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9. Starting A New Venture In India

9 .1 Step by Step Procedur es to Sta r t a New Com pany

Incorporation of a Company

Incorporation of a company in India is governed by the Companies Act,

1956. Part II of the Act deal with the incorporation of a company and

matters related thereto.

Private Company

Private company means a company which has a minimum paid-up

capital of Rs 1,00,000/- or such higher paid-up capital as may be

prescribed, and by its articles,

(a) Restricts the rights to transfer its shares, if any;

(b) Limits the number of its members to fifty, not including

(c) Persons who are in the employment of the company; and persons

who, having been formerly in the employment of the company, were

members of the company while in that employment have continued to

be members after the employment ceased; and

(e) Prohibits any invitation to the public to subscribe for any shares in,

or debentures of, the company;

(f) Prohibits any invitation or acceptance of deposits from persons

other than its members, directors or their relatives.

Public Company

A public company is a company which is not a private company, has a

minimum paid-

up capital of Rs,5,00,000/-or such higher paid-up capital, as may be

prescribed; is a private company which is a subsidiary of a company

which is not a private company.

Formation of a Private Limited Company

A private Company can be formed either by

i. Incorporation of a new company for doing a new business, or

ii. Conversion of existing business of a sole proprietary concern or

partnership firm into a company.


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Name of Company

The name of a Company is the symbol of its existence. Any suitable

name may be selected for registration subject to the following

guidelines:

a. The promoters should select three to four alternative names, quite

distinct from each other.

b. The names should include, as far as possible, activity as per the

main objects of the proposed company.

c. The names should not too closely resemble with the name of any

other registered company.

d. The official guidelines issued by the Central Government should be

followed while selecting the names. Besides, the names so selected

should not violate the provisions of the Emblems and Names

(Prevention of Improper Use) Act, 1950.

e. Apply in form 1-A to the Registrar of Companies having jurisdiction

along with a filing fee of Rs. 500.

Memorandum of Association

An important step in the formation of a company is to prepare a

document called Memorandum of Association. It is the charter of the

company and it contains the basic conditions on which the company is

incorporated.

The Memorandum contains the name, the State in which the registered

office is to be situated, main objects of the company to be pursued by

the company on its incorporation and objects incidental or ancillary tothe attainment of the main objects, liability of the members and the

authorized capital of the company. The main purpose of the

memorandum is to state the scope of activities and powers of the

company.

Articles of Association


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Articles of Association of the company contain rules, regulation and

bye-laws for the general management of the company. It is

compulsory to get the Articles of

Associations registered along with the Memorandum of Association in

case of a private company.

The Articles are subordinate to the Memorandum of Association.

Therefore, the Articles should not contain any regulation, which is

contrary to provisions of the Memorandum or the Companies Act. The

Articles are binding on the members in relation to the company as well

as on the company in its relation to members.

Steps to incorporate Public Limited Company

1. Select, in order of preference, a few suitable names, not less than

four, each of which should indicate as far as possible the main object

of the proposed company.

2. Out of the four proposed names as above one name will be the main

and other three to be mentioned in order of preference.

3. Avoid names which resemble too closely or are the same as the

names of any other company already registered and also avoid names

with the words Stock Exchange as part of the name.

4. Names starting with small alphabets can be used but before using

such names it should be ensured that such names do not have

phonetic or visual resemblance to the name of a company in existence.

5. Follow the guidelines issued by the Central Government for

availability or otherwise of certain names.

6. See that the name chosen does not violate the provisions ofEmblems and Names

(Prevention of Improper Use) Act, 1950.

7. Also see that the name chosen does not contain words like mutual

funds forming part of your proposed company unless it is going to be

incorporated actually as a mutual fund company.

8. Apply to the Registrar of Companies to ascertain which of the names

selected by you is available.


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9. An application in Form No. 1A is prescribed in this regard by the

companies (Central Government's) General Rules and Forms, 1956 and

a fee of Rs. 500/- is payable with each application

10. See that one of the promoters is kept as the subscriber to the

memorandum and articles of association of the proposed company.

11. Pay the fee for the application for availability of name in cash to

the Registrar of Companies.

12.The Registrar of Companies will ordinarily inform within a period of

seven days from the date of submission of your application whether

any of the names applied for is available or not.

13. If the same is not made available, apply again to the Registrar of

Companies selecting fresh names with required application fee.

14. Get the memorandum and Articles of Associations suitably drafted.

(a) The Articles of Association need not necessarily be prepared and

registered

in the case of public companies limited by shares as in that case, Table

'A' of schedule I shall apply, but in practice, they are invariably

prepared and registered to suit individual requirement;

(b) While drafting ensure that Memorandum and Articles of Association

are divided into paragraphs numbered consequently;

15. Ensure that the authorized share capital of the proposed public

company is or more than Rs. 5 lakhs or such higher amount as may be

prescribed to be the minimum paid up capital for a public company

16. Before finally printing the Memorandum and Articles of Association

get proper guidance from the concerned Registrar of Companies, so

that at their time of registration there are less corrections andalterations.

17. Keep in mind that computer printed Memorandum and Articles of

Association will be accepted and taken on record by all the Registrar of

Companies from now on.

18. Get both the Memorandum and Articles of Association stamped as

per the Indian. Stamp Act or the relevant State Act and the

notifications there under in force in your state.


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19. Get both the Memorandum and Articles of Association after

being stamped and duly signed by at least seven subscribers, each of

whom will also write in his own hand, his father's name, occupation,

address and the number of shares subscribed for.

20. There will be at least one witness to these signatures as mentioned

above who will sign and write in his own hand his father's name,

occupation and address.

21. The aforesaid two documents may be signed on behalf of the

subscriber by their agents duly authorized by power of attorney.

22. Both these documents will then be dated.

23. See that the date given on these two documents is any date after

the date of stamping of them and not before that date.

