A Compliation: India Briefing 2011-2012

A Compilation:
India Briefng
2011
_
2012
Established in 1999, Asia Briefng is dedicated to providing individuals and enterprises with the latest business and regulatory news
as well as expert commentary related to conducting business in emerging Asia. The publishing house is a fully-owned subsidiary
of Dezan Shira & Associates and publishes magazines, news, business guides and regional guides for China, India, Vietnam and
other key nations in Asia.
About Asia Briefng
2011 April
India Market Entry - The Establishment Legalities Explained
2011 July
Tax and Financial Management
2011 September
Indias Goods & Service Tax and Retail Sector
2011 November
FDI and Manufacturing Electronics in India
2012 June
Payroll Processing in India
2012 September
PrePost Establishment Compliance for Foreign-invested Entities
2012 November
Establishing a Business in India
Knowledge and expertise is contributed by the legal, tax and accounting professionals
at Dezan Shira & Associates, a specialty foreign direct investment consulting frm
All publications are available on Asia Briefngs online bookstore at
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The Practical Application of India Business April 2011
Daily Business News Available at
www.india-briefng.com/news Volume V - Number I
India Market Entry -
The Establishment
Legalities Explained
In This Issue:
India Market Entry Vehicles : Liaison Offices, Branch Offices, Project
Offces and Limited Liability Companies Compared & Explained
Automatic Investment Routes vs. RBI Approval Requirements
Sectoral Caps & Other Market Restrictions
I
n this issue of India Briefng, we give the why and how for
market entry into India. Specifcally, we walk you through
the eligibility requirements, tax liability, application and
wind-up processes for liasion offces, project offces,
branch offces, and private limited companies. For the
latter, we also point out advantages over other types of offces
and how these advantages may or may not apply to you. We then
give you a quick run-through of the automatic route of approval
for foreign investment - including what industries are and are
not applicable - and industrial policy limitations. Finally, two
snippets from our daily updated website (www.india-briefng.
com): India Works on Stronger Connectivity with ASEAN
Countries and India Puts Accounting Practices in Line with
International Standards.
The articles in this issue of India Briefng were researched and
written with the help of the India-based foreign direct investment
and tax consultancy Dezan Shira & Associates. Please contact
them directly in Mumbai at india@dezshira.com, and feel free
to sign up for our regular India Briefng news bulletins.
We look forward to hearing from you!
With best regards,
Samantha Jones
Senior Editor, Asia Briefng
All materials and contents 2011 Asia Briefng Ltd.
No reproduction, copying or translation of materials without prior permission of the publisher. Contact: editor@india-briefng.com
Cover Art
Tis watercolor painting, Backyard, is done by Karnataka-born Indian artist Mahesh Baliga from his recent show at Project 88 gallery entitled Confabulation. Tis
show is designed to express the artists manner of dealing with possibilities.
Tis cover is reproduced courtesy of the artist and Project 88. Te gallery works with a generation of emerging artists within India who are making innovative, experimental
and ambitious works in all media and modes within a conceptual framework.Te gallery has evolved along with these artists by adding important mid-career artists from the
region and abroad, on the strength of its committed program. It is located on the ground foor of the BMP Building, N.A. Sawant Marg, Colaba, Mumbai.
www.project88.in; contact@project88.in.
Welcome to the April issue of India Briefng
3 India Briefng
Why Does Indian Market Entry Matter?
[ By Chris Devonshire-Ellis, Dezan Shira & Associates ]
W
h e n d i s c u s s i n g
operating a business
in India with those
unfamiliar with the
country, I often hear:
Its dirty, Its bureaucratic, Theres
no infrastructure. These are all partially
true, but as I write, I am having to devote
a considerable additional amount of my
time to our frms India practice just to
keep up with business demand. Getting
dirty, dealing with the administrative, or
lacking infrastructure are not very good
excuses for not wanting to do something
creative. These excuses hardly constitute
an entrepreneurial attitude, and the folks
who bang on about these, well, they have
their own investment choices to protect.
Make no mistake India is arriving, and
it is already having a major impact upon
global trade and supply chain dynamics.

India matters to global investors because
it represents a second opportunity that
has arisen: a global economy, and not
a Chinese one. Combined with the rise
of China, the rise of India has enabled a
combined total of 2.6 billion people to
enter the global economy, a dramatic leap
forward from 25 years ago. The country
has a wealthy and growing middle class
of 200 million, potentially providing a
secondary stream of very potent revenues.
The opportunities are staggering.
India matters because the China price is
steadily increasing, and minimum wages
are set to double by 2015. Ultimately,
being in China is not going to be enough
to provide the cost comparisons, services,
alternatives, market understandings,
analysis and the dynamics of change that
India will and is already bringing to the
global economy. If you are not in India,
you dont have an alternative to offer your
clients and you cant hedge your bets
against anything going wrong in China
and/or with suppliers there.
Indi a i s not ori ous for i t s heavy
bureaucracy, which largely stems from
the period immediately following the
countrys independence from Britain in
1949. During this period, India took the
Soviet Union as a model for developing
a centrally-planned economy. This
legacy, combined with Indias democratic
governance and British-style legal system
has created a potpourri of administrative
processes, with a foot in each camp.
Hence the occasional baffement at Indian
bureaucracy and civil procedures.
Indian bureaucracy, coupled with a
regulatory landscape unfamiliar to many
executives, makes establishing an initial
presence in the country appear quite
confusing. While business establishment
in India is similar to that in China,
among the subtle differences, Indian
bureaucracy raises its head in terms of
the role of the countrys central bank
(in Indias case, the Reserve Bank of
India or RBI) and Foreign Investment
Promotion Bureau in the incorporation
process. The role of bureaucracy in this
process varies largely dependent upon
the investment and investor. Somewhat
perversely, the major bureaucracy comes
into the incorporation process for those
companies incorporating at both the
lowest level of market entry for foreign
investors and for those incorporating into
the restricted industry category, yet not
in the more common circumstances that
many investors will require.
This issue of India Briefing takes us
through the incoporation process,
including details on the role of Indian
bureaucracy.
When global magazines and media start to mention
India as a major player, its time to take notice.
Such reports dont make the India story any more
true than it already is, but should act as a trigger
for global investors to get over to India, research
the potential, and fnd out what and where the
opportunities for their businesses are. India matters
and doing business in India is about to become a
global mainstream dynamic.
4 India Briefng
Vehicles of Indian Market Entry:
the LO, BO, PO, and LLC
[ By Ankit Shrivastava, Dezan Shira & Associates ]
A
n over seas company
s et t i ng up bus i nes s
operations in India has
the following options:
Joint venture companies
Foreign companies may set up a joint
venture company that will take on an
independent legal status as an Indian
company distinct from the parent
foreign company. A joint venture can be
established either under the automatic
route, if the specifed conditions are met,
or obtain approval from the FIPB.
Wholly-owned subsidiaries
Similar to joint venture companies,
foreign companies may also set up a
wholly-owned subsidiary that will take on
an independent legal status as an Indian
company distinct from the parent foreign
company. A wholly-owned subsidiary can
be established either under the automatic
route, if the specifed conditions are met,
or obtain approval from the FIPB.
Trading companies
Foreign companies may invest in trading
companies engaged primarily in exports.
Such trading companies are treated at
par with domestic trading companies
in accordance with trade policy. For
setting up trading companies engaged
primarily in exports, the RBI accords
automatic approval for foreign equity
up to 51 percent. All other proposals can
be addressed to the Foreign Investment
Promotion Board (FIPB).
Liaison Offces
A foreign company can open a liaison
offce in India to look after its Indian
operations, to promote its business
interests, to spread awareness of the
companys products and to explore further
opportunities. Liaison offices are not
allowed to carry on any business or earn
any income in India and all expenses are
to be borne by remittances from abroad.
Project Offces
The project offce, essentially a branch
offce set up with the limited purpose
for executing a specifc project, is the
ideal method for companies to establish
a business presence in India if the
business objective is to have a presence
for a limited period of time. Project
offces are particularly common among
foreign companies engaged in turnkey
construction or installation.
Branch Offces
For ei gn compani es engaged i n
manufacturing and trading activities
outside India may open branch offces for
the purposes of:
Representing the parent company or
other foreign companies in various
matters in India, such as acting as
buying and selling agents
Conducting research in which the
parent company is engaged, provided
the results of this research are made
available to Indian companies
Undertaking export and import trading
activities
Promoting technical and financial
collaborations between Indian and
foreign companies
Foreign companies intending to set up any
kind of offce for the promotion of exports
from India have to obtain a prior approval
from the Reserve Bank by submitting an
application in the prescribed form to the
Central Offce of the Reserve Bank. On
approval of such cases, permission is
granted initially for a period of 3 years,
subject to the condition that expenses of
such offces will be met exclusively out of
inward remittances; such offces are not
permitted to generate any income in India.
Below, we discuss the frst three business
structural options - liaison offces, project
offces and branch offces. Although such
offces are permitted to undertake only
limited activities, these types of offces
are preferred by foreign companies with
limited business purposes in India, as
they are easy, quick and inexpensive
to establish and maintain. Finally, we
briefy discuss the benefts of a private
limited company (which a wholly-owned
subsidiary can be established as) over
such offces.
Liaison Offce
A liaison offce (LO) is set up mainly to
investigate and recognize the business
and investment ambiance. A LO is not
allowed to commence any commercial
/ trading / industrial activities, directly
or indirectly, and is required to sustain
itself out of private remittances received
from its parent company through usual
banking channels.
Permitted Activities:
Representing the parent company in
India
Promoting export from / import to
India
Acting as a communication channel
and promoting technical / fnancial
collaborations between the parent
company and Indian companies
Forbidden Activities:
Carrying out commercial operations
in India
Borrowing or lending money (all
operating costs of the LO must be
met through inward bank remittances
to the parent company)
Eligibility
An overseas company intending to open
an LO in India is required to obtain
prior approval from the Reserve Bank of
India (RBI), the countrys central bank.
A request from an overseas entity to
establish a LO in India is considered on
the basis of this criteria:
5 India Briefng
Vehicles of Indian Market Entry: the LO, BO, PO, and LLC
Principal business
RBI Route - The principal business of the
foreign entity falls under the sectors where
sectoral cap for foreign direct investment
under the automatic route is 100 percent
Government Route - The principal
business of the foreign entity falls under the
sectors where the sectoral cap for foreign
direct investment under the automatic
route is less than 100 percent. Requests
from entities falling under this category
are considered by the RBI in consultation
with the Government of India, Ministry
of Finance, and Department of Economic
Affairs (GOI, MoF, DEA).
Net worth
Net worth (total of paid-up capital and free
reserves, less intangible assets as per latest
audited balance sheet or account statement
by a certifed accountant) not less than
US$50,000 or its equivalent.
Track record
A successful, proft-making track record
during the three immediately preceding
years in the parent companys home
country.
Applicants that do not satisfy the eligibility
criteria may submit a letter of comfort
from their parent company, subject to the
condition that the parent company satisfes
the prescribed eligibility criteria.
Application
A parent company is normally granted
permission from the RBI to open an LO
within 2 to 4 weeks of application.
The following documents are essential
for applying to the RBI to set up an LO:
Form FNC 1* (3 Copies)
Letter from the principal offcer of the
parent company*
Letter of authority from the parent
company i n favor of t he l ocal
representative*
Two copies of the English version
of the Memorandum and Articles of
Association (Charter Documents) of
the parent company, attested by Indian
Embassy/Notary Public in the country
of registration
The latest audited balance sheet of the
parent company
*These documents would need to be
signed by the principal officer of the
company that intends to set up an LO in
India.
Approval is generally given for one to
three years and can be renewed upon
expiration.
Once consent to set up a LO is given
by three governing bodies (GOI, MoF,
DEA), an endorsement letter will be sent
to the parent company. The LO will then
have to apply for a permanent account
number (PAN) and tax deduction and
collection account number (TAN) as well
as a record with the Customs. Visas for
overseas staff will also be sought at this
time and company bank accounts can also
be opened after this. An LO must uphold
a QA22C bank account, allowing infows
from abroad.
Tax Liability
An LO is deemed taxable in India if it is
seen to constitute a business connection
in India or a permanent establishment
in India of its foreign parent, which tax
authorities have generally found to be
the case. Consequently, any receipt from
activity in India by the LO or its foreign
parent is liable to tax in India (in certain
cases without appropriate allowance for
expenses). However, only activities in
India attributable to operations in India
are liable to Indian tax. No income from
operations confned to the purchase of
goods in India for the purpose of export
is taxable in India (under the Income Tax
Act).
On an annual basis, LOs have to file
an activity certificate by a chartered
accountant stating that the LO has
undertaken only permitted actions. Once
it is confrmed that the governing bodies in
India (RBI, income tax department, etc.)
do not desire to fle an objection certifcate
for an LO, custom registration procedures
can begin.
The LO must fle standard returns to the
RBI, including audited annual accounts
and an activity report for the year.
Winding-up
In the event of winding-up, the LO has to
approach designated AD category-1 Bank
with the following documents:
Copy of the RBIs/sectoral regulators
permission-granting documents to
establish the offce
An auditors certifcate indicating how
the remittable amount arrived
A statement of assets and liabilities
A statement of the manner of disposal
of assets
Confrmation that all liabilities in India,
including gratuity and other benefts to
employees, have been paid or provided
for
Confrmation that no legal proceeding
is pending in any court in India
Confirmation that there is no legal
impediment to the remittance
A report from the registrar of companies
regarding compliance with the 1956
Provisions of Companies Act
Any other documents specifed by the
RBI while granting approval
After the above application materials
are approved and the designated AD
category-1 bank confirms that annual
activities certifcates have been fled, the
RBI will grant approval to close the offce.
At the time of closure of the LO, the RBI
grants permission to send back the balance
in the Indian bank account to the parent
company.
Branch Offce
An overseas company also has the option
of establishing a branch office (BO).
Similar to a LO, a BO may undertake only
limited activities but the scope of activities
are broader than a LO.
Permitted activities:
Expor t or i mpor t of goods,
professional or consultancy services
Research work in the activities of
parent company
Technical/financial collaborations
with Indian companies
Acting as a buying or selling agent
IT and software development
services
Technical support on products sold
Forbidden activities:
Retail trading activities
Manufact uri ng or processi ng
activities
6 India Briefng
Eligibility
Companies engaged in manufacturing or
trading activities abroad are permitted to
open a BO. Entities from Nepal are not
allowed to open BO in India
Net worth
Net worth as per latest audited balance
sheet certifed by chartered accountant or
equivalent in that country and shall not be
less than US$1,000,000 or its equivalent.
Track record
The proft-making track record of a parent
company during immediate preceding fve
fnancial years.

Application
An application to the RBI should be
made through a designated authorized
category-1 (AD category-1) bank along
with:

