THE INDIA ADVANTAGE
There is ample reason for India's viability as a destination for foreign investment. Strong and positive macroeconomic indicators, higher disposable incomes, emerging middle class, low cost competitive workforce, investment friendly policies and progressive reform process all contribute towards India being an appropriate choice for investors.
The Indian Government is committed in its efforts to maintain the 8 plus growth rate and provide a conducive policy environment to business enterprises, both public and private, to invest and grow their business in the country. To this end, the Government has liberalized the foreign investment regime substantially over the last decade. Today, foreign direct investment is allowed in almost all sectors barring a few sensitive areas such as defence. Further, FDI is allowed in most of the sectors under the automatic route, except a few, where approval from the Foreign Investment Promotion Board is required.
In addition to FDI, Foreign Institutional Investment (FII) is also flowing into India.
India as a Manufacturing Hub
Over the past few years, a manufacturing revolution has been underway in the Indian economy, spurred on by the increasing presence of multinationals, scaling up of operations by the domestic companies and expanding domestic market. India’s manufacturing base, which is the fourth-largest among emerging economies, is among the fastest growing and has seen more investments as a proportion of GDP than any country except China.
India’s vast domestic market and availability of low-cost workers with advanced technical skills has been instrumental in attracting an expanding number of multinationals who are setting up their manufacturing bases in the country.
The sheer size of the Indian market has obvious appeal. The rapid growth of the Indian economy is likely to make India the fifth largest consumer market in the world by 2025 from twelfth in 2005, says a study by McKinsey Global Institute. Aggregate Indian consumer spending is likewise estimated to more than quadruple to approximately US$ 1.5 trillion by 2025, on the back of a ten-fold increase in middle class population and three-fold jump in household income.
India also offers abundant engineering and technical manpower, producing annually about 300,000 graduate engineers. Significantly, the technical workforce is set to cross the two-million mark this year, with the march from one million to two million happening in just about three years.
Service Sector in India today accounts for more than half of India's GDP, and India has skills across a range of sub-sectors. The various sectors that combine together to constitute service industry in India are :
India is on a development path for more infrastructure facilities on an urgent basis. The expected investment required in infrastructure over the next five years as per the Planning Commission is as follows:
Required investment estimated by Committee on Infrastructure
Source: Planning Commission
Over 300 million Indians (63 million households) are expected to have a household income of over US$6,000 by 2015 (over US$30,000 in PPP terms). India is experiencing a rapid growth in consumer spending. The economic reforms since the early nineties have unleashed a new entrepreneurial spirit creating a vibrant economy supported by rising per capita income. Fast-growing disposable incomes, increased availability and use of consumer finance and credit cards complement the keenness of the average Indian to adapt to and assimilate global trends. This has led to the creation of a rapidly growing consumer base and one of the world’s largest markets for manufactured goods and services.
Growth in key sectors like infrastructure, services and manufacturing continues at about 10-12% p.a.
The market for basic goods such as groceries and textiles is already large, driven by the demands of an enormous population. Markets for other products are equally large and growing rapidly.
VERSATILE & SKILLED MANPOWER
An unparalleled resource of an educated, hard-working, skilled and ambitious workforce is the hallmark of India’s human capital.
That this workforce is also one of the youngest adds to India’s attractiveness as an investment destination. Of the BRIC countries, India is projected to stay the youngest with its working-age population estimated to rise to 70% of the total demographic by 2030 - the largest in the world. India will see 70 million new entrants to its workforce over the next 5 years.
English is the language of business in India and the large English-speaking workforce is a benefit to investors and employers. In fact, the number of Indians who know English is more than the population of the USA. India’s diverse cultural heritage puts its citizens at ease with people from other cultures and vice versa.
With over 380 universities, 11,200 colleges and 1,500 research institutions, India has the second largest pool of scientists and engineers in the world. Over 2.5 million graduates are added to the workforce every year, including 300,000 engineers and 150,000 IT professionals.
ROBUST LEGAL AND BUSINESS SUPPORT SYSTEMS
India is a free-market democracy with a robust, well-developed legal and administrative system. The Indian legal system has been derived originally from that of the United Kingdom and is at par with that of any developed economy.
