INTRODUCTION
India has already marked its presence as one of the fastest growing economies of the world. It has been ranked among the top 10 attractive destinations for inbound investments. Since 1991, the regulatory environment in terms of foreign investment has been consistently eased to make it investor-friendly. India, with a young skilled workforce, high growth rate and deregulation being undertaken by the government, is set to become an important destination for foreign investment.
The government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results. The latest report on World Bank’s ease of doing business ranking has improved India’s position from 77th to 63rd position. The country earned a place among the world’s top 10 improvers for the third consecutive year. This coupled with the recent corporate tax rate reduction, augurs well for business and makes India a preferred investment destination.
According to Department for Promotion of Industry and Internal Trade (DPIIT), FDI equity inflows in India in 2018-19 stood at US$ 44.37 billion,
The net foreign direct investment stood US$ 3.034 billion in May 2019 and US$ 7 billion in June 2019. India invited US$ 7.8 billion of foreign investment in month of June 2019 as compared to US$ 1.6 billion in previous year.
Data for 2018-19 indicates that the services sector attracted the highest FDI equity inflow of US$ 9.16 billion, followed by computer software and hardware – US$ 6.42 billion, trading – US$ 4.46 billion and telecommunications – US$ 2.67 billion. Most recently, the total FDI equity inflows for the month of March 2019 touched US$ 3.60 billion.
During 2018-19, India received the maximum FDI equity inflows from the countries mentioned below:
| Singapore | US$ 16.23 billion |
| Mauritius | US$ 8.08 billion |
| Netherlands | US$ 3.87 billion |
| USA | US$ 3.14 billion |
| Japan | US$ 2.97 billion |
Source www.ibef.org
The measures taken by the Government are directed to open new sectors for foreign direct investment, increase the sectoral limit of existing sectors and simplifying other conditions of the FDI policy. FDI policy reforms are meant to provide ease of doing business and accelerate the pace of foreign investment in the country.
FDI can be from Overseas Individuals, Foreign Companies or Foreign Institutional Investors under Automatic Route or Government Route.
Automatic Route:
Under this route no Central Government permission is required for Investment in all activities/ sectors which have been specified. To name a few sectors – Industrial Parks, Telecom Services, E-commerce activities, Information & Technology services, Outsourcing & Consultancy services etc., The Indian entity is required to undertake reporting to the concerned Regional office of RBI through its Authorized dealer within 30 days from the date of issue of capital instruments to a person resident outside India or foreign entity.
Government Route:
FDI in activities not covered under the automatic route require prior Government approval. The sectors which fall under Government route are specified. Some of the sectors are Defence, Pharma, Multi brand Retail Trading etc., In Defence sector, Foreign investment up to 49% is permitted under the automatic route, Foreign investment beyond 49% and upto 100% is permitted through Government approval. Similarly, FDI in Brownfield pharma sector has been permitted upto 74% under automatic route and FDI beyond 74% and upto 100% is allowed under Government approval route. Further, 100% FDI under automatic route is permitted for Greenfield pharma sector. FDI in multi brand retail is permitted upto 51%.
A. ENTRY STRUCTURES
The ways a foreign Investor can enter Indian market by setting up an entity as an entry vehicle, such as:
- Incorporating a Company
- Incorporating a LLP
- Extension of Foreign Entity by way of Liaison office, Project Office and Branch office
A.1 Incorporating a company:
A foreign company can commence operations in India by incorporating a Private or Public Limited Company under the Indian Companies Act through:
- Joint Ventures
- Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor and subject to equity cap in respect of activities under the Foreign Direct Investment (FDI) policy.
Joint Ventures
Joint Venture with an Indian Partner. Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners.
Wholly Owned Subsidiary Company
Foreign companies can also to set up wholly-owned subsidiary in sectors where 100% Foreign Direct Investment is permitted under the FDI policy. Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
Features of a JV company/Indian Subsidiary
- Treated as Indian company for all applicable laws and income tax purposes.
- Funding mechanism is usually by way of subscription to Equity shares and/or Convertible Preference Shares / debentures of the company. Equity, Debt (Foreign and Local) and Internal accruals.
- No approval required for repatriation of dividends
- Mandatory Requirement of Resident Director in India under Companies Act, 2013.
- Indian Transfer pricing regulation apply
- Taxed at lower rate as compared to a foreign company
- Subject to dividend distribution tax (DDT)
A.2 Incorporating a Limited liability partnerships (LLP):
The Indian LLP regulation, allows foreign national and foreign LLP’s to become partner in Indian LLP. Listed below are the points on Ownership and management of LLPs:
- Partner:At least 2 persons (natural or artificial) are required to form a LLP. In case any Body Corporate is a partner, then it will be required to nominate any person (natural) as its nominee for the purpose of LLP.