24. Submit these documents along with the registration fee to the

Registrar of Companies (RoC) where the company is being

incorporated. The registration fee depends on the Authorized Capital

with which the company is proposed to be registered. For example, if

the Authorized Capital (5 lakh shares @ Rs.10/- each) of the proposed

private limited company as mentioned in the Memorandum of

Association is Rs. 50,00,000, then the Registration fee will be Rs,

1,08,000 (inclusive of documents filing fee of Rs. 2,000/)

On registration a public company cannot commence business so long it

does not obtain Certificate of Commencement of Business. Please note

that if you propose to incorporate a private company as a subsidiary of

a public company, it will be treated as a public company.


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9 .2 Bus iness Reg ist r a t ion Procedure Flow char t

The flow chart below shows the broad steps to be taken to register the

company before commencing the business operations:-

End

Obtain a certificate of commencement of business

from ROC in case of a public company

Receipt of Certificate of incorporation

Payment of registration fee to the Registrar of Companies

Getting the appropriate persons to subscribe to the Memorandum

(a minimum of 7 for a public company and 2 for a private company)

Drawing up the Articles of Association.

Drawing up the Memorandum of Association

Obtaining approval for the proposed name of the

company form the Registrar of Companies

Start


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9. 3 En t ry S t ra t eg ies fo r Fo re ign I nves to r s

A foreign company planning to set up business operations in India has

the following options

As An I ndian Company

A foreign company can commence operations in India by incorporatinga company under the Companies Act, 1956 through

a) Wholly Owned Subsidiaries; orb) Joint Ventures

Foreign equity in such Indian companies can be up to 100% depending

on the requirements of the investor, subject to equity caps in respect

of the area of activities under the Foreign Direct Investment (FDI)

policy. Details of the FDI policy, sectoral equity caps & procedures canbe obtained from Department of Industrial Policy & Promotion,

Government of India (http://www.dipp.nic.in ).

Option 1

Wholly owned

subsidiary

Company

A foreign company can set up a wholly owned

subsidiary company in India for carrying out its

activities.

Such subsidiary is treated as an Indian resident

and an Indian company for all regulations (incl.

Income Tax, Companies Act), despite being foreign

owned.

At least two and seven shareholders are mandatory

for a private

limited and public limited company respectively

Private Limited Company

Formed between 2 to 50 members. it prohibits

invitation to public for capital issues. Many

provisions of the Companies Act are not applicable.

Also, there is a restriction on transfer of shares

and the taxation rates are higher

Public Limited Company
http://www.dipp.nic.in/http://www.dipp.nic.in/


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It must have at least 7 shareholders. A public

company is not authorized to start business upon

the grant of the certificate of incorporation. In

order to be eligible to commence business as a

corporation, it must obtain another documentcalled "trading certificate". It must publish a

prospectus or file a statement in lieu of a

prospectus before it can start transacting business.

A public company is required to have at least 3

directors. It must hold statutory meetings and

obtain government approval for the appointment of

the management.

Option 2

Joint venture

with an Indian

partner

preferably with

majority equityparticipation

Though a wholly owned subsidiary has been the

most preferred option, foreign companies have also

been setting up shop in India by forging strategic

alliances with Indian partners. The trend in this

respect is to choose a partner who is in the same

field/area of activity and has sufficient experienceand expertise in the relevant line of activity

Incorporation of Company

For registration and incorporation, an application has to be filed with

Registrar of Companies (ROC). 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. For details please visit the website of Department of

Company Affairs under Ministry of Finance at http://dca.nic.in

As A Foreign Company

Foreign Companies can set up their operations in India through

Liaison Office/Representative Office

Project Office
http://dca.nic.in/http://dca.nic.in/


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Branch Office

Such offices can undertake any permitted activities. Companies have

to register themselves with Registrar of Companies (ROC) within 30

days of setting up a place of business in India.

Option 1: Liaison Office/ Representative Office

Liaison office acts as a channel of communication between the principal

place of business or head office and entities in India. Liaison office

cannot undertake any commercial activity directly or indirectly and

cannot, therefore, earn any income in India.

Its role is limited to collecting information about possible market

opportunities and providing information about the company and its

products to prospective Indian customers. It can promote

export/import from/to India and also facilitate technical/financial

collaboration between parent company and companies in India.

Approval for establishing a liaison office in India is granted by Reserve

Bank of India (RBI).

Option 2: Project Office

Foreign Companies planning to execute specific projects in India can

set up temporary project/site offices in India. RBI has now granted

general permission to foreign entities to establish Project Offices

subject to specified conditions. Such offices can not undertake or carry

on any activity other than the activity relating and incidental to

execution of the project. Project Offices may remit outside India the

surplus of the project on its completion, general permission for which

has been granted by the RBI.

Option 3: Branch Office

Foreign companies engaged in manufacturing and trading activities

abroad are allowed to set up Branch Offices in India for the following

purposes:

(i) Export/Import of goods

(ii) Rendering professional or consultancy services

(iii) Carrying out research work, in which the parent company is

engaged.


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(iv) Promoting technical or financial collaborations between Indian

companies and parent or overseas group company.

(v) Representing the parent company in India and acting as

buying/selling agents in India.

(vi) Rendering services in Information Technology and development of

software in India.

(vii) Rendering technical support to the products supplied by the

parent/ group companies.

(viii) Foreign airline/shipping company.

A branch office is not allowed to carry out manufacturing activities on

its own but is permitted to subcontract these to an Indian

manufacturer. Branch Offices established with

the approval of RBI, may remit outside India profit of the branch, net

of applicable Indian taxes and subject to RBI guidelines Permission for

setting up branch offices is granted by the Reserve Bank of India

(RBI). Branch Office on Stand Alone Basis Such Branch Offices would

be isolated and restricted to the Special Economic zone (SEZ) alone

and no business activity/transaction will be allowed outside the SEZs in

India, which include branches/subsidiaries of its parent office in India.

