Investing in India
A Q&A guide to investing in India.
This Q&A gives an overview of the key factors affecting inward investment, including information on the jurisdiction's legal system; key laws and regulatory authorities; investment restrictions; and details of international treaties, customs and monetary unions. The guide also provides information on investor individuals; visa permits; restrictions on foreign ownership; transfer pricing and thin capitalisation rules; imports and import duties; safety regulations and standards for commercial goods and services; structuring and tax incentives; investment guarantees; recent developments and proposals for reform.
To compare answers across multiple jurisdictions, visit the Investing in... Country Q&A tool.
This Q&A is part of the Investing in…Global Guide. For a full list of contents, please visit www.practicallaw.com/investingin-guide.
Despite recent challenges, India remains one of the top global destinations for foreign investment (source: The International Monetary Fund and the World Economic Forum have acknowledged the Indian economy as one of the fastest growing economies in the world. Foreign direct investment (FDI) in India has seen a record surge of more than 40% (a total of US$13 billion) in 2015-16.
Investors are considering India for both its services and manufacturing supply chain. With the services sector forming the backbone of the Indian economy, the government is now placing more emphasis on strengthening the country's manufacturing ecosystem. The new campaign by the Government of India called "Make in India" focuses on establishing India as a manufacturing hub for both local and international investors.
Currently, the FDI policy in India is considered to be one of the most liberal when compared to other emerging economies, and FDI of up to 100% is allowed under the automatic route in most sectors and activities (see Question 5).
With the launch of the "Make in India" programme (an initiative to encourage companies to establish manufacturing facilities in India), domestic manufacturing is expected to grow significantly.
The majority of foreign investments are in relation to infrastructure, defence, smart cities, railways and port-related infrastructure services, manufacturing and information technology. Various global companies in the technology sector, infrastructure, electronics, industrial components, renewable energy, manufacturing, automotive, and waste management industries are already investing in, or have announced their plans to invest in India.
Investors are attracted to India's large domestic market, competitive labour costs and its skilled workforce. Other factors which have attracted investors include the country's:
Strong management and business education system.
Improving telecommunications and infrastructure.
Emphasis on the manufacturing industry.
Development of "smart cities".
Increasing foreign direct investment limits.
Changes to the policy framework.
Smoother process for obtaining government clearances.
Following the "Link West, Look East policy", Prime Minister Narendra Modi's initiatives and developments include the following focus areas:
Ease of doing business. This includes:
smoother government clearances processes (including the integration of 14 government services on a single online portal);single-step company incorporation;
reduced compliance obligations;
gaining investor confidence.
Redefining the policy framework. This includes:
increasing FDI limits;
decreasing wasteful subsidies;
changes to laws, bills and policies.
Focus on infrastructure and industries. This includes:
increased infrastructure spending;
the development of smart cities;
emphasis on manufacturing industry and exports; and
the launch of the "Make in India" campaign.
The Indian judiciary is partly a continuation of the British legal system established by the British in the mid-19th century, based on a typical hybrid legal system known as the "Common Law System". The system includes components of law, such as customs, precedents and legislation.
The Constitution of India is the supreme legal document of the country.
The judicial structure is as follows:
The Supreme Court of India is at the top of the judiciary.
This is followed by the High Courts (there are 24 High Courts at the State level) of respective states with district judges sitting in District Courts. The District Courts of India are established by the State Governments in India for every district, or for more than one district, taking into account the number of cases, and the population distribution in that district.
This is followed by Magistrates of Second Class and Civil Judges (Junior Division) at the bottom.
In addition, village courts, called "Lok Adalat" (people's court) or "Nyaya Panchayat" (justice of the villages) compose a system of alternative dispute resolution. Furthermore, a number of "Judicial Tribunals" have been set up in specialised areas, which function under the supervisory jurisdiction of the High Court (depending on their location).
Investments by non-residents in India are governed by the Foreign Exchange Management Act 1999 (FEMA). FEMA. Under the An FDI Policy and FEMA, an Indian company can receive foreign direct investment (FDI) in two ways:
Automatic Route. Under this route, FDI is allowed without prior approval (from either the Foreign Investment Promotion Board (FIPB) or the government) in relation to all activities/sectors up to thresholds specified in the FDI Policy, issued by the Government of India.
Government Route. Under this route, FDI in activities not eligible for investment under the automatic route or investments beyond the threshold specified for the automatic route require prior approval from the FIPB. The FIPB comprises of the representatives of the following government departments and ministries:
Ministry of Finance;
Department of Industrial Policy & Promotion, Ministry of Commerce & Industry;
Department of Commerce, Ministry of Commerce & Industry;
Economic Relations Division, Ministry of External Affairs;
Ministry of Overseas Indian Affairs.
The FIPB can approve investment proposals of up to INR50 billion and can request the opinion of other relevant ministries and other experts if it consider appropriate to do so. FDI applications exceeding INR50 billion require the approval of the Cabinet Committee on Economic Affairs, which comprises select cabinet ministers of the government.
India is a member of the following international treaty organisations and/or economic, customs or monetary unions or free-trade areas (FTAs):
India-World Trade Organization (WTO).
India- North America Free Trade Agreement (NAFTA).
ASEAN-India Free Trade Area (AFTA). India signed a free-trade pact in services and investment with the Association of Southeast Asian Nations (ASEAN) in September 2014. This is aimed at allowing freer movement of professionals and encouraging investments.
India signed an FTA in goods with the bloc in 2009 with the ASEAN in 2009. ASEAN countries comprise Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand and Vietnam.
Regional Comprehensive Economic Partnership (RCEP) negotiations between ASEAN and six partner countries. RCEP is a 16-member grouping of ten ASEAN countries and six others (Australia, China, India, Japan, South Korea and New Zealand) that have FTAs with it. The grouping accounts for 40% of world trade.
India-SAFTA South Asia FTA agreement.
India-SAARC agreement on Trade in Services (SATIS).
Asia Pacific Trade Agreement (APTA).