- Determination of Designated Partner: Every limited liability partnership shall have at least two designated partners who are individuals and at least one of them shall be a Resident in India
- Body Corporate as Designated Partner:In case of LLP having Foreign Direct Investment (FDI), the designated partner can be a body corporate which is a company registered under the Indian Companies Act or a Foreign Company represented through an Individual.
- Compliance of Foreign Direct Investment (FDI) Policy: The designated partners will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.
- Conversion into LLP:Any conversion of a company with FDI into an LLP will be allowed only if the company is engaged in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions and prior approval of Government is obtained.
- Foreign direct Investment (FDI)is permitted in LLPs operating in sectors/ activities where 100% FDI is allowed, through the automatic route and there are no FDI linked performance conditions. Also, an Indian company or LLP, having foreign investment, will be permitted to make downstream investment in another company or LLP in sectors in which 100% FDI is allotted under the automatic route and there are no FDI linked performance conditions
A.3 Extension of a Foreign entity:
Foreign Companies can set up their operations in India through
- Liaison Office/Representative Office
- Project Office
- Branch Office
Such offices can undertake any permitted activities. Foreign Companies have to register themselves with Registrar of Companies
A.4 Other structures:
Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA).
B. STEPS INVOLVED IN SETTING UP AN ENTITY IS INDIA
- Identify the structure
- Undertake Central Government approval, if required
- Incorporate the entity.
- Obtain basic Registrations like PAN, TAN, GST etc.,
- Obtain other State & Central level registrations.
- Arrange for inflow of funds via eligible instruments and by following pricing guidelines
- Meet the reporting requirements of RBI and Companies Act
- Obtaining Industry specific licenses, if any.
- Meet annual requirements based on the structure, file returns and pay taxes etc.,
Mode of receipt of Foreign Remittance
Companies Incorporated in India can receive overseas remittances in the following forms:
- Share Capital– Foreign Direct Investment by Issuance of shares / convertible preference shares/ debentures under the FDI Scheme.
- Revenue– Earned against the Invoice raised for services rendered to overseas clients/customers
- Borrowings– External Commercial Borrowings by way of Loans, Capital market instruments, floating rate notes / fixed rate bonds / securitised instruments, non-convertible, optionally convertible or partially convertible preference shares, FCCB etc.,
Repartriation
Repatriation of Dividend:
Dividends are freely repatriable without any restrictions (net after tax deduction at source or Dividend Distribution Tax.
Repatriation of Capital:
- Authorized Dealer(AD) Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.
- Investments are subject to lock-in period of 3 years in case of construction development sector.
Repatriation of Interest:
- Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes).
Structuring of Investments into India:
Investments into India are often structured through holding companies in various jurisdictions for number of strategic and tax reasons. For instance, US investors directly investing into India may face difficulties in claiming credit of Indian capital gains tax on securities against US taxes, due to the conflict in source rules between the US and India. In such a case, the risk of double taxation may be avoided by investing through an intermediary holding company.
While choosing a holding company jurisdiction it is necessary to consider a range of factors including political and economic stability, investment protection, corporate and legal system, availability of high quality administrative and legal support, banking facilities, tax treaty network, reputation and costs.
Over the years, a major bulk of investments into India has come from countries such as Mauritius, Singapore and Netherlands, which are developed and established financial centers that have favorable tax treaties with India. There may be advantage of capital gains tax, withholding tax on outbound royalties and fees for technical services etc., by these treaties.
C. ASPECTS OF TAXATION
Indirect Tax:
The newly introduced Good & Services Tax was launched in India on 1st of July, 2017. Goods & Services Tax Law in India is a comprehensive, multi-stage, destination-based tax that will be levied on every value addition. The GST slabs are pegged at 5%, 12%, 18% & 28% depending on the nature of products and services. Various Indirect Taxes like the Central Excise Duty, Additional Excise Duty, Service Tax, Customs Duty have been subsumed into single tax GST. Every Individual or entity which makes a taxable supply of goods or services is required to pay GST.
Direct Taxes:
The investor is required to pay tax on net income earned in India. The rates of taxes differ among structures.
Tax on Company:
The drastic reduction in tax rates has been a welcome initiative by corporates. Income-tax Act with effect from FY 2019-20 allows any domestic company an option to pay income-tax at the rate of 25.17% inclusive of surcharge & cess subject to condition that they will not avail any exemption/incentive. Also, such companies will not be eligible for Minimum Alternate Tax credit.
Also, new domestic companies incorporated on or after 1st October 2019 making fresh investment in manufacturing, an option to pay income-tax at the rate of 17.01% inclusive of surcharge & cess. This benefit is available to companies which do not avail any exemption/incentive and commences their production on or before 31st March, 2023. Also, such companies will not be eligible for Minimum Alternate Tax credit.
