A guide to establishing presence in India...A guide to establishing presence in India 2018. 2 Doing Business in India Contents SectionPage Foreword 3 ... Digital India initiative and

A guide to establishing presence in India

2018

2 Doing Business in India

ContentsSection Page

Foreword 3

Introduction 5

Countryprofile 6

KeyeconomicindicatorsofIndia 8

Keysectors:Anoverview 11

Politicalandlegalsystem 14

Foreigninvestment 15

Finance 19

Businessentities 23

Labour 25

Accountingandreportingrequirements 27

Directtax 30

Indirecttax 39

TransferpricinginIndia 41

Glossaryofabbreviations 45

Doing Business in India 3

Foreword

WithGDPgrowthof7.1percentandFDIinflowofUSD60bnin2016-17,IndiaisboththefastestgrowingeconomyandthelargestrecipientofFDI,globally.

Overthelastfewyears,thegovernmenthasdeliveredlandmarkstructural reforms which are expected to further propel this growth.ThislistincludestheGoodsandServicesTax(GST),whichintegratesIndiaintoasinglemarketandremovesaspate of complex indirect taxes; a competition among India’s 29statestoimprovetheir‘EaseofDoingBusiness’;the‘Indiastack’,whichleveragesthenewbiometricidentification(Aadhaar)andmobilepenetrationofabillionplusIndiansfordigital financial transactions; and a sudden withdrawal of all high denomination currency notes along with strengthened legislationandenforcementtotacklecorruptionandunaccountedmoney.

Theperiodbetween31March2015and2017sawanumberof reforms coming together within the ambit of financial regulationsinthecountry.TheIndianequivalentof‘SOX’documentationandauditorattestationofcontrols(ICFR),IndianIFRS(IndAS)andmandatoryrotationofexternalauditorsaresomeofthekeyreformsthatwillalignIndia’spracticestothebestintheworld.

There has never been a time in history where so much has happenedinIndia.AtGrantThorntoninIndia,wearedelightedto be at the forefront of helping shape a more vibrant India workingwiththegovernment,theleadersofIndiaInc.,andglobal companies that want to maximise this amazing opportunity.

Vishesh C. ChandiokChiefExecutiveOfficerGrant Thornton India LLP

PrimeMinisterNarendraModiwonalandslidemandateinMay2014−asingleparty government was formed for the first timein30years−onthepromiseofmakingIndiagreatjustlikehehadpreviouslytransformedhishomestate,Gujarat.



Introduction

ThisisaninterestingtimefortheIndianeconomy.Ratedasoneofthemoststableeconomies,Indiacontinuestoshineamidstglobalgloom.LedbytheModigovernment,anumberofeconomic,financialandinstitutional,reformsincluding the reforms leading to ease of doing business acrossstates,havebeenimplemented.Indiaclaimingthe100thspotinWorldBank’srecentlyreleasedEaseofDoingBusinessrankingsisatestimonytothisfact.Thisalsomarksthebiggestimprovementrecordedamong190countriesintheWorldBank’s‘DoingBusiness2018-Reformingtocreatejobs’report.Strictmonetaryactiontakenbythegovernmenttobringbackunaccountedmoneyintothesystempavesthewayforeconomicgrowthbackedwithdigitisation.Bankingregulationsincludingthemovetoreplacehigh-valuecurrencynoteswithnewhigherdenominationsin2016didcontributetowardsmakingtheeconomymorerobustandcompliant.Thegovernment has also notified the final regulations related to the insolvency resolution process under the Insolvency and BankruptcyCode2016.ThelawaimstoimprovetheeaseofdoingbusinessinIndiabyfacilitatingsmootherandtime-bound settlement of insolvency and faster turnaround of businesses,apartfromcreatingadatabaseofserialdefaulters.

InitiativessuchasMakeinIndiacampaign,improvingtheeaseofdoingbusinessinIndiaandStartupIndia,StandupIndiawillfurtherpavethewayforgrowth.Additionally,thegovernment’sDigitalIndiainitiativeandopeningofbankaccountsformassesviaJanDhanYojnahavebeenawelcomechange.