Framework agreement with Gulf Cooperation Council (GCC) states.
In addition, India has FTA and CEPA arrangements with a several countries such as:
To encourage capital inflows and provide a safe business environment for all investments abroad, many countries have entered into bilateral investment treaties (BITs) or agreements with India.
India also has a vast network of double taxation avoidance agreements signed with more than 80 countries. Additionally, India has entered into bilateral investment protection agreements to promote and protect the interests of investors of either country in the territory of other country. To facilitate effective exchange of information, India has also been signing tax information exchange agreements with several countries.
Foreign nationals. Under Indian law, the legal rights and the restrictions imposed on foreign nationals depend on whether they are categorised as residents or non-residents.
Entry into India generally requires a valid visa granted by an Indian Mission (that is, consulate of the Indian embassy) abroad. Furthermore, foreign nationals who enter India must register themselves with the Foreign Regional Registration Office (FRRO) within 14 days of arrival if they intend to reside in India for a consecutive period of more than 180 days.
The entry, stay and exit of foreign nationals into India are governed by the following:
Passport (Entry into India) Act 1920.
Passport (Entry into India) Rules 1950.
Foreigners Act 1946.
Registration of Foreigners Rules 1992.
Business visa. The duration of the visa may depend on the duration of the employment or business contract or the place where the visa has been issued.
A business visa with multiple entry facilities allows a visitor to enter India more than once during the visa validity period. It can be granted for a maximum period five years and can be granted by Missions/Posts abroad to foreign business persons who intend to:
Set up an industrial/business venture in India.
Explore the possibility of setting up an industrial/business venture in India.
Buy/sell industrial/commercial products in India.
Attend technical meetings/discussions, board meetings or general meetings for providing business support.
Act as foreign experts on a visit to India for a short duration with the objective of monitoring the progress of work and/or conducting meetings.
Proof of financial standing and expertise in the field of the intended business must be produced.
For business visas valid for up to one year, the prescribed fee for a one-year business visa is charged, even if the visa is valid for less than one year.
Persons of Indian origin. Indian law recognises a distinct category called "persons of Indian origin" (PIO) and extends certain privileges to them. PIO means a citizen of any country, other than a national of Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka, Nepal and Pakistan, if any of the following are applicable:
The person at any time held an Indian passport.
The person, his parents, or any of his grandparents, was a citizen of India by virtue of the Constitution of India or the Citizenship Act 1955 (57 of 1955).
The person is a spouse of an Indian citizen, or a person referred to in the first two sub-clauses above.
The holder of a PIO card does not require a visa to visit India for a period of 15 years from the date of issue of the PIO card. A number of foreign nationals who are PIOs are likely to benefit from this scheme.
For further details, see http://passportindia.gov.in/AppOnlineProject/online/visaServices.
Permanent Account Number (PAN) for foreign residents
Any person (whether resident in India or abroad), who is taxable in India, must obtain a Permanent Account Number (PAN) from the Indian Income Tax Authorities. A PAN is also required for the purposes of opening a bank account in India and for investing in securities, shares and mutual funds in India.
India has entered into bilateral agreements with 64 countries to waive visa requirements. Most of these agreements exempt only diplomatic officials from the requirement of obtaining a visa. Exceptions apply to agreements with Bhutan, Maldives and Nepal which exempt all passport holders from the requirement to obtain a visa.
International travelers from more than 150 countries can take advantage of the e-tourist visa facility if the sole purpose of their visit is:
Casual visit to meet friends or relatives.
Short duration medical treatment.
Casual business visit.
For a full list of the countries, see https://indianvisaonline.gov.in/visa/tvoa.html.
Travelers from 11 countries are also eligible for a visa on arrival. For a full list of the countries, see http://passportindia.gov.in/AppOnlineProject/online/visaServices.
An individual qualifies as a tax resident of India if the person meets the physical presence test, which means they must either (subject to further exceptions/amplifications in certain circumstances):
Have been present in India during the relevant tax year, for a period of 182 days or more.
Have been present in India during the four years preceding the relevant tax year, in aggregate, for a period of 365 days or more, and be present in India for a period of 60 days or more in the relevant tax year.
Resident individuals are liable to income tax in India on their global income. Non-resident individuals are subject to income tax in India only on income, which is received or is deemed to be received in India, or accrues or is deemed to accrue in India.
Currently, foreign direct investment (FDI) of up to 100% is allowed under the Automatic Route in most of the sectors and up to a specified threshold in certain sectors and activities in India. FDI beyond the threshold eligible for investment under the automatic route requires government approval (see Question 5).
FDI in India is prohibited in following activities:
Lottery business, including government/private lottery, online lotteries and so on.
Gambling and betting including casinos and so on.
Chit funds (that is, a savings scheme specific to India).
Nidhi Company (that is, a "mutual benefit financial company" subject to specific regulations).
Trading in transferable development rights.
Real estate business or construction of farm houses.
Manufacturing of cigars, cheroots, cigarillos and cigarettes, tobacco or tobacco substitutes.
Activities/sectors not open to private sector investment (for example, atomic energy and railway transport (other than permitted railway activities such as railway infrastructure, including mass rapid transport systems).
Further, foreign technology collaboration in any form, (including licensing for franchises, trade-marks, brand names and management contracts) are also prohibited for lottery businesses, gambling and betting activities.
The Indian government retains and exercises control over certain industry sectors in the country. Control is retained and exercised through:
Sector specific restrictions on foreign investments in sensitive sectors (such as defence, media and so on).
Government ownership and management
Finance from government funds and government owned banks.
Public welfare (such as education and healthcare).
Public utility services (such as provision of electricity and water).
Public accountability (such as price control measures for essential goods and services).
Prescribing approvals to be taken for undertaking certain activities.
The three different forms of organisations used for public sector enterprises in India are:
Departmental undertaking. This is primarily used for the provision of essential services, such as railways, postal services, broadcasting and so on. These organisations function under the overall control of a ministry of the Government and are financed and controlled in the same way as any other Government department.
