of duty credit scrip (scrip).
- (Gross Earnings of Foreign Exchange) minus (total expenses / payment / remittances of Foreign Exchange) by the IEC holder, relating to service rendered in the financial year
Stamp duty exemption / reimbursement: States offer additional incentives in the form of stamp duty exemption on land related transactions in a SEZ.
3) Incentives under Foreign Trade Policy 2015-20 (FTP)
Trade facilitation is a priority of the government to cut down the transaction cost, thereby rendering Indian exports more competitive. To achieve the said objective, various incentives have been provided by the Government of India for the benefit of stakeholders of import and export trade vide FTP. The FTP provides a framework for increasing exports of goods and services as well as generation of employment and increasing value addition in the country thereby integrating the Make in India, Digital India and Skill India initiatives of the government.
4) Service Exports from India scheme
Definition of Net Foreign Exchange earnings as per FTP:
|Benefit of duty scrip||Payment of customs duty, excise duty and service tax|
|Value of incentive||3% or 5% of NFE available as duty scrip for notified services|
|Preferential features as compared to SFIS||No actual user condition on goods procured through the scrip|
Scrip is freely transferable, can be sold in open market
|Eligibility||Available to exporter of notified services only|
Minimum of US$15,000 NFE in previous year
Available against exports made w.e.f. 1 April 2015
|Validity period of scrip||18 months from the date of issue|
|Other features||CENVAT credit o\f (eligible) duty debited against scrip available|
Compliance calendar for the period 1 January 2019 to 31 December 2019
|7||Payment of taxes withheld/ collected in December 2018|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of December 2018|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of December 2018|
|30||Due date for issue of quarterly (Oct to Dec 2017) TCS certificate in respect of tax collected in Form 27D|
|31||Electronically file quarterly (October to December 2018) withholding tax returns in Form 24Q/26Q/27Q|
|7||Payment of taxes withheld/ collected in January 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of January 2019|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of January 2019|
|7||Payment of taxes withheld/ collected in February 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of February 2019|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of February 2019|
|31||Electronically filing Form GSTR-3B to discharge GST tax liability for the period July 2017 to February 2018 for newly migrated taxpayers|
|31||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the period July 2017 to December 2018 for newly migrated tax payers|
|31||Filing of country-by-country (CbC) report by Indian constituent entities of an international group where exchange of information agreement has not been signed, in respect of fiscal year 2016-17 and 2017-18 (in Form 3CEAD)|
|31||Filing of revised income tax return for tax year 2016-17 and 2017-18|
|31||Filing of belated income tax return for tax year 2017-18|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of March 2019|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of March 2019|
|30||Payment of taxes withheld in March 2019|
|30||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for tax payers having turnover less than INR 1.5 Cr. for the quarter January 2019 to March 2019|
|7||Payment of taxes withheld in April 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of April 2019*|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of April 2019*|
|30||Furnishing annual statement (in Form 49C) for tax year 2017-18 by a NR having Liaison Office in India|
|31||Electronically file quarterly (Jan to Mar 2019) withholding tax returns in Form 24Q/26Q/27Q|
|7||Payment of taxes withheld in May 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of May 2019*|
|15||Due date for issue of quarterly (January to March 2019) TDS certificate in respect of withholding for payments (other than salary) in Form 16A|
|15||Issue annual certificate of withholding to employees in respect of salary paid during tax year 2018-19 in Form 16|
|15||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of May 2019*|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of April 2018*|
|30||Filing of annual returns in Form GSTR-9 / 9A and reconciliation statement in Form GSTR - 9C for the tax year 2017-2018|
|7||Payment of taxes withheld in June 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of June 2019*|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of June 2019*|
|31||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for tax payers having turnover less than INR 1.5 Cr. for the quarter April 2019 to June 2019|
|31||Electronically file quarterly (April to June 2019) withholding tax returns in Form 24Q/26Q/27Q|
|31||Filing income tax for individual and non-corporates [who are not subject to tax audit and non-transfer pricing (TP) cases], for tax year 2018-19|
|7||Payment of taxes withheld in June 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of July 2019*|
|15||Issue of quarterly (April to June 2019) TDS certificate in respect of withholding for payments other than salary in Form 16A|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of July 2019*|
|7||Payment of taxes withheld in June 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of August 2019*|
|15||Payment of advance tax (Not less than 45% of the estimated tax for tax year 2019-20)|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of August 2019*|
|30||Filing of income tax return for non-corporates (who are subject to tax audit and non-TP cases) and corporates (non-TP cases) for tax year 2018-19|
|7||Payment of taxes withheld in June 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of September 2019*|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of September 2019*|
|31||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for tax payers having turnover less than INR 1.5 Cr. for the quarter July 2019 to September 2019|
|31||Intimation by a designated constituent entity, resident in India, of an international group in Form no. 3CEAB for the tax year 2018-19|
|31||Intimation by a resident constituent entity of an international group whose parent is non-resident [Country-by-Country report (CbCR) intimation] for tax year 2018-19 (Assuming consolidated financial statements ending on 31 December) [Form 3CEAC]|
|31||Electronically file quarterly (July to September 2019) withholding tax returns in Form 24Q/26Q/27Q|
|7||Payment of taxes withheld in June 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of October 2019*|
|15||Issue of quarterly (July to September 2019) TDS certificate in respect of withholding on payments other than salary in Form 16A|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of October 2019*|
|30||Filing of income tax return and other certifications (in Form 3CEB) for taxpayers subject to TP compliance, for the tax year 2018-19|
|30||Report in Form No. 3CEAA by a constituent entity of an international group for the tax year 2018-19|
|7||Payment of taxes withheld in June 2019|
|11||Electronically filing details of outward supplies of taxable goods and/or services in Form GSTR-1 for the month of November 2019*|
|15||Payment of advance tax (Not less than 75% of the estimated tax for tax year 2019-20)|
|20||Electronically filing Form GSTR-3B to discharge GST tax liability for the month of November 2019|
|31||Electronically file GST Annual return and audit report (if applicable) for the period 2018-19 in form GSTR-9 and GSTR-9C respectively|