Doing Business in India_2011_Deloitte

Doing Business in India

March 2011

Index • Indian Economy – An overview • Regulatory and Tax environment in India Foreign Direct Investment Regulations – select sectors Entity Forms Intermediary Holding Company Funding Options Modes of Repatriation and Exit Options Indirect taxes Significant regulatory and policy changes • Key considerations

Indian Economy

Overall economy – showing considerable strength

Growth Rate of GDP - Sector-wise wise Constant (2004-05) (2004 Prices

90%

10.20%

9.50%

10.50%

9.70%

80%

10.06%

9.66%

9.62%

12.00% 10.00%

9.20%

8.00%

6.90%

70%

8.60% 8.00%

60% 50% 40%

6.00% 9.30%

12.70%

8.10%

9.50%

30%

4.00% 4.39%

20% 10%

5.20%

3.70%

4.70%

2.16%

0% 2005-06

2006-07

2007-08

2008-09

Agriculture

7.96% 5.40%

0.40%

GDP growth rates (%)

Sectoral growth rates (%)

11.10% 100%

2.00% 0.00%

2009-10 (QE) 2010-11 (AE) Industry

Services

GDP

• Growth momentum continues overcoming the financial crisis – 8.60% in 2010-11 • Revival in agriculture contributed to overall growth – 5.40% in 2010-11 against less than 1% last year • Marginal increase in growth rate of Industry from 8% in 2009-10 2009 to 8.1% in 2010-11 • Services keep momentum at around 10% year to year 4

Income and Saving pattern in India • Indian middle class population projected to reach a figure of 583 million (41 percent of population)

Percentage

120 100 80

Globals Strivers

Seekers Aspirers

Deprived

• Indian middle class to control largest block of income at INR19 trillion by year 2015 and INR 51.5 trillion by year 2025

• Savings-Investment gap in private sector was 7.1% in 2008-09 and fell to 6.7% 2009-10

0 1985

1995

2005

2015

2025

Percentage of GDP

• Households plays a critical role in savings and capital formation

35 30 25 20

Public Sector

Private Corporate

10 5

Household

• High percentage of savings indicate capacity to build demand of products

Source: The ‘Bird of Gold’: Rise of India’s Consumer Market, Mckinsey & Company and Economic Survey 2010-11 Note: Figures are rounded of to nearest integer and may not exactly add up to 100

Spending pattern in India 120

100

4 3 1 11

Percentage

5 2

6 9

4 2

6 19

3 11

• Spending pattern of Indian consumers shifting from basic necessities to discretionary items • Personal products and services, Education and recreation, Transportation, Healthcare and communication to be fastest expanding categories

12 3

5 42

34 25

0 1995

2005

2015

2025

Year Food, beverages & tobacco Housing and utilities Personal products and services Communication Healthcare

Apparel Household products Transportation Education and recreation

Source: The ‘Bird of Gold’: Rise of India’s Consumer Market, Mckinsey & Company Note: Figures are rounded of to nearest integer and may not exactly add up to 100

FDI Equity inflow in India – Country wise Country

% to total inflows

Mauritius

Cumulative FDI Equity Inflows (April 00 till Dec. 10) (in million US$) 237,136

Singapore

51,716

USA

42,019

9% 7%

28,170

Netherlands

24,736

Japan

22,279

Cyprus

20,678

Germany

12,973

France

10,046

UAE

8,503

42%

Source: http://dipp.nic.in/

FDI Equity inflow in India â&#x20AC;&#x201C; Sector wise Sector Services Sector (financial and non-financial) Computer Software & Hardware Telecommunication (Radio paging, Cellular mobile, Basic telephony) Housing & Real Estate

Cumulative FDI Equity Inflow (April 00 to Dec. 10) (in million US$) 118,274 47,144

% to total inflows 21% 8%

46,727

42,049

Construction Activities (including roads & highways) Automobile Industry

39,802

25,628

Power

25,610

Metallurgical Industry

17,911

Petroleum & Natural Gas

13,979

Chemicals (other than Fertilizer)