Statutory (or public) corporation. This is a corporate body created by the Parliament or state legislature by a special act, which defines its powers, functions and its pattern of management.
Government company. This is a company in which 51% or more of the paid-up capital is held by the Government.
Central government and state governments run various public sector undertakings or government owned corporations. The government is planning to disinvest its stakes in various non-strategic corporations as part of the resource-raising strategy due for fiscal and regulatory reasons.
A branch or office (other than a liaison office, that is an office set-up for information exchange) of a person resident outside India can acquire real estate necessary to carry out permitted activities in India. Persons who are residents or nationals of certain specified countries must obtain prior permission of Reserve Bank of India to acquire such properties. These countries include Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran, Hong Kong, Macau, Nepal, Bhutan and China.
Further, a non-resident Indian or person of Indian origin can acquire any immovable property in India other than:
Foreign Exchange Management Act (FEMA)
In India, all transactions that include foreign exchange are regulated by the Foreign Exchange Management Act 1999 (FEMA). The Act regulates two types of foreign exchange transactions:
Capital account transactions.
Current account transactions.
The Reserve Bank of India (RBI) is tasked with administering the various provisions of FEMA.
Restriction on profits remittance abroad
The following rules apply to profits remitted abroad:
Dividends on foreign investments (net of applicable taxes) can be remitted freely.
Branch Offices are permitted to remit profits from a branch, net of applicable Indian taxes, outside India.
Project Offices can remit intermittent remittances pending winding-up/completion of the project.
The RBI has granted general permission to foreign entities to remit the surplus on winding up/completion of projects.
Under the Liberalised Remittance Scheme (LRS), a resident individual can remit funds abroad for permitted current and capital account transactions or a combination of both. The limit of remittance changes from time to time, depending on the foreign exchange position. The present limit is US$250,000 per financial year.
In addition, this scheme can be used by resident individuals to set up joint ventures/wholly owned subsidiaries outside India for bona fide business activities within the limit of US$250,000 (subject to the terms and conditions stipulated in FEMA).
Import of goods in India is currently governed by the Foreign Trade Policy (2015-2020) of India (FTP) and the Foreign Trade (Development and Regulation) Act 1992. Import trade is regulated by the:
Directorate General of Foreign Trade (DGFT) (part of the Ministry of Commerce and Industry).
Department of Commerce.
Customs authorities (part of the Department of Revenue).
Ministry of Finance.
Every person proposing to engage in import of goods must obtain an Importer-Exporter Code (IEC) from the DGFT before engaging in such import. Although most goods are freely importable, some goods are either completely prohibited from being imported into India or are restricted which can only be imported after obtaining a specific import licence.
An exact Harmonised System Nomenclature (HSN) classification (which is based on the harmonised classification of goods created by the World Customs Organization (WCO)) of the product is required to determine whether the goods can be imported freely, or whether they are restricted or prohibited under the FTP.
Import of most non-agricultural goods/products in India currently attracts customs duty at an effective rate of about 29.44% payable by the importer. Customs duty is a type of indirect/transaction tax levied on goods imported into and exported out of India (the taxable event being the import into or export from India). The exact rate of customs duty on a product depends on the Harmonised System Nomenclature classification of the product.
The basic legislation for levy and collection of customs duty is the Customs Act 1962. This outlines the:
Levy and collection of duty on imports and exports.
Prohibitions on importation and exportation of goods.
Penalties, offences and so on.
Further, the Customs Tariff Act 1975 makes provisions for duty rates, additional duty, preferential duty, anti-dumping duty, protective duties and so on.
Effective custom duties include the following components:
Basic customs duty.
Additional customs duty in lieu of Excise.
Additional duty of customs in lieu of Sales tax.
Education Cess & Secondary & Higher Education Cess.
The Central Government of India has provided certain exemptions on whole or part of the customs duty on various products.
The duties can be levied either on a specific or on an ad-valorem basis (there are circumstances in which a hybrid of a specific and ad valorem duty may be collected on imported items).
The Central Board of Excise & Customs (CBEC) is the apex regulating body for customs, excise and service tax matters. The CBEC is a part of the Department of Revenue under the Ministry of Finance, Central Government of India.
Indian regulations that address safety and standards for commercial goods and services are usually sector specific. For example, the Food Safety and Standards Act 2010 regulates the safety standards for all food products in India (whether manufactured domestically or imported into India).
If bound by an international treaty, the Government of India strives to ensure that the domestically created requirements are aligned with international treaty obligations. There are also well-established institutions that focus on aligning international obligations with domestic regulations, to ensure compatibility is maintained.
There are no restrictions on the importation of commercial services under the Foreign Trade Policy Law or customs laws in India. However, import of nuclear, defence, national security and other such services may be restricted.
The service tax regime in India is governed by the Finance Act 1994.
The importation of services in India attracts service tax if the place of provision of such services is within the taxable territory (that is, the whole of India except for Jammu and Kashmir). The "place of provision" of a service is determined in accordance with criteria prescribed under the Place of Provision of Service Rules 2012.
Service tax is:
Levied at the rate of 14.5% (proposed to be increased to 15% with effect from 1 June 2016).
Paid by the service importer (that is, the service recipient under the reverse charge mechanism).
Structuring and tax
An Indian company is a common legal vehicle for structuring foreign investment into India. A foreign company can commence operations in India by incorporating a company in India under the Companies Act 2013, through a joint venture or a wholly-owned subsidiary.
Foreign Direct Investment (FDI) in India is undertaken in accordance with the FDI Policy which is formulated and announced by the Government of India. Foreign investment in India is governed by the Foreign Exchange Management Act 1999, read with Notification No. FEMA 20/2000-RB dated 3 May 2000, as amended from time to time.
FDI is permitted up to 100% on the automatic route in sectors/activities other than those where FDI is restricted up to the limits indicated against certain sectors/activities under the FDI Policy (see Question 11). Details of the FDI policy can be obtained from the website of the Department of Industrial Policy & Promotion (www.dipp.nic.in).