Thegovernmenthasstartedseveraldevelopmentschemes,which,inthelongerrun,willmakethecountrystrongerandmorestable.Inadditiontothis,thepropertymarket,whichwaslargelyconsideredfragmentedandunorganised,isnowregulatedbytheenactmentoftheRealEstateRegulationAct(popularlyknownasRERA).AllthestateshadtoimplementtherulesundertheRERAby01May2017tomaketheregulationarealityacrossthecountry.Thishasbeensupplementedbyinsolvencyandbankruptcylaws,amendmentintheBenami(aterminHindulawwhichmeans‘made,held,done,ortransactedinthenameofanotherperson’)TransactionsAct,arbitrationandconciliationlaws,andcorporategovernancelaws.

Whilethecountryisnowworkingtowardsthedevelopmentof100smartcities,spreadingfinancialinclusiontoallwillempoweralargesectionofthepopulation.

However,thebiggestmovebythegovernmentisitsenactmentofalegislationtointroduceanationalvalue-addedtax(namedGoodsandServicesTax)witheffectfromJuly2017,replacingthecurrentmultitudeofcentral,stateandlocallevies.TheGSTregime will create a much more integrated and productive economyinthelongerrun.Sofarthereisa50percentriseinthenumberofindirecttaxpayerssincetheintroductionofGST.

Aftertwoquarters,theIndianeconomyissettoshine.TheEconomicSurvey2017-18broughtoutbythegovernmentinJanuary2018forecastsagrowthrateof7to7.5percentfor2018-19.

TheInternationalMonetaryFund(IMF)alsoexpectsIndia’sGDPtogrowmorethan7percentthisyear,makingIndiatheworld’sfastest-growinglargeeconomy.Amidstslowingglobalgrowth,Indiaremainsabrightspotamongemergingeconomies.TheforecastbyIMFfactorsinthewaveofreformsthatthecountryiswitnessing.AscorroboratedbytheWorldEconomicForum’s(WEF)GlobalCompetitivenessIndexfor2017-18,Indiaranked40thonimprovingbusinessenvironmentandinnovation.Followingthecentre’smove,statestooareeyeing significant share of foreign investments demonstrating bothcooperativeandcompetitivefederalism.AllofthistrulyispoisedtounlockthepotentialforgrowthinIndiaandbuildamorevibranteconomy,andweatGrantThorntoninIndiaareallsettogrowingtogetherwithIndia.Wehopethisguidewill support your growth plans of either setting up base or expandinginIndia.Welookforwardtobeingyourgrowthadvisersinthelandofemergingopportunities.

This guide is intended to serve as a primer for companies planningtoentertheIndianmarkettotapsignificantopportunitiesinvarioussectors.Itaimstoprovidebusinessinformationonthecountry’slegal,accountingandtaxationframework.


Country profile

India has emerged as a key investment destination globally. The U.S. Department of Commerce has identified India as one of the world’s top 10 ‘big emerging markets’.

According to the World Investment Report 2017 published by the UNCTAD, India continues to be among the top 10 countries in terms of FDI inflows globally and the fourth in the developing Asian region.

India’s FDI inflow for the period April-December 2017 remained fairly stable at USD 35.94 bn as compared to USD 35.84 bn in the corresponding period April-December 2016.

India’s FDI inflow in 2016-17 was in excess of USD 60 bn, a new all-time high surpassing the inflows of USD 55.6 bn in 2015-16.

Summary OutlinedbelowarekeyfactsandstatisticsthatmakeIndiaafavourable business destination worldwide:• A growing middle class • An abundant supply of raw material• Anextensiverailandroadnetwork• World’slargestworkingpopulationintheagegroupof25-45

years • LargepoolofskilledEnglish-speakingmanpower• Lower labour cost and hence reduced cost of

manufacturing,especiallyincomparisontonon-Asiancountries

• Geographicallocation,whichmakesIndiaclosertomarketsincludingtheMiddleEast,SouthAsiaandEurope

Main ports of entry: Chennai,JawaharLalNehru,Kandla,Kochi,Mormugao,Kolkata,Mumbai,Paradip,Tuticorin,Ennore,VishakhapatnamandNewMangalore1

Major international airports: Chennai,NewDelhi,Mumbai,Hyderabad,Kolkata,Bengaluru,Goa and Thiruvananthapuram


Geographical locationIndiaformsanaturalsubcontinentwiththeHimalayanmountainrangetothenorth,andtheIndianOcean,theArabianSeaandtheBayofBengaltothesouth,westandeast,respectively.ThecountryisborderedbyPakistanonthenorthwest,China,BhutanandNepalonthenortheast,andBangladeshandMyanmarontheeast.Nearthecountry’ssoutherntip,acrossthePalkStrait,liesSriLanka.