12,880

Source: http://dipp.nic.in/

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Regulatory and Tax environment in India

Foreign Direct Investment I Regulations â&#x20AC;&#x201C; select sectors

FDI regulations for select sectors Sector/Activity

FDI Cap/Equity

Agriculture

100% (Automatic) For companies dealing with development of transgenic seeds / vegetables; certain additional conditions have been prescribed. Now. ‘controlled conditions’ have been specified for the various sectors

Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisciculture, aqua-culture, cultivation of vegetables, mushrooms, under controlled conditions and services related to agro and allied sectors. Note: Besides the above FDI is not allowed in any other activity

Remarks

Food Processing (except for items reserved for small scale industries)

100% (Automatic) 24% for items reserved for small scale industries (Approval)

Storage and Warehouse Services (including warehousing of agricultural products with refrigeration)

100% (Automatic)

Manufacturing

Generally 100% (Automatic)

Subject to specified conditions

FDI regulations for select sectors Sector/Activity

FDI Cap/Equity

Remarks

Wholesale / Cash & Carrying 100% (Automatic) Trading

Subject to specified conditions

Retail trading (Single brand)

51% (Approval)

Trading for Exports

100% (Automatic)

Subject to specified conditions

Business Services

100% (Automatic)

Business Services route is allowed in data processing, software development and computer consultancy services; Software supply services; Business and management consultancy services, Market Research Services, Technical testing & Analysis services.

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Entity Forms

Liaison / Representative Office • Requires prior approval of the Reserve Bank of India • Permitted activities: Representing the parent/group companies in India Promoting export/import from/to India Promoting technical/ financial collaborations between overseas parent/group companies and companies in India Acting as a communication channel • Not permitted to engage in commercial or income generating activities in India thus not a taxable entity in India • Annual filings with the Reserve Bank of India and Registrar of Companies • Not permitted to acquire, hold (otherwise than by way of lease for a period not exceeding five years) any property in India without the prior permission of RBI. • Setting up time: Used to take 6 to 8 weeks for RBI approval but now, since application to be routed through a banker, it takes much longer time.

Branch Office • Requires prior approval of the Reserve Bank of India • Permitted activities: Export/import of goods Rendering professional or consultancy services Carrying out research work in which the parent is engaged Acting as the buying/selling agent of the parent Rendering services in IT and development of software in India Rendering technical support to products supplied by parent co. etc Promoting technical or financial collaborations between Indian companies and parent or overseas group companies Foreign airline/shipping company • BO is regarded as a Permanent Establishment (PE) in India of the Foreign Company and taxed at 40%, permitted to remit profits to head office outside India after payment of taxes • Company required to comply with withholding tax provisions, transfer pricing regulations and other tax & regulatory compliance requirement. • Setting up time: Used to take 6 to 8 weeks for RBI approval but now, since application to be routed through a banker, it takes much longer time. 15

Indian Company • A separate legal entity, allowed to do all kinds of business subject to restrictions under FDI regulations • Company liable to tax @ 30% (plus applicable surcharge and cess). • Minimum Alternate Tax (MAT) – payable by Company when taxable profit per normal provisions of domestic tax law is less than 18.5% of the book profit. MAT payable @ 18.5% (plus applicable surcharge and cess)) on the book profit • Dividend Distribution Tax (DDT) – DDT payable on distribution of profit as dividend @ 16.23% (as proposed in the Finance Bill, 2011) . However, some tax jurisdictions provide for underlying tax credit of DDT paid by the subsidiary company. Dividend not taxable in the hands of shareholders if DDT paid. • Company required to comply with withholding tax provisions, transfer pricing regulations and other tax & regulatory compliance requirement. • Setting up time – 4 to 6 weeks

Intermediary Holding Company

Intermediary Holding Company Factors to be considered while deciding intermediary country

Canadian Co. Canada

IHC

Mauritius /Cyprus Singapore / etc.

• Good tax treaty network with India as well as the country from where investment will be made • Intermediary country has a favorable tax framework Following objectives can be achieved by having favorable tax jurisdiction • Low corporate tax rate at Intermediary level

India

Indian Co.