Certifcate of incorporation registration
Memorandum of association attested
by the Indian embassy / notary public
in the country of registration
Latest audited balance sheet
Letter of comfort from the parent
company in the case that an applicant
is a subsidiary and does not otherwise
satisfy eligibility criteria
Approval is generally given for a period
of three years and an extension is granted
on the track record of annual activity
certifcates, and the record of the account
maintained with the designated bank,
per the terms and conditions of original
approval.
A permanent account number (PAN)
should be obtained from the income tax
authorities in India. BOs are permitted to
open a non-interest bearing INR current
account with an AD category-1 bank.
Such bank can allow a term deposit not
exceeding 6 months out of temporary
surplus.
Winding-up
In the event of winding-up, the company
has to approach designated AD category-1
bank with the following documents:
A copy of the RBIs/sectoral regulators
permission-granting documents to
establish the offce
An auditors certifcates indicating how
the remittable amount arrived
A statement of assets and liabilities
A statement of the manner of disposal
of assets
Confrmation that all liabilities in India,
including gratuity and other benefts to
employees have been paid or provided
for
Confrmation that all income accruing
from sources outside India has been
remitted to India
No objection/tax clearance from income
tax authorities
Project Offce
A project offce is a place of business
to represent the interests of the foreign
company executing a project in India
Permissible activities:
Activities to execute the project
under approval
Forbidden activities:
Any activities unrelated to executing
the project under approval
Eligibility
For ei gn ent i t i es f r om Paki st an,
Bangladesh, Sri Lanka, Afghanistan,
Iran, Bhutan or China are not allowed to
acquire immovable properties in India.
A project offce must secure a contract
from an Indian company in order to
execute a project in India and thus
establish a project offce. A project must
be:
Funded from remittance from abroad
directly
Funded by a joint or multilateral
fnancing agency
Cleared by an appropriate authority
A company or entity in India awarding
the contract is funded by a public
fnancial institution or bank in India
In case the PO does not meet the above
criteria, the entity must approach the
RBI for approval. A PO is permitted to
acquire property for its own use and carry
out permitted or incidental activities (said
property may not be rented out or leased
out).
Banking
Where the contract specifcally provides
for payment in foreign currency, each
project office can open two foreign
currency accounts; one in US$ and one
in the currency of the parent company.
In same AD category-1 bank permissible
debits shall be expenditure related to
the project. Credits shall be foreign
currency receipts from the parent/
group company/sanctioning authority/
multilateral/bilateral fnancing agency.
Foreign currency accounts shall be closed
on completion of the project
Application criteria
A PO can be set up under common
permission or specific permission.
Application in form FNC-1 shall be made
to the relevant regional offce of the RBI
along with following details:
Name and address of the parent
company
Reference number and date of letter
awarding the contract
Particular authority awarding contract
Total amount of contract
Address and tenure of project
Nature of project
A permanent account number (PAN)
should be obtained from the income tax
authorities in India.
The tenure of the PO shall end with the
conclusion of the project. Extra activities
are not allowed, except for activities for
which the approval is given under that
contract.
Winding-Up
On completion of project, the following
documents are to be submitted to an AD
category-1 bank:
A certified copy of audited project
accounts
A certified accountant certificate
indicating how the surplus arrived
Evidence of tax payment or a certifed
accountant certifcate to that affect
An auditors certifcate that no statutory
liabilities are outstanding
Intermittent remittance can be made
before the completion/pending winding-
up, with the following restrictions:
7 India Briefng
An auditors certificate is provided
stating that suffcient provisions are
made to meet the liabilities and taxes
An undertaking from the PO that
remittances will not affect project
completion
In addition, an inter-project transfer of
funds needs the prior permission of the
RBI.
Private Limited
Liability Company
The procedure for establishing a private
limited liability company (LLC) in India
depends on the intended scope of business.
For certain RBI-designated sectors, 100
percent foreign ownership is allowed
and the automatic route of approval is
permitted (this process is described in the
next article). Other sectors are restricted
(RBI approval is required, the automatic
route is unavailable) or prohibited by the
RBI.
Eligibility
A LLC requires a minimum of two
directors, and has from two to fifty
shareholders with liability limited to the
paid and unpaid capital that is issued as
part of the company. Both directors and
shareholders can be other legal entities.
The minimum paid-up capital for a private
company is about US$2,500. Formation
takes approximately six to eight weeks.
In a private limited company, the
shareholders right to transfer shares is
restricted and the invitation to the public
to subscribe to any shares or debentures
is prohibited. No invitation or acceptance
of deposits from persons other than
members, directors or their relatives is
allowed.
Companies must also comply with various
requirements relating to the filing of
various documents and forms with the
Registrar of Companies, including annual
returns, a list of directors, and a notice of
the creation of charge in its assets or of
an increase in its nominal share capital
and copies of notices for shareholder
meetings. Furthermore, a private limited
company must keep a record of accounts,
audit its records, and fle an annual report
or return with the registrar of companies.
Application
Generally, the steps of application for a
limited liability company include:
Obtain the certifcate of approval and
company incorporation certifcate from
the local approval authority
Co mp l e t e d r a f t a p p l i c a t i o n
documentation
Apply for preregistration of the name
with the approval authority
Draft a memorandum of association and
articles of association for the private
limited company
Apply for the incorporation certifcate
of the company
Obtain the Director Identification
Number (DIN) for each director from
the Ministry of Corporate Affairs
Obtain a digital signature certifcate
from Ministry of Corporate Affairs for
the directors
Obtain approval for the registered
address of the company
Obtain a company seal from state
treasury or authorized private bank
Obtain Permanent Account Number
(PAN) for the company and its directors
(if directors are resident in India)
Obtain a tax account number for the
company
Enroll with the office of Inspector,
Shops, and Establishment Act (state/
municipal)
Enroll for value-added tax with the State
Commercial Tax Offce
These steps are slightly simplifed for the
automatic route of approval and slightly
more involved for those LLC that fall
into a sector designated by the RBI as
restricted. For more details, please see
the next article on the automatic route of
approval and consult a professional.
Private Limited Company
vs. LO/BO/PO
A wholly-owned subsidiary can be set
up as a private limited company. Such
a company is often preferable over other
types of offces, as it allows total control
over business, provides limited liability,
and has fewer restrictions on business
activities. The exception to this is when a
company needs to raise fnances through
a public issue.
A private limited company is a company
limited by shares in which there can be
a maximum of 50 shareholders and a
minimum of two. No invitation can be
made to the public for subscription of
shares or debentures and no deposits can
be made or accepted from the public and
restrictions are in place for the transfer of
shares. The liability of each shareholder
is limited to the extent of the unpaid
amount of the shares face value and the
premium thereon in respect of the shares
held. However, the liability of a director or
manager of such a company can at times
be unlimited.
Prohibited Sectors
Retail trading (except single brand
product retailing)
Atomic energy
Lottery business
Gambling and betting
Housing and real estate business
( except i on: devel opment of
t owns hi ps , cons t r uct i on of
residential/commercial premises,
roads or bridges to the extent
specifed in RBI Notifcation)
Agriculture (excluding foriculture,
horticulture, development of seeds,
animal husbandry, viniculture and
cultivation of vegetables, mushrooms
under controlled conditions and
services related to agro and allied
sectors) and plantations (other than
tea plantations)
Chit funds
Nidhi companies (mutual benefit
fnancial companies)
Restricted Sectors
RBI Approval Required, Automatic
Route Unavailable
Petroleum sector (except for private
sector oil refning), natural gas/LNG
pipelines
Investing companies in infrastructure
and services sector
Defense and strategic industries
Atomic minerals
Print media
Broadcasting
Postal services
Courier services
Establishment and operation of
satellites
Development of integrated townships
Tea sector
Asset reconstruction companies
8 India Briefng
The Automatic Route of Approval,
Sectoral Caps, and Other Limitations
[ By Dezan Shira & Associates ]
I
ndian bureaucracy plays a major
role in making establishing an
initial presence in the country
appear quite confusing, but its
presence is largely overstated. The
extent to which the countrys bureaucracy
plays a role the incorporation process
varies largely based on the chosen
establishment structure type. As Chris
Devonshire-Ellis pointed out in his
opening article, the points at which
bureaucracy steps into the incoporation
process are not always where you would
expect.
For most investors, the RBI will play a
surprisingly small role in incorporation
due to what is colloquially termed the
automatic or the fast-track route
to bypass the need for prior approval
from the Foreign Investment Promotion
Board. Using this method of entry,
foreign investment - including foreign
direct (FDI), non-resident Indian (NRI)
and overseas corporate body (OCB)
investment - only has to be registered with
the Reserve Bank of India (RBI).
There are, of course, restrictions on
which investments can use the automatic
route. For example, the placement
of industrial units needs to adhere to
government guidelines, and materials
such as liquor need specific industry
licenses. If the Indian company into which
the investment is heading does not already
conform to such government policies,
then it is not eligible for investment
under the automatic route. Industry scale
also plays a role: foreign investment
through the automatic route into frms
that are considered a part of small-scale
industry cannot exceed 24 percent under
the automatic route.
Additionally, there are restrictions on
which investors can make investments
under the automatic route. If a foreign
investor has previously engaged in
another JV in the sector in which he
would like to invest, prior approval from
the foreign investment promotion board
must be sought. There are limits based on
nationality as well: if the investor is of Sri
Lankan, Pakistan, or Bengali nationality,
approval from the central government
is required before investing in Indian
companies.
The general guidelines for determining
eligibility under the automatic route are
discussed below. As always, we strongly
suggest that you seek professional advice
tailored to your individual investment
situation.
Main Eligibility Criteria
Generally, government approval through
the Foreign Investment Promotion
Board for FDI/NRI/OCB investments is
necessary for proposals that:
Fall outside of notifed sectoral policy/
caps or under sectors in which FDI is
not permitted
Involve a foreign collaborator who has
a previous venture or tie up in India
(excluding those made by multilateral
fnancial institutions or the IT sector)
Relate to acquisition of shares in an
existing Indian company in favor of a
foreign/NRI/OCB investor
Require an industrial license, which
includes those stipulated under the 1951
Industries (Development & Regulation)
Act; in which foreign investment is
more than 24 percent in the equity
capital of units manufacturing items
reserved for small scale industries; and/
or stipulated under the location policy
of the 1991 New Industrial Policy
Eligibility by Sector
In determining automatic rate of
approval eligibility based on sector,
the Indian government creates two
types of restrictions. First, it stipulates
sectors under which FDI is not permitted
under any circumstance - prohibited
sectors - and sectors that fall under the
government route (in other words, they
are not eligible for the automatic route and
Furthermore, a private limited company
faces fewer restrictions in business
activities than a other types of offces,
such as a liaison office, which is not
allowed to commence any commercial,
trading, or industrial activities, directly
or indirectly, and is required to sustain
itself out of private remittances received
from its parent company through normal
banking channels.
In addition, for private limited companies,
t he parent company can execut e
manufacturing activities as well as
commercial activities in the country,
whereas liaison offces are not allowed to
conduct any commercial activities.
Private limited companies nonetheless
have a series of possible disadvantages
that investors should be aware of,
including a governance system many
people are unfamiliar with and additional
lawyer time in drafting establishment
agreements (meaning higher legal bills).
Dezan Shira & Associates is a foreign
direct investment practice offering
business advisory, tax, accounting, due
diligence, payroll and audit services to
multinational clients in China, India,
and Vietnam. For advice on Indian LO/
BO/PO establishment, please contact
Dezan Shira & Associates at india@
dezshira.com or visit www.dezshira.
com.
9 India Briefng
Automatic Route of Approval and Industrial Policy Limitations
require prior approval from the Foreign
Investment Promotion Board).
Prohibited sectors
(a) Retail trading (except single brand
product retailing)
(b) Atomic energy
(c) Lottery business
(d) Gambling and betting
(e) Agriculture (excluding foriculture,
horticulture, development of seeds,
animal husbandry, viniculture and
cultivation of vegetables, mushrooms
under controlled conditions and
services related to agro and allied
sectors) and plantations (other than
tea plantations)
Government route sectors
(a) Petroleum sector (except for private
sector oil refining), natural gas/
liquifed natural gas pipelines
(b) Investing companies in infrastructure
and services sector
(c) Defense and strategic industries
(d) Atomic minerals
(e) Print media
(f) Broadcasting
(g) Postal services
(h) Courier services
(i) Establishment and operation of
satellites
(j) Development of integrated townships
(k) Tea sector
(l) Asset reconstruction companies
(J) Cigar and cigarette manufacturing
(K) Air transport services
(L) Telecom services
Second, the government stipulates very
specifc sector caps. A summary of these
caps (which frequently change) is given
in the table on the next page.
Please note that both the prohibited
sectors, government route sectors and
sector cap stipulations all change - for
updated information please consult a
professional.)
Additional Eligibility
Requirements
New vs Existing Companies
The eligibility for the automatic route of
approval for FDI/NRI/OCB investments
also varies slightly for new and for
existing companies.
For new companies, up to 100 percent
of said investment falls under the
automatic route of approval. This includes
investment in public sector units, export-
oriented units (EOUs), export processing
zone units (EPZs), electronic hardware
technology park units (EHTPs) and
software technology park units (STPs).
Existing companies proposing to induct
foreign equity are also eligible in certain
cases for the automatic route of approval
for FDI/NRI/OCB investment.
Futhermore, existing companies with
an expansion program must meet the
following requirements:
(i) the increase in equity level must result
from the expansion of the equity base
of the existing company without the
acquisition of existing shares by FDI/
NRI/OCB investment
(ii) the money to be remitted should be
in a foreign currency
(iii) the proposed expansion program
should be in the sector(s) designated
under the automatic route (otherwise,
the proposal must be approved by
the FIPB and supported by a board
resolution of the existing Indian
company)
For existing companies without an
expansion program, the additional
requirements for eligibility for automatic
approval are:
(i) the company is engaged only in
the industries designated under the
automatic route of approval
(ii) the increase in equity level is from
expansion of the equity base
(iii) the foreign equity must be in foreign
currency
In addition, equity participation by
international financial institutions in
domestic companies is permitted through
the automatic route, subject to Security and
Exchange Board of India/RBI regulations
and sector-specifc caps on FDI.
Technical Collaboration
Indian companies can enter into technical
collaboration agreements with foreign
collaborators under two routes:
1. The automatic route of Reserve Bank
under approval of the Secretariat for
Industrial Assistance (SIA), Ministry
of Industry in New Delhi.
2. Applications for foreign technical
collaboration which do not conform
to the parameters given in the
automatic route are required to be
made to SIA, Ministry of Industry,
Government of India, New Delhi.
The extension of Foreign Technical
Collaboration Agreements (including
those approved by the Reserve Bank)
is also required to be approved by
SIA.
Time Frame
There is no defnite time frame as to when
the approval will be granted. It depends
on a case-to-case basis. However, if the
information supplied in Form FC / IL -
SIA is precise and calls for no clarifcation
from the government, approval is normally
obtained in 4-6 weeks.
In the case of an item reserved for
manufacturing in a small-scale sector, the
unit must also register with the Directorate
of Industries/District Industries Centre of
the concerned state government.
If, for any of these reasons, an Indian
company cannot receive an investment
from a foreign entity under the automatic
route, then an application, along with
a detailed description of the proposal,
may be submitted to the Secretariat
for Industrial Assistance, Ministry of
Commerce & Industry, Government of
India, Udyog Bhavan, New Delhi. If
approval is acquired, then no approval by
the RBI is required.
Dezan Shira & Associates is a foreign
direct investment practice offering
business advisory, tax, accounting, due
diligence, payroll and audit services
to multinational clients in China,
India, and Vietnam. For advice on
the automatic route of approval and
industrial policy limitations, please
contact Dezan Shira & Associates at
india@dezshira.com or visit www.
dezshira.com.
10 India Briefng
Items and Activities with Sectoral Cap on Foreign Investment
Sector Investment Cap Description of Activity / Items / Conditions
1. Private sector banking 74% Subject to guidelines issued by the Reserve Bank of India.
2. Non-banking fnancial
companies
100% FDI /NRI/ investments allowed 19 NBFC activities shall be subject to specifc condition.
3. Insurance 26% FDI up to 26% in the insurance sector is allowed on the automatic route subject to obtaining license from the Insurance Regulatory and Develop-
ment Authority (IRDA).
4. Telecommunications 49% Basic and cellular, unifed access services, national/ international long distance, v-sat, public mobile radio trunked services, global mobile person-
al communications services and other value added telecom services: FDI is permitted up to 49% under automatic route while FDI beyond 49%
but up to 74% is allowed under FIPB route; these limits are subject to guidelines notifed in the Press Note 5 (2005 series). ISP with gateways,
radio paging and end-to-end bandwidth: FDI is permitted up to 49% under automatic route and FDI beyond 49% but up to 74% is allowed under
FIPB route; these services would be subject to licensing and security requirements. No equity cap is applicable to manufacturing activities
FDI up to 100% is allowed for the following activities in the telecommunications sector: ISPs not providing gateways (both for satellite and
submarine cables), Infrastructure providers providing dark fber (IP Category 1), Electronic mail, Voice mail
FDI is permitted up to 49% under automatic route and FDI beyond 49% but up to 100% is allowed under FIPB route.
5. Petroleum 100% Dependant on whether it is refning, product marketing, exploration or pipelines, government policy and regulations vary.
6. Housing and real estate 100% Only NRIs are allowed to invest in certain specifc areas.
7. Coal and lignite Private Indian companies setting up or operating power projects as well as coal and lignite mines for captive consumption are allowed FDI up to
100%; 100% FDI is allowed for setting up coal processing plants subject to certain condition; FDI up to 100% is allowed for exploration or min-
ing of coal or lignite for captive consumption; In all the above cases, FDI is allowed up to 50% under the automatic route subject to the condition
that such investment shall not exceed 49% of the equity of a PSU
8. Venture capital funds (VCFs)
and Venture capital companies
(VCCs)
Offshore venture capital funds/companies are allowed to invest in domestic venture capital undertaking as well as other companies through the
automatic route, subject only to SEBI regulations and sector specifc caps on FDI.
9. Trading Trading is permitted under automatic route with FDI up to 51% provided it is primarily export activities, and the undertaking is an export house/
trading house / super trading house/ star trading house. However, under the FIPB route:
100% FDI is permitted in case of trading companies for the following activities: Exports, Bulk imports with export/ ex-bonded warehouse sales,
Cash and carry wholesale trading, Other import of goods or services provided at least 75% is for procurement and sale of the same group and not
for third party use or onward transfer/ distribution/sales
The following kinds of trading are also permitted, subject to provisions of EXIM policy: Companies for providing after sales services (that is not
trading per se), Domestic trading of products of JVs is permitted at the wholesale level for such trading companies who wish to market manu-
factured products on behalf of their joint ventures in which they have equity participation in India, Trading of hi-tech items and items requiring
specialized after sales service, Trading of items for social sector, Trading of hi-tech, medical and diagnostic items, Trading of items sourced from
the small scale sector under which, based on technology provided and laid down quality specifcations, a company can market that item under its
brand name, Domestic sourcing of products for exports, Test marketing of such items for which a company has approval for manufacture pro-
vided such test marketing facility will be for a period of two years, and investment in setting up manufacturing facilities commences simultane-
ously with test marketing
FDI up to 100% permitted for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favor of the
Indian public in fve years, if these companies are listed in other parts of the world. Such companies would engage only in business to business
(B2B) e-commerce and not in retail trading.
10. Power 100% FDI allowed up to 100% in respect of projects relating to electricity generation, transmission and distribution, other than atomic reactor power
plants. There is no limit on the project cost and quantum of foreign direct investment.
11. Drugs and pharmaceuticals 100% FDI permitted up to 100% for manufacture of drugs and pharmaceuticals provided the activity does not attract compulsory licensing or involve
use of recombinant DNA technology and specifc cell/tissue targeted formulations.
FDI proposals for the manufacture of licensable drugs and pharmaceuticals and bulk drugs produced by recombinant DNA technology and spe-
cifc cell/tissue targeted formulations require prior government approval.
12. Road and highways, ports
and harbors
100% In projects for construction and maintenance of roads, highways, vehicular bridges, toll roads, vehicular tunnels, ports and harbors.
13. Hotel and tourism 100% The term hotels include: Restaurants, beach resorts and other tourist complexes providing accommodation and/or catering and food facilities
to tourists, tourism related industry include travel agencies, tour operating agencies and tourist transport operating agencies, units providing
facilities for cultural, adventure and wild life experience to tourists, surface, air and water transport facilities to tourists, leisure, entertainment,
amusement, sports and health units for tourists and convention/seminar units and organizations.
For foreign technology agreements, automatic approval is granted if: Up to 3% of the capital cost of the project is proposed to be paid for techni-
cal and consultancy services; Up to 3% of the net turnover is payable for franchising and marketing/publicity support fee; Up to 10% of gross
operating proft is payable for management fee, including incentive fee
14. Mining 100% For exploration and mining of diamonds and precious stones, FDI is allowed up to 100% under automatic route; For exploration and mining of
gold and silver and minerals other than diamonds and precious stones, metallurgy and processing FDI is allowed up to 100 % under automatic
route; Press Note 18 (1998 series) dated Dec. 14, 1998 would not be applicable for setting up 100% owned subsidiaries in so far as the mining
sector is concerned, subject to a declaration from the applicant that he has no existing joint venture for the same area and/or the particular mineral
15. Advertising 100% FDI up to 100% allowed on the automatic route.
16. Films 100% Film production, exhibition and distribution including related services/products, FDI up to 100% allowed on the automatic route with no entry-
level condition.
17. Development of new
airports
74%
100%
Government approval required beyond 74%.
Available only for Greenfeld projects.
18. Mass rapid transport
systems
100% FDI up to 100% is permitted on the automatic route in mass rapid transport system in all metros including associated real estate development.
19. Pollution control and
management
100% In both manufacture of pollution control equipment and consultancy for integration of pollution control systems is permitted on the automatic
route.
20. Special economic zones 100% All manufacturing activities except: Arms and ammunition , explosives and allied items of defense equipment, defense aircraft and warships;
Atomic substances, narcotics and psychotropic substances and hazardous chemicals; Distillation and brewing of alcoholic drinks; Cigarette/cigars
and manufactured tobacco substitutes
21. Any other sector/activity 100% If not included in Annexure A.
22. Air transport services
(domestic airlines)
100% for NRIs
49% for others
No direct or indirect equity participation by foreign airlines is allowed.
23. Townships, housing, built-
up infrastructure and construc-
tion development projects.
100% This sector would include, but not to be restricted to, housing, commercial premises, hotels, resorts, hospitals, educational institutions, recrea-
tional facilities, city and regional level infrastructure.
India Works on Stronger Connectivity with ASEAN Countries
P
ursuing its Look East
policy, India held the Delhi
Dialogue III between March
3 and 4 i n New Del hi ,
inviting a signifcant number
of delegates working in distinct felds
from the Association of Southeast Asian
Nations (ASEAN).
Co-hosted by the Indian Ministry of
External Affairs (MEA), the Indian
Council of World Affairs, and the
Federation of Indian Chambers of
Commerce and Industry, the dialogue was
aimed at trying to provide a partnership
platform for idea exchange to build a safe,
secure and prosperous region.
As a major contributor to Asias economic
emergence, just like its neighbor and
competitor China, India is looking for
more political and economic cooperation
with the ASEAN countries. MEA
Minister S.M. Krishna mentioned at
the dialogue, We are committed to
deepening our engagement with the
countries of ASEAN as the power shift
to Asia in the 21st Century is almost a
clich now.
The ASEAN side also expressed its strong
will to strengthen economic ties with the
emerging Asian country with a 1.2 billion
population and strong annual economic
growth averaging 9 percent.
India and ASEAN are natural partners.
Together we are a formidable force,
said ASEAN Secretary General Surin
Pitsuwan.
After establishing and maintaining a
formal partnership for 19 years, both
parties are seeing signifcant progress
towards reducing connectivity roadblocks
and are still working for an inter-
connected economic bloc.
India and ASEAN countries signed a
free trade agreement on commodities
one year ago. India hopes that by 2012,
the two sides will reach a comprehensive
economic cooperation agreement which
will realize free trade in services and
investments, and bring an estimated trade
volume of US$70 billion.
Because of the geographic and strategic
importance of the region, both India
and China have been treating their
relationship with the ASEAN countries
seriously for a long time. While China
reached a framework agreement on
comprehensive economic cooperation
with the ASEAN countries back in 2002,
its territorial disputes in the South China
Sea with some ASEAN members have
often set back the friendly relationship.
In fact, on the same day that the Delhi
Dialogue was held, a protest was held in
the Philippines against two Chinese navy
gunboats harassment of a Philippine
research vessel near the disputed Spratly
Islands in the South China Sea.
India, who also has territorial disputes
wi t h Chi na, bel i eves t he mut ual
commitment between the country and the
ASEAN region is becoming increasingly
important. The Delhi Dialogue III was
also in preparation for 2012s India-
ASEAN commemorative summit that
celebrates their 20-year-long formal
relationship.
T
he I ndi an Mi ni st r y of
Corporate Affairs recently
said that it had aligned 35
Indian accounting practices
with international standards,
marking an important step to bringing
International Financial Reporting
Standards (IFRS) to India and making
fnancial statements of Indian frms read
similarly to those of their international
peers.
However, a few discrepancies between
the two rubrics will still remain, the Wall
Street Journal reported.
These include:
Revenue recognition for real-estate
sales on the basis of percentage
completion method (IFRS generally
requires revenue recognition when
the final possession is given to the
customer)
Accounting for the equity-conversion
option of a foreign currency convertible
bond as an equity component
(IFRS requires the foreign-currency-
based equity conversion option to be
periodically marked to market)
Whereas under the previous list of
discrepancies firms had to adhere to
Indian accounting standards, the second
category of differences between IFRS and
Indian accounting standards will permit a
company to choose which set of standards
fts better:
Deferring exchange differences on
long-term foreign-currency monetary
assets and liabilities, and recognizing
such differences over the period of
the underlying asset/liability (IFRS
requires all such differences to be
immediately recognized in the proft-
and-loss account)
Considering Indian GAAP carrying
values as deemed cost for fxed assets
acquired prior to transition date (IFRS
offers no such choice on transition)
Eliminating IFRS principles relating
to embedded leases and service-
concession arrangements for an initial
period
Choosing IFRS principles usually allows
a company to have better access to
overseas capital markets and to align
its statements with those of its parent
company.
However, some investors do worry about
the ministrys commitment to enacting
such changes, as no strict timeline was
provided for their implementation.
To read the ministrys notifcation, please
visit: http://www.mca.gov.in/Ministry/
accounting_standards.html.
India Puts Accounting Practices in Line with International
Standards
The Practical Application of India Business July 2011
Daily Business News Available at
www.india-briefng.com/news Volume V - Number II
Tax and Financial
Management
In This Issue:
Navigating the Tax Jungle in India: The Basics
Specifc Tax Requirements for Foreign Companies in India
Tax Benefts for Special Economic Zones
Indian Taxes and International Trade Agreements
I
n this issue of India Briefng, we take an introductory
look at corporate and personal taxes in India for foreign
companies. From fling dates, to forms and fees, this
issue helps lay the foundation for a solid understanding of
Indian taxes for a new investor. As well, the issue explores
the tax benefts provided to investors in Indias numerous
Special Economic Zones. A strategic understanding of industry
specifc tax incentives in Special Economic Zones can help a
new investor fnd the path to success in India.
We take a step back to look at India in the context of global
trade agreements, listing and defning the different kinds of trade
agreements India has and exploring the beneft these agreements
entail for international investors.

This issue was edited by Kaitlin Shung, an editorial assistant
at Asia Briefng.
The articles in this issue of India Briefng were researched and
written with the help of the India-based foreign direct investment
and tax consultancy Dezan Shira & Associates. Please contact
them directly in Mumbai at india@dezshira.com, and feel free
to sign up for our regular India Briefng news bulletins.
We look forward to hearing from you!
With best regards,
Samantha Jones
No reproduction, copying or translation of materials without prior permission of the publisher. Contact: editor@india-briefng.com
Cover Art
Tis months cover art is by the artist Partha Pratim Deb, who works and lives in Calcutta and brings together indigenous folk traditions rooted in the rich art and craft of
Santiniketan and the experimental Pop Art of the West.
Image provided courtesy of Delhi Art Gallery. Delhi Art Gallery boasts a distinctive collection of early-modern as well as modern and contemporary art from over 400 artists. As one of
the largest repositories of Indian modern art anywhere in the world, Delhi Art Gallery has become distinguished for its focus on 20th century Indian art. Te Gallery works to shed new
light on not only the well-established artists and their genres, but also on the lesser-known talented painters and sculptors. Te Gallery is located at 11 Hauz Khaz Village, New Delhi
110016.
www.delhiartgallery.com; info@delhiartgallery.com.
Welcome to the July issue of India Briefng
3 India Briefng
I
ndia has a very low entry for
creating a taxable presence, so
foreign frms should reach out for
tax advice at the beginning of an
Indian investment.
KEY TAX FILING DATES
FOR FOREIGN INVESTORS
The following chart illustrates important
dates related to tax flings specifcally for
foreign investors.
Note: failure to meet the annual tax return
deadline entails a penalty of INR5000. Foreign
investors are also not required to fle an annual
tax return if their income is from wages or
subject to a deduction at source.
CORPORATE TAX IN INDIA
Companies established in India are taxed
at a rate of 30 percent, with an additional
charge of fve percent if taxable income
is greater than Rs.10 million.
For a foreign company, the tax rate
depends on a number of other factors,
such as where the home country of the
company is. Income that is taxable for
foreign companies include income raised
in India from capital assets, interest
gained, income from sale of equity shares
of the company, royalties, dividends
earned, etc.
PROPOSED TAX RATES
FOR FINANCIAL
YEAR 2011-2012
Domestic companies (including Limited
Liability Partnership (LLP)
Domestic companies are taxable at 30
percent. Education cess is applicable at
3 percent on income tax (inclusive of
surcharge, if any).
Foreign companies
Foreign companies are taxable at 40
percent; surcharge is applicable at 2
percent if total income is in excess
of Rs.10 million. Education cess is
applicable at 3 percent on income tax
(inclusive of surcharge, if any).
INCOME TAX RATES
(INDIVIDUALS AND
FOREIGN COMPANIES)
Individual income tax
Individual income tax is a direct tax paid
by an individual (or by a company/frm
on an employees behalf) to the central
government on personal income. The
Indian Income Tax department is governed
by the Central Board for Direct Taxes
(CBDT) and is part of the Department of
Revenue under the Ministry of Finance,
Government of India. Individual income
tax (IIT) calculation in India is based on
resident-status and source of the income.
Residents are taxed on their global
income whereas non-residents are only
taxed on income that is sourced, received
or accrued in India.
Work done in India, regardless of the
employers international status, will be
taxed. As residency determines the tax
rate, it is important to understand how
resident status is determined. See the
chart at the bottom of the page for your
individual tax rate.
How to read the below chart: identify
which demographic column you belong
to (general, women, senior citizens), read
down the column to identify your income
range for 2011-2012. Once you have
identifed your income range, follow the
row to the left to identify the applicable
tax rate.
INCOME TAX RATES
BY INCOME SOURCE
Dividends
20 percent for non-treaty foreign
companies
15 percent for companies under a treaty
based in the United States
Interest gains
companies
For royalties
companies
For technology based services
30% for non-treaty foreign companies
Navigating the Tax Jungle in India:
The Basics
April 1- March 31
Tax Year
Deadline: June 15, September 15,
December 15, March 15, March 31
Advance
payments
due
Deadline: September 30
(For income from business)
Annual
tax return
Individual Tax Rates
Financial Year 2011-2012
Year Tax Rate
Income Range by Demographic
General Women
Senior citizens
60 79 years old 80+ years old
2011-2012 0 0 - 1,80,000 0 - 190,000 0 - 250,000 Up to 500,000
10 percent 180,001 - 500,000 190,001 - 500,000 250,001 - 500,000 -
20 percent 500,001 - 800,000 500,001 - 800,000 500,001 - 800,000 500,001 - 800,000
30percent Above 800,000 Above 800,000 Above 800,000 Above 800,000
2010-2011 0 160,000 190,000 240,000
10 percent 160,001 - 300,000 190,001 - 300,000 240,001 - 300,000
20 percent 300,001 - 500,000 300,001 - 500,000 300,001 - 500,000
30 percent Above 500,000 Above 500,000 Above 500,000
4 India Briefng
For all other kinds of income and gains
40 percent for both non-treaty foreign
companies and companies under a
treaty based in the United States
ADDITIONAL TYPES
OF TAXES
Wealth tax
A wealth tax is imposed at one percent
of the value of the specifed assets held
by the tax payers in excess of the basic
exemption of Rs.3 million.
Excise duty
Manufacturing goods in India are subject
to excise duty under the Central Excise
Act of 1944 and the Central Excise Tariff
Act of 1985. Most products attract excise
duties at a rate of ten percent.
Custom duty
The levy and the rate of customs duties
in India are governed by the Customs
Act of 1962 and the Customs Tariff Act
of 1975. Imported goods in India attract
basic and additional customs duties and
education fees.
The peak rate of basic custom duty has
been reduced to ten percent for industrial
goods. Additional customs duties are
equivalent to the excise duty payable on
similar goods manufactured in India.
An education fee of two percent is levied
on the aggregate of the customs duty on
imported goods. The customs duty is
calculated using the transaction value of
goods.
Sales tax and Value-added tax
Sales tax is levied on the sale of movable
goods. Most states in India have replaced
the sales tax with a new value-added
tax (VAT) since April 1, 2005. A VAT is
imposed only on goods, not on services,
and is implemented at the state level. A
VAT is applied on each stage of the sale
and a credit mechanism keeps track of
the VAT paid. There are four tiers of VAT,
covering 550 items:
One percent for essential commodities
One percent on gold or silver bullion
and precious stones
Four percent on industrial inputs, capital
goods and items of mass consumption
including medicine, drugs, agricultural
and industrial inputs, capital and
declared goods
12.5 percent for all other products,
including petroleum products, tobacco,
liquor etc. (These items may attract
higher VAT rates that vary from state
to state). Sugar, textile and tobacco
products are exempt from VAT for one
year
Every business is required to register their
VAT. However, businesses with less than
Rs.500,000 turnover are exempt from
VAT. A central sales tax of four percent is
also levied on inter-state sales but this tax
will eventually be phased out.
Capital gain tax
Capital gain tax is a deliberate tax payable
on the sale of assets, investments and
capital accumulation. Short-term capital
gain taxes are primarily administered by
the Registrar of Companies.
For short-term capital gains associated
with the sale of property, the gained
amount needs to be included in total
annual income. Then the amount will be
subject to a capital gain tax, depending on
the total taxable amount.
In the case of long-term capital gains
related to the sale of property, factors
such as infation are usually taken into
consideration. The seller of the property
needs to pay tax not only on the real
capital gain, but also on the projected gain
as a result of infation.
Capital gain tax rates, according to
revenue source, are listed in the chart
below.
Service tax
Every person, irrespective of status, is
liable to pay service tax if the provision of
Sold within three years of purchase
Exception: mutual funds or company
shares (sold within one year)
Short-term
Capital Gains
Sold after three years of purchase
Exception: mutual funds or company
shares (sold after one year)
Long-term
Capital Gains
Capital Gain Tax Rates by Revenue Source
Category Short term Long term
Sale transactions of securities attracting STT* 15 percent N/A
Sale transaction of securities not attracting STT* N/A N/A
Individuals (resident and non-residents) Progressive slab rate 20 percent with indexation; 10 percent
without indexation (for units/
zero coupon bonds)
Partnerships (resident and non-resident) 30 percent
Domestic companies 30 percent
Overseas fnancial organizations specifed in section
115AB
40 percent (corporate)
30 percent (non-corp.)
10 percent
Foreign Institutional Investor (FII) 30 percent 10 percent
Other foreign companies 40 percent 20 percent with indexation, 10 percent
without indexation (for units/
zero coupon bonds)
Local authority 30 percent
Cooperative society Progressive slab rate
*STT stands for Securities Transaction Tax
Service Tax
Payment Dates
Individual,
Proprietorship,
Partnership
Corporate
Entities, Trust and
Societies
Value realized Due
date
Value
realized
Due
date
April to June July 5 March March 31
July to September October 5 Other 5th of
succeeding
month
October to December January 5
January to March March 31
Excise duty
Custom duty
Wealth tax
5 India Briefng
the service results in any taxable income.
Small service providers are exempt from
service tax where the value of taxable
service does not exceed Rs.1 million
in the previous fscal year. The central
government can grant exemption to
certain services wholly or partly.
Service providers must register for the
service tax with form ST-1 within 30
days of the date on which the service tax
became leviable. The service tax rate is
levied at 10.3 percent and VAT is charged
at 12.5 percent.
Failure to comply with the aforementioned
details will result in interest penalties on
delayed payments at a rate of 18% per
annum charged for the number of days
between payment due date and actual
payment date.
HALF YEARLY RETURN
IN FORM ST-3
April to September - 25 October
October to March - 25 April
REGISTRATION OF
COMPANIES (ROC)
COMPLIANCE
Companies listed in India are required
to fle the following reports on the dates
specifed throughout the year.
As well, all companies are also required to
adhere to the following compliance dates
for fling annual returns.