Indiahasalandfrontierofover15,000kilometres,stretchingfromtheHimalayasinthenorthtothePalkStraitsinthesouth,andfromtheArabianSeaintheWesttotheBayofBengalintheeast.Ithasalongcoastlinespanningover7,000kilometres.The climate varies from tropical in the south to temperate in the north.

Population and standard of livingIndia is the second most populated country in the world withapopulationof1.324bn(WorldBank,2016estimates).Accordingtothe2011populationcensus,thereare35citiesinIndiawithapopulationofmorethanamillion,withMumbai,DelhiandKolkatahavingapopulationover10million.Around70percentofthecountry’spopulationresidesinruralandsemi-ruralareas.OneofthemainreasonsthatIndiaisconsideredasanattractive,high-growthmarketisitslargepoolofuntappedanduppermiddleclasspopulation.Also,the standard of living in metropolitan cities of the country is comparabletothebestinotherdevelopingnations.

Asperestimates,250mnpeoplearesettojoinIndia’sworkforceby2030.Withasignificantchunkofpopulationshiftingintotheworkingagegroup,thereisacorrespondingincreaseindisposableincomeandconsumptiondemand.Infact,itisestimatedthatIndiawillhave247,800newmillionairesby2025.

DiversityIndiaisrichinhistory,culture,religionanddiversity.Thereare22officiallyrecognisedlanguagesspokeninIndiaacrossits29statesand7unionterritories.Indiaissecularthroughitsconstitutionwithpeoplefromallfaithsresidinghere,includingHindus,Muslims,Sikhs,Christians,BuddhistsandJains.

EducationThe education system in India is considered as one of the best globally.Thesystemcomprisespublicandprivateschools,universitiesandotherinstitutionsforhigherlearning(MBA,PhD,MScetc.).Theseinstitutionsarecommittedtoimpartexcellentacademicandvocationaltraining,andencourageparticipationinsportsandotherextra-curricularactivities.ThecurrentliteracyrateinIndiastandsat74.04percent.The country offers quality education comparable to global standardsinthefieldsoffinance,consulting,literature,computerengineering&programming,science&technology,medicine,dentistryandbusinessmanagementandadministration.TheIndianInstitutesofTechnology(IITs)andIndianInstitutesofManagement(IIMs)arerecognisedworld-overaspremierhighereducationalinstitutions.

CurrencyTheIndianRupee(INR)istheofficialcurrencyoftheRepublicofIndia.TheReserveBankofIndia(RBI)isthenationalandsolecurrency-issuingauthorityinthecountry.Theexchangerateoftherupeeismainlymarketdetermined.TheRBItakesakeeninterestinthefinancialmarketsofthecountryandothercountriesgloballytodeterminesuitablemonetary,regulatoryandothermeasures.ThecurrentRBIreferencerateforINRtoUSD1is66.76(04May2018).

Key economic statisticsIndia’s economic policies are designed to attract significant capitalinflowsinthecountryonasustainedbasis,andencouragetechnologicalcollaborationwithforeignfirms.Policyinitiativestakenoverthepastfewyearshaveresultedin significant inflow of foreign investment in all areas of the economy,exceptthepublicsector.