No approval shall be necessary from RBI for a company to establish a

branch/unit in SEZs to undertake manufacturing and service activities

subject to specified conditions.

Application for setting up Liaison Office/Project Office/ Branch Office

may be submitted

in form FNC 1 (available at RBI website at www.rbi.org.in )

9 .4 Fo r e ign D ir ect I nvestm en t ( FD I ) Po l i cy

The Indian government has recognized the importance of foreign direct

investment as an important factor in the economic growth of the

nation. This will help to supplement as well as complement the

domestic investment in India. Foreign direct investment in India is

allowed freely in all sectors, except a small number of sectors, where
http://www.rbi.org.in/http://www.rbi.org.in/


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specific guidelines do not allow foreign direct investment beyond a

limit.

Under the current FDI framework, foreign investment is permitted

from all categories of investors and in all sectors except

From the citizens/entities of Pakistan and Bangladesh From the certain sectors, namely :

Atomic Energy Lottery Business/ Gambling & Betting Agriculture (excluding floriculture, horticulture, seed

development, animal husbandry, pisciculture and

cultivation of vegetables, mushrooms etc.)

Plantations (excluding Tea plantation) Retail Trading

For other sectors, there are two a p p ro v a l r o u te s for foreign

investment in India:

Automatic route under delegated powers exercised by theReserve Bank of India (RBI)

Approval by the Government through the Foreign InvestmentPromotion Board (FIPB) under the Ministry of Finance

9.4.1 Automatic Route of Investment

No prior approval is required for FDI under the Automatic Route. Only

information to the RBI within 30days of inward remittances or issue of

shares to Non Residents is required. RBI has prescribed a new form,

Form FC-GPR (instead of earlier FC-RBI) for reporting shares issued to

the Foreign Investors by an Indian company. FDI under automatic

route is now allowed in all sectors, including the services sector,

except a few sectors where the existing and notified sectoral policy

does not permit FDI beyond a ceiling.


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9.4.2 Government Approval - Foreign Investment Promotion

Board (FIP B) Route

Foreign Investment not covered under the Automatic Route is

considered for Government approval on the recommendations of the

Foreign Investment Promotion Board (FIPB).

The proposal for foreign investment is decided on a case-to-case basis

depending upon the merits of the case and in accordance with the

prescribed sectoral policy. Preference is given to projects in high

priority industries, infrastructure sector, those having export potential,

large-scale employment opportunities, linkages with agriculture and

food processing sector, projects focused on North Eastern region of

India, project having social relevance or relating to infusion of capital

and induction of technology.

9.4.3 Foreign Direct Investment Norms for the investors

Fo re ig n Di r e ct I n v e stm e n t ( FDI ) is permitted as under thefollowing forms of investments:

Through financial collaborations Through joint ventures and technical collaborations Through capital markets via Euro issues Through private placements or preferential allotments

100% Export Oriented Units/ Export Processing Zones/ SpecialEconomic Zones

100 per cent Export Oriented Units (EOUs) and units in the Export

Processing Zones (EPZs)/Special Economic Zones (SEZs), enjoy a

package of incentives and facilities, which include duty free imports of

all types of capital goods, raw material, and consumables in addition to

tax holidays against export. 100% FDI is permitted under automatic

route for setting up of industrial park/industrial model town/specialeconomic zone in the country.


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FDI up to 100% for new and existing companies/joint ventures /firms,

is permitted under the automatic route (i.e. without requiring prior

approval) for the following items/activities:

Most manufacturing activities Non-banking financial services Infrastructure such as roads and highways, ports and harbours,

electricity generation transmission and distribution, mass rapid

transit systems, LNG projects, etc.

Drugs and pharmaceuticals that do not attract compulsorylicensing or involve use of recombinant DNA technology

Hotels and tourism Food processing Electronic hardware Software Development Film industry Advertising Hospitals Oil refineries Pollution control and management Exploration and mining of

minerals other than diamonds and precious stones

Management consultancy Venture capital funds/ companies Setting up/ development of industrial park/ industrial model

town/ SEZ

Government route

Airports (beyond 74%) B2B e-commerce Trading companies within notified policy Drugs and pharmaceuticals not falling under the automatic route Integrated township development ISPs without gateways, electronic mail and voice mail beyond 49

per cent Courier services other than distribution of letters


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TV software production for Broadcasting

FDI upto100% is allowed through the automatic route for all

manufacturing activities in

Special Economic Zones (SEZs), except for the following activities:

Arms and ammunition, explosives and allied items of defenseequipments, defense aircraft and warships;

Atomic substances; Railways; Narcotics and psychotropic substances and hazardous chemicals; Minerals; Postal Service Distillation and brewing of alcoholic drinks; and Cigarettes/cigars and manufactured tobacco substitutes.

9.4.4 Sector specific guidelines for Foreign Direct Investment

(FDI)

The results of Sector specific guidelines for FDI in India has been that

it has made it easy for the foreign investors to make investments in

the different sectors of the country and this in its turn has led to huge

inflows of foreign direct investment in India.

FDI in Hotel & Tourism sector in India

100% FDI is permissible in the sector on the automatic route.

The term hotels include restaurants, beach resorts, and other tourist

complexes providing accommodation and/or catering and food facilities

to tourists. Tourism related industry include travel agencies, tour

operating agencies and tourist transport operating agencies, units

providing facilities for cultural, adventure and wild life experience to

tourists, surface, air and water transport facilities to tourists, leisure,

entertainment, amusement, sports, and health units for tourists and

Convention/Seminar units and organizations.

For foreign technology agreements, automatic approval is granted if


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i. up to 3% of the capital cost of the project is proposed to bepaid for technical and consultancy services including fees for

architects, design, supervision, etc.

ii. up to 3% of net turnover is payable for franchising andmarketing/publicity support fee, and up to 10% of gross

operating profit is payable for management fee, including

incentive fee.