Indian companies are subject to entity-level taxation and distribution taxes. Investments in Indian companies are generally routed through jurisdictions such as Singapore, Mauritius, Netherlands, the UAE and so on as India has favourable double taxation avoidance agreements (DTAAs) with these jurisdictions for tax-efficient repatriation of funds and minimal tax outflow on the sale of investments.
Foreign companies can set up their operations in India through any of the following offices, which can undertake any of the permitted activities. Such companies must register themselves with the India Registrar of Companies (ROC) within 30 days of setting up a place of business in India:
Liaison office (LO). LOs are set up as a representative office in India, which are used primarily to explore and understand the business and investment climate of India. LOs cannot undertake any commercial/trading/industrial activity, directly or indirectly. An LO set up in India in accordance with the RBI's regulations will not prima facie attract any tax liability in India, unless it constitutes a "business connection" with India as stipulated under the Income Tax Act 1961, or a permanent establishment in India under the applicable DTAA.
Project office. Foreign companies planning to execute specific projects in India can set up temporary project/site offices in India. The RBI has granted general permission to foreign entities to establish project offices subject to specified conditions (for example, such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project). Project offices can remit the surplus of the project outside of India on its completion, although general permission for this must be granted by the RBI. Typically, a project office qualifies as a "permanent establishment" of the foreign enterprise. Therefore, all profits attributable to such a project office are taxed in India (see Question 21).
Branch office. A branch can be set up in India for undertaking business operations in India. A branch typically qualifies as a "permanent establishment" of the foreign enterprise. Therefore, all profits attributable to such branch are taxed in India (see Question 21). Presently, India does not impose any branch profits tax on foreign companies.
Limited Liability Partnership
Foreign investment can also be structured in the form of Limited Liability Partnerships (LLPs), which are not subject to distribution taxes.
Foreign enterprises are taxable in India on income which is either:
Received or deemed to be received in India.
Accrued or deemed to accrue in India.
The following income is deemed to accrue in India:
Income which accrues directly or indirectly, through or from any business connection in India.
Income which accrues through or from any property, asset or source of income in India.
Income which accrues through the transfer of capital assets situated in India.
If a tax treaty exists between India and the country of residence of the foreign enterprise, one of the following will apply (whichever is more beneficial):
The provisions of domestic law.
The provisions of the tax treaty.
Accordingly, the taxability of the foreign enterprise may be restricted or modified and/or lower tax rates may apply.
In general, India's tax treaties provide that foreign enterprises will only be taxable for business profits in India if the business profits are attributable to the foreign enterprise's "permanent establishment" in India.
India's tax treaties typically embrace the following types of permanent establishment:
Fixed-place permanent establishment. This can arise if a foreign enterprise has a fixed place of business in India, through which it partly or wholly carries on its business.
Agency permanent establishment. A dependent agent's permanent establishment can arise if a foreign enterprise has a dependent agent in India, who undertakes certain specified activities in India.
Service permanent establishment. This can arise if a foreign enterprise has employees in India, who are rendering services for the foreign enterprise for a specified duration.
Further, depending on the nature of the business transactions, such business may also be liable to pay indirect/transactional taxes, such as excise duty, service tax, value added tax (VAT) and so on.
From financial year 2016-2017 onwards, a foreign company can qualify as a tax resident of India if its place of effective management is situated in India during such year, and accordingly, may be subject to Indian income taxes on its global income.
Domestic companies. Domestic companies are taxed at 30% (plus applicable the surcharge of 7% or 12%, depending on the taxable income of the company (see below)) and education cess of 3%). The surcharge is imposed on the taxes payable by domestic companies at the following rates:
If the income of the company is up to INR10 million: a 0% surcharge is payable.
If the income of the company is more than INR10 million: a 7% surcharge is payable.
If the income of the company is above INR100 million: a 12% surcharge is payable.
The Government of India has committed to reduce the corporate tax rate for domestic companies to 25% over the next four years with corresponding phasing out of tax incentives. The Finance Bill 2016 proposes:
A reduction of the corporate tax rate to 29% for domestic companies with total turnover or gross receipts for the 2014-2015 financial year not exceeding INR50 million.
An optional tax rate of 25% for select newly set up domestic companies that are:
not eligible to any specified tax incentives;
engaged solely in the manufacture or production.
Short-term capital gains are taxed at 30% (plus an applicable surcharge of 5% or 10%, and education cess of 3%) in the hands of domestic companies. Long-term capital gains may be taxed at the rate of 10% or 20% (plus an applicable surcharge of 7% or 12% and education cess of 3%) depending on the nature of the capital asset transferred. Long-term capital gains are exempt from capital gains tax in the case of a sale of securities on a recognised stock exchange in India.
Domestic companies are also subject to a minimum alternate tax (MAT), which is a presumptive tax on book profits (that is, profits shown in their financial statements), which applies if the tax payable under the regular provisions is less than 18.5% of the company's book profits. MAT is payable at 18.5% plus:
A surcharge of 7% or 12%.
An education cess of 3%.
Credit for MAT paid can be carried forward for the next ten years and set-off against tax payable under regular tax provisions.
Domestic companies are subject to a tax of 23.07% (inclusive of surcharge and cess) at the time of buying back their shares (not being listed company shares) from its shareholders (buy back tax). This tax is payable on the difference between the buy-back price and the issue price of shares. Income in respect of such buy back by the company is tax exempt in the hands of shareholders.
Domestic companies are also subject to a dividend distribution tax (DDT) on the declaration, distribution or payment of any dividend to its shareholders at 17.3% (inclusive of surcharge and cess) on the gross dividends paid. Dividend distributions are tax exempt in the hands of the shareholders. However, the Finance Bill 2016 proposes to levy an additional 10 % tax on any gross dividend income exceeding INR1 million in the hands of the following shareholders :
Tax resident individuals.