Listed Companies Tax Compliance Dates
Filing with Stock Exchange Q1 Q2 Q3 Q4
Corporate Governance Report July 15, 2011 Oct. 15, 2011 Jan. 15, 2012 April 15, 2012
Distribution Schedule Filing July 21, 2011 Oct. 21, 2011 Jan. 21, 2012 April 21, 2012
Financial Results Unaudited July 31, 2011 Oct. 31, 2011 Jan. 31, 2012 April 31, 2012
Consolidated Aug. 31, 2011 Nov. 31, 2011 Feb. 28, 2012 May 31, 2012
Audited June 30, 2012
Sept. 30,
2011
Within 30
days of
AGM
Within 60
days of
AGM
ROC Filling Fees
Form / Document Fee
Form 1A
Application Fees
Inspection Fees
Rs.500
Rs.50
Other documents
Rs.100,000 - Rs.500,000
Rs.500,000 - Rs.2,500,000
Rs.2,500,000 and above

Rs.200
Rs.300
Rs.500
90 days or more 9x nominal
fling fees
60-90 days 6x nominal
fling fees
30-60 days 4x nominal
fling fees
30 days or less 2x nominal
fling fees
Late ROC Filing Fees
A tax deduction is effectively an expenditure earned by a taxpayer. They are changeable amounts that can be subtracted, or
deducted, from the assessees gross income. As a result, the tax deduction will lower overall taxable income and thus lower
the amount of tax paid.
The following chart lists the relevant cut-offs and rates depending on the type of payment.
TAX DEDUCTION AT SOURCE (TDS)
Tax Deduction at Source Cut-offs and Rates
Nature of Payment
Cut-off Amount (Rs.) Rate
June 30, 2010 July 1, 2010 HUF
*
/Independent Others
Interest other than interest on securities (by bank) 10,000 10,000 10 10
Interest other than interest on securities (by others) 5,000 5,000 10 10
Lottery/crossword puzzles 5,000 10,000 30 30
Winnings from horse races 2,500 5,000 30 30
Contracts 20,000 30,000 1 2
Sub-contracts/advertisements 20,000 30,000 1 2
Insurance commission 5,000 20,000 10 10
Payments out of deposits under NSS 2,500 2,500 20 0
Repurchase of units by MF/UTI 1,000 1,000 20 20
Commission on sale of lottery tickets 1,000 1,000 10 10
Commission or brokerage 2,500 5,000 10 10
Rent (Land & building) 120,000 180,000 10 10
Rent (P&M, equipment, furniture and fttings) 120,000 180,000 2 2
Professional/technical charges/royalty and non-compete fees 20,000 30,000 10 10
Compensation on acquisition of immovable property 100,000 100,000 10 10
*
Hindu Undivided Family, a technical term related to the Hindu Marriage Act
Last day for
convening
Annual
General
Meeting
(AGM)
File copies
of manual
account
with
Registration
of
Companies
(ROC)
File annual
return
with ROC
All Companies Compliance Dates
6 India Briefng
A
company is considered
a f or ei gn non- I ndi an
company i f i t s cor e
management is located
outside of India for the
duration of the year. Companies formed
in India are considered Indian domestic
companies, even subsidiary units with
mother companies in foreign countries.
A foreign company working in India
is subject to the conditions of the
Companies Act of 1956, which stipulates
registration requirements for such entities.
Furthermore, foreign companies with
branches in India need to register with
the Registrar of Companies, New Delhi.
Other mandatory registrations include:
Shops & Establishment
Profession Tax
Income Tax PAN
Service Tax
VAT/TIN
Import Export Code
Provident Fund
Employees State Insurance etc.
Foreign companies are required to fle
yearly audited financial statements
with income tax authorities under the
Companies Act of 1956. Applicable
returns on a monthly/quarterly/semi-
annual basis need to be compiled and fled
in an appropriate manner.
If an Indian company, under contractual
obligations to a foreign company, agrees
to pay the balance of the contract in a
foreign currency (in an account outside of
India) then the foreign company needs to
open a separate banking account in India
and relocate funds to meet its spending
in India. The same rules are applicable
if the Indian company agrees to pay the
entire contract value to a foreign company
in Indian Rupees to its bank account in
India. The only additional point is the net
income from the agreement after paying
the taxes on completion of the assignment
can be remitted to the overseas company.
Foreign branches of India companies
are subject to Indian tax; specifically
their revenues must be included in the
companys international income. The
foreign branch may be subject to taxes
in their foreign country, to avoid double
taxation the company will be given credit
for the lesser of the Indian tax or the
foreign tax.
TAX FILING PROCEDURE
FOR FOREIGN
COMPANIES IN INDIA
Foreign companies need to apply and
obtain a Permanent Account Number
(PAN)
Foreign companies with contractual
work in India will be subject to income
tax of 41.2 percent on net income
earned from the contract. Net income
at this juncture represents the total
agreed upon revenues, reduced by the
expenditure incurred, related to the
contract both in India and outside of
India. The taxes withheld by the Indian
company can be claimed as a credit
against the tax payable of 41.2 percent
For payments towards expenditure
incurred in India, e.g. salaries, rent,
subcontracting charges, etc., the foreign
company needs to deduct income tax at
source at the applicable rates
Foreign companies need to pay taxes
using the appropriate challan (a Hindi
term for receipt). When paying taxes,
mention your PAN and Assessing
Offcer Code number in the challan.
The tax has to be deposited at RBI,
State Bank of India, IOB, Indian Bank
or other notifed banks
WITHHOLDING TAX FOR
NON-RESIDENT INDIANS
AND FOREIGN COMPANIES
Withholding tax rates for payments made
to non-residents are determined by the
Finance Act.
The current rates are:
Withholding Tax Rates for Non-resident
Indians and Foreign Companies
Income Source Tax Rate
Interest 20 percent
Dividends 10 percent
Royalties 20 percent
Technical services 20 percent
Any other services 30 percent (of net income)
Companies/Corporate 40 percent (of net income)
The above rates are general and in respect
to countries with which India does
not have a double taxation avoidance
agreement (DTAA).
On a final note, there are a number
of other tax-related factors to keep in
mind when investing in India. Bilateral
and multilateral trade treaties are worth
Specifc Tax Requirements for Foreign
Companies in India
DI VI DEND REPATRI ATI ON
FOR SUBSIDIARY OF FOREIGN
COMPANIES (FY 2011-2012)
One of the current budgets objectives
is to encourage the repatriation of
offshore funds through reducing
taxes paid on dividends received by
Indian companies from their foreign
subsidiaries. The proposed change
is a reduction from 30 percent to 15
percent. This, however, means that
Indian companies would not be able
to declare deductions on those same
dividends.
Royalties
Dividends
Tech-based
Services
Interest
7 India Briefng
Specifc Tax Requirements for Foreign Companies in India
2
http://www.caclubindia.com/forum/fles/56_master_circular_foreign_investment_in_india_2009.pdf
3
http://www.rbi.org.in/Scripts/NotifcationUser.aspx?Id=1932&Mode=0
investigating and understanding, since
they can reduce the amount of tax a
foreign company pays for its subsidiaries
in India through limiting repetitive
taxation on profits. Furthermore, the
above tax rates are not applicable for
business transactions that are initiated and
completed overseas (including payment)
unless there is a verifable connection to
the Indian company. And fnally, foreign
corporations do not need to pay taxes on
goods purchased in India for export.
PROFIT REMITTANCE,
REPORTING AND
VIOLATION
Payment of Sale Proceeds/Remittance on
Winding up/Liquidation of Companies
Sale earnings of shares and securities
and their allowance is governed by
The Foreign Exchange Management
(Remittance of Assets) Regulations
2000 under FEMA
For non-resident Indians, an AD
Category I bank can remit the
proceeds of the sale of a security (net of
applicable taxes) provided the security
has been held on repatriation basis,
the sale of security has been made in
agreement with the agreed plan and
NOC/tax clearance certificate from
the Income Tax Department has been
produced
FDI REPORTING
Infow Reporting
1
If an Indian company is receiving
investment through the issuance of
shares, convertible debentures and/
or preference shares under an FDI
scheme from a source outside of
India, the company needs to report the
information to a regional offce of the
Reserve Bank within 30 days of the
receipt of the funds using the Advance
Reporting Form
In your fling be sure to include:
Copies of the FIRC, which is evidence
of payment receipt
The KYC report on non-resident
investor
Share Issuance Reporting
For issued shares (including bonus
and shares issued on rights basis and
shares issued under ESOP), convertible
debentures and convertible preference
shares, the Indian company has to fle a
FC-GPR (form) within 30 days of issue
The FC-GPR has to be completed
and signed by the Managing Director/
Director/Secretary of the company and
submitted to an AD Category-I Bank
who will forward it to the Reserve Bank
The following documents need to be
submitted along with an FC-GPR:
A certifcate from the company secretary
confrming that the company is:
In compliance with The Companies Act
of 1956
In compliance with any additional
government requests
Entitled to issue shares under relevant
regulations
In ownership of original certifcates,
issued by authorized dealers in India
evidencing receipt of amount of
consideration
Note: For companies with paid-up capital
with less than Rs.50 million, the above
mentioned certifcate can be given by a
practicing company secretary.
As well, to fle an FC-GPR the company
needs to complete the following:
Confrmation from a statutory auditor
or chartered accountant verifying how
share price was determined
Annual return on overseas liabilities
and assets regularly fled by the Indian
company with the Reserve Bank by
July 15. Must report on all investments,
i ncl udi ng di r ect and por t f ol i o
investments, reinvested earnings and
other capital in the Indian company
made during the previous year
FC-GPR must include information on:
Bonus, rights shares or stock options
belonging to non-resident Indians
acquired through amalgamation,
merger and/or demerger with an
existing Indian company
Shares issued on conversion of ECB
Royalties
Lump sum technical know-how fees
Import of capital goods by units in
SEZs
Share Transfer Reporting
2
When reporting transfer of shares between
residents and non-residents use an FC-
TRS form. The form should be submitted
to an AD Category I bank within 60 days
from the date of receipt of the amount of
consideration. It is the responsibility of the
resident Indian to submit the form before
the deadline.
Non-Cash Reporting
3
Details of issue of shares against exchange
of ECB have to be reported to the regional
offce of the RBI.
Full conversion of ECB into equity
The corporation will report the
conversion with the submission of a
FC-GPR form to the regional offce
of the RBI and will also submit an
ECB-2 to the Department of Statistics
and Information Management (DSIM),
Reserve Bank of India, Bandra-Kurla
Complex, Mumbai 400 051, within
seven working days from the close
of month to which it relates. Once
reported, fling the ECB- 2 again is not
necessary.
Partial conversion of ECB
The corporation will report information
on converted ECB with submission of
form FC-GPR to the relevant regional
office and will also file an ECB-
2, clearly differentiating between
converted and non-converted ECB.
After this initial fling, the remaining
balance of ECB shall be reported in
form ECB-2 to the DSIM.
Violation
The violation under FEMA is civil
offence and not criminal offence. So
anybody who violates the provisions
non-intentionally will be penalized by
imposing fne in monetary terms not any
imprisonment. FDI is a capital account
contract and thus any infringement of
FDI regulations are covered by the penal
provisions of the FEMA. The Reserve
Bank of India administers the FEMA
and Directorate of Enforcement under
the Ministry of Finance is the authority
for the enforcement of FEMA. The
Directorate takes up investigation in any
contravention of FEMA.
8 India Briefng
A
Special Economic Zone
(SEZ) can be established
by a pri vat e company
(e. g. i ndi vi dual , NRI,
domest i c company, or
foreign company), state government or a
combination of both. For SEZ developers,
or units of SEZs, to acquire any foreign
direct investment (FDI) they must be
in compliance with related policies and
procedures.
The following are common SEZ policies
and procedures:
Where the developer has leasehold
rights, leases should be for a minimum
of 20 years
The types of units specifed for an SEZ
(e.g. manufacturing, service, trade, or
warehouse) must comply with approved
minimum area coverage requirements
Minimum land areas for adjacent or
vacant space bordering an SEZ is
determined by the type of units in the
SEZ. The adjacent area should not
include any public access roads
FDI is progressively being acknowledged
as an imperative aspect of economic
growth in developing countries. Besides
financial capital, FDI facilitates the
transfer of technology, organizational
and managerial practices and skills, as
well as entrance to international markets.
More and more countries are pushing
for policies to generate constructive and
enabling environments to attract FDI. In
addition to lowering the barriers to FDI,
India is aggressively liberalizing its FDI
regime.
INDUSTRY SPECIFIC
INCENTIVES
Manufacturing and production
A manufacturing/production entity
qualifes for a 30 percent tax exemption
on profts for ten years (beginning in the
frst year of production) if:
Established before March 31, 1995
Established in underdeveloped state/
union territory (or technologically
underdeveloped district)
Parallel remuneration is presented to
small-scale industrial activities that began
manufacturing or production on cold
storage plants before March 30, 2000.
Manufacturing entities may also qualify
for additional tax exemptions if:
Established before March 2000
Located in underdeveloped states, as
specifed by Eighth Schedule of the
Constitution
Category A or B: 100 percent tax
exemption on income for frst fve years,
30 percent for next fve years
Power generation/allocation
An enterprise established for power
generation or power allocation is entitled
to a 100 percent tax exemption on profts
for frst fve years and 30 percent for the
next fve years if:
An ent erpri se est abl i shed for oi l
production, anywhere in India, is exempt
from taxes on profts for the frst seven
years if:
Established before Oct. 1, 1998
Infrastructure
An enterprise which develops, maintains
and operates new infrastructure services is
entitled to a 100 percent tax exemption on
profts for the frst fve years of operations
and 30 percent for the following five
years if:
Established on or after April 1, 1995
Examples of applicable infrastructure
services include work related to roads,
highways, bridges, airports, ports, rail
systems, irrigation, sanitation and water
supply and any other similar public
facility notifed in the Offcial Gazette
The exemption is available for any ten
successive years of the frst 12 years of the
development, maintenance and operation
of infrastructure. The limit for claiming
the exemption increases if the highway
project timeline increases from ten to
twenty consecutive years.
Telecommunications
A telecommunications-related enterprise
is entitled to a 100 percent tax exemption
for frst fve years and 30 percent for the
Power
Generation
100%
Tax Exemption
(year 1-5)
+
30%
Tax Exemption
(year 6-10)
Science
+
R & D
Telecom
Manufacturing
Infrastructure
Introduction to India
Why India matters and where India is going
A brief history of India
Key demographics of India
Setting up a business in India
India's taxes
Import/export trends
Geographical overview
Living in India
Business etiquette and culture
Pre-order your copy at
sales@india-briefng.com
following fve years on profts if:
Applicable enterprises are engaged
i n pr ovi di ng basi c or cel l ul ar
telecommunications services (including
radio paging, domestic satellite or
network services and electronic data
interchange services)
Science and Industrial R&D
A scientifc and industrial R&D-related
enterprise is entitled to a 100 percent
tax exemption on profts for its frst fve
years if:
Established before April 1, 1999
INCENTIVES
The highest tax beneft (not a tax break) is
provided to companies that are established
in free trade zones (FTZs) for the frst ten
years of operations.
These FTZs include:
The Kandla Free Trade Zone (KAFTZ)
(Gujarat)
Sant a Cruz El ect roni cs Export
Processing Zone (SEEPZ) (Mumbai)
Madras Export Processing Zone
(MEPZ) (Tamil Nadu)
Cochin Export Processing Zone (CEPZ)
(Kerala)
Noida Export Processing Zone (NEPZ)
(Uttar Pradesh)
Falta Export Processing Zone (FEPZ)
(West Bengal)
Offcial, newly established 100 percent
export-oriented industrial activities and
units in electronic hardware and software
technology parks are permitted a similar
tax break.
Hotel or Travel Agency
A hotel or travel agency company (Indian
company or a non-corporate resident)
can enjoy a 50 percent tax break on
income resulting from services provided
to foreign tourists, plus any portion of
the leftover income that is transferred
to a reserve account from the proft and
loss account. Proft must be reported in
convertible foreign exchange.
Construction
For construction ventures (including
construction of buildings, roads, dams,
bridges, assemblage or installation of
machinery or plants, and construction
executed outside of India) a 50 percent
tax freedom is available on profts. The tax
freedom should be allocated to a Foreign
Project Reserve Account and utilized for
the purpose of business within the next
fve years and not used for distribution
(i.e. dividends or profts).
Housing
For housing projects, a similar tax
exception advantage as those available
for construction ventures is accessible
on profts supported by a global currency
and aided by the World Bank. The total
of tax immunity should be transferred to
a Housing Projects Reserve Account and
utilized within fve years.
Other incentives
For the export of manufactured goods or
computer software, an occupant tax payer
can claim deduction from profts on the
basis of the fraction of export turnover to
total income. The profts must be received
in convertible foreign exchange.
Dividends, interest or long-term capital
gains of an infrastructure capital fund or
infrastructure capital company, earned
from investments made on or after
June 1, 1998 in any venture engaged in
developing, maintaining and constructing
any infrastructure facility, and which has
been permitted by the central government,
is not liable for tax.
Dividends paid by domestic entities to
their shareholders are excused from tax.
However, the domestic corporation would
have to pay a tax on circulated profts
computed at 10 percent of total dividends
distributed by the company.
INCENTIVES FOR SEZ
DEVELOPERS AND UNITS
Special Economic Zone developers are
awarded a number of additional tax
benefts in India, deductable from profts
and gains from the export of goods and
services, including:
100 percent income tax exemption for
frst fve years
50 percent income tax exemption for
fve following years
For businesses that relocate to Special
Economic Zones, the following benefts
are provided:
Capital gains tax exemption on
relocation to SEZ (Section 54GA) for
new units
No TDS by overseas banking units
(OBUs) on interest on deposits and
loans from non-residents or aliens
No MAT (Minimum Alternate Tax)
Transferee developer enjoys 100
percent income tax exemption for the
balance period of 10 assessment years
JAMMU AND
KASHMIR
HIMACHAL
PRADESH
PUNJAB
CHANDIGARH
RAJASTHAN
HARYANA
DELHI
UTTAR
PRADESH
UTTAR-
ANCHAL
SIKKIM
ARUNACHAL
PRADESH
NAGALAND ASSAM
BIHAR
JHARKHAND
CHHATTISGARH
WEST
BENGAL
MEGHALAYA MANIPUR
MIZORAM
TRIPURA
CRISSA
MADHYA PRADESH
MAHARASHTRA
DADRAAND
NAGAR HAVELI
GUJARAT
DAMAN AND DIU
PONDICHERRY
ANDHRA
PRADESH
GOA
KARNATAKA
PONDICHERRY
PONDICHERRY
PONDICHERRY
TAMIL NADU KERALA
LAKSHADWEEP
I NDI A
Jammu
Amritsar
Pathankot
Tinsukia Dibrugarh
Gorakhpur
Kanpur
Delhi
Bareilly
Agra
Bikaner
Jaisalmer
Jodhpur
Okha
Kandla
Jamnagar
Ahmadabad
Udaipur
Kota
Indore
Gwalior
Jabalpur
Allahabad Benares
Jamshedpur
Balasore
Cuttack
Paradip
Haldia
Vishakhapatnam
Kakinada
Nagpur
Pune
Diu
Marmagao Guntakal
Cuddalore
Coimbatore
Madurai
Mangalore
Calicut
Cochin
Tuticorin
Silchar
Vadodara
Surat
New Delhi
Hyderabad
Kargil
Leh
SEZ
SEZ
SEZ
SEZ
10 India Briefng
F
oreign investors in India
benefit from a transparent
regulatory environment and
a number of benefts related
to bilateral trade agreements.
The purpose of such agreements is
to develop a fair basis for the right to
tax different types of income between
the source and residence states and to
guarantee tax impartiality in transactions
between residents and non-residents.
A non-resident is subject to income tax in
India for income that is raised in India. In
addition, the non-resident will be subject
to taxes on the same income in his/her
home country, as part of total world
income.
Tax treaties are implemented only if they
offer protection to tax payers against
double taxation, which effectively
addresses issues of tax in the free fow of
worldwide trade, international investment
and international transfer of technology.
These treaties also prevent discrimination
between tax payers in the global feld, and
provide a reasonable element of legal and
fscal conviction within a legal structure.
In the following sections, six types of
trade agreements are discussed. From
free trade agreements, to regional and
framework agreements, these treaties
work to the beneft of foreign investors
through providing tax incentives and
liberalizing the fow of trade between
partner nations. Trade agreements are
consistently changing and it is worth
keeping abreast of the most up to date
changes to these treaties. Additional
resources are provided at the end of this
article.
FREE TRADE
AGREEMENT (FTA)
A free trade agreement between two
countries, or group of countries, is an
agreement to abolish tariffs, quotas
and preferences on most, if not all,
Indian Taxes and International Trade
Agreements
Summary of India Trade Agreements Status
2011
Existing Ongoing Under Study and
Consideration
Bangkok Agreement
Global System of Trade
Preferences (GSTP)
SAARC Preferential Trading
Agreement (SAPTA)
India-Sri Lanka FTA
India - Thailand FTA
India Singapore
Comprehensive Economic
Cooperation (CECA)
Indo-Nepal Trade Treaty
India-Mauritius PTA
India-Chile PTA
Japan
Malaysia
Indo-ASEAN CECA
South Asian Free Trade
Agreement (SAFTA)
BIMSTEC (Bay of Bengal
Initiative for Multi-Sectoral
Technical & Economic
Cooperation)
India - MERCOSUR PTA
Gulf Cooperation Council
(GCC)
China
South Korea
Pakistan
Southern African Customs
Union (SACU)
Egypt
Israel
Russia
Australia
India has a host of trade agreements with a large number of countries. The above chart summarizes the
statuses of the trade agreements mentioned above as well as others which are in progress.
11 India Briefng
Indian Taxes and International Trade Agreements
goods traded between them. Partner
countries choose to enter into FTAs if their
economic structures are complementary.
India enjoys FTAs with the following
countries:
Sri Lanka
Thailand
TRADE AGREEMENT
A trade agreement is a bilateral, multilateral
treaty or any other enforceable agreement
which commits two or more nations to
specifed terms of commerce.
India is engaged in trade agreements with
the following countries:
Bangladesh
Bhutan
Ceylon
Maldives
China
Japan
Korea
Mongolia
In addition, India has a trade treaty with
Nepal and a Comprehensive Economic
Cooperation Agreement (CECA) with
Singapore.
FRAMEWORK
AGREEMENT
A framework agreement is one which
sets a time frame for future liberalization
of trade.
India enjoys framework agreements with
the following countries:
GCC states (Cooperation Council for
the Arab States of the Gulf)
ASEAN (The Association of South East
Asian Nations)
Chile
REGIONAL AGREEMENT
A regional agreement is a trade agreement
to reduce tariffs and taxes on trade
between two, or more, countries located
in a regional area.
India is part of the South Asia Free Trade
Agreement (SAFTA) with:
Pakistan
Nepal
Sri Lanka
Bangladesh
Bhutan
The Maldives
PREFERENTIAL TRADE
AGREEMENT (PTA)
A preferential trade agreement gives
preferential right of entry to certain
products through dropping (but not
eliminating) tariffs. A PTA is established
through a trade pact and it is the weakest
form of economic integration.
India enjoys PTAs with the following
countries:
Afghanistan
Chile
MERCOSUR - A trading community
in Latin America comprised of Brazil,
Argentina, Uruguay and Paraguay.
Chile and Bolivia
DOUBLE TAXATION
AVOIDANCE TREATY (DTA)
A DTA is an agreement which works to
the beneft of residents of both countries
by reducing repetitive taxation of the
same income.
India has the following double taxation
avoidance treaty agreements:
Indias Double Tax Avoidance Treaty
Agreements
2011
Country
Dividend
(%)
Interest
(%)
Royalties
(%)
Australia 15 15 15
Austria 20 20 30
Bangladesh 15 10 10
Belarus 15 10 15
Belgium 15 15 20
Brazil 15 15 15
Bulgaria 15 15 20
Canada 25 15 15
China 10 10 10
Cyprus 15 10 15
Czech Republic 10 10 10
Denmark 20 15 20
Egypt 20 20 30
Finland 15 10 20
France 10 15
Germany 10 10 10
Greece 20 20 30
Hungary 15 15 30
Indonesia 15 10 15
Israel 10 10 10
Italy 20 15 20
Japan 15 15 20
Jordan 10 10 20
Kazakhstan 10 10 10
Kenya 15 15 20
Korea 20 15 15
Kyrgyzstan 10 10 15
Libya 20 20 30
Malaysia 20 20 30
Malta 15 10 15
Mauritius 15 20 15
Mongolia 15 15 15
Morocco 10 10 10
Namibia 10 10 10
Nepal 15 15 15
Netherlands 10 10 10
New Zealand 15 10 10
Norway 15 15 30
Oman 12.5 10 15
Philippines 20 15 15
Poland 15 15 22.5
Portugal 15 10 10
Qatar 10 10 10
Romania 20 15 22.5
Russian
Federation
10 10 10
Singapore 15 15 15
South Africa 10 10 10
Spain 15 15 20
Sri Lanka 15 10 10
Sweden 10 10 10
Switzerland 15 15 20
Syria 0 7.5 10
Tanzania 15 12.5 20
Thailand 20 20 15
Trinidad and
Tobago
10 10 10
Turkey 15 15 15
Turkmenistan 10 10 10
United Arab
Emirates
15 12.5 10
United Kingdom 15 15 15
United States 20 15 15
Uzbekistan 15 15 15
Vietnam 10 10 10
Zambia 15 10 10
Non-treaty
countries
0 20 20
Indian Trade Agreement Additional Resources
Government of India, Ministry of Commerce & Industry
http://commerce.nic.in/
World Trade Organization (India and the WTO)
http://www.wto.org/english/thewto_e/countries_e/india_e.htm
Business Knowledge Resource Online
http://business.gov.in/trade/index.php
The Practical Application of India Business
Issue 12 October 2011
The New Dual Goods and Service Tax (GST)
Foreign Direct Investment in Single and Multi-brand Retail
India and Chinas Retail Sectors Compared
Daily business news: www.india-briefng.com/news
INCLUDING
Indias Goods &
Service Tax and
Retail Sector
2 India Briefng
Welcome to the October issue of India Briefng
T
his issue of India Briefng focuses on two dramatic,
ongoing initiatives by the Indian government to fuel
economic activity in the country: the introduction of
a dual goods and services tax and further opening
in the retail sector.
Indias existing indirect tax structure is being restructured with a
synchronized tax system and uniform levy, continuing national
tax structure reform to encourage entrepreneurial initiatives
and economic activity in India. A dual Central and State level
- Goods and Service Tax (GST) is planned to replace most of
Indias current indirect taxes by 2012-13. We discuss the details
of this plan and its impact on you.
Additionally, the Indian government is currently discussing
the removal of the 51 percent cap on FDI into single-brand
retail outlets and allowing some degree of FDI in multi-brand
retailing, which has so far been prohibited in India. What are the
motivations for this and how will it affect your opportunities?
Finally, a quick comparison between India and Chinas retail
sectors and lessons that can be drawn.
Warm regards,
Samantha L. Jones, Senior Editor, Asia Briefng
China Briefng Contact: editor@china-briefng.com
No reproduction, copying or translation of materials without prior permission of the publisher.
This months cover artwork by A A Almelkar. Courtesy of Delhi Art Gallery.
www.delhiartgallery.com; info@delhiartgallery.com
MONGOLIA BRIEFING
3 India Briefng
I
ndi as exi st i ng i ndi rect t ax
structure is being restructured
with a synchronized tax system and
uniform levy continues on national
tax structure reform to encourage
entrepreneurial initiatives and economic
activity in India.
A dual Central and State level - Goods
and Service Tax (GST) is planned to
replace most of Indias current indirect
taxes. A country-wide GST is anticipated
to be realized by 2012-13. The GST tax
base is projected to be comprehensive,
including virtually all goods and services,
with minimum exemptions. Alcohol,
tobacco, and petroleum products are
among the few goods expected to be left
out of the GST regime.
It is expected that the GST will add
about US$500 billion to Indias GDP
over the next 10 years, increasing Indias
GDP by about 0.5 percent to 1 percent
yearly once implemented. By eliminating
area-based exemptions and distorting
state taxes, it will enable larger single
location investments and will recover the
competence of capital.
The GST will cover almost all aspect of
business operations in India, for example,
pricing of products and services; supply
chain optimization; IT, accounting and
tax compliance systems. Once the GST
is put into place, it will help the logistics
industries reduce transportation costs and
reduce delay in services.
The dual GST model would include
a central excise duty, service tax and
value-added tax (VAT), and come with
two tax rates: one that will be charged
uniformly across the states and the other
by the Union government. The uniform
state GST rate will be decided by the
empowered committee of state fnance
ministers, a collective platform for states.
This is considered key to putting an
effective GST system in place, as the lack
of a standardized rate would complicate
its execution because the same commodity
would have been taxed differently across
states.
Calculation, Registration
and Return Submission
The Central GST and the State GST should
be applicable to all goods and services
transactions except those specifically
exempted, those outside the purview
of GST and the transactions below the
prescribed threshold limits.
Essentially, the GST can be seen as a
utilization tax collected on the value-
addition made in the goods and services at
each phase of the supply chain. Generally,
the end consumer, being the last person
in the supply chain, has to bear this tax.
Under the GST arrangement, all different
stages of production and distribution
can be interpreted as a simple tax pass
through and the tax essentially sticks
on fnal consumption within the taxing
jurisdiction. The seller of goods or the
service source can claim their paid
input credit for purchasing the goods or
procuring the service. Subsequently the
seller can use that GST credit to offset
the amount paid on the initial goods or
services.
In the GST system, both central and state
GST will be charged at the point of sale.
Presently, services are taxed at 10 percent
and the combined charge with indirect
taxes on most goods are is around 20
percent, but under the dual GST system
there will be no distinction made between
goods and services. The total GST rate
has yet to be determined, but will likely
be around 14-16 percent. After the total
GST rate is determined, the States and the
Central GST will be determined.
Services imported into India will be
subjected to GST by way of a reverse
charge. Under the reverse charge
mechanism, the receiver of the imported
services has to account for the GST on
the imported services as if he is providing
the services himself. The person will then
maintain the GST accounted for on the
imported services as his/her input tax to
be credited against his output tax. State
GST on imports should also be levied
and collected by the central government.
The New Dual Goods and Service
Tax (GST)
GST
The New Dual
4 India Briefng
Following the destination principle,
GST structure will include imports,
while exports would be zero-rated. For
inter-state transactions in India, the state
tax would be applicable in the state of
destination as opposed to the state of
origin. In addition, IGST (Integrated
Goods and Services Tax) on inter-state
transactions should also be levied by the
central government. The full input credit
system will work in parallel for Central
GST and State GST. On the other hand,
cross-consumption of input tax credits
between Central GST and State GST is
permitted.
A common registration form, registration
number, return format, and service centers
for applications and return for both Central
and State GST are proposed, according to
the Central Excise department offcial.
This registration system should enable
easy linkage with the Income Tax database
through use of a PAN number.
The taxpayers would need to propose
periodical returns, in common format as
far as possible to both the Central GST
authority and to the concerned State
GST authorities. Also, taxpayers having
inter-state transactions are required to
submit returns to the related Central IGST
authority.
Threshold Limit
The Department of Revenue (DOR) is
of the opinion that there should be a
standardized threshold of or greater than