Accounting standards in India are similar to those followed internationally. Many Indian companies are listed on the NYSE and NASDAQ and report their results under US Generally Accepted Accounting Principles (GAAP).
India has a long history of entrepreneurship, private enterprise and market economics that dates back to the 19th century. In fact, the Bombay Stock Exchange (BSE) was set up in 1875.
The original Indian Companies Act governing the incorporation and operation of limited liability companies dates back to 1882, though it has been extensively updated thereafter.
As a result of the pro-business environment, Indian companies have investments in most sectors of the economy spanning infrastructure, manufacturing and services. Several Indian companies conduct their business on a global scale and have worldwide operations. These, along with numerous companies from the small and medium enterprise (SME) sector offer considerable scope for joint ventures, collaborations and partnerships.
India has well-developed support services for business and industry with professional audit and accounting firms (some are affiliated with international accounting firms) and qualified corporate law practitioners. Major international advertising companies, investment banks and consulting firms are also well-represented in India.
FOREIGN DIRECT INVESTMENT
India has been ranked at the third place in global foreign direct investments in 2008, despite the economic meltdown, and will continue to remain among the top five attractive destinations for international investors during the next two years, according to United Nations Conference on Trade and Development (UNCTAD) report on world investment prospects titled, ‘World Investment Prospects Survey 2009-2011’. FDI equity inflows amounting to US$ 10.5 billion were received during April-July 2009 marking about 8% increase over the same period last year.
Improving global sentiment and an increasingly conducive environment in India are facilitating foreign investors’ role in the country currently. Several other factors being attributed to the revival in foreign direct investments (FDI) in the country include liberal investment policies and reforms, innovative and technologically advanced products being manufactured in India and low cost and effective solutions.
To bolster higher overseas investment into cash-strapped micro and small enterprises (MSEs), the government has liberalised the FDI norms for the sector replacing the current 24 per cent ceiling on foreign holding with sectoral caps. These industries will now be guided like other large enterprises as far as FDI is concerned.
The top sectors attracting highest Foreign Direct Investment inflows into the country are electrical equipments, services sector (financial and non financial), telecommunications, transportation industry, fuels, chemicals, construction activities, drugs and pharmaceuticals, food processing, cement and gypsum products. Huge investment potential exists in the upcoming Knowledge Process Outsourcing (KPO) sector and the real estate industry.
Foreign Direct Investment Policy
Foreign Direct Investment in India is allowed on automatic route in almost all sectors except following :
Procedure under Automatic Route
FDI in sectors / activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. The investors are only required to notify the regional office concerned of RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issue of shares to foreign investors.
Procedure under Government Approval
FDI in activities not covered under the automatic route, requires prior Government approval and is considered by the Foreign Investment Promotion Board (FIPB).
For details on sectoral FDI caps, please see www.dipp.gov.in
Approvals of composite proposals involving foreign investment / foreign technical collaboration are also granted on the recommendations of the FIPB. Application for all FDI cases , except non- resident Indian (NRI) investments and 100% export oriented units ( EOUs), should be submitted to the FIPB unit , Department of Economic Affairs (DEA), Ministry of Finance. Application for NRI and 100% EOU cases should be presented to SIA in Department Industrial Policy and promotion. Applications can also be submitted with Indian missions abroad who forward them to the Department of Economic Affairs for further processing. Application can be made in form FC- IL , which can be downloaded from www.dipp.gov.in. Plain paper applications carrying all relevant details are also accepted. No fee is payable.
Sectors Where FDI Is Prohibited
A NON-PROFIT JOINT VENTURE COMPANY ‘INVEST INDIA’ FORMED BETWEEN THE GOVERNMENT AND PRIVATE SECTOR
In September 2009, the Government of India formed a non-profit company “Invest India”, as a joint venture between the Department of Industrial Policy & Promotion, Federation of Indian Chambers of Commerce and Industry (FICCI) and the State Governments, for promotion of FDI into the country.
The company will be responsible for promoting foreign investments into the country in a more focused, comprehensive and structured manner. It will assist the Government in its efforts towards projecting India as an attractive investment destination for foreign investors and facilitating them in identifying and realizing investment opportunities in India.The unique feature of this company is the partnership between the private sector organization and the Government of India and the State Government(s).
