DOING BUSINESS IN INDIA

May 2008© Indo-Italian Chamber of Commerce & Industry

General

The FDI regulations in India have been progressively liberalized over the last few years. Barring a few select sectors in which FDI is altogether prohibited (e.g. agriculture, atomic energy, gambling etc.), FDI is allowed in most other sectors.

FDI by foreign companies needs to have government approvals. The approval may prior or subsequent. Where prior approvals are not required, one invests and then seeks registration of the investment with the RBI. This is called the ‘automatic route’ of FDI.

Where prior approvals are required, those are handled by FIPB, Ministry of Finance. This is called the ‘non-automatic route’ of FDI.

General

A large majority of FDI investments today qualify for the automatic route.

Important exceptions are: Manufacture of items reserved for the small-scale sector, Where automatic route investment is limited to 24%; Proposals where the foreign investor has an existing joint-venture or technology transfer/trademark agreement in the same field; Sectors where specific investment limits have been prescribed.

Investing in India Regulations 1

Foreign investments have to be authorized by public bodies, either through the automatic route or not.

For new companies, automatic route applies to all kind of FDI with exception to: production activities requiring industrial license; ventures in sectors where the foreign investor already has a participation; ventures where the foreign investor acquires shares of an existing Indian company; ventures in non-regulated sectors.

Investing in India Regulations 2

For existing companies, automatic route also applies in case foreign equity is added to the company’s capital. The authorization is issued provided that: the increase in the share capital happens before the acquisition of shares from the foreign company; the money to be invested is in foreign currency; the development plan for which the increase in capital is needed has to be in the sectors in which the automatic route applies.

For companies with 100% FDI can benefit of the automatic rout if they are active in sectors with high priority, namely: production and transmission of electric energy; distribution of electrical energy for domestic, industrial and commercial use; construction and maintenance of roads, highways, bridges, galleries and ports.

All the activities for which the automatic route does not apply have to request the Government approval through the Foreign Investment Promotion Board.

Investing in India Regulations 3

Business Presence in India The Options

You may set up a business presence in India using any one of the following options:

Liaison/Representative Office Branch Office Technical collaboration Subsidiary/JV Company

Liaison/Representative Office

It can carry out promotional activities without putting in any trade transactions as a principal party; It cannot earn any income in India, or carry out any income earning activity; It does not pay any Income tax; It is legally a part of its parent company.

To open a liaison office requires a limited investment and the permit is normally granted for a period of three years

Branch Office

It can carry out most activities except manufacturing and processing; It can carry out trading activities on its own account and also earn a profit; For the profit earned in India it has to pay Income tax as a foreign enterprise; Foreign enterprises are subjected to higher tax rates on their net profits compared to Indian companies;They are not entitled to several of the tax concessions available to an Indian company– including a foreign subsidiary.

This option suits well Italian companies willing to test the Indian potential partner before establishing a joint-venture. This form of collaboration implies the transfer of know-how, engineering and services. The Indian counterpart can get the automatic approval provided that: the forfait payment cannot exceed $2 billion; royalties must be paid on no more than 5% on domestic market sales and 8% on exports; payments are subject to a cap of 8% on net total sales; the products do not have to be subject to industrial license or being reserved to Small Industry; the foreign counterpart does not have similar agreements in the same sector

Technical Collaboration

Subsidiary or Joint Venture

It will have a limited liability;

It will be regarded for all regulatory purposes as an Indian company.This means that it can do whatever an Indian company can do;

It pays tax at rates about 10% lower than that applicable to foreign enterprises;

It is legally independent of the holding company. This means that the holding company is not liable for the liabilities of the subsidiary company.

Setting Up A Business Presence In India From Italy

Any of the above forms can be set up and all regulatory approvals obtained without the foreign company personnel visiting India.

The Indo-Italian Chamber’s consultants can handle the entire process long-distance on behalf of the foreign company. This enables faster and cheaper set-up.

Specific SectorsExtent of Holding

In many sectors, a foreign company can hold upto 100% of the equity share capital of an Indian company. For some sectors, the current regulations provide different sectoral caps, for instance: 20% in Radio Transmissions 26% in defence items, petrol refining, TV Transmissions, and insurances; 47% in satellite control; 49% in Aerotransportation, infrastructures (transmissions); 51% retail (monobrand); 74% banking and telecommunications (services);

Specific Sectors Extent of Holding

Sector Maximum Holding Permitted

FDI Permission

IT/ITES 100% Automatic

Engineering Manufacturing 100% Automatic

Wine Making (“Alcohol – Distillation & Brewing”)

100% Automatic

Specific Sectors Extent of Holding

Sector Maximum Holding Permitted

FDI Permission

Agro Food

Food Processing 100% Automatic

Cultivation of vegetables, mushrooms under controlled conditions and services related to Agro and Allied sectors

100% Automatic

Specific Sectors Extent of Holding

Sector Maximum Holding

Permitted

FDI Permission

Transport And Logistics

General 100% Automatic

Courier services for carrying packages, parcels and other items which do not come within the ambit of the Indian Post Act, 1989 (subject to existing laws and exclusions of activity relating to distribution of letters which is exclusively reserved for the State)

100% FIPB (Non-automatic)

Specific Sectors Extent of Holding

Sector Maximum Holding Permitted

FDI Permission

Furniture

Furniture – Wooden 24% Automatic

Over 24% FIPB (Non-Automatic)

Furniture – Other 100% Automatic

Manufacturing & Trading

If a foreign company is looking at setting up a manufacturing, it can have a wholly owned subsidiary. Generally, Automatic Route will apply.