FDI in Private Sector Banking in India

Non-Banking Financial Companies (NBFC)

49% FDI is allowed from all sources on the automatic route subject to

guidelines issued from RBI from time to time.

a. FDI/NRI/OCB investments allowed in the following 19 NBFCactivities shall be as per levels indicated below:

i. Merchant bankingii. Underwritingiii. Portfolio Management Servicesiv. Investment Advisory Servicesv. Financial Consultancyvi. Stock Brokingvii. Asset Managementviii. Venture Capitalix. Custodial Servicesx. Factoringxi. Credit Reference Agenciesxii. Credit rating Agenciesxiii. Leasing & Finance


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xiv. Housing Financexv. Foreign Exchange Brokeringxvi. Credit card businessxvii. Money changing Businessxviii. Micro Creditxix. Rural Credit

b. Minimum Capitalization Norms for fund based NBFCs:i) For FDI up to 51% - US$ 0.5 million to be brought upfront

ii) For FDI above 51% and up to 75% - US $ 5 million to be

brought upfront

iii) For FDI above 75% and up to 100% - US $ 50 million out of

which US $ 7.5 million to be brought upfront and the balance in

24 months

c. Minimum capitalization norms for non-fund based activities:Minimum capitalization norm of US $ 0.5 million is applicable in respect

of all permitted non-fund based NBFCs with foreign investment.

d. Foreign investors can set up 100% operating subsidiaries

without the condition to disinvest a minimum of 25% of its equity to

Indian entities, subject to bringing in US$ 50 million as at b) (iii) above

(without any restriction on number of operating subsidiaries without

bringing in additional capital)

e. Joint Venture operating NBFC's that have 75% or less than 75%

foreign investment will also be allowed to set up subsidiaries for

undertaking other NBFC activities, subject to the subsidiaries also

complying with the applicable minimum capital inflow i.e. (b)(i) and

(b)(ii) above.


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f. FDI in the NBFC sector is put on automatic route subject to

compliance with guidelines of the Reserve Bank of India. RBI would

issue appropriate guidelines in this regard.

FDI in Telecommunication sector

i. In basic, cellular, value added services and global mobilepersonal communications by satellite, FDI is limited to 49%

subject to licensing and security requirements and adherence by

the companies (who are investing and the companies in which

investment is being made) to the license conditions for foreign

equity cap and lock- in period for transfer and addition of equity

and other license provisions.

ii. ISPs with gateways, radio-paging and end-to-end bandwidth,FDI is permitted up to 74% with FDI, beyond 49% requiring

Government approval. These services would be subject to

licensing and security requirements.

iii. No equity cap is applicable to manufacturing activities.iv. FDI up to 100% is allowed for the following activities in the

telecom sector :

a. ISPs not providing gateways (both for satellite andsubmarine cables);

b. Infrastructure Providers providing dark fiber (IP Category1);

c. Electronic Mail; andd. Voice Mail

The above would be subject to the following conditions:

e. FDI up to 100% is allowed subject to the condition thatsuch companies would divest 26% of their equity in favor

of Indian public in 5 years, if these companies are listed inother parts of the world.


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f. The above services would be subject to licensing andsecurity requirements, wherever required.

Proposals for FDI beyond 49% shall be considered by FIPB on case to

case basis.

FDI In P ower Sector in India

Up to 100% FDI allowed in respect of projects relating to electricity

generation, transmission and distribution, other than atomic reactor

power plants. There is no limit on the project cost and quantum of

foreign direct investment.

FDI I n Real Estate Sector in India

Further the Sector specific guidelines for FDI in India for the sectors of

townships, built- up infrastructure, housing, and construction

development projects is that foreign direct investment up to 100% is

allowed in all the sectors.


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Drugs & P harmaceuticals

FDI up to 100% is permitted on the automatic route for manufacture

of drugs and pharmaceutical, provided the activity does not attract

compulsory licensing or involve use of recombinant DNA technology,

and specific cell / tissue targeted formulations.

FDI proposals for the manufacture of licensable drugs and

pharmaceuticals and bulk drugs produced by recombinant DNA

technology, and specific cell / tissue targeted formulations will require

prior Government approval.

Roads, Highways, Ports and Harbors

FDI up to 100% under automatic route is permitted in projects for

construction and maintenance of roads, highways, vehicular bridges,

toll roads, vehicular tunnels, ports and harbors.

FDI in other Manufacturing sectors:

Most Manufacturing sectors are on the 100% automatic route.Foreign equity is limited only in production of defense equipment

(26%) and 5 specific industries where an Industrial License (IL)is mandatory.

Most mining sectors are similarly on the 100% automatic route,with foreign equity limits only on atomic minerals (74%), coal &

lignite (74%) and diamonds and precious stones (74%).

100% equity is also allowed in non-crop agro-allied sectors(agro-processing) and crop agriculture under controlled

conditions (e.g. hot houses).


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Pollution Control and Management

FDI up to 100% in both manufacture of pollution control equipment

and consultancy for integration of pollution control systems is

permitted on the automatic route.

Call Centers in India / Call Centres in India

FDI up to 100% is allowed subject to certain conditions.

Business Process Outsourcing BPO in India

FDI up to 100% is allowed subject to certain conditions.

Some other sectors, where partial or full FDI is allowed, have been

indicated in the tables below:-


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i) Automatic route for specified activities subject to Sectoral cap and

conditions.