For more details, please visit:
Foreign Trade Policy 2009-14
The Government of India announced a new Foreign Trade Policy in August 2009 for the period 2009-14, which provides higher support for market and product diversification. Highlights of the Policy are as follows:
For more details, please visit :
BUSINESS BACKGROUND INFORMATION
ENTRY OPTIONS FOR A FOREIGN COMPANY IN INDIA
A foreign company is one that has been incorporated outside India and conducts business in India. These companies are required to comply with the provisions of the Companies Act, 1956. A foreign company can set up Liaison, Project, or Branch offices in India. Such companies have to register themselves with Registrar of Companies (ROC) within 30 days of setting up a place of business in India.
One of the ways for foreign companies to enter the India markets is the setting up of a Liaison/Representative Office. A Liaison Office is not allowed to undertake any business activity in India and cannot earn any income in India. The role of such an office is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.
The opening and operation of such offices is regulated by the Foreign Exchange Management Act, 1999 (FEMA). Approval from the Reserve Bank of India (RBI) is required for opening such offices. There are certain standard conditions imposed for operation of such offices.
Liaison / representative offices also have to file an annual activity certificate and other documents from Indian customers for providing liaison offices.
Permission to set up such offices is initially granted for a period of 3 years and this may be extended from time to time.
For permission/assistance, you may contact :
Reserve Bank of India, Foreign Investment Division,
Exchange Control Department,
Shahid Bhagat Singh Marg,
Mumbai – 400001, India.
Tel: +91 22 2661602
Fax: +91 22 2665330 / 2654992
Foreign companies planning to execute specific projects in India can set up temporary project/site offices in India.Specific approval from the RBI is required for setting up a project office.Such approval is generally accorded in respect of projects approved by appropriate authorities or where the projects are financed by an Indian bank/financial institution or a multilateral/bilateral international financial institution.
For permission/assistance, you may contact the concerned Regional Office of Reserve Bank of India under whose jurisdiction the office will be situated.
Government of India has allowed foreign companies engaged in manufacturing and trading activities abroad to set up Branch Offices in India for the following purposes :
A Branch office is not allowed to carry out manufacturing and processing activities direct/indirectly.The Branch Office will have to submit an activity certificate from a Chartered Accountant on an annual basis to the Reserve Bank of India.For annual remittance of profit, the Branch Office may submit required documents to the authorized Bank. Permission for setting up branch offices is granted by the Reserve Bank of India on a case-by-case basis.RBI normally considers the operating history of the applicant company worldwide and its proposed activities in India for granting the approval.
A foreign company can commence operations in India through incorporation of a company under the provisions of the Indian Companies Act, 1956.Foreign equity in such Indian companies can be up to 100% depending on the business plan of the foreign investor, prevailing investment policies of the Government and receipt of requisite approvals.For registration as an Indian company and its incorporation, an application has to be filed with Registrar of Companies (ROC).Once a company has been duly registered and incorporated as an Indian company, it will be subject to the same Indian laws and regulations as applicable to other domestic Indian companies.
Joint Venture with an Indian Partner
Foreign Companies can set up operations in India by forging strategic alliances with Indian partners. Setting up of operations through joint ventures may entail the following advantages for a foreign investor :
Foreign companies may set up a wholly-owned subsidiary, which is an Indian Company with an independent legal status, distinct from the parent company. Under the current foreign investment policy, a wholly-owned subsidiary can be established either under the automatic route, if the conditions specified therein are complied with or obtain an approval from the Foreign Investment Promotion Board. Applications for establishment of wholly-owned subsidiaries other than those where automatic route is available are approved by the Foreign Investment Promotion Board on a case by case basis, taking into account factors such as credentials of the foreign parent, nature of the industry, export commitments, whether proprietary technology is sought to be protected or sophisticated technology is proposed to be brought in, etc.
The web site of Secretariat of Industrial Assistance is www.dipp.nic.in
INVESTMENT IN EXPORT PROCESSING ZONES
In order to encourage exports, the Government of India offers special incentives to investors to set up units to manufacture goods for exports. Such units may be set up in Export Processing Zones (EPZs) or may be 100 per cent Export Oriented Units (EOUs) outside EPZs. 100 per cent foreign equity is welcome in EOUs and EPZs.