Hindu undivided family (HUF) (that is, a Hindu family having common ownership of assets due to ancestry and regarded as a separate taxable unity).
Partnership firms. These include partnership firms and limited liability partnerships.
Foreign companies. Foreign companies are taxed at 40% (plus applicable surcharge of 2% or 5% (see below), and education cess of 3%). The surcharge is imposed on the taxes payable by domestic companies at the following rates:
If the income of the company is up to INR10 million: a 0% surcharge is payable.
If the income of the company is more than INR10 million: a 2% surcharge is payable.
If the income of the company is above INR100 million: a 5% surcharge is payable.
Short-term capital gains are taxed at 40% (plus an applicable surcharge of 2% or 5%, and education cess of 3%) in the hands of foreign companies. Long-term capital gains may be taxed at the rate of 10% or 20% (plus an applicable surcharge of 2% or 5%, and education cess of 3%) depending on the nature of the capital asset transferred. Long-term capital gains are exempt from capital gains tax in the case of a sale of securities on a recognised stock exchange in India.
Foreign companies are not subject to DDT or buy back tax. However, they are subject to MAT if they have a permanent establishment/tax presence in India.
Further, receipt of interest, royalties and fees for technical services (FTS) sourced from India by foreign companies are subject to withholding tax at applicable rates on a gross basis. However, if the royalties and FTS are attributable to the foreign company's permanent establishment in India, such royalties and FTS are taxed as business profits at 40% (plus an applicable surcharge of 2% or 5%, and education cess of 3%) on a net basis.
For withholding tax rates, see Question 23.
In addition to income tax, various indirect taxes are levied either at the federal or state level, depending on the nature of business transaction/taxable event in India.
The Central Government levies the following major indirect taxes in India:
Customs duty. This is imposed on the import of goods into India and export of goods outside India. Currently, the effective rate of customs duty on the import of most non-agricultural products in India is about 29.44%. Exports are mostly at 0%, except for specified goods.
Central excise duty. This is a tax levied on the manufacture of excisable goods in India. Most non-agricultural products attract a uniform rate of 12.5%.
Central sales tax (CST). This is levied on the inter-state sale of goods in India. Currently, CST is chargeable at a concessional rate of 2%, subject to:
producing the required statutory form (Form C);
meeting all other relevant requirements such as obtaining the Form C by the purchasing dealer in the State in which the goods are delivered and submitting Form C before the prescribed authority within three months of the end of the period to which the same relates.
Service tax. This is levied on the provision of services within Taxable Territory of India by the Central Government. Currently, service tax is levied at the rate of 14.5% (proposed to be increased to 15% with effect from 1 June 2016.)
Research & Development Cess (R&D Cess). This is levied on all payments made by an industrial concern for import of technology. At present, the R&D Cess is levied at 5% on payment towards technology imports.
The rate of the following taxes varies from state to state:
State excise Duty. This tax is levied on manufacture of alcohol (meant for human consumption).
Value Added Tax (VAT). This is levied on a sale which takes place within a particular state of India. The rate of VAT mostly varies from 5% to 15%, depending upon the nature of the goods and the rate of VAT in the particular state.
Entry tax. This is levied on the entry of goods into a particular state's jurisdiction for the use, consumption or sale of goods within such jurisdiction.
Professional tax. In certain states such as Gujarat, Karnataka, Maharashtra and Andhra Pradesh, professional tax is levied on every person engaged in any profession, trade, calling or employment. The bands of professional tax vary from state to state subject to the maximum of INR 2,500 per year.
Luxury tax. This is levied on the goods and services "for enjoyment over and above the necessities of life". Luxury tax rates vary depending on the state legislation and generally vary from 4% to 12%.
In addition to the above, certain municipalities may also levy octroi (local body tax) for the use, consumption or sale of goods within their jurisdictions (for example, a local body tax is levied in Maharashtra). The rates of local body tax vary from 0.5% to 4%.
Domestic companies are subject to dividend distribution tax (DDT) on the payment of dividends. However, such dividend income is tax exempt in the hands of the shareholder. The Finance Bill 2016 proposes to levy an additional 10 % tax on any gross dividend income exceeding INR1 million in the hands of shareholders who are tax resident individuals, Hindu undivided family or firm (see Question 22, Income tax: Domestic companies).
Similarly, domestic companies are subject to a buy back tax at the time of buying back their shares (not being listed company shares) from their shareholders.
Additionally, repatriation of funds as interest, royalties or fees for technical services (FTS) may also be subject to withholding tax in India on a gross basis.
Foreign enterprises are subject to withholding tax of 10% (plus an applicable surcharge of 2% or 5%, and education cess of 3%) on royalties and FTS on a gross basis. For the surcharge rates, see Question 22, Income tax: Foreign companies.
Foreign enterprises are subject to income tax on interest income at the rate of 40% (plus an applicable surcharge of 2% or 5%, and education cess of 3%). However, foreign enterprises may avail themselves of concessional rates on interest income under different circumstances ranging from 5% to 20%, plus applicable surcharge of 2% or 5%.
Under India's transfer pricing regulations, any international transaction and/or a specified domestic transaction between two or more associated enterprises (including permanent establishments) must be at an arm's-length price.
The transfer pricing regulations require the application of the most appropriate method among the following:
Comparable uncontrolled price method.
Resale price method.
Cost plus method.
Profit split method.
Transactional and net margin method.
Taxpayers entering into international transactions and/or specified domestic transactions must maintain prescribed documents and furnish an accountant's report, which includes prescribed details.
India's income tax law empowers the Central Board of Direct Taxes (CBDT) to enter into an Advance Pricing Arrangement (APA) to determine the arm's-length price (or the manner of determining the arm's length price) in relation to the international transactions to be entered by a person for a period specified in such APA, not exceeding five consecutive years. The CBDT can also enter into APAs which apply retrospectively for a period of four past years.
In addition to APAs, India's domestic tax law also provides for safe harbour rules.