If a foreign company is looking at a trading operation, FDI in a ‘trading’ operation is not freely permitted.

FDI in retail trading is not allowed, except for ‘single-brand’ retailing. This policy is likely to be further liberalized in future.

Investment upto 100% under the automatic route is permitted for: • export-oriented trading;• wholesale/cash-and-carry trading.

Royalty, Trademarks and Brands

Royalty

Current regulations allow royalty payment of upto USD $ 2 million lump sum, 8% on export sales and 5% on domestic sales under the automatic approval route. The limits apply to the net-of-tax amounts. The percentage applies, broadly, to the value excluding import component in the product price.

Trademark/Brands

Current regulations allow royalty payment of 2% on export sales and 1% on domestic sales for use of brand names or trademarks.

Company Structure

A private limited company needs: a minimum authorized capital of INR 100,000 (appx. Euro 1750) and The minimum paid-up capital in both cases is INR 100,000 (approx. Euro 1750). a minimum of two shareholders and two directors. a nominee shareholder is counted as a separate shareholder for counting the legal minimum number required.

A public limited company needs: a minimum authorized capital of INR 500,000 (appx. Euro 8750); a minimum of seven shareholders and three directors.

Repatriability & Other Issues

Repatriability

Once the government permission for the investment is taken, the investment is allowed on a repatriable basis i.e. the Indian company can remit dividends to the foreign company. Also the capital too is repatriable to the holding company in the event that the holding company wishes to divest its holding.

Other issues

The overseas company is not forced to bring in a very large capital into the subsidiary. It can inject money as and when required rather than make a very large infusion at the beginning itself. The subsidiary can borrow money from the Indian banks if it so desires.

Taxes & Benefits 1

An Indian company pays Income tax generally at the effective rate of 33.99%of its taxable profits. The rate for SME’s (taxable profit of less than INR.10.0 millions) is 30.90%.

The other major taxes in India are VAT on goods (residual rate 12.5% for intra-state sale; for inter-state sale the uniform rate is 4%, and will be 3% after the latest budget is passed), Excise i.e. manufacturing tax (residual rate 16.0%), and Service Tax (primary rate 12.36%).

Taxes & Benefits 2

The following tax advantages accrue to a subsidiary under certain circumstances:

Profits of STPI units (for IT/ITES companies) are presently taxed concessionally;Profits of SEZ units are tax-exempt;Service exports are exempt from service-tax subject to prescribed conditions;Exports are exempted from excise, octroi and VAT;Units set up in backward areas enjoy some income-tax and VAT concessions. However, these need to be evaluated against the generally poor state of infrastructure in the backward areas;

Liaison / Represent. Office (LO)

Branch Office (BO)

Joint-Venture or Subsidiary

Company (JV)

PERMISSIBLE ACTIVITIES

1 Promotion YES YES YES

2 Business Development YES YES YES

3 Technical Support YES YES YES

4 After-sales Service YES YES YES

Differences Liaison Office, Branch, Subsidiary/J.V.

Differences Liaison Office, Branch, Subsidiary/J.V.

LO BO JV

5 Purchase/Sales co-ordination on behalf of the overseas parent (e.g. Italian) company

YES YES YES

6 Earning Income NO YES YES

7 Buying Products NO YES YES

8 Selling Products NO YES YES

9 Export NO YES YES

LO BO JV

10 Import NO YES YES

11 Manufacturing NO NO YES

LEGAL, FINANCIAL & TAX ISSUES

12 Opening A Bank Account YES YES YES

13 Recruiting People YES YES YES

14 Can It Repatriate Profit? N.A. YES YES

Differences Liaison Office, Branch, Subsidiary/J.V.

LO BO JV

15 Can It Repatriate Capital ? N.A. N.A. YES

16 Can It Pay Royalty For Designs/Brand Names ?

N.A. N.A. YES

(But subject to regulations)

Differences Liaison Office, Branch, Subsidiary/J.V.

LO BO JV

17 Minimum Authorized Capital Legally Required

Minimum Paid-up Capital Legally Required

NIL

NIL

NIL

NIL

INR.100,000 for a private limited company

INR.500,000 for a public limited

company

INR.100,000 for both.

Differences Liaison Office, Branch, Subsidiary/J.V.

LO BO JV

18 Maximum shareholding that a foreign company can have

NA NA 100% (Subject to applicable

regulations)

REGULATORY PERMISSIONS/REGISTRATIONS

19 Required From Reserve Bank of India

Reserve Bank of India

Registrar Of Companies +

Reserve Bank of India/ FIPB

(in some cases)

Differences Liaison Office, Branch, Subsidiary/J.V.

If you need any information/support in connection with your proposed Indian activities, please contact: The Indo-Italian Chamber of Commerce and Industry502, Bengal Chemicals Compound, V.S. Marg, Prabhadevi, Mumbai – 400052, INDIATel: +91.22. 2436 8186, Fax: +91.22. 2436 8191E.mail: iicci@indiaitaly.com, Web: www.indiaitaly.com