• Parking of funds at the intermediary level for other commercial purposes • Low withholding tax • Exemption of Capital gain at the time of exit

Considerations in choosing the intermediary holding company jurisdiction Tax regime in IHC Provide free capital movement

Applicability of CFC/thin capitalization rules

Tax cost on profit repatriation

Intermediary Holding Company (IHC)

Availability of foreign tax credits

Jurisdiction having wide treaty network

Compliance with substance requirements

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IHC â&#x20AC;&#x201C; a comparative chart on tax considerations

IHC Factors Effective corporate tax rate (domestic laws)

Cyprus

Mauritius

Singapore

16.5%

10%

15%

17%

Capital gains on sale of Indian Cos shares whether taxable in India?

Yes*

No*

No*, subject to substance condition in holding Co

Interest

15%*

10%*

21.12%*

15%*

Dividend

Nil*

Royalty

10.56%*

10%*

Fee for technical services

10.56%*

Nil*

10%*

Yes

Tax Credit in Home Country

Canada

Beneficial rate of the Domestic Tax Law or the tax treaty with India

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Funding Options

Funding Options • Liaison and Branch offices may be directly funded by the Head Office as an Indian Liaison / Branch Office is considered as a virtual extension of the Head Office. No requirement of issue of any instrument for funding. • Various funding options/instruments available to fund a company through foreign investment are: Equity Shares Debt (External Commercial Borrowings) Fully Convertible Debentures • Equity Shares 100% FDI is allowed under automatic route in many sectors, investment caps are provided under FDI policy in certain specified sectors, prior approval from Foreign Investment Promotion Board is required in some sectors. Indian companies can freely issue equity shares subject to the valuation norms as prescribed by the RBI Share Capital and profits can be freely repatriated back to the shareholder

Funding Options – External Commercial Borrowings • Indian companies (other than financial intermediaries) allowed to raise ECB’s from international banks, multilateral financial institutions, export credit agencies, suppliers of equipment, foreign collaborators, foreign equity shareholder etc. • Conditions prescribed on maximum amount of ECB, maturity period, interest rate etc. • ECB can be raised for investment [such as import of capital goods (as ( classified by DGFT in the Foreign Trade Policy), new projects, projects modernization/expansion of existing production units] in real sector - industrial sector including small and medium enterprises (SME), infrastructure sector and specified service sectors namely hotel, hospital, hospital software in India. Infrastructure sector is defined as (i) power, (ii) (ii telecommunication, (iii) railways, (iv) roads including bridges, (v) sea port and airport, (vi) industrial parks, (vii) urban infrastructure (water supply,, sanitation and sewage projects), (viii) mining, exploration and refining and (ix) ix) cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat. • ECB is not permitted for working capital, general corporate purpose

Funding Options – Fully convertible Debentures • Debentures which are fully and mandatorily convertible into equity within a specified time would be reckoned as part of FDI and eligible to be issued to persons resident outside India under the FDI Guidelines • FDI Guidelines as applicable to equity shares are also applicable to fully convertible debentures • Foreign investment in other types of debentures (i.e. non convertible, optionally convertible and partially convertible) would be considered as debt and shall have to confirm to the prescribed ECB Regulations • Interest on debentures would be a tax deductible expenditure in the hands of the company • As per the provisions of the Income Tax Act, 1961, conversion of FCDs into equity shares is not chargeable to tax

Comparative Analysis Key Parameters Permissible under FEMA Nature of payment

Equity Shares

Fully Convertible Debentures

ECB

Yes

Dividend

Interest

Tax implications in the hands of Indian company

Liable to DDT @ 16.23%

India-Canada Canada tax treaty 15% of gross amount of interest, exempt in India if loan extended, guaranteed or insured by Export Development Corporation, 20% under Indian tax laws

India-Canada tax treaty -15% of gross amount of interest, exempt in India if loan extended, guaranteed or insured by Export Development Corporation, 20% under Indian tax laws

Tax deductibility in the hands of Indian company Tax Credit in IHC home country Transfer Pricing Regulations Tax implication on conversion to equity shares