Rs.10 lakh for goods and services for
both State GST and Central GST. The
threshold should not apply to dealers and
service providers who undertake inter-
state supplies.
A dual control system may be diffcult to
implement and may receive opposition
from traders, for whom the implementation
of GST would mean paying a Central
tax in addition to state tax, which they
currently pay in the form of state VAT.
Traders would be required to invest
in information technology to maintain
records.
The government can and likely will
address these issues by facilitating a
compounding scheme provision, as well
as simplifying administrative measures for
smaller dealers through measures such as:
Registration by single agency for both
State GST and Central GST without
manual interface
No physical verifcation of premises and
no pre-deposit of security
Simplifed return format
Larger frequency for return filing,
through certifed service centers, CAs,
etc
Audit in 1-2 percent cases based on risk
parameters
Lenient penal provisions
Benefts of GST
Logistics re-arrangement
GST will permit manufacturers to see
India as one large physical expanse
with no state boundaries. One large,
regional warehouse will replace the
current 4-6 small state level warehouses.
The hub and spoke distribution model
(that offers confrmed cost and operational
effciencies) will gradually be used more.
The GST system will incentivize logistics
companies and third party logistics (3PL)
service providers to invest in scale, service
focus and technology. This will also
catalyze much needed consolidation in
the sector.
Tax credits
Manufacturers will be allowed to input
tax credit of all inputs and capital goods
purchased from a registered dealer from
within the State, as well as inter-State, to
establish the output tax liability on the
sale of their fnished products. Likewise,
distributors would also be able to pass on
the burden to their customers.
This should ensure that there is no
downfall effect of taxes and would
result in a reduction in the cost of doing
business. Presently, manufacturers cannot
argue a credit for the service tax paid
on their inputs. Limitations also apply
on claiming credits for VAT on inputs
other than goods for resale, such as free
samples.
Inventory costs
One more major beneft particularly to
fast moving consumer goods (FMCG)
and consumer durables companies would
be the decline in their inventory costs.
Presently, the Central Value-added Tax
(CENVAT) is included in the inventory
costs, which has to be fnanced by the
manufacturer. In the new structure, the
GST paid on inventory would be fully
recoverable immediately as input tax
credit, reducing inventory fnancing costs.
Cash fow benefts
GST will also bring cash fow benefts
to dealers and distributors. They will be
collecting GST from their customers as
they make sales, but would be required to
remit it to the government only at the end
of the month or the quarter, when they fle
their returns. This extra cash foat would
allow them to achieve scale and invest in
making their operations more effcient.
Lower price
This is likely to result in a reduction in
the prices of commodities in the long run
as manufacturers and distributors would
pass on the benefts of the lower costs
of carrying on their businesses to the
consumers.
Government revenues
Under GST, all goods and services would
be subject to tax, unless specifically
exempted. It is also anticipated that
the number of exemptions would be
signifcantly reduced. Accordingly, the
total revenue collections are expected to
go up, as already proven by post-GST
scenarios in several other countries.
Impact on Industry
The manufacturing sector in India is one
of the most highly strained sectors in the
world in terms of taxation. A multifaceted
and high taxation arrangement eats up
large portions of the cost savings that
Indias low cost economy offers and
creates products that are uncompetitive
price-wise in the worldwide market.
The manufacturing price of most products
in India is nearly half of that in the west,
but customs duty on imports, central
excise duty on manufacturing, central
sales tax (CST) / value added tax (VAT)
on sale of goods, service tax on provision
of services and levies such as entry tax,
Octroi (tax on entry of goods for use/
consumption within areas of the Local
Bodies) and Cess (education tax) by the
State or local municipal corporations and
related costs such as loss of tax credit,
conformity and lawsuit costs cumulatively
chip away almost 50 percent of this costs
savings.
5 India Briefng
GST and SEZs
Materials to non-processing areas
in Special Economic Zones (SEZs),
which includes social infrastructure, like
schools, residential premises and shopping
complexes, are currently exempted from
both Central and State taxes, but will
likely fall under the GST tax regime.
The Empowered Committee of State
Finance Ministers has favored a levy of
tax on supplies to non-processing areas of
the zone, while the Joint Working Group
of India has recommended that GST
apply to sales from SEZs to domestic
tariff areas.
The Cent ral government exempt s
authorized activities by both developer
and co-developer in both processing and
non-processing areas from taxes.
Rates for Goods
and Services
There will be one GST rate for services,
but several GST rates for goods:
Revenue neutral rates
Merit rates
Special rates for gold, silver, precious
metals (around 1 percent)
Zero rate for goods of social importance
Impact on the Poor
The GST is designed as a pro-poor policy
initiative. The advantage to the poor from
the implementation of GST will fow from
two sources:
Increase in income levels
Reduction in prices of goods
Primary food articles like rice and wheat
are subject to taxation by many states
either by way of purchase tax or sales
tax at a lower rate. Consequently, tax
on primary food articles includes tax on
inputs and tax on output (primary food
article). Primary food articles like rice
and wheat are planned to be exempt from
GST (i.e., there will be no output tax).
Therefore, the tax on such items will be
limited to tax on inputs.
Basic health and education services
will remain exempt from tax and no
additional burden will rise on account of
the switchover to GST.
The Joint Task Force suggested the
inclusion of transactions in real estate
within the purview of GST. Consequently,
for a registered real estate builder, all taxes
on inputs (including on land) will be offset
against the tax payable on the constructed
property. This will in fact reduce cost of
housing to the extent of embedded taxes
and therefore, help the poor.
The implementation of the GST will result
in a sharp decline in the price of cotton
textiles (by 6.44 percent), wool, silk &
synthetic fber textiles (by 11.4 percent)
and textile products including wearing
apparel (by 17.45 percent), according to
a National Council of Applied Economic
Research (NCAER) study. The share of
expenditure on clothing in the case of the
poor will be comparatively higher than
in the case of the rich and they will gain
comparatively more from huge drops in
prices.
The implementation of the GST will
witness an increase in the real returns to
land, labor and capital, according to the
NCAER study. Likewise, on account of
an increase in economic activity resulting
in higher growth, there will be new
opportunities for employment which will
directly beneft the urban poor.
Composition /
Compounding Scheme
The Central and State governments
have agreed on a standardized GST
compounding scheme with an upper
ceiling of Rs.50 lakh of gross annual
turnover and a foor rate of 0.5 percent
gross annual turnover.
The Central government may also have
a compounding scheme up to a gross
turnover limit of Rs.50 lakh, if the
threshold for registration is kept as Rs.
10 lakh. The floor rate of 0.5 percent
will be for state GST alone, in the case
that the Central government also brings
a composition scheme for small assesses.
The Central government may also
choose to pass the compounding scheme
administration of both Central GST and
State GST to the states. This step would
help small traders who will be exposed to
both state and Central GST and keep the
threshold at Rs.10 lakh.
Dispute Resolution Scheme
The Centre has suggested setting up a
common dispute resolution scheme to
settle GST cases. A harmonized system
for scrutiny, audit and dispute settlement
may be developed.
GSTs Impact on the Supply Chain
Characteristic Impact Implication
Extended Central GST
Chain
Presently, Service Tax on logistics services used during allotment
and retail are not off-settable against Central Value-added Tax
(CENVAT).
The extended Central GST chain will allow the offset in
post-manufacturing networks and lower the cost of logistics
outsourcing, as the 10.3 percent service tax charged by logistics
companies can be largely offset against the Central GST liability.
Boost outsourcing
in supply chains and
provide greater impetus
to third party logistics
(3PL) service providers.
Affected Inventory Post GST, inventory will also carry Central GST and inter-
state GST input credit, the tax rates may also change for many
products. Unless the GST rates increase for its products, the frms
would be encouraged to minimize pre-GST inventory, which has
fewer input credits.
As the GST implementation date approaches closer, one could
expect uncertainty regarding pre-GST inventory, as was seen
during VAT introduction.
Organizations need
to study GSTs fnal
mechanisms and plan
inventory transition very
carefully for themselves,
suppliers and customers.
Subsuming Octroi &
Entry Tax
Octroi and Entry Tax are not in line with the spirit of GST,
although in some cases entry taxes are VAT applied.
Once these taxes are paid, reverse fow of goods becomes
diffcult; hence companies prefer postponed and uni-directional
fow of goods across entry tax and Octroi borders.
Organizations will be
encouraged to locate
warehouses/hubs and
increase inventory in
Entry Tax and Octroi
zones.
Organizations
Encouraged to Locate
and Increase Inventory
in Warehouses/Hubs in
Entry Tax and Octroi
Zones
There are two possible scenarios through which tax barriers
would be removed:
1. Central Sales Tax (CST) rates reduced to zero with no carry-
over of input credit across states
2. Stock-transfers are disallowed/taxed and inter-state sales are
taxed with carry-over allowed
In both cases, companies would no longer be required to have
a warehouse in every state just to facilitate stock transfers and
avoid CST.
Organizations can
and should design
their networks purely
on supply chain
considerations and not
tax considerations.
6 India Briefng
India is ranked fourth on the 2011
Global Retail Development Index,
produced by U.S. consulting group AT
Kearney.
Indias retail industry is estimated to be
worth approximately US$411.28 billion
and is still growing, expected to reach
US$804.06 billion in 2015. As part of
the economic liberalization process set in
place by the Industrial Policy of 1991, the
Indian government has opened the retail
sector to FDI slowly through a series of
steps:
The Indian government is currently
discussing the removal of the 51 percent
cap on FDI into single-brand retail outlets
and allowing multi-brand retailing, which
has so far been prohibited in India.
In this article, we discuss the policy
developments for FDI in these two retail
categories, with a focus on the details
of the multi-brand retail FDI discussion
paper and related policy developments.
FDI in Single-brand Retail
While the precise meaning of single-brand
retail has not been clearly defned in any
Indian government circular or notifcation,
single-brand retail generally refers to the
selling of goods under a single brand
name.
Currently, up to 51 percent FDI is
permissible in single-brand retail, subject
to the Foreign Investment Promotion
Board (FIPB) sanctions and conditions
mentioned in Press Note 3[8]. These
conditions stipulate that:
a) Only single-brand products are sold
(i.e. sale of multi-brand goods is not
allowed, even if produced by the same
manufacturer)
b) Products are sold under the same brand
internationally
c) Single-brand products include only
those identifed during manufacturing
d) Any additional product categories to
be sold under single-brand retail must
frst receive additional government
approval
FDI in single-brand retail implies that
a retail store with foreign investment
can only sell one brand. For example,
if Adidas were to obtain permission to
retail its fagship brand in India, those
retail outlets could only sell products
under the Adidas brand. For Adidas to sell
products under the Reebok brand, which
it owns, separate government permission
is required and (if permission is granted)
Reebok products must then be sold in
separate retail outlets.
The government of India is considering a
proposal to remove the 51 percent cap on
FDI in single-brand retail frms and allow
100 percent FDI in the sector.
FDI in Multi-brand Retail
While the government of India has also
not clearly defined multi-brand retail,
FDI in multi-brand retail generally refers
to selling multiple brands under one roof.
In July 2010, the Department of Industrial
Policy and Promotion (DIPP), Ministry of
Commerce circulated a discussion paper
on allowing FDI in multi-brand retail.
The Committee of Secretaries, led by
Cabinet Secretary Ajit Seth, recommended
opening the retail sector for FDI with a 51
percent cap on FDI, minimum investment
of US$100 million and a mandatory 50
percent capital reinvestment into backend
operations. Notably, the paper does not
put forward any upper limit on FDI in
multi-brand retail.
Immediately following the release of this
discussion paper, the shares of a number of
retail companies in India grew; domestic
retail giant, Pantaloon Retail gained 7
percent on the same day, while Shoppers
Stop, an Indian department store chain
and emerging retailer gained 2.9 percent.
Foreign Direct Investment in
Single and Multi-brand Retail
Economic Liberalization Landmarks
1995 World Trade Organizations General Agreement
on Trade in Services, which includes both
wholesale and retailing services, came into
effect
1997 FDI in cash and carry (wholesale) with 100
percent rights allowed under the government
approval route
2006 FDI in cash and carry (wholesale) brought
under the automatic route
2006 Up to 51 percent investment in a single-brand
retail outlet permitted, subject to Press Note 3
(2006 Series)
7 India Briefng
The long-awaited scheme has been sent to
the Cabinet for approval at time of writing,
but no decision has yet been made. There
appears to be a broad consensus within
the Committee of Secretaries that a 51
percent cap on FDI in multi-brand retail
is acceptable. Meanwhile the Department
of Consumer Affairs has supported the
case for a 49 percent cap and the Small
and Medium Enterprises Ministry has
said the government should limit FDI in
multi-brand retail to 18 percent. In terms
of location, the proposed scheme allows
investment in towns with at least 10 lakh
populations, while retailers with large
space requirements may also be allowed to
open shop within a 10 km radius of cities
with a population of over one million.
Additional recommendations from the
Committee of Secretaries include:
A requirement that at least 50 percent
of the investment and jobs should go to
rural areas
FDI should source at least 30 percent of
their production inputs from SMEs
Mi ni mum US$100 mi l l i on FDI
investment
A requirement that 50 percent of
investment be made in back-end
infrastructure. Currently, about 35-40
percent of products are lost due to lack
of proper back-end infrastructure, like
cold storage facilities, and this would
not only encourage development in this
sector, but create jobs.
Benefts of FDI in
Multi-brand Retail
Soaring infation is one of the driving
motives behind this move towards muti-
brand retail.
Allowing international retailers such as
Wal-Mart and Carrefour, which have
already set up wholesale operations
in the country, to set up multi-brand
retails stores will assist in keeping food
and commodity prices under control.
Moreover, industry experts feel allowing
FDI will cut waste, as big players will
build backend infrastructure. FDI in multi-
brand retail would also help in narrowing
the current account defcit.
Additional benefts include moving away
from an industry focus on intermediaries
and job creation.
Moving away from
Intermediary-Only Benefts
There is broad agreement on the need
to improve effciencies in the household
trade of consumer goods. Competent
management practices and economies
of scale, joined with the acceptance
of global best practices and modern
technology, could immensely recover
systemic competence.
Like their foreign counterparts, Indian
customers too are entitled to receive
quality products, produced, processed
and handled under hygienic environment
through professionally-managed outlets.
Speculative apprehensions that small
retailers will be adversely affected are
not reason enough to deny millions of
consumers access to products that meet
global standards.
Furthermore, todays intermediaries amid
producers and customers add no value
to the products, adding hugely to fnal
costs instead. By the time products flter
through various intermediaries and into
the marketplace, they lose freshness and
quality, and often go to waste. However,
intermediaries garner huge profits
by distributing these losses between
producers and customers by buying
products at low prices from producers,
but selling at extremely marked-up prices
to consumers. In an unbalanced system
that incorporates multiple intermediaries
simply for logistics, only intermediaries
beneft.
With organized retail, every intermediate
step procurement, processing, transport
and delivery adds value to the product.
This happens because it uses international
best practices and modern technology,
ensuring maximum efficiency and
minimum waste. Organized retail enables
on-site processing, scientific handling
and quick transport through cold storage
chains to the fnal consumer. Once modern
retailers introduce an organized model,
other vendors, including small retailers,
would mechanically copy this model to
improve effciencies, boost margins and
stay in business. Organized retail would
thereby bring more stability to prices,
unlike the present system where hoarding
and artifcial shortages by profteering
intermediaries push up product prices.
Job Creation
Despite predictions from some analysts
that millions of jobs would be lost due to
FDI in retail, it may in fact be the other
way around. With the entry of branded
retailers, the market will increase, creating
additional employment in retail and other
tertiary sectors. Given their professional
approach, organized retailers will allot
some quantity of resources towards the
training and development of the resources
they employ.
Government Safety
Valves on FDI
There is concern about the competition
presented to domestic competitors and
the monopolization of the domestic
market by large international retail
giants. The Indian government feels
that FDI in multi-brand retailing must
be dealt with cautiously, given the large
potential scale and social impact.
As such, the government is considering
safety valves for calibrating FDI in the
sector. For example:
A stipulated percentage of FDI in the
sector could be required to be spent
on building back-end infrastructure,
l ogi s t i cs or agr opr oces s i ng
units in order to ensure that the
foreign investors make a genuine
contribution to the development of
infrastructure and logistics.
At least 50 percent of the jobs in the
retail outlet could be reserved for
rural youth and a certain amount of
farm produce could be required to be
procured from poor farmers.
A mi ni mum pe r c e nt a ge of
manufactured products could be
required to be sourced from the SME
sector in India.
To ensure that the public distribution
system and the Indian food security
syst em i s not weakened, t he
government may reserve the right
to procure a certain amount of food
grains.
To protect the interest of small
retailers, an exclusive regulatory
framework to ensure that the retailing
giants do not resort to predatory
pricing or acquire monopolistic
tendencies.
8 India Briefng
This effect of branded retailing can
already be seen with the Bharti-Wal-Mart
collaboration, which has joined forces
with state governments to open training
and development centers in Amritsar,
Delhi and Bangalore, preparing local
youth for jobs in retail. Training is entirely
free and more than 5,600 local youth
have already been trained. Retail jobs
dont require higher education or highly
specialized abilities.
No Threat to Kiranas
The Indian retail industry is generally
divided into organized and unorganized
retailing:
Organized retailing
Organized retailing refers to trading
activities undertaken by licensed retailers,
those who have registered for sales tax,
income tax, etc. These include corporate-
backed hypermarkets and retail chains,
and also privately-owned large retail
businesses.
Unorganized retailing
Unorganized retailing refers to the
traditional forms of low-cost retailing,
for example, local kirana shops, owner-
operated general stores, paan/beedi shops,
convenience stores, hand cart and street
vendors, etc.
The question of whether or not organized
and unorganized retailing can peacefully
co-exist is a primary concern. While
the Indian retail sector is still heavily
weighted towards unorganized retailers,
which occupy 97 percent of the market,
organized retail is growing quickly. But
with a mere 7 percent of the market,
organized retailers are unlikely to drive
kiranas (local grocery stores) out of
business. Indian retailers simply lack the
deep pockets and in-depth feld expertise
required to be on a par with global models.
However, the presence of foreign retailers
through joint ventures and other means
could speed up the process of transforming
Indias retail trade. Considering that small
stores offer customers quick doorstep
delivery and even credit extensions -
conveniences that no organized retailer
in India has so far matched local,
unorganized retailers will likely retain a
sizeable market share.
Furthermore, the Center for Strategic
& International Studies (CSIS) has also
argued that concerns over the loss of
local and small-scale retail are unfounded.
CSIS has found that though businesses
located near newly opened organized
retailers did see a signifcant decline in
sales (23 percent) in the frst year, these
unorganized retailers bounced back to
previous sales levels after fve years.
The example of China demonstrates
clearly that increased FDI in retailing
does not necessitate the complete closure
of local retailers. China frst allowed FDI
in retail in 1992, capping it at 26 percent,
while India capped FDI in single-brand
retail at 26 percent. Only in 2004 did
China finally permit 100 percent FDI
and local Chinese grocery stores have
since grown from 1.9 million to more
than 2.5 million. Organized retail has just
20 percent market penetration in China,
despite a 20 year lapse since the initial
introduction of FDI.
Accordi ng t o t he proposed st at e
regulations, the minimum FDI would
be US$100 million. Retail stores would
only be allowed in cities with more than
one million people. Front-end operations
would be allowed only in states that agree
to authorize FDI in multi-brand retail. It
will also be mandatory for retailers to
source at least 30 percent of the value
of manufactured goods, barring food
products, from small and medium-sized,
local enterprises.
Such terms will serve as ample safeguards
for small retailers. Farmers and small
producers will benefit in the long run
from better prices for their products and
produce, while consumers receive higher
quality products at lower prices, along
with better service.
The a dva nt a ge s out we i gh t he
disadvantages of allowing unrestrained
FDI in the retail sector, as successful
experiments in countries like Thailand and
China demonstrate. In both countries, the
issue of allowing FDI in the retail sector
was frst met with incessant protests, but
allowing such FDI led to GDP growth and
a rise in the level of employment.
Moreover, in the ferce battle between the
advocates and opponents of unrestrained
FDI fows in the Indian retail sector, the
impact of the consumer on the outcome
of these policy changes has been largely
disregarded.
Consumers will ultimately respond to the
incentives of convenience, price, variety
and service. Thus, the interests of those in
the unorganized retail sector will not be
gravely undermined; rather, the choice to
visit a mega shopping complex or a small
retailer/sabji mandi is purely left to the
consumer, whose tastes are complex and
constantly changing.
7%
10%
20%
0%
5%
10%
15%
20%
25%
2011 2013 2020
Projected Organized Retail Market Share (Years 2011, 2013, 2020)
Organized retail sales have been growing slowly but surely, currently accounting for 7 percent of total retail
sales, a fgure that is expected to amount to 10 percent by 2013 and 20 percent by 2020.
9 India Briefng
A
s big-name retailers like
Best Buy and Home Depot
exit China this year, a
comparison of India and
Chinas retail markets
reveals some lessons for retailers in India.
The key point? Tier 2 and Tier 3 Cities.
International Retail
Development Rankings
India ranks fourth globally for retail
development on the 2011 Global Retail
Development Index (GRDI), a study by
global management consulting frm, A.T.
Kearney.
1
While the countrys ranking
dropped slightly from third place in 2010,
Chinas retail development ranking took a
dramatic fall from the top ranking in 2010
to sixth place in 2011.
Chinas fall in rankings, to where it
ranks below Kuwait, is quite surprising
considering the countrys impressive
growth statistics. In 2010, Chinas GDP
grew by 10.3 percent and the fgure is
expected to be between nine and ten
percent in 2011. Furthermore, Chinas
retail market is worth US$2.1 trillion,
about half the value of the U.S. retail
market.
So why the big fall? Differences in
demographics are a significant factor
differentiating the two countries, with
Indias young population holding great
future potential.
India is currently in what demographers
call the sweet spot, when the dependency
ratio is low, resulting in a society with a
huge population of people aged 15-65. For
retailers, this sweet spot means a healthy
stock of consumers poised to spend on a
wide range of goods.
While China is reaching the peak of this
demographic phase, India can expect
to stay in the so-called sweet spot until
1 http://www.atkearney.com/index.php/Publications/
retail-global-expansion-a-portfolio-of-opportunities2011-
global-retail-development-index.html
2037, with those of working age and
the increasing number of women in the
workforce as dominant consumer groups.
Yet, according to the report, the main
reason for Chinas slide in the GRDI
rankings is high retail market saturation.
As China developed rapidly after the
reform and opening policy, so did its
retail market. Foreign retailers entered
retail markets not only in tier 1 cities like
Beijing and Shanghai, but also in tier 2
and even tier 3 cities.
Retail in Indias Second
and Third Tier Cities
Both Indian and foreign retailers are
expanding outside Bangalore and
Mumbai into Indias growing tier 2
and 3 cities, and even into rural areas.
In addition to the draws of increasing
salaries and attractive real estate prices
and availability, such areas are also
seeing significant transportation and
infrastructure developments that are
paving the way for increased investment.
In the coming years, high profle tier two
cities such as Hyderabad, Chennai, Pune
and Kolkata will see new retail outlets
from domestic retailers such as Spencers,
Reliance Retail, Pantaloon Retail,
Shoppers Stop and Trents Westside.
Given the unique consumer behavior in
these regions, even the biggest retailers
have diversifed their marketing strategies
and retailing formats to adapt to what
Professor Anil Gupta of the Indian
Institute of Management describes as
a more discerning and less impulsive
consumer who takes time to explore,
understand and discuss before finally
purchasing.
At the India Retail Forum 2011, Salil
Chaturvedi of Indian retailer, Provogue,
cautioned other retailers against self-
service shop models, as consumers in
tier 2 and 3 cities need more interaction
on the shop foor with staff who can impart
product knowledge.
This is especially true of Indias high
potential luxury goods market, which saw
a dramatic 20 percent increase in the past
year to reach a market value of US$5.8
billion. Much of this growth has been in
tier 2 and 3 cities, bolstered by the high
value of gold and increasing number of
A Closer Look at Indias Retail
Sector
[ By Cindy Tse, Dezan Shira & Associates ]
Organized; 7%
Organized; 20%
Unorganized;
93%
Unorganized;
80%
0%
20%
40%
60%
80%
100%
120%
India China
India and Chinas Organized Retail Market Shares
10 India Briefng
A Closer Look at Indias Retail Sector
Organized Retail by Sector
high-net worth individuals (second only
to the United States).
One of every four luxury stores in India
have set up outside of Mumbai, Delhi and
Bangalore, according to the A.T. Kearney
report. Outside the booming lower tier
metropolises lies even more promise in
rural India. With 70 percent of Indias
population living in rural regions, and
a rapid increase in per capita incomes,
the rural consumer in India holds great
potential. Industry experts predict that
it will not be long before rural Indias
share of retail exceeds urban regions, as
rural retail has already reached 40 percent
market share.
The bottom of the pyramid is the driving
force between Indias retail market growth
trajectory, empowered by higher education
levels, more purchasing power, increased
brand awareness, and greater exposure to
the internet, according to The India Brand
Equity Foundation (IBEF). The IBEF also
expects government initiatives to increase
rural employment and access to credit to
contribute to higher consumer spending
in the near future.
Fast-moving consumer goods (FMCG) is
expected to experience the most signifcant
growth, as over 80 percent of FMCG
categories are already growing faster in
rural India than in urban India, according
to market research frm, Nielsen. By 2012,
the rural FMCG market is expected to
grow from the current US$19.08 billion
to US$23.08 billion.
Domestic retailers are already on the
move in rural India, with innovative
chain retailing models that have been
well-received by rural communities,
engaging local farmers and enterprises
successfully. One example is Hariyali
Kisaan Bazaar, one of the largest national
rural retail chains in India, which operates
270 locations and plans to open another
20 by the end of 2011.
Organized
31%
Unorganized
69%
Clothing and Apparel Sector:
Organized Retail Market Share
Organized
31%
Unorganized
69%
Food and Beverage Sector:
Organized Retail Market Share
Considering the strong foothold organized retailers already have in Indias clothing and apparel sector (31 percent), more
opportunities seem to lie in the food and beverage sector, where organized retail currently accounts for only 1 percent of the
market and the market is expected to grow by over four times from the current US$8 billion over the next fve years, according
to consulting frm Booz & Company.
For business advisory on Indias retail
sector, please contact Dezan Shira &
Associates at india@dezshira.com or
visit www.dezshira.com.
11 India Briefng
A Closer Look at Indias Retail Sector
India Briefings Guide to
Doing Business in India
Second edition, updated for 2011! India Briefng's Guide to Doing Business in
India is available for purchase in hard copy and downloadable PDF. Priced at
US$25 plus p&p.
Introduction to India
Why India matters and where India is going
A brief history of India
Key demographics of India
Setting up a business in India
India's taxes
Import/export trends
Geographical overview
Living in India
Business etiquette and culture
Indias 2011-2012 Economic Outlook: Key Points
Indian Economic Advisory Council
2011-12 (Projected) 2010-11
GDP Growth 8.2% 8.5%
Agriculture 3.0%
The dramatic drop year-on-year is due to the
2011 monsoon season predictions.
6.6%
Industry 7.1% 7.9%
Services 10.0% 9.4%
Investment rates
(% of GDP)
36.7% 36.4%
Domestic savings
(% of GDP)
34.0% 33.8%
Current Account defcit US$54.0 bn
(2.7% of GDP)
US$44.3 bn
(2.6% of GDP)
Merchandise trade defcit US$154.0 bn
(7.7 % of GDP)
US$130.5 bn
( 7.6% of GDP)
Invisibles trade surplus US$100.0 bn
( 5.0% of GDP)
US$86.2 bn
(5.0% of GDP)
Capital fows US$72.0 bn US$61.9 bn
FDI infows US$35.0 bn US$23.4 bn
FII infows US$14.0 bn US$30.3 bn
Accumulation to reserves US$18.0 bn US$15.2 bn
GDP Growth by Sector (Constant Prices)
Indian Economic Advisory Council
2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 (Projected)
Agriculture & allied activities 5.1 4.2 5.8 -0.1 0.4 6.6 3.0
Mining & Quarrying 1.3 7.5 3.7 1.3 6.9 5.8 6.0
Manufacturing 10.1 14.3 10.3 4.2 8.8 8.3 7.0
Electricity, Gas & Water Supply 7.1 9.3 8.3 4.9 6.4 5.7 7.0
Construction 12.8 10.3 10.7 5.4 7.0 8.1 7.5
Trade, Hotels, Transport, Storage & Communication 12.2 11.6 11.0 7.5 9.7 10.3 10.8
Finance, insurance, real estate & business services 12.7 14.0 11.9 12.5 9.2 9.9 9.8
Community & personal services 7.0 2.9 6.9 12.7 11.8 7.0 8.5

