Introduction
India is one of the fastest growing economies and experts are predicting that India has a huge economic potential to grow. Indian dynamics offers various business opportunities be it for domestic markets, where it has vast population and growing purchasing power; to providing offshore opportunities with availability of skilled talent pool, knowledge/R&D hub, cost
savings; to sourcing opportunities with availability of raw material and presence of strong industry infrastructure. Recent efforts by the Indian Government have improved ease of doing business in India, making the market more accessible to foreign investors, businesses and organizations interested in expanding their products and/or services. India’s ranking in the World Bank’s Ease of Doing Business Index currently sits at 63.
While COVID-19 pandemic has disrupted the growth path in 2020, India is expected
to overcome this crisis soon. Indian Government has been taking various initiatives in this direction including several relief measures, especially on statutory and regulatory compliance matters. Further to spur investment several restricted sectors have been relaxed. The stimulus packages including incentives for make in India, policy framework, availability of skilled manpower at competitive price, offers additional opportunities for the private sector to set up their business hubs in India.
Investment Opportunities
For Investing into India, non-residents are required to conform to foreign exchange regulations under Foreign Exchange Management Act (FEMA). This Act provides that the Central Bank (RBI) will have a controlling role in the management of foreign exchange.
Currently, authorized dealers/bankers have been empowered by RBI to transact into major areas, these authorized dealers/bankers are required to exercise their jurisprudence and discretion to adhere to the given regulatory framework. The regulations also provide for limits of investments of any non-residents in an Indian company which are segregated into prohibited and permitted sectors.
Most of the sectors have now been opened up or relaxed which were earlier exclusively available to Public sector only. Very few sectors are under prohibited category like Atomic energy, Gambling/betting, Nidhi/Chit fund, Real Estate, etc
The sectors/activities, other than Prohibited Sectors, foreign investment is permitted
(i) either upto limited extent or (ii) is permitted upto 100% under the automatic route, subject to applicable laws/ regulations and conditions. No prior approval is required under the automatic route. Only some procedural reporting is required to be done
There are several bilateral and regional trade agreements which have been entered into with key trading countries. Apart from offering preferential tariff rates on trading of goods to the member countries, these agreements also enable increased economic cooperation in trade and services, as well as in investment and intellectual property.
The funds invested by the non-residents are generally allowed to be repatriated where investment is made on repatriation basis in terms of the existing regulations. Some of the modes of repatriation are Dividend, buyback, capital reduction. Foreign investors are also entitled to receive Royalties, technical knowhow fees and fees for technical services subject to certain prescribed conditions.
However, currently in order to restrict any opportunistic takeover of Indian companies in Pandemic induced situation and the uneasy situation on the borders, the Government of India has amended its FDI policy whereby any investment made by countries sharing land border with India shall require prior approval of the Government regardless of the sector/activities in which investment is being made.
Setting up of business in India
India offers wide range of options where a non-resident investor can set up its business depending on the business objective and strategy. It can be in the form of incorporated entities or un-incorporated entities. Incorporated entities can be in the form of Public Ltd,
Private Ltd Company or Limited Liability Partnership, One Person Company or under section 8 a charitable company. Un-incorporated entities may be in the form of Liaison office or branch/project office Indian Companies Act provides for a wide range of incorporated entities. An entity can be formed within a period of a week nowadays. Various commercial activities can be undertaken in these entities subject to the sectoral guidelines issued under the FDI policy.
Liability of member /shareholder are limited in most of this form of entities. Foreign Investors can form a wholly owned subsidiary or can enter into a joint venture with local partner. These entities are subject to applicable corporate tax. Such entities provide for a minimum of Directors and Members which an incorporated company shall have.
This Act regulates incorporation of a company, manner of conducting its affairs, responsibilities of its directors and dissolution of a company. The Ministry of Corporate Affairs has the responsibility of ensuring compliance with the provisions of the Companies Act through the offices of Registrar of Companies and the Regional Directors. Securities and Exchange Board of India (SEBI), on the other hand, ensures compliance by the listed companies.
A foreign entity can operate through a Liaison office or Branch office. For Liaison office, it is just a representative of its foreign parent company. For this office, generally approval is taken from authorised dealer/ bank and in some cases from RBI. No commercial or business activities are permitted in this form. Since no business activities is allowed, such office is not subject to tax in India. A branch or project office is an extended arm of the parent entity. For setting up, generally authorized dealer/bank approval is needed and in some cases of RBI. These offices are allowed to do specific activities as are allowed by RBI.