Sources: WorldBank,indexmundi.com,Ministryofcommerceandindustry,PIB,India

1MinistryofShipping:http://shipping.gov.in/writereaddata/l892s/27963559-Perspectiveplans.pdf

India is a union of states with a parliamentary system of government Statistics (2016)

Population 1.324bn

Area 3.29mnsquarekilometres

GDP(current) USD2,263.79bn

GDP – per capita USD1,709.39

Exports(April2017-March2018) USD302.84bn

Imports(April2017-March2018) USD459.67bn

Literacy rate 74.04%(Census2011)

Life expectancy 68.35years

Urbanpopulation 33%

Local currency Indianrupee(INR)


Key economic indicators of IndiaGDP and key fiscal indicators• Atarateof7.1percent,Indiawasoneofthefastestgrowing

largeeconomiesgloballyin2016-17.Thegrowthhasbeensupportedbythecontributionofkeysectorsincludingagriculture,manufacturingandfinancialservices.However,falteringprivateinvestment,weakcapitalgoodsgrowthandlowerexportswereaconcern.TheGDPgrewby7.4percentand7.6percentin2014-15and2015-16,respectively.

• AccordingtoFirstAdvanceEstimatesprovidedbyCSO,thegrowthinGDPduring2017-18isestimatedat6.5percentascomparedtothegrowthrateof7.1percentin2016-17.

• ThefiscaldeficitofthecountryuptoFebruary2018stoodatUSD109.87bn.In2016-17,thefiscaldeficitofthecountrystoodatUSD82.14bn.

• TherevenuedeficitofthecountryuptoFebruary2018stoodatUSD80.50bn.

External factor and per capita national income• Exportsduring2017-18wereatUSD302.84bn,registeringa

growthof9.78percentascomparedto2016-17.• India is the third largest economy in the world in terms of

purchasingpowerparity(Source:InternationalMonetaryFund).• Importsduring2017-18wereatUSD459.67bnregisteringa

growthof19.59percentascomparedto2016-17.• AccordingtoFirstAdvanceEstimatesprovidedbytheCSO,in

realterm(at2011-12prices)during2017-18,thepercapitaincomeislikelytoattainalevelofINR86,660ascomparedtoINR82,269fortheyear2016-17.Thegrowthrateinpercapitaincomeisestimatedat5.3percentduring2017-18,asagainst5.7percentinthepreviousyear.

Growth rates in GDP at factor cost

Source:CSO

7.1%GDP growth in2016-17

19.59%increase in imports in2018

6.9%

7.4%

7.6%

7.1%

0.0% 2.0% 4.0% 6.0% 8.0%

2013-14

2014-15

2015-16

2016-17


Money and credit• AsrecordedinFebruary2018,thegrossbankcreditforFY

2017-18stoodatINR73,737bn(USD1,131.98bn).(Source:RBI)

• ThegrossfixedcapitalformationaveragedUSD82.14bnduringtheperiod2001-17.Inthefourthquarterof2017,itreachedanall-timehighofINR10,519.30bn(USD161.49bn).(Source:MinistryofStatisticsandProgrammeImplementation)

• India’scurrentaccountdeficitstoodat2percentoftheGDPinthethirdquarterof2017-18ascomparedto1.4percentoftheGDPinthesameperiodayearago.(Source:RBI)

• ExternaldebtinIndiaincreasedtoUSD485.8bninthefirstquarteroftheyear2017-18,recordinganincreaseofUSD13.96bnoveritslevelatend-March2017.(Source:RBI)

• IndianforeignreservetouchedUSD424.36bnason30March2018.TheForeignCurrencyAssets(FCAs),whichformamajorityofthecountry’sforeignexchangereserves,stoodatUSD399.12bn,whilegoldreservesstoodatUSD21.61bn.(Source:RBI)

• Indiabecametheninthlargest(accordingtoWorldInvestmentReport,2017)recipientofFDIin2016intheworld,grossingUSD55.46bnfollowingaseriesofreformsbythegovernment,ascomparedtoUSD44bnin2015.(Source:WorldInvestmentReport2016bytheUnitedNationsConferenceforTradeandDevelopment)

• PMModi’sdemonetisationdrivecontinuestopushelectronictransactions.Goingforward,thiswillalsospurthegrowthoffintechcompanies.