Sectors Cap

Airports

Existing Greenfield

74%

100%

Air Transport Services

Non Resident Indians Other

100%

49%

Alcohol distillation and brewing 100%

Banking (Private Sector) 74%

Coal and Lignite mining (specified) 100%

Coffee, Rubber processing and warehousing 100%

Construction and Development (Specified

projects)

100%

Floriculture, Horticulture and Animal Husbandry 100%

Specified Hazardous chemicals 100%

Industrial Explosives Manufacturing 100%

Insurance 26%

Mining (Precious metals, Diamonds and stones) 100%

Non banking finance companies ( conditional) 100%

Petroleum and Natural gas

Refining (private companies) Other areas

100%

100%

Power generation, transmission, distribution 100%

Trading


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Wholesale cash and carry Trading of Exports

100%

100%

SEZs and Free Trade Warehousing Zones 100%

ii) Prior Approval from FIPB for the Sectoral cap for various activities

listed below.

Sectors* Cap

Existing Airports 74% to 100%

Asset reconstruction companies 49%

Atomic Minerals 74%

Broadcasting

FM Radio Cable network, Direct-To-Home

(DTH), Setting up hardware facilities

Up linking news and current affairs Up linking non-news, current affairs

TV channel

20%

49%

26%

100%

Cigarette manufacturing 100 %

Courier services other than those under

the ambit of Indian Post Office Act, 1898

100 %

Defense production 26 %

Investment companies in infrastructure /

service sector (except telecom)

49 %

Petroleum and natural gas refining (PSU) 26 %

Tea Sector including Tea plantation 100 %


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Trading items sourced from Small scale

sector

100 %

Test marketing for equipment for which

company has approval for manufacture

100 %

Single brand retailing 51 %

Satellite establishment and operations 74 %

Print Media

Newspapers and periodicals dealingwith news and current affairs

Publishing of scientific magazines /specialty journals periodicals

26 %

100 %

* New Investment by a foreign investor in a field in which the investor

already has an existing joint venture or collaboration with another Indian

partner. New investment sought to be made in manufacture of items

reserved for Small Scale Industries

Special Facilities and Rules for NRI's (Non Resident

Indians) and OCB's (Overseas Corporate Bodies)

NRI's and OCB's are allowed the following special facilities:

1. Direct investment in industry, trade, infrastructure etc.2. Up to 100% equity with full repatriation facility for capital and

dividends in the following sectors:

i. 34 High Priority Industry Groupsii. Export Trading Companiesiii. Hotels and Tourism-related Projectsiv. Hospitals, Diagnostic Centers


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v. Shippingvi. Deep Sea Fishingvii. Oil Explorationviii. Powerix. Housing and Real Estate Developmentx. Highways, Bridges and Portsxi. Sick Industrial Unitsxii. Industries Requiring Compulsory Licensingxiii. Industries Reserved for Small Scale Sector

3. Up to 40% Equity with full repatriation: New Issues of ExistingCompanies raising Capital through Public Issue up to 40% of the

new Capital Issue.

4. On non-repatriation basis: Up to 100% Equity in any Proprietaryor Partnership engaged in Industrial, Commercial or Trading

Activity.

5. Portfolio Investment on repatriation basis: Up to 1% of the Paidup Value of the equity Capital or Convertible Debentures of the

Company by each NRI. Investment in Government Securities,

Units of UTI, National Plan/Saving Certificates.

6. On Non-Repatriation Basis: Acquisition of shares of an IndianCompany, through a General Body Resolution, up to 24% of the

Paid Up Value of the Company.

7. Other Facilities: Income Tax is at a Flat Rate of 20% on Incomearising from Shares or Debentures of an Indian Company.

9 .5 Repat r i a t i on o f Pr o f i t s f r om I nd ia & Em p loym en t

o f Expa t Wor k e r s


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One of the biggest concerns for foreign investors is how to get

dollars out of India? Historically, it is not a problem to repatriate

investments and profits from India. The Overseas Private Investment

Corporation ("OPIC"), a U.S. government backed insurer of foreign

commercial dealings, has never had to pay a claim due to India's

failure to provide foreign exchange. Dividends, capital gains, royalties

and fees can be repatriated easily with the permission of the Reserve

Bank of India. In a short, specified list of consumer goods industries,

dividend balancing is required against export earnings.

In case of an exit decision, the overseas promoter can repatriate his

share after discharging tax and other obligations. He can also disinvest

his share either to his Indian partner, to another company, or to the

public. Even during the so-called worst period no foreign company left

India without proper and due compensation. Problems do arise when

people and businesses try to go around the rules or from inexperience.

Rupee, the Indian currency, is convertible for the current account. It

means that the repatriation of foreign exchange at the existing market

rates has become easier. Exporters can retain 25% of total receipts in

foreign currency accounts to meet requirements such as travel,

advertising, etc. Foreign exchange will be available at market rates for

all imports except specified essential items. Foreign exchange

requirements for private travel, debt servicing, dividend or royalty

payments and other remittances may also be obtained from banks or

exchange dealers at the current market rate. The system has the

advantages of completely bypassing bureaucratic controls and freeing

importers from delays and inefficiencies.As far as employment of expat workers is concerned, there is not any

rule that governs any ratio of the employment of expat employees to

the employees from India. This solely depends upon the requirement

of the particular company and the norms and benefits prescribed by

Ministry of Labour for various classes of employees. The expat

workers must comply with the work-visa rules set down by

Government of India.


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9 .6 Taxa t ion Ru les fo r t he Organ izat ion s

Corporate tax

The taxability of a company's income depends on its domicile. Indian

companies are taxable in India on their worldwide income. Foreign

companies are taxable on income that arises out of their Indian

operations, or, in certain cases, income that is deemed to arise in

India. The royalty, interest, gains from sale of capital assets located in

India (including gains from sale of shares in an Indian company),

dividends from Indian companies and fees for technical services are all

treated as income arising in India. The current rates of corporate tax

are:-

Company/ Tax

Tax rate

(Inclusive of applicable

surcharge and cess)

Domestic Company

(i)Regular Tax

(a) Where total Income is more than Rs.10

million

33.99%

(b) Where the total Income is equal to or

less than Rs. 10million.

30.90%

(ii) Minimum Alternate Tax

(a) Where total Income is more than Rs.