Thin capitalisation rules
India does not currently have any thin capitalisation rules. However, the General Anti Avoidance Rules (GAAR), which will apply from financial year 2017-2018 onwards, empower tax authorities to re-characterise debt into equity and vice versa.
To stimulate India's economy, India's tax law provides tax incentives such as tax holidays, deductions and rebates to the industry. These are intended to encourage:
Exports and manufacturing activities
The setting up of new industrial undertakings.
The development of facilities related to infrastructure.
The software industry, research activities and development of backward areas.
Further, there are certain sector specific incentive schemes for handicraft, agriculture, oil and gas, renewable resources, research and development, power generation and specified service sectors, subject to the exact nature of business and goods involved (see below).
Special economic zones
Entrepreneurs with business units located in special economic zones (SEZs) are eligible for an income tax holiday for ten years (100% exemption for the first five years and 50% exemption for the next five years) on the profits derived from exports from the year in which such a business unit begins manufacturing or commences its business activities. Further, a deduction of 50% of profits is available for another five consecutive years on the fulfilment of certain conditions.
The Finance Bill 2016 proposes to phase out such tax incentive from financial year 2017-2018.
Although a tax holiday is enjoyed by units set up in an SEZ. The Finance Bill 2016 proposes to phase out such tax incentive from financial year 2020/2021 for SEZ units commencing either:
SEZ units and developers must pay a minimum alternative tax (MAT) on book profits and dividend distribution tax (DDT) on income distributed as dividends.
Offshore banking units and international financial services centres located in SEZ are allowed:
100% deduction on income for five consecutive years.
50% deduction for the next five consecutive years.
In addition, the following indirect tax benefits are available to a unit registered as an SEZ, subject to the fulfilment of specified procedural conditions:
Exemption from the payment of duties of customs on imported goods.
Exemption from the payment of excise duty on domestically procured goods.
Exemption from duty of excise on goods manufactured by an SEZ.
Service tax exemption/refund on input services received by the SEZ unit.
Exemption from central sales tax (CST) on the sale or purchase of goods, if such goods are meant to carry on the authorised operations.
Exemption from value added tax (VAT) on purchase of inputs by an SEZ unit by way or refund/deduction on output in terms of specific State legislations.
In addition, under the Foreign Trade Policy of India, units undertaking to export their entire production of goods and services can be set up under the following schemes:
Export Oriented Units (EOU) Scheme.
Electronics Hardware Technology Park (EHTP) Scheme.
Software Technology Park (STP) Scheme.
Bio-technology Park (BTP) Scheme for manufacture of goods and rendering of services.
Businesses engaged in developing, operating and maintaining infrastructure facilities, such as roads, bridges, rail systems, highway projects, water supply projects, water treatment systems, ports, airports, inland waterways, inland ports or navigational channels in the sea are allowed a deduction of 100% from profits and gains for a period of ten years (out of 20 years). The Finance Bill 2016 proposes to phase out such tax incentives for tax payers that commence such specified activities (that is, development, maintenance and operation of infrastructure facility) from the financial year 2017-2018.
Businesses engaged in the generation and distribution of power transmission, or the distribution of power through a network of new transmissions, or distribution lines, or substantial renovation and modernisation of the existing network of transmission are allowed a deduction of 100% from profits and gains for ten years (out of 15 years). The Finance Bill 2016 proposes to phase out such tax incentives for tax payers that commence such specified activities (of generation, distribution and transmission) from financial year 2017-2018.
Businesses set up in geographical areas
Businesses engaged in specified activities in certain regions of India, such as North Eastern states are provided tax holidays for specified periods. The Finance Bill 2016 proposes to phase out some of these incentives.
Investment-linked tax incentives allow deductions for the expenditure of capital incurred (wholly and exclusively) for the purposes of certain "specified business" during the previous year. A deduction of 100% is allowed for "specific businesses" which includes (among others):
Laying and operating a cross-country natural gas pipeline network for distribution, including storage facilities being integral parts of such network.
Building and operating a new hotel of two-star or above category as classified by the Central Government of India.
Developing and building a housing project under a scheme for slum redevelopment or rehabilitation framed by the Central Government or State Government and which is notified by the board on this behalf in accordance with the prescribed guidelines.
Setting up and operating an inland container depot or a container freight station notified or approved under the Customs Act 1962.
Laying and operating a slurry pipeline for the transportation of iron ore.
Setting up and operating a notified semiconductor wafer fabrication manufacturing unit.
Bee-keeping and production of honey and beeswax.
Setting up and operating a warehousing facility for storage of sugar.
Further, the following specified businesses are allowed a 150% deduction for capital expenditure incurred (among others):
Setting up and operating a cold chain facility.
Setting up and operating a warehousing facility for storage of agricultural produce.
Building and operating a new hospital (with at least 100 beds).
Production of fertilisers.
Developing and building a housing project under a scheme for affordable housing framed by the Central Government or State Government and which is notified by the board on this behalf in accordance with the prescribed guidelines.
The Finance Bill 2016 proposes to restrict the deduction to 100% of capital expenditure from financial year 2017-2018.
Investment linked incentives for research and development
The Income Tax Law allows a deduction of capital expenditure incurred by the tax payer on scientific research related to the business carried on by the tax payer, subject to the fulfilment of certain prescribed conditions.
For instance, a business deduction of 200% is allowed if the company is engaged in the business of bio-technology or the manufacture/production of any article/thing (subject to certain limitations) that incurs expenditure for scientific research (not being expenditure on cost of any land/buildings) which requires in-house research and/or a development facility, as approved by the prescribed authority. The Finance Bill 2016 proposes to restrict the deduction to:
150% of expenditure from financial year 2017-2018 to financial year 2019-2020.
100% of expenditure from financial year 2020-2021.
The best guarantor for investment protection is a stable and democratic political structure, a belief in the rule of law, along with a transparent and independent legal system.
A Bilateral Investment Promotion and Protection Agreement (BIPA) is one such bilateral treaty defined as an agreement between two countries (or states) for the reciprocal encouragement, promotion and protection of investments in each other's territories by the companies based in either country (or state). These agreements:
Have standard elements and provide a legal basis for enforcing the rights of the investors in the countries involved.