Source:OfficeoftheEconomicAdvisor,GovernmentofIndia;DepartmentOfIndustrialPolicy&Promotion(DIPP)

9thlargest recipient ofFDIin2016globally

112.5

113.9

109.7

111.6116

160.0

165.0

170.0

175.0

180.0

185.0

190.0

2013-14 2014-15 2015-16 2016-17 Mar-18

Wholesale Price Index: Base year 2011-12 Key fiscal indicators (per cent of GDP)

4.7

4.13.9

3.5

3.23.12.9 2.8

2.11.9

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2013-14 2014-15 2015-16 2016-17 (RE) 2017-18 (BE)

Key fiscal indicators (per cent of GDP)

Series 1 Series 2



Key sectors: An overview

Thegovernment’sMakeinIndiacampaignhasputmanufacturingattheforefront.Thesectorencompassesanumberofsub-sectorssuchasmetalsandmining,industrialmanufacturing,chemicals,engineering,telecomandautomotive,amongothers.Itisexpectedthatmanufacturingwillcontributesignificantlytothecountry’sgrowthinthecomingdecade.

India is the seventh largest producer of automobiles in the worldandthefourthlargestmarketbyvolume.Thesectorcontributes7.1percenttotheGDPandemploys19mnpeople.Around31percentofsmallcarssoldgloballyaremanufacturedinIndia.Indiaistheworld’slargestmotorcyclemanufacturer.Thetwo-wheelerssegmentcontributes81per

centmarketshareandleadsthemarketonaccountofhugedomesticdemandfromtheyouthandthemiddleclassbuyer.Thus,theautomotivesectoranditsmanufacturingremainsastrongsectorofgrowthforthecountry.

India is also a prominent auto exporter and fifth largest manufacturer of commercial vehicles and the second largest manufactureroftwo-wheelersworldwide.Theexpandingeconomic activity has started to have an impact on the commercialvehiclesegment.Itisexpectedtoregisteradouble-digitgrowthinthenextoneyear.SomeofthekeyforeignplayersareSuzuki,Honda,Nissan,Piaggio,Volkswagen,Renault,Hyundai,GeneralMotors,BMW,FordandToyota.

TheoverallIndianhealthcaremarketiswortharoundUSD100bnandisexpectedtogrowtoUSD280bnby2020,ataCAGRof22.9percent.Healthcaredelivery,whichincludeshospitals,nursinghomesanddiagnosticscentres,andpharmaceuticals,constitutes65percentoftheoverallmarket.ThehealthcareInformationTechnology(IT)market,whichisvaluedatUSD1bncurrently,isexpectedtogrow1.5timesby2020.

TheIndianmedicaltourismindustry,currentlypeggedatUSD3bnperannum,withtouristarrivalsestimatedat230,000,isexpectedtoreachUSD6bnby2018,withthenumberofmedicaltouristssettodoubleoverthenextfouryears.HospitalsanddiagnosticcentresattractedFDIworthUSD3.59bnbetweenApril2000andMarch2016,accordingto data released by the Department of Industrial Policy & Promotion(DIPP).India’suniversalhealthplanthataimstoofferguaranteed benefits to a sixth of the world’s population will cost anestimatedINR1.6tn(USD23.72bn)overthenextfouryears.

TheIndianpharmaceuticalindustryisestimatedtobeUSD30bn,growingataCAGRof16.5percentduringthelastfiveyears(FY2011-16).Indiacontinuestobeamongthelargest producers and exporters of generic drug formulations intheworld,accountingforaround20percentoftotalglobalgenericdrugexports.However,exports,particularlytoregulatedmarkets,havebeenaffectedonaccountofthecontinualUSFDAalertsonIndianmanufacturingstandardsand

facilitiesandtheUSaloneaccountsforabout40percentofIndia’sdrugexports.Theextensionofpricingcontrolonmoreand more essential drugs is also discouraging multinational companiesfromintroducingpatenteddrugsinIndia.However,effortsarebeingtakentopromotelocalmanufacturingandreducing dependence on imports of API from China through thenewbulkdrugpolicytobeinitiated,andthestrongMakeinIndiapushinthesector.