This form is also subject to tax in India.
Other forms of business can be Sole proprietorship or Partnerships. In these type of entities, they have no separate legal existence from that of the proprietor/partner and the liability of proprietor/partner is unlimited. In case a sole proprietor is an NRI or a PIO residing outside India, he is eligible to carry on business in India. However NRI’s/PIO’s cannot invest in proprietary concerns engaged in specified sectors. NRI’s/PIO’s residing outside India are allowed to invest in an Indian partnership firm on repatriable basis.
Repatriation benefits are available with prior approval from the RBI. NRI’s or PIO’s cannot invest in a partnership firm engaged in specified sectors.
Mergers and Acquisitions are also another mode where the investors can gain entry.
The most commonly adopted modes are share acquisitions whereby all existing shares of the target are purchased by the acquirer, or by way of subscription to new shares in the target so as to acquire a controlling stake in the target or a combination of the two methods. Other mode is an Asset Purchase which involves the sale of the whole or part of the assets of the target to the acquirer. Several regulatory approvals are involved in such transactions including approvals of shareholders, creditors, NCLT and various regulatory bodies like RBI, SEBI, CCI, stock exchanges, corporate law authorities and Income tax authorities.
Economic Legislations
Labour laws- According to an estimate a million people enter into the labour market in India every month. A vast young population is available in India at a cheaper price which is one of the important factors for foreign business opportunities. In India there are about 44 national and close to 150 state level laws governing various aspects ranging from conditions of employment to social security, health, safety, welfare, trade unions, industrial and labour disputes, etc. The multiplicity of labour laws and overlapping provisions created significant bottlenecks and a not-so-conducive atmosphere for business growth
In a move to make it easier for employers to comply with certain labour laws, the government has initiated for consolidation of about 30 national level labour laws into four labour codes with focus on amending the existing laws to make it less complex and to create an investment friendly environment. India has enacted 4 new codes viz Wage Code, Industrial Relations Code, Social Security Code, 2020 and Occupational Safety, Health and Working Conditions Code. Further steps have been taken to remove several redundancies and duplications. In addition, several administrative and e-governance initiatives have been undertaken to generate employment and facilitate ease of doing business. Various returns and registers have been curtailed and brought down to mere 5 instead of around 60 earlier. Many registrations can now be done online. Option is also available to get the registrations under various Acts done at the time of incorporation of the Company thus providing an integration of various services. India is also a member of the International Labour Organization (ILO) and complies with the conventions that it has ratified.
Intellectual Property Rights –Intellectual property has gained substantial importance with the increasing knowledge and internet revolution. Intellectual property today has become most valuable commodity and business can go to any extent for its protection. India, being a signatory to the General Agreement on Tariffs and Trade (GATT) and Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement, has complied with the obligations therein by enacting necessary statutes and amending certain statutes wherever needed, whether it is related to Trademarks, Copyrights, Patents, Geographical Indications, Industrial Designs.
Well-known international trademarks have successfully protected their IP rights in India through Indian courts despite the fact that these trademarks were not registered in India.
Computer databases and software programs have been protected under the copyright laws in India, thereby allowing software companies to successfully curtail piracy through police and judicial intervention. Although trade secrets and know-how are not protected by any specific statutory law in India, they are protected under the common law and through contractual obligations.
Contract Act- The Indian Contract Act (ICA) governs the formation, implementation and conclusion of a contract. It also provides remedies in case there is breach of a contract. ICA defines a contract as an agreement enforceable by law. To be enforceable by law, a contract must contain the certain essential elements like offer and acceptance, free consent, competent parties, consideration, lawful object. Along with dealing in the general principles of law of contract, ICA also deals with special kind of contracts such as contract of indemnity and guarantee; contract of bailment and pledge; and contract of agency.
Environment Laws – In order to protect the natural resources Government regulates the development of industrial projects/activities through environmental approvals and compliances. The approvals are required at the Central or State levels, depending on the type of activity undertaken. Most of the compliances are mandatory in nature and consequences of non-compliance could result in criminal liability. Industries have been categorised into red, orange, green and white categories based on the effluent emissions be it air pollutants, water pollutants or hazardous waste generated and consumption of resources.
Taxation Laws
Taxation is one of the important factors which needs to be considered while doing business in India. Taxes are levied in form of Direct Taxes and Indirect Taxes.