Give assurance to the investors that their foreign investments will be guaranteed fair and equitable treatment, as well as full and constant legal security and dispute resolution through international mechanisms.
Most foreign investors are protected by investment treaties.
India ratified the agreement establishing the World Trade Organization (WTO). This contains (among other things) India is a signatory to the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which came into force from 1 January 1995.
TRIPS sets out minimum standards for protection and enforcement of intellectual property rights (IPRs) in WTO member countries, which are required to promote effective and adequate protection of IPRs (including legal systems and practices) with a view to reducing distortions and impediments to international trade. TRIPS provides for norms and standards in relation to the following:
The Indian judicial system provides for effective enforcement of the various forms of IPRs and has played a proactive role in recognising the changing phases of intellectual property.
Courts have been effectively and progressively protecting and enforcing patent rights. This is demonstrated by the upward trend of lawsuits and the interim injunctive relief granted by various courts. In respect of patents, the courts have been especially proactive in affording protection to Standard Essential Patents (SEPs). In respect of telecommunication technologies, the courts have taken a balanced approach in terms of enforcement of pharmaceutical patents, with interim injunctions being granted for alleged infringements. A major issue in this regard concerns the principles relating to the enforcement of SEPs. Since it is impossible to practise a technological standard without implementing a patent that is essential to that standard (an SEP), those implementing SEPs (for example, manufacturers, traders or vendors of products adopting a standard) must first obtain a licence from the respective SEP holder or face an injunction. An absence of any guidelines for the negotiations between SEP holders and those implementing the SEP has resulted in SEP holders demanding excessive royalties.
The courts in India have also supported anti-counterfeiting and piracy measures to both:
Safeguard the property of rights holders.
Protect the public interest.
The courts have granted injunctions against infringers and have issued directions in specific cases to customs officials to prevent, control and prohibit the import of such goods which violate a party's registered IPRs.
In India, arbitration is a medium which provides an effective and quick dispute resolution framework, unlike court proceedings which take a number of years to resolve disputes between the parties.
The Arbitration and Conciliation Act of 1996 (Arbitration Act) is divided in the following two parts:
Part I. This deals with Arbitration conducted in India and its enforcement.
Part II. This provides for arbitration conducted in foreign jurisdictions and the enforcement of such foreign awards.
The Arbitration Act was recently amended to streamline the arbitration process and align it with international standards. Under these amendments, interim measures under Part I are now available to arbitrations seated outside India. This ensures that foreign investors can effectively realise a potential award in their favour by securing assets in India. Similar provisions have been included to allow recourse to Indian courts for assistance in taking evidence and appeals against interim orders. The amendment has narrowed the scope of public policy and clarified that the scope of review for foreign awards is limited as compared to review of domestic awards. The public policy grounds no longer include "patent illegality".
The Arbitration Act now endeavours to ensure that awards are given within twelve months from the date the tribunal first convenes. Parties can then enforce the award within six months. The courts must approve any enforcement after that date. To this extent, arbitration is the only expandable resource available to the traditional court system. It can and does have a streamlining effect on the flow of litigation generally. With the introduction of the amendment, the Indian legislature has made considerable and much required action in establishing India as an (international) arbitration-friendly judicial system
Recent developments and proposals for reform
Under the direct tax regime, the General Anti Avoidance Rules (GAAR) will apply from financial year 2017-2018. GAAR empowers income tax authorities to re-characterise transactions which lack commercial substance (among other things). It should also be noted that GAAR will override the provisions of India's tax treaties.
Currently, India has a multi-layered tax regime at different levels of the supply chain levied both by the Central Government and the state governments.
The Government of India is proposing introduction of Goods and Services Tax (GST) in India. This tax would subsume and streamline all major central and state indirect taxes, such as central excise duty, service tax, entry tax, value added tax and so on in one single levy/tax. The GST is intended to:
Remove the multiplicity of the present indirect taxes and their cascading effect.
Facilitate the consolidation of a single market across the country.
Allow for greater supply chain efficiency and economies of scale.
The government is working tirelessly to introduce GST at the earliest.
Tax information exchange agreements
India continues to sign tax information exchange agreements (TIEAs) with countries for maintaining transparency and exchange of information for enforcement of domestic laws in respect of tax matters. India has signed TIEAs with countries such as the UK, Cayman Islands, British Virgin Islands, Monaco and Liechtenstein (among others).
Base erosion and profit shifting
The Indian tax authorities have taken an active interest in the development of the action plan on base erosion and profit sharing, and have begun implementing recommendations from the Organisation for Economic Co-operation and Development (OECD), through amendments to the Income Tax Act.
Renegotiation of India-Mauritius double taxation avoidance agreement
For a long time, the Indian tax authorities have viewed transactions routed through Mauritius to be for the avoidance of capital gains tax and as an abuse of the India/Mauritius treaty provisions. In this regard, India is negotiating a "limitation of benefits" clause under the India-Mauritius double taxation avoidance agreement, to limit the abuse of the treaty provisions.
Notification of Cyprus as a notified jurisdictional area
India has notified Cyprus as a notified jurisdictional area due to lack of effective exchange of information. Consequently, onerous tax consequences are imposed on taxpayers who undertake transactions with Cyprus residents in respect of such transactions.
FTAs and trade agreements
The Government of India has also entered into various bilateral/multilateral treaties for duty free/partial duty free import of specified goods in India with various countries such as Singapore, Chile, Argentina, Korea, south-east Asian countries, Bangladesh, Sri Lanka and so on.
Main investment organisations
Ministry of Commerce and Industry, Department of Commerce
Main activities. The regulation, development and promotion of India's international trade and commerce, through the formulation of appropriate international trade and commercial policy and the implementation of the various related legal provisions.
Directorate General of Foreign Trade
Main activities. Agency of the Ministry of Commerce and Industry of the Government of India. Responsible for the execution of import and export policies of India.