ThemedicaltechnologysectorwasvaluedatUSD6.3bnin2013atendconsumerpricesandisgrowingat10-12percentperyear.Currently,theIndianmedicaldevicesindustryrepresentsjustover1.3percentoftheglobalmedicaldevicemarket.TheIndianmedicaldevicesindustryconsistsofsmallandmediumcompaniesprimarilyfocusingtheirR&Deffortsand manufacturing capabilities on affordable medical devices such as disposables and medical suppliers – which come underlowpriced,highvolumemarketsegments.Requirementsofhighendmedicalequipment–nearly75percent−aremetbyimports.Thecountry’sMakeInIndiainitiativeisbeingimplementedthrougha‘policypush’toencouragelocalmanufacturing and shift from an import dependent to an export-orientedmarket.TheimplementationoftheMedicalDevicesBill2016,alongoutstandinginitiativewhichattemptsto carve out the medical technology sector from pharma will be agamechanger.

Manufacturing and automotive

Healthcare


India is the world’s largest sourcing destination for the IT industry,accountingforapproximately67percentoftheUSD124-130bnmarket.Theindustryhasaworkforceofabout10mn.Moreimportantly,theindustryhasledtheeconomictransformation of the country and altered the perception of Indiaintheglobaleconomy.TheITindustryhasalsocreatedsignificantdemandintheIndianeducationsector,especiallyforengineeringandcomputerscience.

TheIndianITandITeSindustryisdividedintofourmajorsegments−ITservices,BusinessProcessManagement(BPM),softwareproductsandengineeringservices,andhardware.TheIndianITsectorisexpectedtogrowatarateof12-14percentforFY2016-17inconstantcurrencyterms.ThesectorisalsoexpectedtotripleitscurrentannualrevenuetoreachUSD350bnbyFY2025.

TheIndianM&Eindustryisasunrisesectorfortheeconomyandismakinghighgrowthstrides.ThissectorisexpectedtogrowataCompoundAnnualGrowthRate(CAGR)of14.3percenttotouchINR2.26tn(USD33.7bn)by2020,whilerevenuesfromadvertisingareexpectedtogrowat15.9percenttoINR994bn(USD15.5bn).Indiaisoneofthehighestspendingandfastestgrowingadvertisingmarketsglobally.Thecountry’sexpenditureonadvertisinggrewmorethan12percentin2016,andacceleratedfurtherin2017,ontheback

ofpopularsportingeventsliketheT20WorldCup,theIndianPremierLeague(IPL)andthemediablitzonstateelections.Thetelevisionsegment,whichcontinuestogetthehighestshareofspending,isexpectedtogrowby12.5percentin2017,ledbyincreasedspendingbypackagedconsumergoodsbrandsande-commercecompanies.

ThegovernmentofIndiahassupportedtheM&Eindustry’sgrowth through various initiatives such as digitising the cable distributionsectortoattractgreaterinstitutionalfunding,increasingFDIlimitfrom74percentto100percentincableandDTHsatelliteplatforms,andgrantingindustrystatustothefilmindustryforeasyaccesstoinstitutionalfinance.Also,thegovernment launched the Digital India programme to provide several government services to the people using IT and to integratethegovernmentdepartmentsandthepeopleofIndia.TheadoptionofkeytechnologiesacrosssectorsspurredbytheDigital India Initiative could help boost India’s Gross Domestic Product(GDP)byUSD550bntoUSD1trillionby2025.Thegovernment’sDigitalIndiaandMakeinIndiainitiativesdominatedtheIndianITindustryin2015andalsoboostedthestart-uprevolutioninthecountry.

The Indian retail and consumer industry is broadly segregatedintourbanandruralmarkets,attractingplayersfromacrosstheworld.Thesectorgrewatanannualrateof5.7percentbetween2005and2015.AnnualgrowthintheIndianconsumptionmarketisestimatedtobe6.7percentduring2015to2020and7.1percentduring2021to2025.Themaximumconsumerspendingislikelytooccurinthefood,housing,consumerdurables,andtransportandcommunicationsectors.Indiawillbeaninterestingarenainthenextfewyearsforglobalretailers.Withnewlargeformatmallsprovidinganchorspacetomanyinternationalfashionretailers,theconsumerwillbenefitfromaplethoraofchoices.Further,the current and expected real estate correction along with

economicreformssuchasGSTandinfrastructuredevelopmentschemes will also offer the brands an added incentive to stay investedinIndia.