Not Deductible

Deductible

Underlying tax credit Tax credit available in some treaties

Yes (only for specified end use) Interest

Tax credit available

Not applicable

Applicable

Not Applicable

Not Taxable

Not Taxable ÂŠ2011 Deloitte Touche Tohmastu India Private Limited

Modes of Repatriation and Exit Options

Modes of Repatriation and Exit Options Dividend

Freely Repatriable*

Royalties

Interest

Fee for technical services

Freely Repatriable*

Up to US $ 10,00,000, per Freely Freely project* Repatriable* (without prior Repatriable* approval of RBI)

Buy back of shares

Sale/Transfer of Shares

Freely Repatriable*

*Under Indian Exchange Control Regulations, subject to transfer pricing regulations, and withhold taxes

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Indirect taxes

Central taxes

Excise duty

Applicable on manufacture of goods

Customs duty

Applicable on importation of goods

Service tax

R&D Cess Central sales tax

Indirect taxes in India

Value added tax

Applicable on provision of taxable services

Applicable on import of technology

Applicable on inter-state sale of goods

Applicable on sale or purchase of goods within a State

State taxes Entry tax / Octroi 29

Applicable on entry of specified goods into a State/ local area ÂŠ2011 Deloitte Touche Tohmastu India Private Limited

Indirect taxes Indirect taxes rates Type of tax

Rate applicable

Customs Duty1

26 26.85%

Central Excise Duty2

10 10.3%

Service Tax3

10 10.3%

VAT4

4 - 5% 12 12.5% - 15%

Central Sales Tax5

2 2%

Notes: 1. Customs duty comprises of following Basic Customs Duty (BCD), Additional Duty of Customs in lieu of Excise (CVD), ), Additional Duty of Customs in lieu of VAT/Sales Tax (ADC) and education cess (EC & SHE Cess). Rate indicated is a general rate applicable on most of the goods imported. 2. Rate of Excise duty on most of the goods manufactured. Rate inclusive of 2% EC + 1% SHE Cess. 3. Rate of service tax on all taxable services provided. Rate inclusive of 2% EC + 1% SHE Cess. 4. Applicable on sale of goods within the same State. 5. Applicable on sale of goods within two States. Rate applicable only if statutory concessional ‘Form C’ is provided. Else local VAT rate would apply.

Incentives – Indirect Taxes • Exemptions from Customs and Excise duties to identified goods Infrastructure, Power, Telecom, Agriculture, IT goods etc. • Exemption to services provided to priority sectors Roads, Ports, Airports, • Free Trade Agreements FTAs with various countries to incentivize bilateral trade Import and Export of identified goods exempted • Incentives under Foreign Trade Policy Aimed at augmenting investment in India to become major export hub SEZ, STPI, EHTP, BTP, EOU incentives to boost export of goods and services Export of to identified markets or identified products given extra benefits Import of capital goods or inputs at concessional rate of customs duty • Value Added Tax / Central Sales Tax No VAT/CST on import and export of goods Exemption to or lower tax for various goods of special importance Investment linked incentives by various State Governments

Significant regulatory and policy changes

Significant regulatory and policy changes • Direct Taxes Code Bill, 2009 (DTC) − Proposed to be effective from 1 April 2012 − Bill introduced in the Parliament, currently under discussion • Goods and Service Tax (GST) − India proposes transition to a dual GST regime − Uncertainty over when it will be implemented • Limited Liability Partnership Act (LLP Act) − LLP Act 2008 notified w. e. f. 31 March 2009 − Rules relating to conversion of firm / private company / unlisted company to LLP notified w. e. f. 31 May 2009 − Foreign investors currently not permitted to invest in India through an LLP • International Financial Reporting Standards (IFRS) − The Institute of Chartered Accountants of India (ICAI) too, has decided to fully converge with IFRS from April 1, 2011

Key considerations

Key considerations • Evaluating entry strategy and location analysis for setting up business in India • Choose appropriate legal entity • Plan holding company structure • Plan tax efficient funding and repatriation mechanism • Plan tax efficient supply chain • Implement the plan

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