Department of Industrial Policy & Promotion
Main activities. The formulation and implementation of promotional and developmental measures for the growth of the industrial sector, while considering the national priorities and socio-economic objectives. Responsible for the overall industrial policy and formulation of foreign direct investment policy, and its promotion, approval and facilitation.
Reserve Bank of India (RBI)
Main Activities. General superintendence and direction of the Reserve Bank of India's affairs.
Ministry of Commerce and Industry, Department of Commerce
Description. Contains official and up-to-date information on trade and trade statistics, export promotion councils, budgets and other important information and so on.
Directorate General of Foreign Trade
Description. Provides details about foreign trade policy, foreign trade procedures and application forms for RCMC, IEC, eBRC, and trade-related important information.
Department of Industrial Policy & Promotion (DIPP)
Description. Provides details of the foreign direct investment policy.
Reserve Bank of India
Description. Official website of the Reserve Bank of India.
Ministry of Home Affairs (MHA), Government of India
Description. Provides details on the entry, stay and exit of foreigners into India, along with details of the various policies, acts and rules.
Passport services in India
Description. Provides all the details for the visa and passports for an individual.
Ministry of External Affairs, Government of India
Description. Provides all the details required for doing business and investing in India.
Shardul S Shroff, Executive Chairman
Shardul Amarchand Mangaldas & Co
T +91 11 41614094
F +91 11 26924900
Board Member, First Law International Board Member Firm (Chambers & Partners Elite Global Network)
Professional qualifications. B.Com (Hons), Sydenham College Mumbai; LLB, Government Law College, Mumbai
Areas of practice. Banking and finance; capital markets; corporate restructuring; general corporate advisory; joint ventures; infrastructures; M&A; oil and gas; private equity; project finance; real estate; regulatory policies and takeovers.
- Advised IDFC in relation to lender approval requirements, compliance with RBI guidelines, filing of scheme of arrangement with SEBI, designated stock exchange and the jurisdictional High Court and preparation of presentations for board of directors and investors of IDFC.
- Advised Vodafone India Limited on consolidation of its operating telecommunications licensee subsidiaries with a single Indian flagship entity.
- Advised Zuari Group in their acquisition of a majority stake in Mangalore Chemicals & Fertilisers Limited.
- Advised on several spectrum acquisitions recently.
- Advised the Dalmia Cement (Bharat) Ltd on a recent transaction which included an analysis of proposed structure and review of disclosures by the parties.
- Advised the DLF Limited in relation to the restructuring, drafting of relevant corporate authorisations and stock exchange disclosures.
- Acted as the legal advisor to the Avantha Holdings Limited for its restructuring.
- Advised Vedanta Resources on its US$14 billion restructuring and for merger of its largest subsidiaries, Sterlite Industries and Sesa Goa.
- Advised the reconstituted board of Satyam Computers Limited, nominated by the Government of India, on issues pertaining to restructuring.
Languages. English, Hindi, Gujarati and Marathi
Professional associations/memberships. Chairman of the National Committee on Legal Services, Confederation of Indian Industries (CII) and serves on many prestigious committees, international societies of lawyers, association of independent law firms and chambers of industry and commerce; independent director on the boards of several publicly listed companies; Chairman, CII National Committee on IT & ITeS, 2015-16; member, CII Public Policy Council.; Senior Vice President, Society of Indian Law Firms (SILF).
- India M&A Chapter, LexisNexis Annual Asia Mergers & Acquisitions Law Guide, 2014.
- India Chapter of The Foreign Regulation Investment Regulation Review; Law Business Research, 2013.
- Emerging challenges of managing law firms in the Indian sub-continent; Managing Partner Magazine, 2012.
- Recent Challenges in the Indian M&A Space; IFLR India Annual Review, 2012.
- FDI in single-brand retail: Post Liberalization Analysis; Global Trader Guide, 2012.
- Indian Telecom Industry; Lawyer Monthly Magazine, April 2012.
Krishan Malhotra, Partner, National Head of Taxation
Shardul Amarchand Mangaldas & Co
T +91 11 41590700
F +91 11 26924900
Board Member, First Law International Board Member Firm (Chambers & Partners Elite Global Network)
Professional qualifications. Bachelor of Commerce (Honours), University of Delhi; Qualified Chartered Accountant; LLB (Bachelor of Laws), University of Delhi
Areas of practice. Taxation and regulatory, including inbound investments.
- Advised US Bank in the merger of their two entities.
- Tax advisory in relation to scheme of demerger before the court in the case of Indian FMCG company.
- Representing General Electric Group (GE) in the industrial and IT sector.
- Representing Bechtel India Private Limited before courts.
- Advising Boston Scientific India on a broad array of tax issues.
- Advising companies across sectors on M&A transactions.
- Offering leading-edge tax consulting and litigation services across sectors in the areas of Direct Tax (Domestic and International), cross-border taxation including alternate dispute resolutions and business advisory services, tax strategy, transfer pricing, regulatory practice, mergers, acquisitions, and re-organisations.
Non-professional qualifications. Completed Executive Management Programme from the Indian School of Business and Kellogg, USA.
Languages. English; Hindi
- Indo-American Chambers of Commerce (IACC).
- PHD Chamber of Commerce and Industry (PHDCCI).
- Federation of Indian Chambers of Commerce and Industry (FICCI).
- The Associated Chambers of Commerce and Industry of India (ASSOCHAM).
- Confederation of Indian Industries (CII).
- Indian National Bar Association (INBA).
- Bar Council of Delhi.
- Regular Articles on legal interpretation of tax judgements in Taxmann's Publication Magazine "Corporate Professionals Today".
- Regular comments and opinions on significant tax judgements/events on www.taxsutra.com.
- An article on Indian PE issues in "Danish Review" for IFA 2014 Conference.
- Regular articles in booklets of different Business Chambers (for example, FICCI, PHD and so on).
- Regular comments in Indian leading journals and dailies.