TheGovernmentofIndiahasallowed100percentFDIunderthe automatic route in online retail of goods and services throughthemarketplacemodel,therebyprovidingclarityontheexistingbusinessesofe-commercecompaniesoperatinginIndia.Manystategovernments,corporateandeducationalorganisationsareworkingtowardsprovidingtrainingandeducationtocreateaskilledworkforceof500millionpeopleby2022.UnionCabinetreformslikeimplementationoftheGSTandSeventhPayCommissionareexpectedtogiveaboosttotheconsumerdurablesectorinIndiaduringFY2017-18.

Technology, Media and Entertainment (M&E)

Consumer products


Housingisoneofthebasicneedsofthepopulation.Thesectornot only employs the second most number of people directly andindirectlyinthecountry,butalsosupportsaround250ancillaryindustries.Thesectorcontributesmorethan6percenttothecountry’sGDP.However,thereisahugedemand-supply gap in the housing segment with a projected need of around18mnaffordablehousingunits.Andovertheyears,thesectorhasremainedlargelyunorganised,whichhassignificantlyimpactedtheperceptionofthesector.Withinthelastcoupleofyears,thegovernmenthasinitiatedvariousreforms−‘Housingforallby2022’scheme,creationof100

smartcities,relaxationsinFDInormstoattractinvestments&REITsregime.Apartfromthis,governmenthasfinallybeenabletoenactRERAandawardinfrastructurestatustoaffordablehousingsegment.

The plethora of these reforms not only have the ability to change the landscape of the sector in terms of bringing in muchneededtransparencyandaccountability,butalsoattract significant amount of investments for the sector – both overseas&domestic.

DemonetisationdrivebytheIndiangovernmentin2016,aimedatdrivingthecountrytowardsacashlesseconomy,isreflectiveoftherapidlychangingscenariointhecountry.This,alongwithmanymorepolicychangesandreforms,providesfinancialservicesafirmstanding.WhilethereareconcernsrelatedtohighlevelsofNon-PerformingAssets(NPAs)withbanksandotherfinancialinstitutions,thereisasilverlining.RBI,alongwiththegovernment,hastakenanumberofinitiativesforenhancing the accessibility and financial inclusion of all in the country.BankaccountpenetrationinIndiaincreasedfrom35percentin2011to53percentin2014.WithinitiativessuchasJanDhanYojana,thenumberofunbankedpopulationwithoutanybankaccountsinIndiacamedowncomedown

toaround233mnbytheendof2015,reflectingadropof58percentoverthelastfouryears.Asrecordedin2015,Indiahadatotalof1,440mndepositbankaccountsand1,170mnsavingbankaccountsin2015.Thecountryalsohasaround144mnofborroweraccounts.Withrisinglevelsofdigitisationandtechnologyadoption,thefinancialservicessectorisexpectedtodeepenitspenetrationandreachinthecountry.Consequently,theIndianbankingindustryhasthepotentialtobecomefifthlargestbytheendofFY2020andthefifthlargestbytheendofFY2025.

Real estate and construction

Financial services


Indiaisthelargestdemocracyintheworld.Itisestimatedthatthecountrytodayhasmorethan200politicalparties.Onefeature of the political parties in India is the dominant role playedbytheirleaders.Therearebothnationalandregionalparties,oneofwhichistheIndianNationalCongress(INC)whichhasbeenledmainlybytheNehru-Gandhifamilysincetheindependenceofthecountry.Tocompeteonanationallevel,manypoliticalpartiesformalliances.ThetwomainalliancesinthecountryareNationalDemocraticAlliance(NDA),acoalitionledbytheBharatiyaJanataParty(BJP),andUnitedProgressiveAlliance(UPA),acoalitionledbytheINC.

Structure of the governmentIndiaisthelargestmulti-partydemocracyintheworld.Itis a sovereign socialist secular democratic republic with a parliamentarysystemofgovernment,andaconstitution.TheConstitution of India provides for a parliamentary form of governmentwhich,althoughhascertainunitaryfeatures,isfederalinstructure.ThecounciloftheParliamentoftheUnionconsistsoftwolegislativehouses−theRajyaSabha(UpperHouse),whichrepresentsthestatesoftheIndianfederation,andtheLokSabha(LowerHouse),whichrepresentsthepeopleofIndiaasawhole.Atpresent,thecountryisaunionof29statesandsevenUnionTerritories(UTs).Eachstateisgovernedby a government comprising elected representatives of the public.

