India is the second most populous country in the world and the seventh largest in the world by nominal Gross Domestic Product. Therefore the nation’s progress has a very decisive role in determining the status of the global economy. The Indian Government also appears to be focused on economic growth, its development and improving the business environment. It has undertaken several steps to boost both domestic and foreign investor sentiment and to transform the Indian economy into a global manufacturing hub and attract capital and technological investment.
|B. INDIAN LEGAL SYSTEM:|
Understanding the Indian legal system is one of the keys to establishing a successful business relationship with India. The Indian Constitution enshrines the rule of law as a fundamental governance principle, which means, that the courts of law have the power to test all administrative action by the standards of legality and that the government should be conducted within a framework of recognized rules and principles which restrict discretionary powers. The Supreme Court is the highest appellate Court in India and it has declared the rule of law to be one of the ‘basic features’ of the Constitution and hence everyone is supposed to be treated equally before law.
|C. ENTRY OPTIONS INTO INDIA:|
With a fundamental understanding of the Indian legal system, foreign entities desiring to establish operations in India need to structure their business keeping in mind the prevailing laws in the country. Foreign entities contemplating to set up their business operations in India can start their business in any of the following manner:
- By way of incorporating a company in India which may either be a joint venture with an existing Indian entity or by way of incorporating a wholly owned subsidiary of a foreign entity. Such company may either be a private company or a public company to be incorporated under the provisions of the Companies Act, 2013.
- Private Company: A private limited company is a company limited by shares in which there can be maximum 200 shareholders; no invitation can be made to the public for subscription of shares or debentures. It cannot make or accept deposits from public and there are restrictions on the transfer of shares.
- Public Company: A public limited company is a company limited by shares in which there is no restriction on the maximum number of shareholders, transfer of shares and acceptance of public deposits. It is defined as a company which is not a private company (but includes a private company that is the subsidiary of a public company). A public limited company may also list its shares on a recognized stock exchange by way of an initial public offering (“IPO”).
- By way of unincorporated entities wherein the foreign entities are allowed to carry on their business in India in any of the following ways:
- Branch Office: Branch office of a foreign company in India must be set up with the prior consent of the Reserve Bank of India (“RBI”). RBI considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinizing the application. Branch office can represent the foreign parent company in India and act as its buying or selling agent in India. Profits earned by the branch office are freely remittable from India, subject to payment of applicable taxes. Operations of a branch office are restricted due to limitation on the activities that it can undertake (for example: It is not allowed to carry out retail trading activities of any nature or manufacturing or processing activities whether directly or indirectly, in India). It is an option available to foreign companies that intend to undertake research and development activities in India.
- Liaison Office: Setting up a liaison office requires the prior consent of the RBI. A Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between head office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the head office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers. Permission to set up a liaison office is initially granted for a period of 3 years and this may be extended from time to time.
- Project Office: A foreign company may set up a project office in India under the automatic route subject to certain conditions being fulfilled. The activities of a project office must be related to or incidental to the execution of the relevant project. A project office is permitted to operate a bank account in India and may remit surplus revenue from the project to the foreign parent company. Project offices are generally preferred by companies engaged in one-time turnkey or installation projects.
- Limited Liability Partnership: A Limited Liability Partnership (“LLP”) is a form of business entity which permits individual partners to be shielded from the liabilities created by another partner’s business decision or misconduct. In India, LLPs are governed by “The Limited Liability Partnership Act, 2008”. The LLP is a body corporate and exists as a legal person separate from its partners. 100% Foreign Direct Investment (“FDI”) is allowed in LLPs for businesses operating in sectors/activities where 100% FDI is allowed, through automatic route
|D. EXCHANGE CONTROL REGULATIONS IN INDIA:|
Foreign entities intending to set up their business operations in India are required to comply with India’s foreign exchange regulations, which govern foreign direct investment in India. These regulations lay down the thresholds upto which foreign investment is permitted in various sectors. They may be categorized in the following manner:
- Prohibited Sectors i.e. the industries where foreign direct investment is completely prohibited;
- Sectors under Automatic Route i.e. areas where foreign investment is permitted into an Indian Company without prior approval of the Government. This may again be divided into 2 categories:
- Sectors where FDI upto 100% is permitted under automatic route; and
- Sectors where FDI is permitted under automatic route, but are subject to prescribed threshold limits i.e. foreign investment in such sector cannot exceed the laid down limits.
- Sectors under Approval Route i.e. areas where FDI is allowed only with the prior approval of the Central Government.
- Sectors with partial automatic route and partial government route i.e. where foreign investment upto a certain percentage is allowed under the automatic route and the approval of the Government is required for investment beyond such prescribed percentage.
|E. CORPORATE TAXATION:|
In case of resident companies, tax is levied on their gross global income less allowable deductions which include inter alia, expenditures for materials, wages, salaries, bonuses, commissions, rent, repairs, insurance, interest, lease payments, depreciation etc. A company is deemed to be a resident company if it is incorporated in India or is wholly controlled and managed from India. A resident company is not only taxed at a lower rate but is also entitled to additional incentives and rebates. A Foreign Company means a company, which is not a resident company, as defined above. Foreign companies are subject to Indian income tax in respect of income derived from Indian sources or deemed to be so derived. A branch of a foreign company is liable to corporate tax on the profits attributable to such branch at the rate applicable to a foreign company. The taxable income of companies is computed as profits or gains in business, capital gains and income from other sources. The Government aims to widen tax base and ensure greater compliance and therefore it is anticipated that corporate tax rates in India will come down in the coming years.
|F. INTELLECTUAL PROPERTY:|
Intellectual property, very broadly, means the legal rights which result from intellectual activity in the industrial, scientific, literary and artistic fields. Countries have laws to protect intellectual property for two main reasons. One is to give statutory expression to the moral and economic rights of creators in their creations and the rights of the public in access to those creations. The second is to promote, as a deliberate act of government policy, creativity and the dissemination and application of its results and to encourage fair trading which would contribute to economic and social development.