The EPZs are designed to provide an internationally-competitive, duty-free environment at low cost for export production. Each zone provides basic infrastructure and facilities like developed land, standard design factory buildings, roads, power, water supply and drainage and customs clearance facilities. While EOUs adopt the same regime as an EPZ, they offer a wider option in project location with reference to sourcing of raw materials, port of export, availability of technological skill, existence of an industrial base and the need for a larger area of land for the project. Applications for the approval of EOU/EPZ units are to be addressed to the Development Commissioners of Exports Processing Zones in the case of EPZs and to the Secretariat for Industrial Assistance (SIA) in case of EOUs.
For further details, visit:
Additional incentives are offered to units engaged in the field of electronics and software, which can be set up under the electronic Hardware Technology Park, or Software Technology Park programs.
Incentives for EPZs and EOUs :
Special Economic Zones (SEZs)
SEZs, set up as enclaves separated from domestic tariff areas by physical barriers, are intended to provide a duty free environment for export promotion. Each Zone is headed by a Development Commissioner. Units may be set up in SEZ for manufacture, trading, re-conditioning, repair or for service activity. The units in the Zone have to be a net foreign exchange earner but they shall not be subjected to any predetermined value addition or minimum export performance requirements as in the case of EOUs. Sales in the Domestic Tariff Area by the SEZ units shall be subject to positive foreign exchange earning and on payment of full Custom Duty and import policy in force.
The Government has since converted all the existing Export Processing Zones into Special Economic Zones.
The Special Economic Zones are responsible for administration of the Export-Oriented units located within the zones.
Main benefits for those setting up SEZs in India include :
TAXATION SYSTEM IN INDIA
India has a well-developed tax structure with clearly demarcated authority between Central and State Governments and local bodies.
Central Government levies taxes on income (except tax on agricultural income, which the State Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply, drainage etc.
Indian taxation system has undergone significant reforms during the last decade. The tax rates have been rationalized and tax laws have been simplified resulting in better compliance, ease of tax payment and better enforcement. The process of rationalization of tax administration is ongoing in India.
Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty, interest, gains from sale of capital assets located in India (including gains from sale of shares in an Indian company), dividends from Indian companies and fees for technical services are all treated as income arising in India. Current rates of corporate tax for foreign companies are as under.
|CORPORATE TAX||Tax Amount|
33.39% (including surcharge of 10%)
Short Term Capital Gains
Long Term Capital Gains
Repatriation of Earnings
A foreign national may open bank accounts in India and receive funds from abroad. A foreign national is allowed to repatriate 75% of his net after-tax earnings after the Government and the Exchange Control authorities approve his employment. If employment is for a short duration, such approvals are not necessary, provided the amount of remittance is within approved limits.
LEGAL AND ACCOUNTING SYSTEM
India has a well-developed market economy infrastructure and sophisticated financial sector. As a result of various policy initiatives, several multinational financial companies have made significant investments in the Indian financial sector. India follows global practices in accounting as established by International Financial Reporting Standards. Convergence is expected to be achieved by 2011.
For more details, see Ministry of Corporate Affairs
The Institute of Chartered Accountants of India, being a premier accounting body in the country, took upon itself the leadership role by establishing Accounting Standards Board (ASB), more than twenty five years ago, to fall in line with the international and national expectations.
Present Status in Harmonization
ASB formulates Accounting Standards on the basis of the International Accounting Standards (IASs) issued by the International Accounting Standards Board (IASB). Of the 41 IASs issued so far, 34 are at present in force, the remaining have been withdrawn by the IASB. Corresponding to the IASs, so far, 28 Indian Accounting Standards on the different subjects have been issued.
Accounting standards are made mandatory in India in a phase manner. Specific relaxation is given to particular kinds of enterprises depending upon their size and nature.
India’s legal and judicial systems are highly sophisticated and well developed. India is also fortunate that its judiciary is manned by highly qualified and learned judges. In addition, there are enough laws to safeguard the rights of people and provide justice.
Alternative Mechanism for Redressal – Arbitration
Arbitration of disputes, particularly in commerce and industry, has had a good history in India. International arbitration under the aegis of Arbitration Tribunal of FICCI works effectively in this area.