Direct tax is levied on the Income and is regulated under the Income Tax Act. Resident companies are generally taxed upto 35% depending on the range of the income. In order to boost manufacturing, recently amendments have been made in the IT Act, the entity starting manufacturing prior to April 1, 2023, may avail an effective tax rate of 17.16% subject to meeting certain prescribed conditions. Non-resident companies are taxed at a rate upto 44% depending on the income range. Residents entities are taxed on their worldwide income, nonresidents are only taxed on income arising to them from sources in India. Double tax avoidance agreement- Provisions of the IT Act or the DTAA, whichever is more beneficial are applicable to a non-resident taxpayer. Accordingly, the taxability is likely to be restricted
or modified.
Indirect Tax- With the introduction of Goods and Services Tax (GST) in the mid of 2017, India now has a unified indirect tax system. GST has subsumed many of the earlier indirect taxes like excise, VAT, service tax, interstate sales, octroi etc. The GST is based on a dual levy model. Both the centre and the state are empowered to levy equal amounts of tax (in the form of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST)) on the same taxable base (supply of goods and services). In case of inter-state transitions, centre has the authority to levy Integrated Goods and Service Tax (IGST), a part whereof is transferred by the central government to the destination state.
Imports would be subject to IGST, while exports would continue to be at zero rate.
Dispute Resolution
In line with international practice, in India there are multiple methods adopted for dispute resolution, judicial, quasi-judicial and other forums such as tribunals and administrative bodies Arbitration has also now become a well settled mode for resolving commercial disputes in India.
Judicial Forums – The Supreme Court of India is the apex judicial authority in India. The Supreme Court generally receives appeals from the High Courts that occupy the tier below it.
Beneath the High Courts are the subordinate civil and criminal courts that are classified based on whether they are located in rural or urban areas and by the value of disputes such courts have jurisdiction to adjudicate upon. Certain important areas of law have dedicated tribunals to facilitate the speedy dissemination of justice by individuals qualified in the specific fields. These include the National Company Law Tribunal, the Income Tax Appellate Tribunal, the Labour Appellate Tribunal, the Copyright Board, Securities Appellate Tribunal, Competition Commission of India, National Green Tribunal and others. In order to give a boost to commercial activity an act called the Commercial Courts Act was enacted. Under the Commercial Courts Act certain courts are designated as commercial courts and they are entitled to deal with cases which arise from commercial contracts. The basic purpose behind this is to speed up the cases pertaining to commercial activities and resolution of disputes arising out of commercial transactions.
Arbitration – There is well defined act on Arbitration in India that provides, inter alia, for a mechanism for appointment of arbitrators, objections against an arbitral award as well as enforcement of an arbitral award. Unless the parties otherwise agree, the provisions of the said act will govern every agreement containing arbitration clause. In order to make the Act more effective and time bound, certain amendment in the Act has been made recently. The Parties can keep foreign location as place to Arbitration. India is also signatory to New York and Geneva Convention which provide reciprocal arrangement for enforcement of Arbitration award in the signatory countries. The parties are free to choose the mode and place of arbitration. The Supreme Court of India vide its judgments have held that awards passed in Arbitrations held in foreign countries are enforceable in India and the Indian Courts will carry out executions of such foreign awards and will not interfere in the same till they come to the conclusion that the award has been obtained by fraud or that the same is against the public policy of India.
While efforts are there to provide a framework for business ease. However, at time some may find the Indian markets, policies very challenging. It is important to have clear guidance and practical approach and investing the time and resources to understand the market which is crucial to succeed. This article is for creating awareness. For any details, you may contact at the coordinates below.</p>
Tax treaty between India and Hongkong
The Comprehensive Avoidance of Double Taxation Agreement (CDTA) between Hong Kong and India came into force on November 30, 2018 after the completion of ratification procedures on both sides. It has started having effect in respect of Hong Kong tax for any year of assessment beginning on or after April 1, 2019.
India is the 7th largest trading partner of Hong Kong . The CDTA will bring a greater degree of certainty on taxation liabilities for those who engage in cross-border business activities, and help promote bilateral trade and investment activities. This Agreement will stimulate flow of investment, technology and personnel from India to HKSAR & vice versa, prevent double taxation and provide for exchange of information between both the sides. It will improve transparency in tax matters and will help curb tax evasion and tax avoidance.
The Agreement had been the long pending demand of Indian community in Hong Kong