With the advent of the knowledge and information technology era, intellectual capital has gained substantial importance. Consequently, Intellectual Property and the rights attached thereto (“IPRs”) have become precious commodities and are being fiercely protected. Well-established statutory, administrative, and judicial frameworks for safeguarding IPRs exist in India. It becomes pertinent to mention here that India has complied with its obligations under the agreement on trade related intellectual property rights (“TRIPS”) by enacting the necessary statutes and amending its existing statues.
IPRs are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time. Types of Intellectual Property are as follows:
- Copyright: Copyright is a legal term used to describe the rights that creators have over their literary and artistic works. Works covered by copyright range from books, music, paintings, sculpture and films, to computer programs, databases, advertisements, maps and technical drawings.
- Patents: A patent is an exclusive right granted for an invention. Generally speaking, a patent provides the patent owner with the right to decide how – or whether – the invention can be used by others. In exchange for this right, the patent owner makes technical information about the invention publicly available in the published patent document.
- Trademarks: A trademark is a sign capable of distinguishing the goods or services of one enterprise from those of other enterprises. Trademarks date back to ancient times when craftsmen used to put their signature or “mark” on their products.
- Industrial designs: An industrial design constitutes the ornamental or aesthetic aspect of an article. A design may consist of three-dimensional features, such as the shape or surface of an article, or of two-dimensional features, such as patterns, lines or color.
- Geographical indications: Geographical indications and appellations of origin are signs used on goods that have a specific geographical origin and possess qualities, a reputation or characteristics that are essentially attributable to that place of origin. Most commonly, a geographical indication includes the name of the place of origin of the goods.
|G. CRITICAL TERMS OF DEAL STRUCTURES AND FACTORS LEADING TO DEAL SUCCESS:|
Proper structuring of a transaction is a key element in executing deals. While, acquisition of an Indian company can bring geographical strength and local management, on the other hand, joint ventures and strategic alliances may achieve business goals while eliminating the need for integration, new reporting protocols, compliance with foreign government regulations and other post deal challenges. Therefore proper due diligence and appropriate structuring of a transaction is of paramount importance. Also, the transaction documents should have appropriate representations and warranties of the parties to the transaction and should also have other important clauses like indemnity, damages, non-compete, confidentiality and dispute resolution clause.
|H. TRADE WITH INDIA:|
India is fast emerging as a global leader, what with its vast, natural resources, and huge base of skilled manpower. Combined with cutting edge technology, Indian trade market is making its presence felt all across the world. While some may wish to do business in India, many manufacturers and service providers are interested in doing business with India. With a potential market, India is a lucrative export destination. The primary tax relevant to the import of goods into India is customs duty.
Customs duties are levied whenever there is trafficking of goods through an Indian customs barrier i.e. levied both for the export and import of goods. Taxable event is import into or export from India. India includes the territorial waters of India which extend upto 12 nautical miles into the sea from the coast of India. Basic Customs Duty is levied under Section 12 of the Customs Act, 1962, which is often called as charging section, provides that duties of customs shall be levied at such rates as may be specified under ‘The Customs Tariff Act, 1975′, or any other law for the time being in force, on goods imported into, or exported from, India.
Additional Customs Duty or the Countervailing Duty (“CVD”) is equal to excise duty imposed on a like product manufactured or produced in India. It is imposed to bring the price of the imported goods to the level of locally produced goods which have already suffered a duty for manufacture in India (excise duty) the CVD is imposed at the same rate as excise duty on indigenous goods.
In addition to the above, there are also Additional Duties in lieu of State and local taxes (“ACD”) which are also imposed as a countervailing duty against sales tax and value added tax imposed by States. The ACD is currently levied at the rate of 4 per cent. Further, the Central Government, if satisfied that circumstances exist which render it necessary to take immediate action to provide for the protection of the interests of any industry, from a sudden upsurge in the import of goods of a particular class or classes, may provide for a Safeguard Duty. Safeguard Duty is levied on such goods as a temporary measure and the intention for the same is protection of a particular industry from the sudden rise in import.
Under Section 9A of the Tariff Act, the Central Government can impose an Antidumping Duty on imported articles, if it is exported to India at a value less than its normal value prevailing in the exporting country. Such duty is not to exceed the margin of dumping with respect to that article.
|I. RECENT DEALS BETWEEN INDIA AND AUSTRALIA:|
India has recently concluded civil nuclear cooperation agreement with Australia whereby Australia has agreed to become a long-term reliable supplier of uranium to India for India’s nuclear reactors. India also has a double taxation avoidance agreement with Australia.
With the recent programmes being launched by the Indian Government like Make in India, start up India, Digital India, development of smart cities, it is anticipated that India will require huge investments in the near future. India is currently one of the world’s most attractive investment destinations and it is expected that it will continue to be so in the future.
Authors: Prashant Jain, Co-Founder & Partner; Anita Baid, Senior Partner.
Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. For any queries, the authors can be reached at (i) firstname.lastname@example.org (ii) email@example.com.