10 million

11.33% of the book profits

(b) Where the total income is equal to or

less than Rs.10 million.

10.30% of book profits

(iii) Dividend Distribution Tax 16.995%

(iv) Fringe Benefit Tax 33.99%


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Foreign Company

(i) Regular Tax

(a) Where total income is more than Rs.

10 million

42.23%


less than Rs. 10 million

41.20%

(ii) Minimum Alternate Tax

(a) Where total income is more than Rs.

10 million



less than Rs.10 million.


(iii) Fringe Benefit Tax 31.6725%

Minimum Alternative Tax (MAT)

Normally, a company is liable to pay tax on the income computed in

accordance with the provisions of the income tax Act, but the profit

and loss account of the company is prepared as per provisions of the

Companies Act. There were large number of companies who had book

profits as per their profit and loss account but were not paying any tax

because income computed as per provisions of the income tax act was

either nil or negative or insignificant. In such case, although the

companies were showing book profits and declaring dividends to the

shareholders, they were not paying any income tax. These companies

are popularly known as Zero Tax companies. In order to bring such

companies under the income tax act net, section 115JA was introduced

w.e.f assessment year 1997-98.


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Fringe Benefit Tax (FBT)

The Finance Act, 2005 introduced a new levy, namely Fringe Benefit

Tax (FBT) contained in Chapter XIIH (Sections 115W to 115WL) of the

Income Tax Act, 1961. Fringe Benefit Tax (FBT) is an additional incometax payable by the employers on value of fringe benefits provided or

deemed to have been provided to the employees. The FBT is payable

by an employer who is a company; a firm; an association of persons

excluding trusts/a body of individuals; a local authority; a sole trader,

or an artificial juridical person. This tax is payable even where

employer does not otherwise have taxable income. Fringe Benefits are

defined as any privilege, service, facility or amenity directly orindirectly provided by an employer to his employees (including former

employees) by reason of their employment and includes expenses or

payments on certain specified heads.

The scope of Fringe Benefit Tax is being widened by including the

employees stock option as fringe benefit liable for tax. The fair market

value of the share on the date of the vesting of the option by theemployee as reduced by the amount actually paid by him or recovered

from him shall be considered to be the fringe benefit. The fair market

value shall be determined in accordance with the method to be

prescribed by the CBDT.

Dividend Distribution Tax (DDT)

Under Section 115-O of the Income Tax Act, any amount declared,

distributed or paid by a domestic company by way of dividend shall be

chargeable to dividend tax. Only a domestic company (not a foreign

company) is liable for the tax. Tax on distributed profit is in addition to

income tax chargeable in respect of total income. It is applicable

whether the dividend is interim or otherwise. Also, it is applicable

whether such dividend is paid out of current profits or accumulated

profits.


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The tax shall be deposited within 14 days from the date of

declaration, distribution or payment of dividend, whichever is earliest.

Failing to this deposition will require payment of stipulated interest for

every month of delay under Section115-P of the Act.

Rate of dividend distribution tax to be raised from 12.5% to 15% on

dividends distributed by companies; and to 25% on dividends paid by

money market mutual funds and liquid mutual funds to all investors.

Banking Cash Transaction Tax (BCTT)

The Finance Act 2005 introduced the Banking Cash Transaction Tax

(BCTT) w.e.f. June 1, 2005 and applies to the whole of India except in

the state of Jammu and Kashmir. BCTT continues to be an extremelyuseful tool to track unaccounted monies and trace their source and

destination. It has led the Income Tax Department to many money

laundering and hawala transactions.

BCTT is levied at the rate of 0.1% of the value of following "taxable

banking transactions" entered with any scheduled bank on any single

day:

Withdrawal of cash from any bank account other than a saving bank account; and Receipt of cash on encashment of term deposit(s).


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The value of taxable banking transaction that attract BCTT is as

under

In case of Amount (Rs.)

An individual or HUF 50,000 or more

Assessee other than an individual or HUF 1,00,000 or more

However, Banking Cash Transaction Tax (BCTT) has been withdrawn

with effect from April 1, 2009.

Securities Transaction Tax (STT)

Securities Transaction Tax or turnover tax, as is generally known, is a

tax that is levied on taxable securities transaction. STT is levied on the

taxable securities transactions with effect from 1st October, 2004 as

per the notification issued by the Central Government. The surcharge

is not levied on the STT.

STT is levied on the value of taxable securities transactions as under:

Transaction Purchase/sale of

equity shares, units

of equity oriented

mutual fund

(delivery based)

Sale of equity shares,

units of equity

oriented mutual fund

(non-delivery based)

Sale of

Derivatives

Sale of unit

of an equity

oriented fund

to the Mutual

Fund

Rates 0.125 % 0.025 % 0.17 % 0.25 %

Paid by Purchaser/Seller Seller Seller Seller

Rebate available on the STT paid by an assessee -

Rebate on STT is available to assessee, whose income from the taxable

securities transaction is charged to tax as a business income. However,

such rebate can be claimed only if the following conditions are

satisfied:

(a) The rebate can be claimed only against the tax computed on the

income from the taxable securities transaction;

(b) The evidence of payment of STT should be attached with the

Return of Income;


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(c) The deduction allowable will be maximum to the extent of tax on

such income.

Tax Rebates for Corporate Tax

The classical system of corporate taxation is followed in India

Domestic companies are permitted to deduct dividends receivedfrom other domestic companies in certain cases.

Inter Company transactions are honored if negotiated at arm'slength.

Special provisions apply to venture funds and venture capitalcompanies.

Long-term capital gains have lower tax incidence. There is no concept of thin capitalization. Liberal deductions are allowed for exports and the setting up on

new industrial undertakings under certain circumstances.

There are liberal deductions for setting up enterprises engaged indeveloping, maintaining and operating new infrastructure

facilities and power-generating units.