More details are to be found on website
TRADE FACILITATION MEASURES
Electronic Data Interchange
In the recent past, a number of initiatives and measures have been taken by the government to simplify the customs procedures for expeditious clearance of imported/exported cargo and to reduce the transaction cost of Indian imports and exports. One such measure is Electronic Data Interchange (EDI).
The Implementation of EDI at Customs stations has revolutionized the functioning of customs. The system features on-line assessment, duty payment, and examination of goods. Under EDI, the objections or queries raised by the customs officers are processed on the system, thereby capturing the complete record of the lifecycle of an import/export document.
Customs automation has been extended to all the major ports, airports and inland Container Depots (ICDs)/Container Freight Stations (CFS).Electronic Message Exchange (EME) has also commenced with several of Customs community partners like RBI, Directorate General of Foreign Trade (DFGT), Directorate General of Commercial Intelligence and Statistics (DGCI&S), Apparel Export Promotion Council (APEC) etc.
Website of Central Board of Exercise & Customs could be accessed at www.cbec.gov.in
INTELLECTUAL PROPERTY RIGHTS
The importance of intellectual property in India is well established at all levels- statutory, administrative and judicial. India ratified the agreement establishing the World Trade Organisation (WTO). This Agreement, inter-alia, contains an Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) which came into force from 1st January 1995. It lays down minimum standards for protection and enforcement of intellectual property rights in member countries which are required to promote effective and adequate protection of intellectual property rights with a view to reducing distortions and impediments to international trade. The obligations under the TRIPS Agreement relate to provision of minimum standard of protection within the member countries legal systems and practices. India has complied with the obligations contained in the TRIPS Agreement and amended/enacted IP laws.
The Agreement provides for norms and standards in respect of following areas of intellectual property
India is also an active member of the World Intellectual Property Organisation (WIPO), Geneva and UNESCO, Paris. Department of Industrial Policy & Promotion is the nodal Department in the Government of India for all matters concerning WIPO, and Ministry of Human Resources Development for UNESCO.
India is also member of two major treaties, namely, Paris Convention for the Protection of Industrial Property (relating to patents, trademarks, designs, etc.) of 1883 and the Berne Convention for the Protection of Literary and Artistic Works (relating to copyright) of 1886. Apart from these, India is also a member of the Patent Cooperation Treaty (PCT) which facilitates obtaining of patents in several countries by filing a single application.
India’s copyright law, laid down in the Indian Copyright Act, 1957 as amended by Copyright (Amendment) Act, 1999, fully reflects the Berne Convention on Copyrights, to which India is a party. Additionally, India is party to the Geneva Convention for the Protection of rights of Producers of Phonograms and to the Universal Copyright Convention. The copyright law has been amended periodically to keep pace with changing requirements. The amendment to the copyright law in May 1995, has ushered in comprehensive changes and brought the copyright law in line with the developments in satellite broadcasting, computer software and digital technology. The amended law has made provisions for the first time, to protect performer’s rights as envisaged in the Rome Convention
Several measures have been adopted to strengthen and streamline the enforcement of copyrights. These include the setting up of a Copyright Enforcement Advisory Council, training programs for enforcement officers and setting up special policy cells to deal with cases relating to infringement of copyrights.
Trademarks have been defined as any sign, or any combination of signs capable of distinguishing the goods or services of one undertaking from those of other undertakings. Such distinguishing marks constitute protectable subject matter under the provisions of the TRIPS Agreement. The Agreement provides that initial registration and each renewal of registration shall be for a term of not less than 7 years and the registration shall be renewable indefinitely. Compulsory licensing of trademarks is not permitted.
The basic obligation in the area of patents is that, invention in all branches of technology whether products or processes shall be patentable if they meet the three tests of being new involving an inventive step and being capable of industrial application. The TRIPS Agreement provides for a minimum term of protection of 20 years counted from the date of filing. India had already implemented its obligations under Articles 70.8 and 70.9 of TRIP Agreement.
A comprehensive review of the Patents Act, 1970 was also made and a bill to amend the Patents Act, 1970 was passed by Parliament on 14 May 2002.
Please see Office of the Controller General of Patents, Designs and Trade Marks (CGPDTM) www.ipindia.nic.in