The headl i ne
i n f l a t i o n r a t e ,
approximately 9 percent
from July-October, is
predicted to start falling
in November 2011 and
to decline to 6.5 percent
in March 2012.
- I ndi an Economi c
Advisory Councils 2011-
2012 Economic Outlook
Pre-order your copy at
sales@india-briefng.com
Issue 13 December 2011
Daily business news: www.india-briefng.com/news
INCLUDING
FDI and Manufacturing
Electronics in India

An Overview of Indias Manufacturing Sector and a Detailed Look at the
Next Steps under the Recently Released National Manufacturing Policy
Indias Push to Become an Electronics System Design and Manufacturing Hub
Key Related Policies and Schemes for Electronic Hardware Exports
Welcome to the December issue of India Briefng
T
wo years ago, a conference of the State Industry Ministers put
forth the goal to increase the contribution of the manufacturing
sector to GDP from 16 percent to 25 percent.
The manufacturing sectors contribution to Indias GDP is considered
low when compared to other Asian economies (in which manufacturing
contributes more like 25 to 34 percent to GDP) and is seen as not
fulflling its potential. To remedy this, the recently released National
Manufacturing Policy has set clear objectives to harness the sector
for economic growth, including an emphasis on FDI and foreign
technologies.
Meanwhile, policy makers are pushing to establish India as an
internationally competitive electronics system design and manufacturing
hub. Demand for electronic hardware in India is growing, driven by
growth in income levels, automation demands of the private sector and
a focus on e-governance.
In this issue of India Briefng, we walk you through the National
Manufacturing Policy, the draft National Policy Electronics, and other
related policies and schemes key to foreign investment in the sector.
Warm regards,
Samantha L. Jones, Senior Editor, Asia Briefng
editor@asiabriefngmedia.com
No reproduction, copying or translation of materials without prior permission of the publisher.
This months cover artwork by Nikhil Biswas. Courtesy of Delhi Art Gallery.
MONGOLIA BRIEFING
Corporate Establishment, Tax, Accounting & Payroll Troughout Asia
MONGOLIA BRIEFING
MONGOLIA BRIEFING
INDIA BRIEFING
G
G
DP growth in India has
l ar gel y been dr i ven
by the services sector,
but the manufacturing
sector plays a key role
in economic development one that is
receiving increased government attention,
as demonstrated by the November release
of the National Manufacturing Policy.
Two years ago, a conference of the
State Industry Ministers put forth the
goal to increase the contribution of
the manufacturing sector to GDP from
16 percent to 25 percent. While the
growth of the manufacturing sector has
generally outpaced the overall growth
rate of the economy, the manufacturing
sectors contribution to Indias GDP is
considered low when compared to other
Asian economies (in which manufacturing
contributes 25-34 percent of GDP) and is
seen as not fulflling its potential.
Strengthening Indias manufacturing
sector can be used as a source of growth
for the country as a whole and as a means
of increasing employment for the largest
young population in the world (over 60
percent of population in the working age
group of 15-59 years).This will entail
creation of 220 million jobs by 2025 in
order to reap the demographic dividend.
While the manufacturing sector currently
only employs about 11 percent of the
countrys workforce, manufacturing jobs
are ideal for workers transitioning out of
agriculture in terms of level of education
and professionalism. The manufacturing
sector is thus seen as the bulwark of the
employment creation initiative - every
job created in manufacturing will have a
multiplier effect of creating two to three
additional jobs in related activities.
Furthermore, a stronger manufacturing
sector contributes to national security,
as acquiring depth in manufacturing is
crucial for long-term competitiveness
in strategic areas such as defense and
telecommunication.
The National Manufacturing Policy
sets six clear objectives, the steps to
achievement of which are seen as reducing
compliance burden (a manufacturing unit
currently needs to comply with nearly
70 laws and regulations on average, face
multiple inspections and file as many
as 100 returns in a year), encouraging
innovation and welcoming foreign
investments and technologies.
A st ronger, more i nt ernat i onal l y
competitive manufacturing sector seems
within reach. In recent years, Indian
manufacturers have gained international
recognition for quality improvement and
management, with the largest number
of Deming Award winners (for quality
improvement) outside of Japan.
Furthermore, Indias manufacturing
prowess is internationally seen as being
on the rise - India ranked number two
on the Deloitte Global Manufacturing
Competitiveness Index (2010) and is
predicted to gain an even stronger foothold
over the next fve years.
Foreign Direct Investment in
Manufacturing in India
National Manufacturing
Policy Objectives
1. Increase manufacturing sector
growth to 12-14 percent over the
medium term to make it the engine
of growth for the economy.
2. Increase the rate of job creation in
manufacturing to create 100 million
additional jobs by 2022.
3. Create appropriate skill sets among
the rural migrant and urban poor to
make growth inclusive.
4. Increase domestic value addition
and t echnol ogi cal dept h i n
manufacturing.
5. Enhance global competitiveness
of Indian manufacturing through
appropriate policy support.
6. Ensure sustainability of growth,
particularly with regard to the
environment including energy
efficiency, optimal utilization of
natural resources and restoration of
damaged/ degraded eco-systems.
1 Sector growth
2 Jobs
3 Skill training
4 Value-add/Tech depth
5 Policy support
6 Environmental sustainability
4 India Briefng
Foreign Direct Investment in Manufacturing in India
Focus Sectors
While the policy applies to all sectors,
several focus sectors are specifed for
policy interventions. These sectors are
identifed based on cost competitiveness
and potential to generate maximum
employment.
i. Employment intensive industries
Special attention will be given in
respect of textiles and garments; leather
and footwear; gems and jewellery; and
food processing industries.
ii. Capital goods
The capital goods industry is the
mother industry for manufacturing,
as a robust economic growth would
necessitate a strong demand for capital
goods. A special focus will be given
to machine tools; heavy electrical
equipment; heavy transport, earth
moving and mining equipment.
iii. Industries with strategic signifcance
Incl udi ng aerospace; shi ppi ng;
I T har dwar e and el ect r oni cs;
telecommunication equipment; defense
equipment; and solar energy.
iv. Industries where India enjoys a
competitive advantage
These industries focus around Indias
large domestic market coupled with a
strong engineering base has, including
automobiles; pharmaceuticals; and
medical equipment.
v. Small and medium enterprises
As the SME sector is a major contributor
to the manufacturing sector as a whole
contributing about 45 percent to the
manufacturing output, 40 percent of
the total exports and is widespread in
terms of employment opportunities and
geography, policy interventions will
specifcally target this sector.
These policy interventions will
be in areas like manufacturing
management (including accelerated
adoption of Information technology;
skill development); access to capital;
marketing; procedural simplifcation
and governance reform.
The SME sector has consistently
registered a higher growth rate than
the rest of the industrial sector and is
estimated to employ about 59 million
persons in over 26 million units
throughout the country.
vi. Public Sector Enterprises
Public Sector Undertakings, especially
those in defense and energy sectors,
continue to play a major role in the
growth of manufacturing as well as of
the national economy.
Policy Instruments
specifies the instruments available to
accomplish policy objectives, including
the rationalization and simplification
of business regulations, simple and
expeditious exit mechanism for closure of
sick units while protecting labor interests,
incentives for SMEs, and leveraging
infrastructure deficit and government
procurement (including defense).
Key instruments (described in more
detail below) include:
i. Clustering and aggregation: National
Investment and Manufacturing
Zones (NIMZs)
ii. Fi nanci al and i ns t i t ut i onal
mechani sms f or t echnol ogy
development, including green
technologies
iii. Industrial training and skill upgrade
measures
These key policy instruments are detailed
below.
i. Clustering and aggregation:
National Investment and
Manufacturing Zones (NIMZs)
aims to develop national investment and
manufacturing zones (NIMZs) in the
nature of green feld industrial townships.
These zones are designed to meet the
increasing demand for creating world-
class urban centers in India, absorb surplus
labor and address the infrastructural
bottleneck which has been cited as a
constraining factor for the growth of
manufacturing. They would be different
from SEZs in terms of size, level of
infrastructure planning, and governance
structures related to regulatory procedures
and exit policies.
These zones will be at least 5000 hectares
in size and at least 30 percent of the total
land area proposed for the NIMZ will be
utilized for location of manufacturing
units. The states may reserve a certain
percentage of the land as appropriate,
in a zone, for micro, small and medium
enterprises.
The administrative structure of NIMZ will
comprise of a Special Purpose Vehicle
(SPVs), a developer, State Government
and the Central Government. The SPVs
would ensure master planning of the
zone; pre-clearances for setting up the
industrial units to be located within the
zone and undertake such other functions
as specifed in the various sections of this
policy.
The state governments will manage most
additional aspects of NIMZ development,
while the Central Government will
bear the cost of master planning for the
NIMZ and will improve/provide external
physical infrastructure linkages to the
NIMZs including rail, road (National
Highways), ports, airports, and telecom, in
a time bound manner. This infrastructure
will be created/upgraded through Public
Private Partnerships to the extent possible.
ii. Financial and institutional
mechanisms for technology
development, including
green technologies
will leverage the existing incentives/
5 India Briefng
schemes and introduce new mechanisms
to promote green technologies.
This involves defning eligibility criteria
for what can be categorized as clean
and green defnitions which will be
prescribed by the Green Manufacturing
Commi t t ee (GMAC), compri si ng
representatives from the concerned
Ministries/Departments of the Central
Government and relevant sectoral experts
from outside government.
The promotion of green technologies
according to the National Manufacturing
Policy also involves preferential purchases
by government agencies of indigenously
developed products and technologies.
A Technol ogy Acqui s i t i on and
Devel opment Fund, operat ed and
monitored by the Green Manufacturing
Committee, will be established for
acquisition of technologies (including
environmentally friendly technologies);
creation of a patent pool; and development
of domestic manufacturing of equipment
used for controlling pollution and reducing
energy consumption.
SMEs will be given access to the patent
pool and/or part reimbursement of
technology acquisition costs up to a
maximum of Rs. 20 lakhs for the purpose
of acquiring appropriate technologies
patented up to a maximum of 5 years
generally, prior to the date of submission
of the project.
The fund will also provide incentives
to control pollution, reduce energy
consumption and conserve water,
consisting of five percent interest
reimbursement of the nominal interest
charged by lending agency and a ten
percent capital subsidy.
iii. Industrial training and
skill upgrade measures
Between 2007-2017, an estimated 85
million persons will be added to the labor
force. With agriculture offering little in
the way of incremental job opportunities,
the additional labor force will need to
be accommodated in the manufacturing
and services sectors. The manufacturing
sector is estimated to offer 24.5 million
additional job opportunities during this
period.
To encourage skill development, the
government will provide a weighted
standard deduction of 150 percent of the
expenditure (other than land or building)
incurred on Public Private Partnership
(PPP) projects for skill development in
the manufacturing sector.
In addition, the National Manufacturing
Policy aims to increase the number
of industrial training institutes (ITIs),
building on the goals of the 11th National
Plan - 500 new ITIs in industrial clusters/
SEZs and 1000 new ITIs in other areas
(based on demand via the PPP route).
There are currently 8306 ITIs/ITCs (as on
July 15, 2010) with a capacity of training
1.16 million persons per year.
Manufacturing and the
Consolidated FDI Policy
Department of Industrial Policy and
Promotion Ministry of Commerce and
Industry, Effective April 1, 2011
Under the consolidated FDI Policy,
foreign investment in manufacturing
is given a great deal of freedom.
In addition to the prohibition in the
manufacturing of cigars, cheroots,
cigarillos and cigarettes, of tobacco
or of tobacco substitutes, two notable
limitations are on:
Manufacturing of items reserved
for production in micro and small
enterprises
Defense Manufacturing
Manufacturing of Items
Reserved for Production
in Micro and Small
Enterprises (MSEs)
Any industrial undertaking which is not
a Micro or Small Scale Enterprise, but
manufactures items reserved for the MSE
sector is required to follow the government
route when foreign investment is more
than 24 percent in the capital.
Such an undertaking would also require
an Industrial License under the Industries
(Development & Regulation) Act 1951.
Green Manufacturing Incentives
Environmental Audit
Environmental audit
will be mandatory
for industrial and
institutional units in
NIMZs
Audit will be carried out by the industrial/institutional units through external
auditors/frms drawn from an approved panel of environmental auditors.
25 percent grant to SMEs for expenditure incurred on audits subject to a
maximum of Rs. 1 lakh and subject to improvements/correctives effected.
Third party certifcation in this case will cover certifcation of the corrective
action.
Water Conservation
Water audit will
be mandatory for
industrial and
institutional units in
NIMZ
(i)Audit will be carried out mandatorily by the industrial/institutional
units through external auditors/frms drawn from an approved panel of
environmental auditors. The panel as approved by the GMAC will be
maintained by the SPV.
25 percent grant to SMEs for expenditure incurred on audits subject to
maximum of Rs. 1 lakh.
Exemption from water cess: Sec.16 of the Water Cess (Amendment) Act, 2003,
provides inter alia that the Central Government may by notifcation exempt any
industry consuming water below the quantity specifed in the notifcation from
the levy of water cess.
Wastewater treatment Mandatory treatment of waste-water by every industry as per CPCB and PCB
norms.
Units practicing zero water discharge will be eligible for 10 percent one time
capital subsidy on the relevant equipment/systems subject to actual usage for
one year and third party certifcation (panel approved by GMAC).
Rebate on Water Cess to industries setting-up wastewater recycling facilities as
per Water Cess Act, 1977.
Rain Water harvesting Compulsory for the developer, all industrial/ institutional units as per
guidelines to be formulated by the GMAC.
Renewable energy Appropriate incentives under the existing schemes of Government of India and
State Governments will be available for specifc projects.
Green buildings All buildings (more than 2,000 sqm built up area) in the NIMZ including
industrial/institutional/ commercial/residential which obtain green rating under
the Indian Green Building Council (IGBC/LEED) or GRIHA systems will be
eligible for an incentive of Rs. 2 lakhs.
Source: National Manufacturing Policy
6 India Briefng
E
lectronics and strategic
electronics are at a similar
point of inflexion as the
information technology IT/
ITES industry was a decade
ago, according to the draft National Policy
on Electronics, 2011.
The global electronics industry, valued at
US$1.75 trillion, is the largest and fastest
growing manufacturing industry in the
world, according to the Indian Ministry
of Communications and Information
Technology, and the industry is expected
to reach US$2.4 trillion by 2020.
Yet, while India is a recognized global
player in software and software services
sector and is increasingly becoming a
destination for chip design and embedded
software, it lags behind in electronic
hardware manufacturing capabilities. The
Indian electronics hardware production
constitutes only around 1.31 percent of
global production.
Demand for electronic hardware in India
is growing, driven by growth in income
levels leading to higher purchase of
electronics products, automation demands
of the private sector and the government
focus on e-governance. The current
demand for electronics in India stands at
US$45 billion and is projected to grow
to US$125 billion by 2014 and US$400
billion by 2020.
Electronics Manufacturing for
Domest i c and Int ernat i onal
Consumption
The Industrial License is subject
to conditions including exporting a
minimum of 50 percent of the new or
additional annual production of the MSE
reserved items to be achieved within a
maximum period of three years. This
export obligation applies from the date of
commencement of commercial production
and in accordance with the provisions of
section 11 of the Industries (Development
& Regulation) Act 1951.
Defense Manufacturing
The defense manufacturing industry is
subject to Industrial Licensing under the
Industries (Development & Regulation)
Act 1951, with a 26 percent cap on
FDI and mandatory entry through the
government route, in addition to other
conditions.
Additional Steps
Policy interventions outside of this
document for the medium term, identifed
by the planning commission include:
Digitization of land and resource maps
and creation of land banks
Water zoning
Offset policy
Fiscal and exchange rate measures
Strategic acquisitions
De ve l opme nt of wor l d c l a s s
manufacturing management capabilities
Trade policy especially boosting Indias
exports
Reforming the role of public sector
enterprises
A lower emission inclusive growth
strategy
Government support for the manufacturing
sector has also manifested itself in the
form of the National Manufacturing
Competitiveness Council (NMCC),
which was established a few months ago
to provide policy dialogue to strengthen
and sustain the growth of manufacturing
industries in India.
NMCC act i ons t o enhance t he
competitiveness of the manufacturing
sector include pinpointing:
Manufacturing sectors with the potential
for global competitiveness
Strengths and constraints of identifed
sectors
Nat i onal l evel i ndust r y/ sect or
specifc policy initiatives to grow the
manufacturing sector.
Source: http://www.mit.gov.in/content/statistics
Electronics/IT-ITES Industry Production Value over Time
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10*
RS. Core 152,420 190,300 244,000 295,820 372,450 411,220
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
P
r
o
d
u
c
t
i
o
n

(
R
s
.

C
r
o
r
e
)
7 India Briefng
Electronics Manufacturing for Domestic and International Consumption
In recent years, India has had to import
electronic products from China, Taiwan,
South Korea, etc. But, as the value of
Indias electronic imports is expected to
overtake the value of its oil import bill by
2020, the Indian government is working
to strengthen domestic electronics
production.
Beyond merely satiating domestic
demand, the Indian government sees the
electronics industry as key to economic
growth. It aims to tap into demand
abroad in emerging regions like Africa,
South America, and Asia, among others.
Exports of a large number of electronic
components and projects are tariff-free
under the World Trade Organization
Information Technology Agreement-1
(ITA-1) (1997), making the manufacturing
of such goods for export particularly
appealing.
The 2011 Nat i onal Pol i cy on
Electronics, currently in draft form,
provides a roadmap to the expansion
of the electronics sector. Below, we
present:
I. An Overview of The National
Policy on Electronics; and
II. Key Policies and Schemes Related
to the Electronics Hardware Sector.
I. An Overview of
The National Policy
on Electronics
The key push under the National Policy
on Electronics is to transform India
into a global hub for electronics system
design and manufacturing (ESDM).
Given Indias growing strength in chip
design and embedded software and
the increasing importance of design in
product development, India has great
potential as an ESDM destination.
The 14 objectives of the National Policy
on Electronics are to:
1)Create an eco-system for a globally
competitive ESDM sector in the country
to achieve a turnover of about US$400
billion by 2020, involving investment of
about US$100 billion and employment
to around 28 million people at various
levels.
2)Build on the emerging chip design and
embedded software industry to achieve
global leadership in VLSI, chip design
and other frontier technical areas and
to achieve turnover of US$55 Billion
by 2020.
3)Increase the export in the ESDM sector
from US$5.5 million to US$80 billion
by 2020.
4)Signifcantly enhance the availability
of skilled manpower in the ESDM
sector. Special focus for augmenting
post graduate education and to produce
about 2,500 PhDs annually by 2020.
6)Create an institutional mechanism for
developing and mandating standards
and certifcation for electronic products
and services to strengthen quality
assessment infrastructure nationwide.
7)Develop an appropriate security
ecosystem in ESDM for its strategic use.
8)Create long-term partnerships between
EDSM industry and strategic sectors
like defense, space, and atomic energy,
etc.
9)Become a global leader in creating
intellectual property in the ESDM
sector by increasing fund fow for R&D,
seed capital and venture capital for start-
ups in the ESDM and nanoelectronics
sectors.
10)Develop core competencies in sectors
like automotive, avionics, industrial,
medical, solar, information and
broadcasting etc through use of ESDM
in these sectors.
11)Use technology to develop electronic
products catering to domestic needs and
conditions at affordable price points.
12)Expedite adoption of best practices in
e-waste management.
13)Create specialized governance
structures within government to cater
to specifc needs of the ESDM sector,
including high velocity of technological
and business model changes.
14)Facilitate loans for setting up ESDM
units in identifed areas.
To implement the above objectives,
the policy created establishes the
National Electronics Mission, a nodal
agency for the electronics industry
within the Department of Information
Technology, with direct interface to the
Prime Ministers offce, and renamed the
Department of Information Technology
as the Department of Electronics and
Information Technology.
The policy is split into sections, including:
Human Resource Development
Developing and Mandating Standards
Cyber Security
Strategic Electronics
Creating an Eco-system for Vibrant
Innovation and R&D in ESDM Sector
Nanoelectronics
Handling E-waste
Three of the most prominent sections
(described in detail below) are:
Creating an Eco-system for Globally
Competitive ESDM Sector
Promotion of Exports
Electronics in Other Sectors
Creating an Eco-system for
Globally Competitive ESDM
Sector
The term eco-system truly underscores
the widespread nature of the steps
envisioned under the policy to create a
globally competitive ESDM sector. These
include:
Providing fscal incentives through a
Modified Special Incentive Package
Scheme
Such incentives will be provided
across the value chain and are aimed to
mitigate costs from infrastructure gaps
relating to power, transportation etc.
and the relatively high cost of fnance.
Facilitate the setup semiconductor
wafer fab facilities
Provide preferential market access for
domestically manufactured electronic
products
These include mobile devices, SIM
cards with enhanced features, etc. with
special emphasis on Indian products for
which IPR reside in India
Provide for a 10 year stable tax regime
8 India Briefng
(both at the Central and State level) for
the ESDM sector.
Include mobile phones and other
electronics data communication
products as goods of special importance
under the Central Sales Tax Act.
Provide priority sector lending loans
for procuring computers and related
peripherals including software by
individuals and small businesses
Promotion of Exports
Specific actions for the promotion of
ESDM exports include:
Reforming procedures and logistics to
assist the import of components/sub-
systems and export of products.
Expandi ng t he ESDM s ect or
items (including the Electronics
Manufacturing Services industry) under
the Focus Products Scheme
Extending the beneft of export schemes
to DTA sales of ITA-1/zero duty
electronics products and treating them
as physical exports
Building incentives for electronic
hardware manufacturing units in
developed countries to relocate to India
Marketing and showcasing chip design,
product design and embedded software
industry capabilities globally
Electronics in Other Sectors
While the National Policy on Electronics
focuses most heavily on the ESDM sector,
it also specifes goals for other sectors in
the electronics realm. These include:
Automotive Electronics
To develop a Centre of Excellence
(a team of people that promote
collaboration and best practices) for the
development of microcontroller units,
micro-electro-mechanical systems and
other advanced electronic devices to
enable India to consolidate its position
as one of the global auto hubs.
Avionics
To facilitate research and development
and outsourcing of engineering design
and related software for avionics and
the maintenance, repair and overhauling
of avionics.
LED
To encourage the usage of LED lighting
solutions (especially in rural markets)
through innovative products like solar
LED lamps, public places like street
lighting, traffc lights etc. to promote the
manufacture of LED and LED lights.
Industrial Electronics
To develop a Centre of Excellence for
innovation in industrial electronics,
with a focus on making affordable
standardized products which help
India to maintain its growth in
industrial segments in which it has
core competence, including textiles,
food processing, steel, engineering and
electrical gods like motors, compressors,
inverters, etc.
Medical Electronics
To consol i dat e t he desi gn and
development of an affordable medical
electronic device industry and to
develop downstream manufacturing
activities through sector specific
clustering.
Solar Photovoltaics
To build the manufacturing capacity of
solar photovoltaics to support 20 GW
of solar power by 2020.
Information and Broadcasting
To cr eat e an eco- s ys t em f or
manufacturing of set-top boxes and
other broadcast equipment in the
country as part of the digitalization of
the broadcast network of the country.
Electronics Industry Segments
The electronics industry in India currently designs and manufactures a wide range of electronic hardware such as consumer electronics,
industrial electronics, computers, telecom equipment and electronic components.
Some leading global players of the electronics industry that have set up manufacturing units in India are Siemens, Texas Instruments,
Matsushita, Alcatel, LG, Samsung, Sharp and Lenovo. Many international players have also set up their research and development units in
India.
Segment Description
Consumer
Electronics
Consumer electronics consists of products that are directly consumed by end users, such as televisions, VCD/MP3 players,
microwave ovens, etc.
This sector has a large manufacturing base, and is quite competitive, with presence of several global players in India.
Industrial
Electronics
Industrial electronics include products that are used by other industries, such as process control instrumentation, automation
systems, test and measuring instruments and medical instruments.
Computers Including personal computers, servers, workstations, supercomputers, data processing equipment and peripherals such as
monitors, keyboards, disk drives, printers, plotters, digitizers, modems, networking products and add-on cards.
Strategic
Electronics
Covering satellite base communications, navigation and surveillance, underwater electronics and infrared-based detection,
disaster management and GPS-based vehicle tracking systems. The segment has a number of mechanized units both in the
public and private sectors.
Communication
and Broadcasting
Equipment
The communication and broadcasting apparatus sector includes digital exchanges (EPABX, RAX, TAX and MAX),
transmission equipment such as HF/VHF/Microwave trans-receivers, satellite communication terminals, optical fber
communication equipment, troposcatter equipment, two-way radio communication equipment, etc.
Electronics
Components
The electronics components section provides to the requirements of consumer electronics, telecom, defense and information
technology sectors. Machinery in production in India at present includes TV picture tubes (black & white and color), monitor
tubes, diodes and transistors, power devices, ICs, hybrid microcircuits, resistors, capacitors (plastic flm, electrolytic,
tantalum, ceramic), connectors, switches, relays, magnetic heads, DC micro motors and tape deck mechanism, PCBs, crystals,
loudspeakers and hard and soft ferrites. The consumer electronics sector in general and the color television (CTV) industry
specially is the growth engine for electronic components.
9 India Briefng
II. Key Related
Policies and Schemes
Related Policies
Three related policies that have a strong
infuence on the electronics sector include
Industrial Approval Policy, Fiscal Policy
and Foreign Trade Policy. Below, we
include a quick overview of these
infuential policies and how they apply to
the sector, as described by the Department
of Information Technology.
Industrial Approval Policy
Industrial Licensing has been virtually
abol i shed i n t he el ect roni cs and
information technology sector, except
for manufacturing electronic aerospace
and defense equipment.
There is no reservation for public
sector enterprises in the electronics and
information technology industry and
private sector investment is welcome in
every area. Investment in the electronics
and information technology industry
can be done anywhere in the country,
subject to clearance from the authorities
responsible for control of environmental
pollution and local zoning and land use
regulations.