Business losses can be carried forward for eight years, andunabsorbed depreciation can be carried indefinitely. No carry

back is allowed..

Dividends, interest and long-term capital gain income earned byan infrastructure fund or company from investments in shares or

long-term finance in enterprises carrying on the business of

developing, monitoring and operating specified infrastructure

facilities or in units of mutual funds involved with the

infrastructure of power sector are proposed to be tax exempt.

Capital Gains Tax


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A capital gain is income derived from the sale of an investment. A

capital investment can be a home, a farm, a ranch, a family business,

work of art etc. In most years slightly less than half of taxable capital

gains are realized on the sale of corporate stock. The capital gain is the

difference between the money received from selling the asset and the

price paid for it. Capital gain also includes gain that arises on "transfer"

(includes sale, exchange) of a capital asset and is categorized into

short-term gains and long-term gains.

The capital gains tax is different from almost all other forms of

taxation in that it is a voluntary tax. Since the tax is paid only when an

asset is sold, taxpayers can legally avoid payment by holding on to

their assets--a phenomenon known as the "lock-in effect."

The scope of capital asset is being widened by including certain items

held as personal effects such as archaeological collections, drawings,

paintings, sculptures or any work of art. Presently no capital gain tax is

payable in respect of transfer of personal effects as it does not fall in

the definition of the capital asset.


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Short Term and Long Term capital Gains

Gains arising on transfer of a capital asset held for not more than 36

months (12 months in the case of a share held in a company or other

security listed on recognised stock exchange in India or a unit of a

mutual fund) prior to its transfer are "short-term". Capital gains arising

on transfer of capital asset held for a period exceeding the aforesaid

period are "long-term".

Section 112 of the Income-Tax Act, provides for the tax on long-term

capital gains, at 20 per cent of the gain computed with the benefit of

indexation and 10 per cent of the gain computed (in case of listed

securities or units) without the benefit of indexation.

Double Taxation Relief

Double Taxation means taxation of the same income of a person in

more than one country. This results due to countries following different

rules for income taxation. There are two main rules of income taxation

i.e. (a) Source of income rule and (b) residence rule. As per source of

income rule, the income may be subject to tax in the country wherethe source of such income exists (i.e. where the business

establishment is situated or where the asset / property is located)

whether the income earner is a resident in that country or not. On the

other hand, the income earner may be taxed on the basis of the

residential status in that country. For example, if a person is resident

of a country, he may have to pay tax on any income earned outside

that country as well.

Further some countries may follow a mixture of the above two rules.

Thus, problem of double taxation arises if a person is taxed in respect

of any income on the basis of source of income rule in one country and

on the basis of residence in another country or on the basis of mixture

of above two rules.

In India, the liability under the Income Tax Act arises on the basis ofthe residential status of the assessee during the previous year. In case


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the assessee is resident in India, he also has to pay tax on the

income, which accrues or arises outside India, and also received

outside India. The position in many other countries being also broadly

similar, it frequently happens that a person may be found to be a

resident in more than one country or that the same item of his income

may be treated as accruing, arising or received in more than one

country with the result that the same item becomes liable to tax in

more than one country. Relief against such hardship can be provided

mainly in two ways: (a) Bilateral relief, (b) Unilateral relief.

Bilateral Relief

The Governments of two countries can enter into Double Taxation

Avoidance Agreement (DTAA) to provide relief against such Double

Taxation, worked out on the basis of mutual agreement between the

two concerned sovereign states. This may be called a scheme of

'bilateral relief' as both concerned powers agree as to the basis of the

relief to be granted by either of them.


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Indirect Taxation

Central Sales Tax (CST)

Central Sales tax is generally payable on the sale of all goods by a

dealer in the course of inter-state trade or commerce or, outside a

state or, in the course of import into or, export from India.

The ceiling rate on central sales tax (CST), a tax on inter-state sale of

goods, has been reduced from 4 per cent to 3 per cent in the current

year.

Value Added Tax (VAT)

VAT is a multi-stage tax on goods that is levied across various stagesof production and supply with credit given for tax paid at each stage of

Value addition. Introduction of state level VAT is the most significant

tax reform measure at state level. The state level VAT has replaced the

existing State Sales Tax. The decision to implement State level VAT

was taken in the meeting of the Empowered Committee (EC) of State

Finance Ministers held on June 18, 2004, where a broad consensus was

arrived at to introduce VAT from April 1, 2005. Accordingly, allstates/UTs have implemented VAT.

Excise Duty

Central Excise duty is an indirect tax levied on goods manufactured in

India. Excisable goods have been defined as those, which have been

specified in the Central Excise Tariff Act as being subjected to the duty

of excise. There are three types of Central Excise duties collected inIndia namely

Basic Excise Duty

This is the duty charged under section 3 of the Central Excises and Salt

Act,1944 on all excisable goods other than salt which are produced or

manufactured in India at the rates set forth in the schedule to the

Central Excise tariff Act,1985.


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Additional Duty of Excise

Section 3 of the Additional duties of Excise (goods of special

importance) Act, 1957 authorizes the levy and collection in respect of

the goods described in the Schedule to this Act. This is levied in lieu of

sales Tax and shared between Central and State Governments. These

are levied under different enactments like medicinal and toilet

preparations, sugar etc. and other industries development etc.

Special Excise Duty

As per the Section 37 of the Finance Act,1978 Special excise Duty was

attracted on all excisable goods on which there is a levy of Basic excise

Duty under the Central Excises and Salt Act,1944.Since then each year

the relevant provisions of the Finance Act specifies that the Special

Excise Duty shall be or shall not be levied and collected during the

relevant financial year.

Customs Duty

Custom or import duties are levied by the Central Government of India

on the goods imported into India. The rate at which customs duty is

levied on the goods depends on the classification of the goods

determined under the Customs Tariff. The Customs Tariff is generally

aligned with the Harmonised System of Nomenclature (HSL).