In other cases, the tax rates remain unchanged at 30% (plus applicable surcharge and education cess). Surcharge varies from 0-12% and Health and Education cess is 4%
Tax on Limited Liability Partnerships (LLPs):
LLPs are required to pay tax 30% flat tax rate. Additionally Health and Education cess is at the rate of 4%. Surcharge of 12% will be levied only if the taxable income exceeds Rs. 1 crore. Alternative Minimum Tax for LLPs is at the rate of 18.5% but there is no Dividend Distribution Tax.
Tax on Branch office/ Project office/ Liaison office or permanent establishment:
Foreign Company operating through its Branch office, Project Office or Liaison Office will be taxed at a Flat Tax rate 40%
- a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 2% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 5% of such tax, where total income exceeds ten crore rupees.
- b) Education Cess: The amount of income-tax and the applicable surcharge, shall be further increased by education cess calculated at the rate of 4% per cent of such income-tax and surcharge.
There is no tax on profits distributed.
Minimum Alternate Tax (MAT):
Indian tax law requires MAT to be paid by corporations in cases where the tax payable according to the regular tax provisions is less than 15% of their book profits. The MAT rate is 15%+Surcharge (if applicable)+4% Education Cess. However MAT credit (MAT-actual tax) can be carried forward in next 10 years for set-off against regular tax payable during the subsequent years subject to certain conditions.
D. LICENCES & REGISTRATIONS
Any entity which sets up its operations in India is firstly required to undertake basis registrations like PAN, TAN, GST etc.,
Apart from these, there are some key Establishment & Employment laws under which the entities have to Register in India. The list is exhaustive and would depend on the nature of activity, No. of employees, location etc., However, some of them are listed below. There are also some Industry specific registrations which will be required.
Basic Registrations:
| Sl No | Enactment | Approval/ registrations/ license required | Applicability |
| 1. | PAN – Income Tax Act | Income Tax Department | Every tax payer/ assesse.
PAN is a universal identification code for Financial transactions |
| 2. | TAN – – Income Tax Act | Income Tax Department | Every Individual or entity who is responsible for Tax Deduction at Source (TDS) or Tax Collection at Source (TCS) |
| 3. | Central Goods and Services Tax Act, 2017 | Goods & Service Tax (GST) | Any person who makes a taxable supply of goods or services or both and his aggregate turnover in any financial year exceeds Twenty Lakh Rupees has to compulsory register under GST. |
Establishment & employment related Registrations:
| 4. | Registration under Shops and Establishments Act | Registration and thereafter requires renewal every calendar year | Applicable to all shops and commercial establishments etc., other than covered under Factories Act, 1948. |
| 5. | Employees State Insurance Act, 1948 | Registration/ transfer | Entity employing 10 or more persons (including contract labour) have to register under the said act.
Note:- Contribution has to be paid for employees who are drawing the remuneration in gross up to Rs 21,000/- per month |
| 6. | Employees’ Provident Funds and Miscellaneous Act, 1952 | Registration / transfer | Entity employing 20 or more persons have to register under the said act.
Note:- Contribution has to be paid for employees whose Basic plus DA is up to Rs 15000/- per month. |
| 7. | Contract Labour (Regulation and Abolition) Act, 1970 | Registration / transfer | Entity in which twenty or more workmen are employed or were employed on any day of the preceding twelve months as contract labour. |
| 8. | Tax on Professions, Trades, Callings and Employments Act (State specific Act) | a) Registration | Every employer who is liable to pay tax on behalf of employee should register and obtain a certificate of registration from the assessing authority. |
| b) Enrolment | Every employer has to enrol for Professional Tax. | ||
| c) Enrolment | Every director drawing remuneration has to enrol for Professional Tax. | ||
| 9. | Municipal Corporation Act | Municipal Trade License | Every Trader to run the business within the jurisdiction of Municipality should get License from the Corporation. |
| 10. | Foreign Trade (Development and Regulation) Act 1992 | Importer and Exporter Code(IEC) | IEC is required to Import or Export in India. No person or entity shall make any import or export without IEC. |
To conclude, whilst it is apparent that India still has a long way to go, it is and will continue to be an attractive destination for investment and trade. India’s expanding levels of intellectual capital, large English-speaking population, high levels of domestic consumption coupled with significant cost competitiveness is likely to make it a global hub for services and manufacturing.
Contributed by:
G Raghu Babu, Founder Partner, R&A Associates – raghu@rna-cs.com, +91 98480 27782
Vaishali Vohra, Senior Associate, R&A Associates – vaishali@rna-cs.com, +91 9043003883
Updated as on 30th October, 2019
Disclaimer: The content of this article is intended to provide a general guide on the subject matter. Specialist advice should be sought about your specific circumstances.