Large industries (where investment in
plant and machinery is more than Rs.10
crores) and those industries exempted
from licensing are only required to fle
information in the prescribed Industrial
Entrepreneurs Memorandum (IEM) with
the Secretariat for Industrial Assistance
(SIA), Department of Industrial Policy
and Promotion, Ministry of Commerce
& Industry.
Immediately after the commencement
of commercial production, Part B of the
IEM has to be fled. No further approval
is required. Forms can be downloaded
from the website of the Department of
Industrial Policy and Promotion, Ministry
of Commerce & Industry (http://dipp.
gov.in).
Small scale industries (where investment
in plant and machinery is more than Rs.
25 lakh but less than Rs. 5 crores) and
medium industries (where investment
in plant and machinery is more than
Rs. 5 crores but less than Rs. 10 crores)
are required to register with the District
Industries Centre (DIC).
Fiscal Policy
The peak customs duty rate is 10 percent,
while the rate on 217 Information
Technology Agreement (ITA-1) items is
zero percent. The agreement covers the
following main categories of products and
components: computers and peripherals;
telecommunication equipment; electronic
components including semiconductors;
semiconductor manufacturing equipment;
software and scientifc instruments.
Foreign Trade Policy
All electronics and IT products are freely
importable, with the exception of some
defense-related items, and exportable,
with the exception of a small negative
list (which includes items such as high
power microwave tubes, high end super
computer and data processing security
equipment).
For exporters of electronic goods, a Zero
Duty Export Promotion Capital Goods
scheme (EPCG) is available. The export
obligation under EPCG Scheme can also
be fulflled by the supply of Information
Technology Agreement (ITA-1) items to
the DTA, provided the realization is in free
foreign exchange.
Related Schemes
Special schemes available for setting
up electronics hardware sector export-
oriented units include:
Software Technology Parks (STP)
Electronics Hardware Technology Parks
(EHTP)
Export Oriented Units (EOU)
Special Economic Zones (SEZ)
In addition to location-specifc special
schemes available for setting up electronics
hardware sector export-oriented units,
additional schemes include:
Export Promotion Capital Goods
(EPCG)
Duty Exemption and Remission
Deemed Exports
Export Promotion Capital
Goods (EPCG)
The EPCG scheme allows import of capital
goods for pre-production, production and
post-production at zero percent customs
duty, subject to an export obligation
equivalent to 6 times of duty saved on
capital goods imported under the EPCG
scheme, to be fulflled within 6 years of
authorization.
The concessional 3 percent duty EPCG
Scheme allows import of capital goods
for pre-production, production and post-
production (including CKD/SKD thereof
as well as computer software systems) at 3
percent customs duty, subject to an export
obligation equivalent to 8 times of duty
saved on capital goods imported under
EPCG scheme, to be fulflled in 8 years
reckoned from Authorization issue-date.
The capital goods shall include spares
(including refurbished/reconditioned
spares), tools, jigs, fixtures, dies and
Deemed
Exports
Fiscal
Industrial
Foreign
Trade
Duty Exp.
The National
Policy on
Electronics
EPCG
10 India Briefng
moulds. Secondhand capital goods,
without any restriction on age, may also
be imported under the EPCG Scheme. The
export obligation can also be fulflled by
the supply of ITA-1 items to the DTA,
provided the realization is in free foreign
exchange.
The details of the EPCG scheme are
available in Chapter 5 of Indias Foreign
Trade Policy and Procedures on the
website of the Department of Commerce,
Ministry of Commerce & Industry (http://
commerce.nic.in).
Duty Exemption and Duty
Remission Schemes
A duty exemption scheme enables duty
free import of inputs required for export
production.
A duty remission scheme enables post
export replenishment / remission of duty
on inputs used in export product.

The details of these schemes are available
in Chapter 4 of Indias Foreign Trade
Policy and Procedures on the website of
the Department of Commerce, Ministry of
Commerce & Industry (http://commerce.
nic.in).
Deemed Exports
Deemed exports refer to those transactions
in which the goods supplied do not leave
the country, and the payment for such
supplies is received either in Indian rupees
or in free foreign exchange.
The following categories of supply of
goods by the main/ sub-contractors are
regarded as Deemed Exports under the
Foreign Trade Policy, provided the goods
are manufactured in India:
(a) Supply of goods against Advance
Authorization/Advance Authorization
for annual requirement/DFIA
(b) Supply of goods to Export Oriented
Units (EOUs) / Software Technology
Park (STP) units / Electronic Hardware
Technology Park (EHTP) units /
Biotechnology Park (BTP) units
(c) Supply of capital goods to Export
Promotion Capital Goods (EPCG)
Authorization holders
(d) Supply of goods to projects fnanced
by multilateral or bilateral Agencies/
Funds as notifed by the Department of
Economic Affairs, Ministry of Finance
under International Competitive
Bidding (ICB) in accordance with the
procedures of those Agencies/Funds,
where the legal agreements provide for
tender evaluation without including
customs duty
(e) Supply of capital goods, including in
unassembled/disassembled condition,
as wel l as pl ant s, machi nery,
accessories, tools, dies and such
goods which are used for installation
purposes till the stage of commercial
production, and spares to the extent
of 10 percent of the FOR value to
fertilizer plants
(f) Supply of goods to any project or
purpose in respect of which the
Ministry of Finance, by a notifcation,
permits the import of such goods at
zero customs duty
(g) Supply of goods to the power projects
and refneries not covered in (f) above
(h) Supply of marine freight containers
by 100 percent export-oriented unit
(EOU), provided the said containers
are exported out of India within 6
months or such further period as
permitted by the customs
(i) Supply to projects funded by UN
agencies
(j) Supply of goods to nuclear power
projects through competitive bidding
as opposed to international competitive
bidding.
The benefts of deemed exports shall be
available under paragraph (d), (e), (f) and
(g) only if the supply is made under the
procedure of ICB.
For information on foreign investment
in India, please contact Dezan Shira &
Associates at india@dezshira.com or
www.dezshira.com.
Benefts of Special Schemes for Setting Up Electronics Hardware Export-Oriented Units
Benefts
Software Technology Parks, Electronics Hardware
Technology Parks, Export-oriented Units
Special Economic Zone
Foreign Equity permissible
100 percent FDI investment permitted through automatic
route
100 percent FDI investment permitted through
automatic route
Duty free imports/ domestic
procurement permissible
Capital goods, Raw materials, Components and other
inputs
All goods for development, operation and maintenance
Income Tax Beneft
Export profts 100 percent tax-exempt under Sections
10A/10B of the Income Tax Act (up to 31st March 2011)
100 percent Income Tax exemption on export profts
under Section 10AA of the Income Tax Act for 5 years,
50 percent for next 5 years thereafter and 50 percent of
ploughed back export proft for next 5 years
Export Obligation
Unit shall be a positive Net Foreign Exchange (NFE)
Earner. Supplies of ITA-1 items manufactured by these
units in the Domestic Tariff Area (DTA) shall be counted
towards fulfllment of export obligation
Unit shall be a positive Net Foreign Exchange (NFE)
Earner. Supplies of ITA-1 items manufactured by
these units in the Domestic Tariff Area (DTA) shall be
counted towards fulfllment of export obligation
DTA Sales
DTA sales permissible up to 50 percent of FOB value
of exports, subject to fulfllment of positive NFE, on
payment of concessional duties (50 percent of basic
customs duty and full excise duty). DTA sales beyond this
entitlement are permissible against payment of full duties
provided the unit has achieved positive NFE.
DTA sales permissible on payment of full duties.
However, the unit is required to be a positive Net
Foreign Exchange (NFE) Earner over the fve year
period of its operation.
Central Sales Tax Refundable Exempted
Supplies from DTA Deemed Export Physical Export
The details of SEZ/EHTP/EOU schemes are available in Chapter 6 of Indias Foreign Trade Policy and Procedures on the website of the Department of Commerce, Ministry of
Commerce & Industry (http://commerce.nic.in).
1. Mumbai
GDP US$209 billion
Mumbai is the most populous city in India and in the top fve in the
world. While the 2011 census estimated population at 12.4 million,
external estimates suggest double that.
Formerly known as Bombay, Mumbai is the capital city of
Maharashtra, the finance centre, economic powerhouse, and
industrial hub of India. It is home to important fnancial institutions,
such as the Reserve Bank of India, the Bombay Stock Exchange,
the National Stock Exchange of India, and corporate headquarters
of many Indian companies and multinational corporations.
2. New Delhi
GDP US$167 billion
New Delhi, the nations capital city, is part of Delhi, the largest
commercial center in northern India and a center of the largest center
for small-scale industries, including manufacturing of televisions,
automobile parts, textiles and software. Delhi also plays host to a
number of national and international events including sports-related
events, conferences and seminars.
The Delhi-Mumbai Industrial Corridor DMIC, a state-led
development zone spanning 1483 kilometers over 6 provinces, is
being supported by the Japanese government.
4. Bangalore
GDP US$83 billion
Bangalore, Silicon Valley of India, was named the fourth Best
Technology Hub globally by the United Nations Development
Programme and provides tech outsourcing solutions to many Fortune
500 companies. Karnataka state of which Bangalore is the capital
accounts for more than 33 percent of Indias total software exports.
In addition to biotechnology companies and start-ups, the city hosts
R&D facilities such as the Indian Institute of Science, the National
Center for Biological Sciences, and the Institute of Bio-Informatics
and Biotechnology. The Bangalore Helix project, a biotech cluster,
will likely be completed by 2013.
5. Chennai
GDP US$67 billion
The gateway to South India, Chennai is called The Detroit of India,
accounting for 30% of the countrys automotive sector and 40%
of auto components. Investments come from companies including
Ford, Hyundai, Mitsubishi, Renault SA, Daimler AG, BMW AG and
Nissan Motor Company. Car-parts suppliers include tire company
Michelin SA and window maker Saint-Gobain SA.
Chennai is also home to investments from electronic giants. The
citys skilled manpower is sourced from its educational institutions,
including the Indian Institute of Technology, one of the most
prestigious engineering universities of India.
6. Hyderabad
GDP US$60 billion
Hyderabad is sometimes referred to as Cyberabad
or the second Silicon Valley of India. The city
houses technology giants including IBM,
Toshiba, Oracle, Wipro, and Microsoft. In
addition, Google, Amazon, as well as Facebook
have set up offces there.
Aside from IT, Hyderabad is a pharmaceutical
hub and a tourist destination - The New York
Times ranked Hyderabad the 19th most attractive
travel destination in the world in 2011, the only
Indian city in the rankings.
3. Kolkata
GDP US$150 billion
Formerly known as Calcultta, Kolkata was
built along the eastern bank of the Hugli River,
forming an important trade and commerce
hub in northeast India. The city is strategically
positioned with three international frontiers:
Bangladesh in the east, Nepal in the west, and
Bhutan in the northeast.
It is the capital of West Bengal, a province rich in
natural resources with a thriving tea-production
industry.
A Look at Indias Top Six Cities
(by GDP)
Introduction to the Social Security System in India
Payroll Processing in India
The Applicability and Calculation of Gratuity
From Dezan Shira & Associates
Issue 14 June 2012
Payroll Processing
in India
INCLUDING
2 India Briefng
This months cover artwork by Shanti Dave. Courtesy of Delhi Art Gallery.
Welcome to an Asia Briefng Media Publication!
T
here is a great deal of information available about the Indian social security system that is written from the perspective
of policy makers and academics studying international development.
What seems to be most lacking, however, is a concise and practical overview of social security in India as it relates
to payroll. In this issue, we aim to help expatriate managers and business owners grasp the overall picture of how
payroll works in India.
We also discuss how outsourcing payroll can beneft all types of companies, particularly those of small and medium-size.
These issue is divided into three articles:
Introduction to the Social Security System in India..........................................................................................................................3
Payroll Calculation, Processing and Reporting in India.....................................................................................................................6
The Applicability and Calculation of Gratuity.....................................................................................................................................11
Cherry Bansal, Parveen Chandra and Ankit Shrivastava contributed to all articles in this issue.
Warm regards,
Samantha L. Jones,
3 India Briefng
I
ndias social security system is
composed of a number of schemes
and programs spread throughout
a variety of laws and regulations.
Keep in mind that the government-
controlled social security system in India
applies to only a small portion of the
population.
Furthermore, the generally accepted
concept of the social security system
includes not just an insurance payment
of premiums into government funds (like
in China), but also lump sum employer
obligations.
Generally, Indias social security schemes
cover the following types of social
insurances:
Pension
Health Insurance and Medical
Maternity
Gratuity
Disability
While a great deal of the Indian population
is in the unorganized sector and does not
have an opportunity to participate in each
of these schemes, Indian citizens in the
organized sector (which include those
employed by foreign investors) and their
employers are entitled to coverage under
the above schemes.
The appl i cabi l i t y of mandat or y
contributions to social insurances
varies; some of the social insurances
require employer contributions from
all companies, some from companies
with ten or more employees and some
from companies with twenty or more
employees.
In this article, well discuss each of
these social insurances, along with their
coverage, contribution rates, and the laws
and regulations behind them.
Pension
The Empl oyees Provi dent Fund
Organization, under the Ministry of Labor
and Employment, ensures superannuation
pension, and family pension in case of
death during service.
Presently only about 35 million out of a
labor force of 400 million have access
to formal social security in the form
of old-age income protection. Out of
these 35 million, 26 million workers are
members of the Employees Provident
Fund Organization, which comprises
private sector workers, civil servants,
military personnel and employees of State
Public Sector Undertakings.
The schemes under the Employees
Provident Fund Organization apply to
businesses with at least 20 employees.
Cont ri but i ons t o t he Empl oyees
Provident Fund Scheme are obligatory
for both employer and employee when
the employee is earning up to INR6,500
(US$126)
1
per month and voluntary when
the employee earns more than this amount.
If the pay of any employee exceeds this
amount, the contribution payable by the
employer will be limited to the amount
payable on the frst INR6,500 (US$126)
only. Contributions should be made to the
Employees Provident Fund Organization
on an annual basis.
The Empl oyees Provi dent Fund
Organization includes three schemes:
The Employees Provident Fund
1 US$ = INR51.3 (average January-May 2012)
Introduction to the Social Security
System in India
[ By Delhi Offce, Dezan Shira & Associates ]
Gratuity Maternity Health Insurance
and Medical
Pension Disability
Some of the social insurances require employer

contributions from all companies, some from
companies with ten or more employees and
some from companies with twenty or more
employees.
4 India Briefng
Scheme, 1952
The Employees Pension Scheme, 1995
The Employees Deposit Linked
Insurance Scheme, 1976
The Employees Provident Fund Scheme
is contributed to by the employer (1.67-
3.67 percent) and the employee (10-12
percent).
The Employee Pension Scheme is
contributed to by the employer (8.33
percent) and the government (1.16
percent), but not the employee.
Finally, the Employees Deposit Linked
Insurance Scheme is contributed to by the
employer (0.5 percent) only.
Four main types of pension (all monthly)
are offered:
Pension upon superannuation or
disability;
Widows pension for death while in
service;
Childrens pension; and
Orphans pension.
In addition, there are separate pension
funds for civil servants, workers employed
in coal mines and tea plantations in the
State of Assam and for seamen.
Health Insurance
and Medical
India has a national health service, but
this does not include free medical care
for the whole population. The Employees
State Insurance Act creates a fund to
provide medical care to the employees
and their families, as well as cash benefts
during sickness and maternity, and
monthly payments in case of death or
disablement for those working in factories
and establishments with 10 or more
employees.
In case of sick leave, the employer will
pay half salary to the employees covered
under the Employees State Insurance Act.
Disability
The Workmens Compensation Act
requires the employer to pay compensation
to employees or their families in cases of
employment related injuries resulting in
death or disability.
In addition, workers employed in certain
types of occupations are exposed to
the risk of contracting certain diseases,
which are peculiar and inherent to those
occupations. A worker contracting an
occupational disease is deemed to have
suffered an accident out of and in the
course of employment and the employer
is liable to pay compensation for the same.
Occupational diseases have been defned
in the Workmen Compensation Act in
parts A, B and C of Schedule III.
Compensation calculation depends on the
situation of occupational disability:
(a) Death
50% of the monthly wage multiplied by
the relevant factor (age) or an amount
of INR80,000 (US$1,559), whichever
is more
(b) Total permanent disablement
60% of the monthly wage multiplied by
the relevant factor (age) or an amount
of INR90,000 (US$1,754), whichever
is more
The Compensation Act also includes
stipulations for partial permanent
disablement and temporary disablement
(total or partial).
Maternity
The Maternity Beneft Act requires an
employer to offer 12 weeks wages during
maternity as well as paid leave in certain
other connected contingencies.
Every woman shall be entitled to, and her
employer shall be liable for, the payment
of maternity benefit at the rate of the
average daily wage (the average of the
womans wages payable to her for the days
on which she has worked during the period
of three calendar months immediately
preceding the date from which she is
absent on account of maternity), including
the day of her delivery and for the six
weeks immediately following that day.
The maximum period for which any
woman shall be entitled to maternity
beneft shall be 12 weeks, six weeks up to
and including the day of her delivery and
six weeks immediately following that day.
During the one month proceeding the
period of six weeks before her expected
delivery or any period during that six
week period for which she does not take
a leave of absence, no pregnant woman
shall be required by her employer to do
any work that is arduous, involves long
hours of standing or is in any way likely to
interfere with her pregnancy or the normal
development of the fetus, or is likely
to cause her miscarriage or otherwise
adversely affect her health.
Any woman working in an organization
and allowed to maternity beneft may give
written notice to her employer stating
that her maternity beneft and any other
benefts to which she may be entitled may
be paid to her or to anyone she nominates
in the notice and that she will not work
in any establishment during the period
for which she receives maternity beneft.
On receipt of the notice, the company
shall authorize the employee to absent
herself from the company until the end
of six week period following the day of
her delivery.
The maternity benefit for the period
preceding the date of her expected delivery
shall be paid in advance by the company
to the employee after having confrmed
that she is pregnant. The amount due for
the subsequent period shall be paid by the
employer to the employee within 48 hours
of the childs birth.
In addition to the above, the act states that
no company shall deliberately employ a
woman in any organization during the
six weeks immediately following the
day of her delivery or her miscarriage.
No company shall compel its female
employees to do tasks of a laborious
nature or tasks that involve long hours of
standing or which in any way are likely to
interfere with her pregnancy or the normal
development of the fetus, or are likely
to cause her miscarriage or otherwise
adversely affect her health.
Gratuity
For establishments with ten or more
employees, the Payment of Gratuity
Act requires the payment of 15 days of
additional wages for each year of service
to employees who have worked at a
company for fve years or more.
5 India Briefng
Social Security Schemes Contribution Rates and Coverage
Scheme/Program Program type Contribution Rates Coverage
Pension - Employee Provident Fund Organization
Employees Provident Fund Mandatory Employer: 1.67-3.67 percent
Employee:10-12 percent
Government: None
Employees in frms with 20+ employees
Employees Pension Scheme Mandatory Employer: 8.33 percent
Employee: None
Government: 1.16 percent
Employees Deposit Linked
Insurance Scheme
Mandatory Employer: 0.5 percent
Employee: None
Government: None
Health Insurance and Medical
Employees State Insurance
Act
Mandatory Employer: 4.75 percent of wages
Employee: 1.75 percent of wages
Government: 1/8th share of
expenditure
Disability
The Workmens
Compensation Act
Mandatory Employer: depends on situation
of occupational disability
Employee: None
Government: None
All employees
Maternity
The Maternity Beneft Act Mandatory Employer: 12 weeks wages
and paid leave in certain other
connected contingencies
Employee: None
Government: None
All female employees
Gratuity
The Payment of Gratuity Act Mandatory Employer: 15 days of additional
wages for each year of service
Employee: None
Government: None
Employees who have worked 5+ years in frms with 10+
employees
Laws and Regulations of the Social Security System
The details of the social security system are spread throughout a variety of laws and regulations, including:
The Employees Provident Funds & Miscellaneous Provisions Act, 1952
Applies to factories and establishments employing 20 or more employees, ensures superannuation pension, and family pension
in case of death during service.
The three schemes under the Employees Provident Funds Organization are:
The Employees Provident Fund Scheme, 1952
The Employees Pension Scheme, 1995
The Employees Deposit Linked Insurance Scheme, 1976
Separate Provident Fund legislation exists for workers employed in coal mines and tea plantations in the State of Assam and
for seamen.
The Employees State Insurance Act, 1948
For factories and establishments with 10 or more employees, this Act requires complete medical care to the employees and
their families, as well as cash benefts during sickness and maternity, and monthly payments in case of death or disablement.
The Workmens Compensation Act, 1923
Entails payment of compensation to the workman or his family in cases of employment related injuries resulting in death or
disability.
The Maternity Beneft Act, 1961
Offers 12 weeks wages during maternity as well as paid leave in certain other connected contingencies.
The Payment of Gratuity Act, 1972
For establishments with 10 or more employees, this Act requires the payment of 15 days of additional wages for each year
of service to employees who have worked at a company for fve years or more.
6 India Briefng
P
a y r o l l , o r e mp l o y e e
compensation management,
is a multifaceted process. As
part of payroll, businesses
gener al l y comput e and
withhold government taxes like social
security and individual income taxes from
employee salary.
Many companies also have benefit
plans like health insurance, which
include deductions of premiums from
employee salary according to employee
customization, adding another layer of
activity for payroll processing.
To help shed some light on this complicated
process, in this article we discuss:
Salary
Allowances (including housing and
leave travel assistance)
Payr ol l Repor t i ng For ms and
Submission Details
The Benefts of Outsourcing Payroll
Tax Payable Calculations for Metro and
Non-Metro Cities (Sample Table)
Salary
Section 17 of the Income Tax Act defnes
salary to include:
Wages
Pensions or Annuities
Gratuities
Advance of Salary
Any fee, commission, perquisites
1
or
profts in lieu of or in addition to salary
or wages
Any encashment of leave salary
Any amount of credit to provident fund
of employee to the extent it is taxable
Salary also generally includes what is
known as a dearness allowance. A
dearness allowance is a type of allowance
provided for the higher-cost of living
in particular cities or states. While
this allowance is most important for
government employees, certain private
companies also offer it at their own
discretion.
As a result, salary includes basic
1 Perquisites include: the value of rent-free
accommodation provided by the employer or the value of
any concession in the matter of rent.
salary, encashment of leave salary,
advance of salary, various allowances
such as dearness allowance, entertainment
allowance, house rent allowance, and
also includes perquisites by way of free
housing, free car, free schooling for
children of employees, etc.
For income to be treated as salary:
There must be an employer-employee
relationship between the payer and
receiver of income;
Salary income must be real and there
must an intention to pay and receive
salary;
Salary may be from more than one
employer and may be received from
not just the present employer but also
a prospective employer and (in some
cases even from a former employer, as
is sometimes the case for pension).
Salary can be charged in the year received
or in the year earned, whichever is earlier,
i.e. if the salary has been received frst,
then it will be taxable in the year of
receipt.
Payroll Calculation, Processing
and Reporting in India
Payroll Reporting Forms and Submission Details
Reporting
Person
Statutory Body for
Submission
Purpose Form Name Submission
Frequency
Submission Due Date Submission
Format
Employer Employees Provident
Fund Organization
Social Security
Contribution
Statement of Contribution
Made
Monthly 15th of the month following
the end of month
Manual
Form 6A/3A Yearly 30 April Manual
Income Tax Department Deposit of Withheld Tax TDS Challan Monthly 7th of each month Electronic
Return of Withheld tax 24Q Quarterly 15th of the month following
the end of the quarter
Manual
State Revenue
Department
Return of Professional
Tax (if applicable)*
Return of Professional Tax Monthly/
Quarterly/
Annually
Varies by State Manual
Employee Income Tax Department Income Tax Return Income Tax Return Annually 31 July Online with
Digital
Signature
Certifcate
Professional tax applies to staff members in well-known private companies in most Indian states, including Karnataka, West Bengal, Andhra Pradesh, Maharashtra, Tamilnadu,
Gujarat, and Madhya Pradesh. Professional tax varies by income level and state and the maximum amount payable per year is INR2,400/person. This tax is subtracted by the
employer each month and sent to the Municipal Corporation.
Source: Dezan Shira & Associates
7 India Briefng
Payroll Calculation, Processing and Reporting in India
If salary has been earned, but not yet
received, then it will be taxable in the year
earned. Salary income is taxable in the
hands of individuals only. No other type
of person, such as a frm, or company can
earn salary income.
Salary tax rates are shown in the
accompanying table. An employer is
required to deduct tax at source on a
monthly basis from a salaried employee
and to make additional contributions to a
provident fund and insurance.
Wages vary considerably, depending
on industry, company size and region.
The national minimum wage of India is
currently at INR115 (US$2.24) per day
(effective from April 1, 2011); though this
varies by state.
Companies use both time and piece rates
to set compensation for their employees.
Time rates are more common in
organized-factory industries, such as
engineering, chemicals, cement, paper
and glass. Rates may be per hour, day,
week or month.
Piece rates, which the government
has encouraged in order to boost
productivity, are usually paid monthly,
though casual workers are paid on a
daily basis. Some industries (especially
metal extracting, metal rolling,
electrical machinery and glass) pay
production premiums.
In the organized sector, salaries are often
set by settlements reached between
trade unions and management. Base
pay typically contains benefts such as
provident funds, pensions and bonuses,
which account for up to 30 percent - 42
percent.
Allowances
Allowances are categories of expenditures
in India that are not taxable, provided they
match certain specifcations and do not
exceed a certain amount.