In line with aligning the customs duty and bringing it at par with the

ASEAN level, government has reduced the peak customs duty from

12.5 per cent to 10 per cent for all goods other than agriculture

products. However, the Central Government has the power to

generally exempt goods of any specified description from the whole or

any part of duties of customs levied thereon. In addition,

preferential/concessional rates of duty are also available under the

various Trade Agreements.

Service Tax


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Service tax was introduced in India way back in 1994 and started

with mere 3 basic services viz. general insurance, stock broking and

telephone. Today the counter services subject to tax have reached

over 100. There has been a steady increase in the rate of service tax.

From a mere 5%, service tax is now levied on specified taxable

services at the rate of 12% of the gross value of taxable services.

However, on account of the imposition of education cess of 3%, the

effective rate of service tax is at 12.36%.


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9 .7 I nvestm en t Faci l i t a t i on Bod ies

There are various regulatory bodies, which act as a first point of

contact between the investors and Indian Government. To name a

few:

Secretariat For Industrial Assistance (SIA) Foreign Investment Promotion Board (FIPB) Reserve Bank Of India (RBI) Securities and Exchange Board Of India (SEBI)

Secretariat For Industrial Assistance (SIA)

The SIA, functioning within the Department of Industrial Policy andPromotion, Ministry of Commerce and Industry, acts as a gateway to

industrial investment in India. It provides a single window clearance

for Entrepreneurial Assistance and facilitates the processing of

investors' applications requiring Government approval

Broadly SIA performs the following functions: -

Assists entrepreneurs and investors in setting up projects andfurther

monitoring the implementation of these projects;

Liaisons with State Governments and other governmental bodiesfor seeking

necessary clearances;

Notifies all Government policy relating to investment andtechnology

SIA, in providing such functions, acts through its specialized divisions

like Foreign Investment Promotion Board, Foreign Investment

Promotion Council, and Foreign Investment Implementation Authority


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Foreign Investment Promotion Board (FIPB)

The FIPB is the nodal agency for all matters concerning foreign direct

investment as well as its promotion into the country

The m a in func t ion s o f FI PB, am ong o t he rs , inc lude :

Ensuring expeditious clearance of the proposals for foreigninvestment;

Reviewing periodically the implementation of the proposalscleared by the Board;

Reviewing the general and sectoral policy guidelines and inconsultation with Administrative Ministries, incorporate a set of

transparent rules for each of these sectors;

Undertaking investment promotion activities includingestablishment of contact with and inviting selected international

companies to invest in India in appropriate projects.

The FIPB (functioning under the Ministry of Finance), in itsapproach to granting approvals, maintains flexibility of

purposeful negotiations with investors and considers project

proposals in totality, free from parameters, with a view to

maximizing foreign direct investment into the country

The Board meets once every week ensuring speedy disposal ofapplications

In addition to SIAs office, applications can also be submittedwith Indian Missions abroad who will forward them to the SIA for

further processing

Foreign investment proposals received in the SIA are placedbefore the Foreign Investment Promotion Board (FIPB) within 15days of its receipt

The Board has the flexibility of purposeful negotiation with theinvestors and considers project proposals in totality in order to

ensure optimum foreign direct investment into the country

The recommendations of FIPB in respect of project proposals involving

a total investment of up to Rs. 6 billion are considered and approvedby the Industry Minister. Projects with a total investment exceeding


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Rs. 6 billion are submitted to the Cabinet Committee on Foreign

Investment (CCFI) for decision.

Reserve Bank Of India (RBI)

The RBI, India's Central Bank, was established on April 1, 1935. RBI

has been delegated the authorities Under the Automatic Route, to

allow companies for Foreign Direct Investment In India. The following

functions have been outlined for RBI to reach its desired objective:

Prescribing broad parameters of banking operations withinthe country's banking and financial system

functions

Administering external trade and payment, thus promotingorderly development and maintenance of foreign

exchange market in India

The RBI also acts as a banker to Central/State Governments,

commercial banks, state cooperative banks and some financial

institutions. It plays a potent role in maintaining the exchange value of

the Rupee and acts as an agent of the Government in respect of

India's membership of International Monetary Fund

Securities and Exchange Board Of India (SEBI)

SEBI was established with the prime objective of protecting the

interests of investors in securities, promoting the development of, and

regulating, the securities market and for matters connected therewith

or incidental thereto. Its primary functions include:

Promoting fair dealing in issue of securities Ensuring that the capital markets function efficiently,

transparently an economically in the better interests of both the

issuers and the investors

Safeguarding the interests of investors from unethical practices Coordinating and monitoring the working of stock exchanges

across the nation and intermediation with stock brokers


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9.8 Usefu l Addr esses

Department of Industrial Policy

and Promotion

Joint Secretary,Secretariat for IndustrialAssistance (SIA) ,

Ministry of Commerce & Industry,Udyog Bhavan, New Delhi-110 011,INDIATel.: +91-11-23011983Fax : +91-11-23011034Website: http://dipp.nic.in

Reserve Bank of India (RBI )

Foreign Investment Division,

Shaheed Bhagat Singh Road,Mumbai-400 001, INDIATel.: + 91-22-2266 1603

Fax :+ 91-22-2266 5330Web site: http://www:rbi.org.in

Registrar of CompaniesDepartment of Company Affairs,

Ministry of Finance, B Block, IInd Floor, ParyavaranBhawanC.G.O. Complex, New Delhi-110 003,INDIATel.: +91-11-24362708Website: http://dca.nic.in

Details regarding taxes in I ndiaMinistry of Finance,

Government of India,North Block, New Delhi 110 001Web site: http://finmin.nic.in/
http://dipp.nic.in/http://dca.nic.in/http://finmin.nic.in/http://finmin.nic.in/http://dca.nic.in/http://dipp.nic.in/

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