Allowances in India include those for:
House Rent
Transport
Medical
Meal Coupons
Leave Travel
Education
Special Allowance
House Rent
If a company chooses to provide House
Rent Allowance (HRA) to its employees,
the amount of this allowance exempt from
tax is the lowest of three numbers:
1) 50% percent of salary in metropolitan
areas (40% percent non-metropolitan)
2) Total rent paid over 10 percent of salary
3) House Rent Allowance received
Transport
Transport payments of up to INR800
(US$14.22) per month for an employee
commuting between residence and place
of work are exempt from tax.
In the case of blind or orthopedically
handicapped employees, INR1,600
(US$28.61) per month is exempt from tax.
Medical
An exemption for medical expenses is
allowed for:
Reimbursement up to INR15,000
(US$266.66) for medical treatment of
the employee and family members
Reimbursement of expenses sustained
by an employee and family members in
approved hospitals, etc.
Premiums paid by the employer towards
medical insurance on the health of an
employee
Reimbursement by the employer
of premiums paid by the employee
towards insurance on his health or of
that of his family
Expenditure incurred by the employer
on medical treatment of the employee
whose family is outside India
Travel and housing abroad of the
employee or his family including one
attendant accompanying the patient for
medical treatment
Group medical insurance for an
employee and family members or
reimbursement of premium paid by an
employee for medical insurance.
For medical treatment abroad, the actual
expenditure incurred includes the travel
and stay abroad of the patient and one
attendant (if permitted by the RBI).
The ceiling for the gross total income
excluding the amount to be reimbursed
is INR200,000 (US$3,898).
The following medical facilities provided
to an employee are exempt from income
tax:
Treatment of an employee or his family
in any hospital maintained by the
employer
Tax Rates 2012 by Earning Group
No. Tax rates General Women Sr. Citizens
(Above 60 years but below 80 years)
Individuals above the age of 80 years
1 No tax Up to 200,000 Up to 200,000 0 to 250,000 Up to 500,000
2 10 % 200,001 to 500,000 200,001 to 500,000 250,001 to 500,000
3 20 % 500,001 to 1,000,000 500,001 to 1,000,000 500,001 to 1,000,000 500,001 to 1,000,000
4 30 % Above 1,000,000 Above 1,000,000 Above 1,000,000 Above 1,000,000
Compulsory Bonus
A compulsory bonus supplements
wages for lesser skilled workers, per
the Payment of Bonus Act. The Act
applies to every factory where 10 or
more workers are working and every
other establishment in which 20 or
more persons are employed, on any day
during an accounting year.
The compulsory bonus applies to
every person (other than an apprentice)
drawing salary up to INR3,500 per
month, with a bonus of 8.33 percent
of salary/wages earned or INR100,
whichever is higher. Employees
drawing remuneration of INR3,500 or
more and those who have worked for
less than 30 days are not eligible to
receive a bonus under the Act.
The bonus is to be paid within
eight months from the expiry of the
accounting year.
8 India Briefng
Calculation of Tax in Metropolitan and Non-Metropolitan Areas
Sample Annual Income: Rs.1,500,000

Metro Cities
(ex: Delhi, Mumbai, Kolkata, Bangalore)
Non-Metro Cities
(ex: Gurgaon, Pune, Hyderabad, Faridabad)
Annually (Rs.) Monthly (Rs.) Annually (Rs.) Monthly (Rs.)
Income
Basic Pay 900,000 75,000 900,000 75,000
House Rent Allowance 450,000 37,500 450,000 37,500
Transport Allowance 9,600 800 9,600 800
Medical Allowance 15,000 1,250 15,000 1,250
Meal Coupons 24,000 - 24,000 -
Leave Travel Allowance (LTA) 30,000 - 30,000 -
Uniform Allowance 30,000 2,500 30,000 2,500
Books and Periodicals 30,000 2,500 30,000 2,500
Special Allowance 11,400 950 11,400 950
Total Gross Salary 1,500,000 120,500 1,500,000 120,500
Tax to be deducted at Source 7,320 8,865
Net Salary Payable 113,180 111,635
Taxable Income
Basic Pay 900,000 900,000
House Rent Allowance
1
Exempt 90,000
Transport Allowance Exempt up to Rs.800/month
Medical Allowance Exempt up to RS.15,000/year
Meal Coupons Exempt up to Rs.75/working day
Leave Travel Allowance (LTA)
2
Exempt
Uniform Allowance Exempt
Books & Periodicals Exempt
Special Allowance 11,400 11,400
Total Gross Salary 911,400 1,001,400
Deductions
3

80 C (Provident Fund, Fixed Deposits,
ULIPs, Life Insurance Policy etc.)
100,000 100,000
80 CCF (infrastructure funds) 20,000 20,000
80 D (mediclaim policy) 15,000 15,000
Taxable Income 776,400 866,400
Tax Payable
Income Tax Payable 85,280 103,280
Add: Education fee @2% of income tax 1,706 2,066
Add: SHEC @1% of income tax 853 1,033
Total Tax Payable 87,839 106,379
Tax to be Paid 87,839 106,379
Monthly Deduction to be made (tax to
be paid/12)
7,320 8,865
Tax Calculation
0-200,000 0 0 0 0
200,000-500,000 0 30,000 0 30,000
500,000-1,000,000 0 55,280 0 73,280
1,000,000 and above 0 N/A 0 N/A
Total Tax 85,280 103,280
House Rent Allowance (HRA) Exemption
The Lowest of Three Values
Metro Cities (Rs.) Non-Metro Cities (Rs.)
1 50% of Salary in Metro Cities (40% Non-Metro) 450,000 360,000
2 Total rent paid (10% of Salary) 510,000
3 House Rent Allowance Received 450,000
Exemption 450,000 360,000
Notes:
1
See accompanying HRA Exemption box to the left.
2
Two journeys in a block of four calendar years (current block
runs from 2010-2013) are exempt. If an individual does not use
their exemption, it can be carried over to the next block and
used in the calendar year immediately following that block.
3
Less deductions as per Income Tax Act of India, sections 80
C, 80 CCF, 80 D. For more detail on deduction types, please
contact a professional services provider.
9 India Briefng
Rei mbursement of any medi cal
expenditure actually incurred by the
employee for himself or his family
Treatment in any hospital maintained or
approved by the government
Meal Coupons
Lunch and refreshments that the employer
provides to the employee at free or
concessional rates is not taxable.
Leave Travel
Leave travel is remunerated for meeting
travelling expenses incurred by an
individual and family members (this
includes only the spouse, two children
and dependent parents, brothers and
sisters) while on holiday in India. The
amount excluded depends upon the mode
of travel.
Two journeys in a block of four calendar
years (current block runs from 2010-2013)
are exempt. If an individual does not use
their exemption, said exemption can be
carried over to the next block and used in
the calendar year immediately following
that block.
Education
Education payment of INR50 (US$0.97)
per month per child (INR150, US$2.92,
in special cases) for up to two children of
the employee is exempt from tax.
Other Allowances
In addition to those listed above, the
subsequent allowances are exempt from
tax:
Uniforms (not merely clothing)
Books and Periodicals (unlimited)
Work-related transportation expenses;
Cost of travel on tour or on transfer;
Daily ordinary charges incurred by the
employee on account of absence from
his normal place of duty during a tour;
Expenditure on a helper engaged in
offce duties;
Allowances granted to encourage
academic research and training in
educational and research institutions;
and
Expenditures incurred on the purchase
or maintenance of uniforms necessary
for in offce duties.
The Benefts of Outsourcing Payroll
Increased
efciency
A payroll outsourcing
company has specialized
software for producing reports
according to the exact specifcations
required by the Tax Bureau and banks. This
leads to increased payroll efciency compared to
manual methods and non-specialized programs, such
as Microsoft Excel.
Increased accuracy
Payroll outsourcing companies can provide experienced
staf, who are better able to prevent errors such as over or
under paying employees, late distribution of salaries or non-
compliance with mandatory social insurance contributions. Such
errors can cause human resources issues or government fnes
for non-compliance - both of which are potentially very costly.
Increased transparency
Outsourcing payroll allows for increased transparency
throughout the payroll process - errors can be reported
immediately and directly to management without complications
of inter-departmental reporting structures.
Increased confdentiality
The more employees who are aware of salary details in an
organization, the higher the risk that salary details will become
public knowledge within the company. Outsourcing payroll
allows for only a small number of senior people in an organization
to be aware of payroll details.
Decreased liability
Outsourcing payroll management lowers
the risk of flling incorrect information
to the tax bureau. Assuming the correct
information has been provided to the
third party outsourcer by the agreed
deadline, any responsibility for under-
reporting of tax or penalty for late fling
should be the responsibility of the
outsourced company.
Decreased cost
Running payroll internally involves
stafng costs, software/IT costs and other
miscellaneous costs. Outsourcing payroll
allows a slimmed-down internal
human resources department
to focus on managing the
companys relationship
with employees and
strategic issues.
10 India Briefng
Outsourced Payroll Processing Procedure
Source: Dezan Shira & Associates.
Design according to
users requests
Send to internal
accounting team
Upload into internal
accounting system
Submit file via internet
and/or physically
visit tax bureau
Send to employees
on or after credit date
HR submits to the bank
for processing of payments
Bank pays to
employee accounts
on pay date
Bank transfer file
Pay slips
Individual Income
Tax file
General ledger file
Cost center report
Other user-
defined reports
Written confirmation
obtained from HR
manager
1. Collect payroll information
from internal HR & other
service providers
(if applicable)
2. Cross check & verify
information, upload into
payroll system
6. Amend master report
according to clients
requests
4. Send master report to HR
manager
7. Send final version of
master report to client
3. Run master report first draft
5. HR manager approval
Some companies create a separate department for payroll, others

make it part of the human resources department, while others outsource
payroll to a third-party payroll processing service.
This fnal option fts small businesses that may not have the profciency or
time to administer payroll or larger businesses that see outsourcing as a
cost-saving technique. Benefts of outsourcing payroll include increased
efciency, accuracy, transparency and confdentiality, with decreased
liability and cost.
11 India Briefng
Gratuity = Last Drawn Salary x 15/26 x No. of Years of Service
Notes:
The ratio 15/26 represents 15 days out of 26 working days in a month
Last drawn salary = Basic salary + Dearness Allowance
Years of Service are rounded down to the nearest full year. For example, if the employee has a total service of 20 years, 10 months and 25 days,
only 20 years will be factored into the calculation.
G
ratuity is a lump sum that
a company pays when
an employee leaves an
organization; one of the
many retirement benefts
offered by a company to an employee.
Basic requirements for gratuity are set out
under the Payment of Gratuity Act, 1971.
An employer may also choose to pay
gratuity outside of that which is required
by this Act.
In this article, we discuss gratuity in
terms of:
Applicability
Tax exemption
Payment
Forfeiture
Applicability
The Payment of Gratuity Act, 1971,
applies to employees engaged in factories,
mines, oilfelds, plantations, ports, railway
companies, shops or other establishments
with ten or more employees. Gratuity
is fully paid by the employer and no
part comes from an employees salary.
To fall under the Act, an employee needs
to have at least fve full years of service
with the current employer to qualify
for gratuity, except in the event that an
employee passes away or is rendered
disabled due to accident or illness, in
which case gratuity must be paid.
Gratuity is paid when an employee:
Reaches the time of superannuation
(retiring at the age of 58);
Retires at any other age;
Resigns; or
Passes away or is rendered disabled due
to accident or illness.
If an employee passes away, gratuity will
be paid to the employees nominee.
Points to Remember
For computation of gratuity, the
continuous period with one employer
is used
Seasonal establishments are not covered
in these gratuity formulas
Only commissions on salary paid on a
turnover basis are included
Tax Exemption
Gratuity received under the Act is exempt
from taxation to the extent that it does
not exceed 15 days salary for every
completed year of service calculated
on the last drawn salary subject to a
maximum of INR350,000.
Any other gratuity is exempt to the extent
that it does not exceed one half-month
salary for each year of completed service
calculated on the basis of average salary
for 10 immediately preceding months
subject to a maximum of INR350,000.
The upper limit of INR350,000 applies
to the aggregate of gratuity received from
one or more employers in the same or
different years.
Payment
The employer shall arrange to pay the
amount of gratuity within 30 days from
the date it becomes billed to the person to
whom the gratuity is allocated.
If the amount of gratuity payable under
the section is not paid by the employer
within the period specifed, from the date
on which the gratuity becomes payable he
will have to pay simple interest on it at the
rate not exceeding the rate stipulated by
the Central Government.
Gratuity should be paid in cash, or if so
desired by the payee, by demand draft
or bank cheque to the eligible employee,
nominee or legal heir.
Forfeiture
The gratuity payable to an employee shall
be wholly forfeited if:
The service of such employee has been
terminated for his lawless or disorderly
conduct or any other act of violence on
his part; or
The service of such employee is
terminated for any act which constitutes
an offence involving moral turpitude
provided that such offence is committed
by him in the course of his employment.
In order to forfeit gratuity of an employee,
there must be a termination order
containing charges as established to the
effect that the employee was guilty of
any of the aforesaid misconducts. In one
case, it has been held that in the absence
of a termination order containing any of
the above allegations, the gratuity of an
employee cannot be forfeited.
The Applicability and Calculation
of Gratuity
For more information on payroll in India,
please contact india@dezshira.com
or visit www.dezshira.com.
2012 | INDIA BRIEFING - 1
Pre & Post Incorporation
Compliance for Foreign-
invested Entities
Issue 15 September 2012
Compliance Requirements in India by Entity Type
Tax Compliance
Annual Audit and Compliance
INCLUDING
2 - INDIA BRIEFING | 2012
It has been an eventful summer in Indian politics and, with the entry of the new Indian president,
Pranab Mukherjee, and fnance minister, Mr. Palaniappan Chidambaram, new initiatives are underway
for foreign investment.
In particular, Finance Minister Palaniappan Chidambaram has voiced a clear intention to execute
positive changes in the countrys tax regime, with a focus on regaining the confdence of investors.
This includes initiatives to remove the perceived difculties in doing business in India, including
fears about undue authoritarian burden or regulatory over-reach.
With these new initiatives on the horizon, we dedicate this issue of India Briefng to a closely
related topic: compliance. Compliance requirements, which vary by entity type, include tax
compliance, annual activity reporting (for branch ofces and liaison ofces), annual compliance and
ongoing compliance (such as notifcations about major changes in an entity or Foreign Exchange
Management Act compliance).
One key compliance requirement for wholly foreign subsidiaries that wed like to draw attention to
(as foreign investors tend to forget about it) is the four board meetings per annum requirement. It is
a common misconception that these meetings must be held in India, in fact, they can be conducted
overseas as well and only the Annual General Meeting needs to be conducted in India in the city
where the Indian company is headquartered.
We hope this issue helps to clarify compliance requirements as a whole!
Warm regards,
Asia Briefng
Notes
This Months Cover Art
Ramkinkar Baij from Delhi Art Gallery
Untitled
Watercolor on paper, 25.9 X 17.8 cm
info@delhiartgallery.com
http://www.delhiartgallery.com
Issue 16 September 2012
Contents
Many new entrants

bring petty cash from
outside India to use
for expenses in the
subsidiary company. This
violates the provisions
of the Foreign Exchange
Management Act.
Scan this QR code with your

smartphone to download the
Asia Briefng mobile application.
News on India-Briefing.com
Compliance Obligations
by Entity Type
BO LO PO WOS
Compliance
Requirements in India
by Entity Type
Any business with plans to set up operations
in India will need a frm understanding of
compliance requirements in the country...
p.6
Required forms for ROC flings
Balance sheet e-form 23 AC
Proft & loss
account
e-form 23 ACA
Annual return e-form 20 B for
companies with share
capital
e-form 21 A for
companies without share
capital
Annual Audit and
Compliance
Annual compliance and audit procedures are
relatively simple for foreign representation
entities compared to Indian setup entities.
Since liaison ofces and branch ofces are
permitted to conduct only a limited...
p.4
Haryana
Gujarat
Maharashtra
Karnataka
New Delhi
Tax Compliance
Basic taxation compliance requirements
applicable to all businesses are as follows:
corporate i ncome tax, empl oyee tax
deductions at source, other taxes as
applicable, including sales tax/value-added
tax, service tax and professional tax...
p.8
Cherry Bansal
Assistant Manager, Corporate Accounting Services
Dezan Shira & Associates, Delhi Ofce
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
F/Y 2012-2013
August 24 Deadline for Annual Audit and Compliance: September 30, 2012
August 13 Establishment of Branch Ofce/Liaison Ofce in India by Foreign Entities
August 9 Initiatives from the New Indian Finance Minister are Promising...
August 1 Walmart Lobbies for Multi-brand Retail in India, as Opposition Remains
July 10 Corporate Social Responsibility in India
A
nnual Audit and Compliance
procedures are rel ati vel y
s i mp l e f o r f o r e i g n
r epr es ent at i on ent i t i es
compared to Indian setup
entities.
Foreign Representation
Entities
For annual c ompl i anc e, f or ei gn
representation entities are required to fle
the following:
Audited balance sheet
Proft and loss accounts
Directors report
Statutory auditors report
Annual account of holding company
List of places of business in India
Liaison ofce(s) that are not engaged in any
trading, manufacturing or other commercial
activities in India are (with approval of the
Reserve Bank of India that is valid up to the
end of the relevant accounting year) only
required to fle Indian business accounts,
with along with:
1. A copy of an approval letter issued by the
Reserve Bank of India, valid up to the end
of the relevant accounting year.
2. Statement of receipts of payments made
by the Indian branches of the company.
3. A statement of the companys assets and
liabilities in India.
4. A certifcate that the company did not
carry out any trading, manufacturing or
commercial activity or undertake any
invoicing of goods in India
All statements must be verifed by:
An authorized representative of the
foreign ofce; and
A Chartered Accountant practicing in
India.
These documents must be submitted to
the Registrar of Companies within 9 months
from the end of the fnancial year of the
entity.
Indian Setup Entities
All incorporated companies, whether public
or private, are required to undertake an
annual audit of accounts. Audited fnancial
reports along with the auditors report must
be sent to the shareholders well before the
Annual General Meeting (AGM) is held.
Company accounts must be submitted to
the office of the concerned Registrar of
Companies (ROC) annually, following an
AGM.
In India an AGM must be held once in every
calendar year before September 30, with
the gap between two AGMs not lasting
more than 15 months. The main agenda
points in any AGM include presentation of
the annual accounts, and appointment of
statutory auditors.
Guidelines for the annual accounts are as
follows:
Filing accounts
Annual accounts must be fled with the
ofce of the concerned ROC within 30
days after the AGM. If an AGM is not held,
then accounts should be fled within 30
days of the last date on which the AGM
was required to be held.
Accounts must relate to a fnancial year,
comprising 12 months and not exceeding
15 months. The company can obtain prior
permission from the ROC for an extension
of the accounting period to the extent of
18 months. Submissions to the ROC must
be accompanied by forms 23 AC and 23
ACA.
Annual accounts must cover a period
ending no more than 6 months ahead
of the AGM, except for the frst annual
accounts of a newl y i ncorporated
company, which should cover a period
ending no more than 9 months ahead of
the AGM.
Required forms for
ROC flings
Balance
sheet
e-form 23 AC
Proft & loss
account
e-form 23 ACA
Annual
return
e-form 20 B for
companies with share
capital
e-form 21 A for
companies without
share capital
Annual
compliance
certifcate
Form 66 to be fled by
companies with paid
up capital between
INR1 million and INR20
million
Appointing auditors
Auditors are appointed by the Board of
Directors.
The appoi nted audi tor must be a
chartered accountant.
She or he may not be an employee or
partner of the company, hold security of
the company or be indebted to it.
The auditor is always appointed from
one AGM to another by the shareholders,
except for the first auditor, who is
responsible from start of business until
the frst AGM.
Auditors shall have right of access at
all times to the books, accounts and
vouchers of the company.
Additional requirements
Every company with share capital is
required to file an annual return with
the ROC within 60 days from the date
on which the AGM of the company was
held. Returns should be accompanied
by form 20 B. The return is to be signed
In India, excise duty is the major compliance
area for the manufacturing sector. Excise
duty is levied on manufacture but paid
on sale.
Audit for the purpose of central excise
means scrutiny of records and verifcation
of receipts, storage, production and removal
of goods with the purpose of checking
whether duty is being paid or excise
procedures being fully followed.
The Central Excise Act provides for two kinds
of audits on manufacture of goods:
1. Special Valuation Audit. This audit aims
to ensure the value of a good is correctly
determined: if tax authorities believe
that the value has not been correctly
determined through self-assessment, a
special valuation audit may be ordered.
2. Central Value-added Tax (CENVAT) credit
audit. CENVAT is a centrally administered
tax which measures value added in each
stage of manufacture. If a Commissioner
of Central Excise has reasons to believe
that the credit availed is not normal, or
that it has been availed on account of
fraud, wilful misstatement, suppression
of facts or collusion, then she or he can
order an audit to assess the claimed
credit.
Both of these audits are undertaken by a
cost accountant (a member of the Institute
of Cost and Works Accountants of India
holding a Certifcate of Practice), nominated
by the authority ordering the audit.
Entities in the trading industry are liable
to pay value-added tax and central sales
tax (CST).
VAT audits are performed to verify whether
VAT and CST liabilities are being properly
determined and paid by the businesses in
question. There is no separate audit for CST;
VAT departments themselves are responsible
for their compliance, and generally carry all
necessary details about CST.
In India each state has its own VAT system
and is responsible for collecting its own
taxes; states consequently each have their
own VAT legislation governing VAT audit.
In general, a VAT audit is made compulsory
for dealers who cross a certain turnover
threshold.
More than 100 services are subject to a
service tax audit, outlined in the Finance
Act and controlled by the Central Excise
department.
The object of this audit is to ensure that
undertakings in all relevant industries (listed
in Chapter V of the Finance Act) are correctly
paying service tax. Like excise audits, the
assessees are chosen on the basis of risk
assessments; frequency of audits is decided
as per the undertakings turnover.
A Central Excise Ofcer will play the role of
auditor, while the actual audit is conducted
by a team of superintendents and inspectors
of the Central Excise departments Service
Tax Audit Cell.
Manufacturing
Trading
Service
digitally by the authorized director and to
be certifed by the practicing Company
Secretary, Chartered Accountant, Cost
and Works Accountant or Lawyer. The
requisite forms (as per the following table)
must be attached.
Companies with paid-up capital of
between INR1 million and INR20 million
are required to fle an annual compliance
certifcate (Form 66), signed by a full-time
Company Secretary within 30 days from
the date of the AGM, along with the
Annual Report.
Companies with paid-up capital of more
than INR20 million are required to employ
a full-time Company Secretary who will
act as their Compliance Ofcer.
Audit
The Income Tax Act stipulates that every
person carrying out a business or profession
in India is required to get their accounts
audi ted by a char tered accountant.
Applicability varies according to type of
work.
Foreign representation entitiesliaison
ofces, branch ofces and project ofces
have a legally limited scope of activity and as
a result, their compliance requirements are
signifcantly diferent from those for Indian
setup entities.
An audit becomes applicable when income
exceeds INR10 million for companies
dealing in trade and manufacturing of
goods (business) and INR1.5 million for
companies dealing in services (profession).
The income tax audit is applicable to
compani es pr i vi l eged to t ax on a
presumptive basis only if they claim their
tax to be lower than that presumed. The
audit generally focuses on disallowances
and non-compliance under the Income
Tax Act. The last date for submission of the
income tax audit report is September 30.
Indian law also specifies a number of
audits that are limited to specifc business
types. These apply to, but are not limited to
manufacture, trading and service activities.
?
A
ny business with plans to set up operations in India will need a frm understanding of compliance requirements in the country.
Foreign-invested entities in India can broadly be split into two types: foreign representation entities (branch ofces, liaison
ofces and project ofces) and Indian setup entities (wholly owned subsidiaries, limited liability partnerships and joint
ventures). Compliance requirements vary by foreign-invested entity type - in this issue we discuss compliance for foreign
representation entities and wholly owned subsidiaries.
Compliance Requirements in
India by Entity Type
Compliance Obligations by Entity Type
BO LO PO WOS
Tax Compliance
Corporate income tax must be paid in increments throughout the year according to the advance
corporate tax (ACT) payment schedule. Income tax returns should be submitted by September 30.
Annual Activity Reporting

To demonstrate that BO and LO are conducting activity within their limited set of activities, an
Annual Activity Certifcate should be fled by May 30.

Annual Compliance
Annual compliance documentation must be fled with the Registrar of Companies within 9
months from the end of the fnancial year of the entity.
Ongoing Compliance
Ongoing compliance requirements include notifcation about major changes in an entity,
such as its address, its directors or secretaries or its capital.
2012 2013
Apr May Jun Jul Aug Sep ... Oct Nov Dec Jan Feb Mar Apr
Apr 1
F/Y begins
April 30
Last day to submit
Annual Activity
Certifcate for LOs and
BOs
July 15
Submission of Annual
Return on Foreign
Liabilities and Assets
Sept 30
Last date to convene
AGM and to fle (if
applicable):
-tax return and tax audit
report
- income tax for BO and
PO
July 15
15% ACT*
Sept 15
45% ACT*
2012-2013 Compliance Timetable
* Advance Corporate Tax (ACT) Payment, on estimate income, culumative percentage
Compliance Requirements in India by Entity Type
Entity Types
Branch Ofce (BO) Liaison Ofce (LO) Project Ofce (PO)
A branch ofces allowable scope of activities
is broader than for a liaison ofce. In addition
to activities permissible for liaison ofces,
branch ofces can conduct activities such as:
Rendering professional and consultancy
services
Rendering services in information
technology and development of software
in India
Rendering technical support to the
products supplied by parent/group
companies
Branch ofces are generally forbidden from
engaging in retail trading, manufacturing or
processing activities within India. The major
exception to this rule is in special economic
zones, where branch ofces are permitted
to undertake manufacturing and service
activities.
Liaison ofces are representative entities
permitted to engage in the following
activities:

Representing the parent company/group
companies in India
Promoting export/import from/to India
Promoting technical/fnancial collaborations
between parent/group companies and
companies in India
Acting as a communication channel
between the parent company and Indian
companies

A liaison ofce is not allowed to commence
any commercial, trading or industrial
activities, directly or indirectly, and is required
to sustain itself out of private remittances
received from its foreign parent company
through usual banking channels.
A project ofce, essentially a branch ofce
set up with the limited purpose of executing
a specifc project, allows companies to
establish a business presence for a limited
period of time.

A business must secure a contract from an
Indian company in order to execute a project
in India and thus establish a project ofce.
This project must generally be:
Funded with remittance from abroad
directly by a joint or multilateral fnancing
agency
Cleared by an appropriate authority; or
Based on a contract awarded by a company
or entity in India which in turn is funded by a
public fnancial institution or bank in India.

Project ofces are permitted only for
activities to execute the project under
approval; all unrelated activities are
forbidden.
Wholly Owned Subsidiaries and Joint Ventures
For a foreign enterprise to engage in activities not listed within the limits of liaison, branch and project ofces, wholly owned subsidiaries or
joint venture companies can be established. Both wholly owned subsidiaries and joint venture companies have independent legal status as
Indian companies distinct from the foreign parent company.

Wholly owned subsidiaries and joint ventures are set up as private limited companies. Private limited companies are the most suitable and
widely used form of business enterprise for foreign investors in India because they allow total control over business operations, provide
limited liability, and have fewer restrictions on business activities than liaison ofces and project ofces. The setup process of private limited
companies is discussed in the next chapter.
2012 2013
Apr May Jun Jul Aug Sep ... Oct Nov Dec Jan Feb Mar Apr
Dec 15
75% ACT*
Mar 15
100% ACT*
Oct 30
Last date to fle (if
applicable):
-annual accounts with
ROC
-annual compliance
certifcate (for
companies with paid-up
capital of INR1 million+)
Nov 30
Last date for companies
with share capital to fle
an annual return with
ROC
Mar 31
F/Y ends
?
Basic taxation compliance requirements applicable to all businesses are as follows:
Corporate income tax
Employee tax deductions at source
Other taxes as applicable, including sales tax/value-added tax, service tax and professional tax
Tax Compliance
Corporate income tax
Employee tax deductions at source
Other taxes
Income tax must be paid by all types of
foreign-invested entities, except for liaison
ofces, which are not permitted to earn
income. A tax return must be sent to the
income tax authorities by September 30.
In case of liaison ofces, the foreign company
is required to submit the Annual Statement
in Form 49C within 60 days from the end of
the fnancial year.
Corporate income tax must be paid in
increments throughout the year according
to the advance corporate tax (ACT) payment
schedule, as follows:
July 15 - 15%
September 15 - 45%
December 15 - 75%
March 15 - 100%
All entities in India (including foreign
representative offices and Indian setups
like wholly owned subsidiaries) are required
to make tax deductions at source on
employees salaries on behalf of the Income
Tax Department.
The payment and compliance schedule is
as follows:
Payment
7th of the next month and April 30 for the
month of March
Quarterly returns
15th of the next month from the end of
the quarter
Issue of Certifcate
30th of the next month; for salaried
certifcates, by May 30
Companies that sell a product must file
annual sales tax or submit their value-added
tax returns.
Compani es l ocated i n states where
professional tax registration is mandatory
must fle annual professional tax returns for
each of their employees for whom they have
deducted professional tax.
The tables on the next page give some
examples of sales tax and professional tax
requirements for a selection of states.
Companies in the service industry with more
than INR1 million in service revenue need to
pay service tax by the 5th of the following
month (6th for online payments). Service
tax returns must be fled every six months,
by October 25 and April 25.
Entities with sales revenues over INR10
million or professional fees over INR2.5
million must undertake a tax audit and
file the resulting tax audit report before
September 30 of the following year.
A Permanent Account Number (PAN) is a
10-digit alphanumeric code, printed on
an identifcation card, for the reference of
the Income Tax Department. Companies
are required to obtain a PAN during the
establishment process in order to fle
an income tax return, to manage any
correspondence with the Income Tax
Department, and to submit challans for
tax payment.
The Tax Deduction Account Number
( TAN) i s a mandat or y 10 di gi t
alphanumeric code for all persons who
deduct tax at source, which must be
cited during the process of deduction.
Application forms and instructions
for obtaining a TAN can be found on
government websites. Non-compliance
may result in a penalty extending up to
INR10,000.
Tax Compliance
Goods and Service Tax
Sales Tax Requirements by State
Maharashtra Gujarat Karnataka New Delhi
Registration
Criteria
(total turnover)
> INR100,000
(Importers)
INR500,000
(Others)
> INR500,000;
taxable turnover
> INR10,000
> INR500,000 < INR1 million
Return (following
month)
Last day Depends on
liability amount
By 20th, 15th if
quarterly
Depends on
liability amount
Professional Tax
Rates by State
Maharashtra
Income (per month) Tax
Up toINR2500 Nil
INR2500 toINR3500 INR60
INR10000 and above INR200
New Delhi
Up toINR110,000 Nil
INR110,000 to INR145,000 Nil
INR145,000 to INR150,000 10%
INR150,000 to INR195,000 20%
INR195,000 to INR250,000 20%
Gujarat
INR3000 to INR6000 INR20
INR6000 to INR9000 INR80
INR9000 to INR12,000 INR150
INR12,000 and above INR200
Karnataka
INR10,000 to INR15,000 INR150
INR15,000 and above INR200
Gurgaon (Haryana)
Professional tax is not applicable
Haryana
Gujarat
Maharashtra
Karnataka
New Delhi
Requirements by State
The Government of India is currently
fnalizing negotiations for a comprehensive
indirect tax reform, which will introduce
the new Goods and Service Tax (GST). This
will replace the CENVAT, VAT and service
tax systems outlined above, with planned
implementation in April 2013. As a result,
auditing procedures will change.
The dual GST model would include a
central excise duty, service tax and value-
added tax (VAT), and come with two tax
rates: one that will be charged uniformly
across the states and another by the Union
government. The uniform state GST rate
will be decided by a committee of state
fnance ministers, meaning that state
disparities like those listed in the table
above will be eradicated. Legislation is still
being shaped, but it is likely that virtually
all goods and services will be included,
with minimum exemptions including
alcohol, tobacco and petroleum products.
Periodical returns will be made separately
to the central and state GST authorities.
Annual Activity Reporting
Since liaison ofces and branch ofces are
permitted to conduct only a limited set
of activities, these ofces are obliged to
demonstrate that they are operating within
their legally permissible areas of activity
once a year.
This reporting takes the form of an Annual
Activity Certifcate, which must be produced
in a specifed format provided by the ofces
auditor.
The functi on of thi s cer ti fi cate i s to
demonstrate that the company has
carried out only those activities which are
approved by the Reserve Bank. The auditor
must provide details and sources of funds
received, and the nature of expenses on
which funds have been spent.
In the case of companies with multiple
foreign ofces, a combined Annual Activity
Certifcate in respect of all ofces in India
may be submitted by the nodal ofce of the
foreign company.
Certificates should be submitted to the
local regional ofce of the Reserve Bank
of India through a designated authorized
dealer Category-I bank every year on or
before May 30.
For 2012, this deadline has been extended
to September 30.
The Foreign Exchange Management Act
(FEMA) regulates foreign exchange into
and out of India. In accordance with this
act, foreign exchange must be reported at
two stages:
Upon receipt of share application
money from the non-resident parent
company
Within 30 days of the receipt of money
from the non-resident parent company,
the Indian subsidiary is required to report
to the regional ofce of the Reserve Bank
of India under whose jurisdiction the
registered ofce is located. An Advance
Reporting Form should be submitted
through an authorized dealer category
bank.
Upon issue of shares to the foreign
parent company
Within 30 days of the issue of shares, the
Indian subsidiary is required to submit
Form FC-GPR Part A together with the
prescribed documents. These must be
submitted to the same regional ofce.
Foreign businesses also have obligations
with regard to reporting of foreign direct
investment (FDI). In order to capture statistics
relating to FDI, the Indian government has
mandated businesses engaging in FDI
to submit an Annual Return on Foreign
Liabilities and Assets.
This should be submitted by all Indian
companies which have received FDI and/
or made FDI abroad in the previous year(s),
including the current one, by July 15 of
every year.
Foreign Exchange Management Act Compliance
Other Compliances
Ongoing reporting requirements
Detail Time Limits
Change in name of company Within 30 days of fling Form 23, or
Within 1 month of passing resolution
Changes in directors, managers, etc. Within 30 days of change
Change in details (such as the general
manager or address) of foreign company
Within 30 days of date of change; fling Form
49
Increase in paid-up capital Within 30 days of allotment
Change in registered address Within 30 days of change
Receipts of share application money Within 30 days of receiving
Allotment of shares Within 30 days of allotment
Transfer of shares Within 60 days of transfer
Execution of agreements with related parties Within 30 days
Execution of any loan agreement with a bank Within 30 days
Changes in statutory auditors Within 30 days
Ongoing Reporting Requirements
Companies are required to report certain
events to the Registrar of Companies on an
ongoing basis.
These reporting requirement deadlines
are generally within 30 days of a change,
with the notable exceptions of transfer of
shares, which should be reported within
60 days of a transfer, and a change in the
charter, statutes, memorandum/articles of
association of a company, which should
be reported on or before January 31 of the
year following that in which the alteration
has been made.
?
Q & A
Cherry Bansal
Assistant Manager, Corporate Accounting Services
Further Resources
Many new entrants

bring petty cash from
outside India to use
for expenses in the
subsidiary company. This
violates the provisions
of the Foreign Exchange
Management Act.
How should a foreign-owned subsidiary bring money to India for

expenses in its early years, and how should it account for this?
Money should be brought to India through normal banking channels either as share capital
or against service invoices. Many new entrants bring petty cash from outside India and use
that cash for expenses in the subsidiary company. However, this violates the provisions of
the Foreign Exchange Management Act.
Since cash received from the director of the company will be debited to the cash account
and credited to the director account, the transfer will amount to a loan from the director in
cash. As per the provisions of the Income Tax Act, loans cannot be received or repaid in cash
for more than the value of INR20,000. If this is done, then the audit report must be qualifed
with the fact, and a penalty equal to the amount of deposits will be levied on the company.
Therefore, we recommend bringing money to Indian companies through normal banking
channels with proper supporting documents: invoices, contracts and authorization
documents from the management for sending more capital.
How should Corporate Income Tax be calculated in India?
Corporate Income Tax is charged at 30 percent of a companys profts. If the tax payable
on the total income of the company is less than 18.5 percent of book profts , then the
total income of the company shall be deemed to be equal to the book profts, and the tax
payable by the company shall be deemed to be equal to 18.5 percent of the book profts.
(Book profts are to be calculated as per the provisions of the Income Tax Act; your advisor
can provide more detail as this process can be quite complex). This type of tax is called
Minimum Alternate Tax (MAT). Where a company has paid Minimum Alternate Tax, it shall
be allowed a tax credit to ofset tax payable at normal rates in any of the ten subsequent
assessment years.
Questions on doing business in India? Email Dezan Shira & Associates at india@dezshira.com
or visit the frm at www.dezshira.com.
Issue 17 November 2012
Investment Structures and Setup Processes
Setup and Dissolution Processes by Investment Structure
Taxation Basics by Entity Foreign-invested Entity Type
Scan this QR code with your smartphone to visit:
www.india-briefng.com/news
INCLUDING
Establishing a
Business in India
Expats working in India and business people visiting the country for the frst time generally agree
that India is diferent; that it stands apart from other developing nations in the business opportunities
it presents.
These opportunities are plentiful partly due to Indias sizeable population, which includes a large,
young labor pool the median age of Indias population is only 26.2 and an attractive consumer
base.
Even the challenges of an inferior infrastructure (for which India is well known) present large
investment opportunities for foreign-invested enterprises, as the government is prioritizing
investment in infrastructure upgrades.
Now is a good time for foreign investment in India as the Indian government has recently set out
a string of foreign investment reforms (which we discuss in India Briefng magazines, as well as on
www.india-briefng.com).
So, in this issue of India Briefng, we discuss establishment structures, including liaison ofces, project
ofces, branch ofces, and wholly owned subsidiaries. We overview each structure in terms of the
situations in which it is appropriate, its permissible activities and limitations, as well as its setup and
winding up processes, complete with fow charts.
Warm regards,
Asia Briefng
Notes
Winding Up Procedure
Business Model Timeframe
Branch Ofce 2 to 6 months
Liaison Ofce 2 to 6 months
Wholly Owned Subsidiary 6 to 24 months
Issue 17 November 2012
Contents
A liaison ofce is
often chosen by overseas
companies as a frst step
to setting up a company in
India. The major advantage
of establishing a liaison
ofce is that, if adhering
to allowable business
activities, it is not subject to
taxation in India.
Scan this QR code with your

smartphone to download the
Asia Briefng mobile application.
News on India-Briefing.com
Setup and Dissolution
Processes by
Investment Structure
Branch Ofce
Liaison Ofce
Wholly Owned Subsidiary
Introduction to
Investment Structures
Until 1991, the Indian economy was a closed
market. Indias economic liberalization and
globalization have dramatically changed
the solution for foreign investment. Today,
government policies incentivize foreign...
Taxation Basics by
Foreign-invested
Entity Type
Tax liabilities vary dramatically by entity type.
The key diferentiation for corporate income
tax is between domestic companies...
October 19 Mumbais Commercial Real Estate Market
October 10 Board and General Meetings for Indian Companies
October 9 Reforms in India: Government Clears FDI in Insurance and Pension
July 18 Entering India: Visa Process and Registration
February 2 Foreign Direct Investment in Indias Single and Multi-Brand Retail
G
o
v
e
r
n
m
e
n
t
A
p
p
r
o
v
a
l
A
u
t
o
m
a
t
i
c
A
p
p
r
o
v
a
l
p.4
Obtain TAN
Local sales tax authorities
Custom authorities
p.8 p.10
I nt roduct i on t o I nvest ment
Structures
A liaison ofce is often chosen by overseas
companies as a frst step to setting up a
company in India. The major advantage
of establishing a liaison ofce is that, if it is
obeying regulations and only adhering to
the business activities above, it is not subject
to taxation in India.
A liaison ofce can engage in the following
activities:
Representi ng i n I ndi a the parent
company/group companies;
Promoting export/import from/to India;
Pr omot i ng t ec hni c a l / f i na nc i a l
collaborations between parent/group
companies and companies in India; and
Assisting communication between parent
company and Indian companies.
A liaison ofce is not allowed to commence
any commercial, trading or industrial
activities, directly or indirectly, and is
required to sustain itself out of private
remittances received from its foreign parent
company through usual banking channels.
To establish a liaison ofce, a foreign parent
company should have a net worth of no less
than US$50,000 and have a three-year proft-
making track record in its home country.
Companies without a significant profit
record and/or capital amount may fnd it
difcult to get permission for a liaison ofce
by the Reserve Bank of India (RBI).
Applications to establish a liaison ofce are
sent to the Reserve Bank of India (RBI) and a
license to operate is generally given for three
years (after which it needs to be renewed).
Liaison Offce
The project ofce, essentially a branch ofce
set up with the limited purpose of executing
a specific project, allows companies to
establish a business presence for a limited
period of time.
A business must secure a contract from
an Indian company in order to execute a
project in India and thus establish a project
ofce.
This project must be:
Funded with remittances from abroad;
Funded by a joint or multilateral fnancing
agency;
Cleared by an appropriate authority; or
Based on a contract awarded by a
company or entity in India which in turn
is funded by a public fnancial institution
or bank in India.
Otherwise, RBI permission is required.
Project Offce
U
ntil 1991, the Indian economy was a closed market. Indias economic liberalization and globalization have dramatically
changed the situation for foreign investment. Today, government policies incentivize foreign companies to invest in India,
both on a national and on a state government level.
Foreign direct investment (FDI) policies have liberalized dramatically in recent years. FDI up to 100 percent is allowed under
the automatic route in most sectors/activities. Under the automatic route, FDI does not require any prior agreement and only involves
intimation to the Reserve Bank of India within 30 days of inward remittances and/or issue of shares to non-residents.
FDI in actions not covered under the automatic route require prior government approval. Such proposals are measured by the Foreign
Investment Promotion Board (FIPB), a government body that ofers single window clearance. The Indian government continues to shape
FDI policies. Key examples include FDI into the aviation and multi-brand retail sectors (please see the www.india-briefng.com article,
India to Revive FDI into Aviation, Multi-Brand Retail).
Structures for foreign investment into India include liaison ofces, project ofces, branch ofces, wholly owned subsidiaries. Here, we
overview each structure in terms of the situations in which it is appropriate, permissible activities and limitations, as well as set-up process
fow charts.
Introduction to Investment Structures
Any f orei gn company engaged i n
manufacturing or trading activities overseas
is allowed to set up a branch ofce in India
to:
Export/import goods
Rendering professional or consulting
services
Promot i ng techni cal or f i nanci al
collaborations between Indian companies
and parent or overseas group companies
A BOs business activities must be in
compliance with a parent companys
activities. A branch ofce is considered to be
a foreign company in India by the Reserve
Bank of India (RBI), which means that BO
are treated as an addition of the foreign
company for income tax purposes.
A branch offi ces allowable scope of
activities is broader than for a liaison ofce,
however branch ofces are still generally
forbidden from engaging in retail trading,
manufacturing or processing activities
within India.
The major exception to this rule is in special
economic zones, where branch ofces can
be established to undertake manufacturing
and service activities without RBI approval if
conditions are met.
To qualify to open a branch office, the
foreign parent company should have a
net worth not less than US$100,000 and a
proft-making track record for the preceding
fve years.
Similar to a liaison ofce, applications to
establish a branch ofce are sent to the RBI
and a license to operate is generally given
for three years (after which it needs to be
renewed).
Wholly owned subsidiaries (WOS) are the
most suitable and widely used form of
business enterprise for foreign investors
in India because they allow total control
over business operations, provide limited
liability, and have fewer restrictions on
business activities than liaison ofces and
project ofces. They have independent legal
status as Indian companies distinct from the
foreign parent company.
Foreign investment in India is regulated
under Foreign Exchange Management Act,
1999 and is allowed under two routes i.e.
the automatic route and approval route
(described on page 7).
A WOS requires a minimum of two directors,
and has from two to ffty shareholders with
limited liability. No track record is required
for the shareholders; the shareholders
can be other legal entities. The minimum
paid-up capital requirement is INR100,000
(approx US$2,000). No approvals of other
regulatory authorities are needed.
A wholly owned subsidiary is subject to
Indian laws and regulations as applicable
to other domestic Indian companies and
treated as an Indian company for taxation.
Major Advantages of a Wholly Owned Subsidiaries
Total control over business operations
Limited liability
Fewer restrictions on business activities than LO or PO
There is a great fexibility in operations. The scope of operations is decided by the
Memorandum of Association, which can be amended through internal approvals.
Managed business risk
The income and expenditure statement, which is fled with the Registrar of Companies
(ROC) in a separate electronic form, is not available in the public domain for competitors
and others for review; they are only in the custody of company shareholders.
Methods to augment capital
Private limited companies can raise funds by issuing shares and debentures. They can
also convert into a public company and raise funds from the capital market. However,
they will be subject to disclosure requirements according to the listed agreement with
Security Exchange Commission of India.

Company surplus can be used
A private limited company can use the excess funds obtained in its ordinary course
of business either by making a loan or investing in the shares of another company.
Separate legal entity, and the assets can be purchased in its own name
The legal liability of members in a private limited company is limited to the nominal
value of the shares they have acquired
Branch Offce
Key Features by Business Model
Business
Model
Authority and/or Key
Governing Act
Permitted Activities
Type of
Establishment
Type of Legal
Entity
Liaison
Ofce
Reserve Bank of India;
Registrar of Companies
Business activity is not permitted, only acting as
representative of foreign entity and:
Promoting export/import from/to India;
Promoting technical/financial collaborations between
parent/group companies and companies in India; and
Acting as a communication channel between the parent
company and Indian companies.
Non-Permanent
Establishment
Not a legal
entity
Project
Ofce
Business activity as per contract Subject to relevant
tax treaty
Not a legal
entity
Branch
Ofce
Any foreign company engaged in manufacturing or trading
activities overseas can set up a branch ofce in India to:
Export/Import goods
Render professional or consulting services
Promote technical or financial collaborations between
Indian companies and parent or overseas group companies
Permanent
Establishment;
Registered ofce
mandatory in India
Legal entity
Wholly
Owned
Subsidiary
Companies Act, 1956;
Permitted activities are broader than for any other
establishment structure.
Limitations are only those sectoral caps listed under the
automatic and government routes (shown in the diagram
on the next page)
Permanent
Establishment;
Registered ofce
mandatory in India
Legal entity
Whether an enterprise is a permanent
establishment determines the right of the
state to charge taxes on the income that
accrues or arises in India and is therefore
taxable in India.
A permanent establishment (PE) is a fxed
place of business through which the
business of an enterprise is carried on.
Whether a foreign-invested enterprise is a
PE depends on business model and any
tax treaty between India and the foreign
companys country.
I mportant concepts in determining a
permanent establishment include:
Business Connection
I f there i s no busi ness connecti on
between a non-resident entity and a
resident-entity, the resident entity may
not be a PE of the non-resident entity,
and the resident-entity would have to
be assessed to income tax as a separate
entity. In such a case, a non-resident entity
will not be liable to tax in India.
Attribution of Profts
The PE criterion is commonly used in
international double taxation conventions
to determine the taxability of an income
in the country from which it originates.
As per double taxation conventions, the
profts of an enterprise of a contracting
state shall be taxable only in that state
unless the enterprise carries on business
in the other contracting state through
a PE.
The tax treaties that are entered by India
with other states recognize mainly three
types of PE (see box to right).
Permanent Establishments
Types of PEs
Fixed Place PE
A fxed place of business, with a degree
of permanence, at which business is
wholly or partially carried out.
Agency PE
An agency that secures orders wholly
or almost wholly on behalf of foreign
enterprises, regularly delivers goods
from a maintained stock of goods and
has the authority to conclude contracts
on behalf of foreign enterprises.
Service PE
The foreign enterprise furnishes or
performs services in India through
employees or other personnel for
specified period, which varies by
country.
Automatic vs. Government Approval Route
FDI in India can be done through two routes - the automatic route
and the government route - with most done through the former.
Automatic Approval
FDI in sectors/activities to the extent permitted under the automatic route does
not require any prior approval either by the Government or RBI. Investors are only
required to notify the regional ofce associated with RBI within 30 days of receipt of
inward remittances and fle the required documents with that ofce within 30 days
of issue of shares to foreign investors.
The FDI policy allows investment up to 100 percent under the automatic route in
all the sectors/activities except:
1. Sectors prohibited for FDI
Lottery business including government /private lottery, online lotteries, etc.
Gambling and betting including casinos etc.
Chit funds
Nidhi company
Trading in Transferable Development Rights (TDRs)
Real estate business or construction of farm houses
Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
substitutes.
Activities/sectors not open to private sector investment e.g. atomic energy and
railway transport (other than mass rapid transport systems).
2. Activities requiring an industrial license
3. All the proposals falling outside notifed sectoral policy/CAPS under the sectors
in which FDI is not permitted.
4. Proposals in which the foreign collaborator has an existing collaboration in India
in existing feld.
5. Proposals for acquisitions of shares in an existing Indian company in fnancial
services sector where stock exchange regulations are attracted
Government Approval
Under the government route,
the foreign investor or the Indian
company are required to obtain prior
approval of the Government of India,
Ministry of Finance, and Foreign
Investment Promotion Board (FIPB)
or Department of Industrial Policy &
Promotion (DIPP) in the case of 100
percent export-oriented units (EOU).
The activities/sectors for which the
automatic route is not available,
and thus the government route for
foreign investment must be used,
include the following:
Public sector banks and credit
information companies
Commodities and stock exchanges
Assets reconstruction company
Power exchanges
Atomic energy and related projects
Petroleum including exploration/
refnery/marketing
Defense and strategic industries
Print media
Satellite establishment and private
security agency services
A
u
t
o
m
a
t
i
c
A
p
p
r
o
v
a
l
G
o
v
e
r
n
m
e
n
t
A
p
p
r
o
v
a
l
Set-up and Dissolution Processes
by Investment Structure
Branch Offce/Liaison Offce
Agreement for ofce space
Ensure that branch ofce in India will carry out
activities in which parent company is engaged
Application to RBI through authorized dealers
with all annexure
Appoint authorized representative to act
on behalf of parent company in India
Opening of Bank Account Unique identifcation number is issued by RBI Obtain digital signature certifcate of
authorized representative
File form-44 for registration with ROC
BO/LO legally exists
Obtain PAN
Ongoing annual activity certifcate
Basic terminology:
PAN - Permanent Account Number RBI - Reserve Bank of India ROC - Registrar of Companies
In this article, we discuss set-up procedures and dissolution processes for branch ofces and liaison ofces, which share similar processes
in this regard, as well as for wholly owned subsidiaries.
Winding up
The processes of opening a branch ofces and opening a liaison
ofces are very similar, as are the processes to dissolve such business
entities. Approval to establish a LO and BO is generally given for a
period of three years and extension is granted on the track record
of annual activity certifcates and bank account records. This difers
dramatically from wholly owned subsidiaries, which have perpetual
succession.
The windup process for branch ofces and liaison ofces generally
takes two to six months. This is signifcantly shorter than that required
for winding up a wholly owned subsidiary, which takes 6-24 months.
The closure of a branch ofce from India involves the below steps:
a) Obtain auditors certificate indicating the manner in which
remittable amount has been calculated;
b) Tax clearance certifcate from tax authorities in India;
c) Confrmation from the applicant that no legal proceedings are
pending, and that there is no legal impediment to the remittance;
d) Report and approval from Registrar of Companies; and
e) Application to Authorised Dealer Bank with aforesaid documents
for closure of branch ofce from India.
Set-up and Dissolution Processes by Investment Structure
Basic terminology:
RBI Reserve Bank of India
ROC Registrar of Companies
TAN Tax Identifcation Number
PAN Permanent Account Number
FRRO Foreigners Regional Registration Ofcer
IEC Import export code
Winding up
A wholly owned subsidiary can be wound up as per the guidelines
issued by the act in consultation with Ministry of Corporate Afairs
(MCA).
The procedural aspects involved in winding up involve:
a) Approval of Shareholders and Creditors;
b) Afdavit from Directors;
c) Newspaper notice for inviting objections in winding up;
d) No objection letter from the tax authorities with which the
company was engaged;
e) Appointment of liquidator to distribute assets and disperse
liabilities;
f ) Discharging all debts;
g) Intimation to Registrar of Companies about the winding up; and
h) Final order by the court.
Furthermore, the Ministry of Corporate Afairs has introduced a
Fast Track Exit scheme for companies that have not commenced
business since incorporation or are not doing business for past one
year and are defunct.
WOS legally exists
Obtain Director Identifcation No. and digital signature
certifcate
Application to ROC for name registration
Lease agreement for registered ofce/virtual ofce
Application to ROC for incorporation
Issuance of certifcate of incorporation by ROC
Visa application Obtain PAN Apply for industrial
license
Register with local tax
authorities
FRRO registration/
residential permit
Bank
account
Environment clearance
Injection
of paid up
capital
Obtain IEC code
Intimation of inward remittance
to RBI through authorized dealers
Issue of shares report to RBI
through authorized dealers
Obtain TAN
Register with
local sales tax
authorities
Register with
local custom
authorities
Register
with local
service tax
authorities
CIT and MAT by Business Type
Business Type Corporate Income Tax (CIT) Minimum Alternate Tax (MAT)
Liaison Ofce NA NA
Branch Ofce 40% NA
Wholly Owned Subsidiary 30% 18.5%
Taxati on Basi cs by Forei gn-
invested Entity Type
A corporate income tax (CIT) is levied
against profits and income under the
provisions of the Income Tax Act.
Domestic and foreign companies and
partnership frms pay a fat rate income tax
of 30, 40, and 30 percent, respectively. There
is an additional education fee of 3 percent
on total taxes and surcharges.
Normally, a company is liable to pay tax
on the income computed in accordance
with the provisions of the Income Tax
Act, but the proft and loss account of the
company is prepared as per provisions of
the Companies Act.
Previously, there were large number of
companies who had book profts as per their
proft and loss account, but were not paying
any tax because their income computed
as per provisions of the Income Tax Act
was either nil, negative or insignificant.
In such case, although the companies
were showing book profts and declaring
dividends to the shareholders, they were not
paying any income tax. These companies
are popularly known as zero tax companies.
To tax such companies, minimum alternative
tax (MAT) is levied on companies that
assess at 18.5 percent of the adjusted book
profits. This is only in the case of those
companies where the income tax payable
on the taxable income according to normal
provisions of the Income Tax Act is less than
18.5 percent of the adjusted book profts.
A surcharge is applicable at 5 percent in
case of domestic companies if adjusted
book profts are in excess of Rs.10,000,000;
marginal relief is available. Education cess
is applicable at 35 percent on Income Tax
(inclusive of surcharge, if any). MAT credit is
available for 10 years.
Tax liabilities vary dramatically by entity type. The key diferentiation for corporate income tax is between domestic companies and
foreign companies. Below, we introduce the basics of two taxes of interest - corporate income tax and minimum alternative tax.
Minimum Alternate Tax
Corporate Income Tax (proposed for FY 2012-2013)
Domestic Companies Foreign Companies
Domestic companies are taxable at 30 percent. However, there is
a special method for computation of total income of insurance
companies. A surcharge is applicable at 5 percent if total income is in
excess of INR10,000,000.
Marginal relief may be available. Education cess is applicable at 3
percent on income-tax (inclusive of surcharge, if any).
Foreign companies are taxable at 40 percent; a surcharge is
applicable at 2 percent if total income is in excess of INR10,000,000.
Marginal relief may be available. Education cess is applicable at 3
percent on income-tax (inclusive of surcharge, if any).
Corporate Income Tax
?
Q & A
Gunjan Sinha
Associate, Business Advisory Services
Further Resources
The Companies Act

makes it mandatory for
limited liability companies
(including wholly owned
subsidiaries) to hold a
meeting of the board of
directors every quarter.

For limited liability companies, what are the legal
requirements for board meetings and general meetings?
The Companies Act makes it mandatory for limited liability companies (including wholly
owned subsidiaries) to hold a meeting of the board of directors every quarter. In addition,
an annual general meeting (AGM) of the shareholders should also be conducted annually.
Minutes of these meetings should be approved and signed by the chairman, bound and
available at the business premises of the company.
Requirements for these board meetings include:
The board meetings can be held at any place in India or abroad, on any day (including a
public holiday), and even after the business working hours.
At least two directors must be present in person at such a board meeting. The directors
should receive a notice defning the meeting agenda at least 7 days beforehand.
Requirements for an AGM include:
Shareholders who are unable to physically attend any AGM may appoint any natural
person as their proxy, with a minimum of two shareholders or authorized representatives
at each meeting in case of a privately held company.
AGMS should be held at the registered ofce of the company or in the city of the registered
ofce, unless otherwise specifed by the articles of the company.
In most cases, shareholders should receive notifcation of the agenda of a meeting from
the board of directors at least 21 days prior to the meeting.
Any business that arises between AGMs that necessitates shareholder approval, an
extraordinary general meeting (EGM) must be conducted.
Questions on doing business in India?
Email Dezan Shira & Associates at india@dezshira.com or visit www.dezshira.com.
Delhi
delhi@dezshira.com
Level 2, Kalpataru Synergy
Opposite Grand Hyatt Santacruz (East)
Mumbai, 400053, India
+91 12 4401 1219
CP - 204, Block No. 1, 2nd Floor
DLF Corporate Park, Mehrauli Gurgaon Road
Gurgaon, 122002, India
Sy
Hyat
3, Ind
y Meh
91 91
n, 1
Corpo Co
hi@
+
04, Blo
orate Park
delhi
CP - 204, B
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4
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Level 2, Ka
Oppos
Mumb
1219
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Road
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L
Singapore
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