The central and state governments comprise a council of ministersheadedbyaPrimeMinisterandaChiefMinister,respectively.TheheadofthestateisthePresidentofIndia,whiletheheadofthegovernmentisthePrimeMinister.ThePrimeMinisterandtheChiefMinisterareusuallytheheadsofthepoliticalpartiesthatareelectedbythepeople.TheyhavesupportofallthemajoritymembersintheParliament.Electionsforthestate,centreandUTsareheldaftereveryfiveyears.

NewDelhiisthenationalcapitalofIndia.TheseatofthecentralgovernmentisNewDelhi.AlltheotherStategovernmentshaveprimaryresponsibilityformatterssuchaslawandorder,education,healthandagriculture.Currently,ShriNarendraModiisthePrimeMinisterofIndia.IndiaisamemberofmajorinternationalorganisationsincludingSouthAsianAssociationforRegionalCooperation(SAARC),Brazil,Russia,India,ChinaandSouthAfrica(BRICS),andtheCommonwealthofNations,amongothers.

Judiciary and lawIndiahasawell-established,independentjudicialsystem.TheSupremeCourtofIndiaisbasedinNewDelhi.Ineachstate,thereisaHighCourtinitscapitalcity.Thestatesalsohaveseveraldistrictcourts.

IndiaderivesmostofitsjudicialframeworkfromtheEnglishlegalsystem.ThemaingoaloftheIndianlawistoprotectthepromotionofbusinessentities,provideahealthyindustrialandsocialenvironmentandensurerobustlabourprotection.Till1991,manytradebarrierswereinplacesoastopromotethelocalindustry,butsince1991manybarriershavebeenliftedtopromotetheinfluxofforeigninvestorsinthecountry.

Political and legal system

Source:GrantThorntonDealTracker

Introduction


Foreign investment

IntroductionForeigninvestorskeentosetupoperationsinIndiaarerequiredtocomply,interalia,withtheforeignexchangecontrollawsofthecountry,particularlytheconsolidatedFDIPolicy,issuedbythegovernmentofIndiafromtimetotime.Accordingly,theCompaniesAct2013,ForeignExchangeManagementAct,1999(FEMA)andtheregulationsthereundergovernthesetting-upofincorporatedentities(jointventuresorwholly-ownedsubsidiaries)andofunincorporatedentities(branch,liaisonorprojectoffices).

FDI policyIn recognition of the important role played by FDI in acceleratingtheeconomicgrowthofthecountry,thegovernment initiated a slew of economic and financial reforms in1991.Indiaisnowusheringinthesecondgenerationreformsaimed at furthering the integration of the Indian economy with theglobaleconomy.

FDIisallowedinmostsectors,includingtheservicessector,throughthe‘automaticroute’withoutrequiringanyprior

governmentapproval.Ontheotherhand,inafewsectors,the existing and notified sectoral policy does not permit FDI beyondaceilingoritissubjecttocertainspecifiedconditions.

FDI can be brought in after obtaining an approval from the government.TheapprovingauthorityusedtobetheFIPBwhichusedtofunctionundertheMinistryofFinance.ThegovernmenthasabolishedFIPBwitheffectfromMay2017.Newproposalsfor FDI under approval route are now directly handled by the concernedministries.Towardsthisend,theDIPPhasissuedthe‘StandardOperatingProcedures’(SOP)forprocessingFDIproposals.ThisSOPclearlylaysdowntheproceduretosubmittheonlineapplicationthroughtheFIPBportal(nowknownastheForeignInvestmentFacilitationPortal).

The table below gives an indicative summary of the sectoral FDI policy:

FDI policy parameter Sectors

Automatic route FDIupto100percentpermittedundertheautomaticrouteinmostservices,manufacturing,infrastructuresectorandservices,B2Btrading,SingleBrandRetailTrading(SBRT)

Approval route FDIintheseactivitiesispermittedonlywithpriorgovernmentapproval,e.g.,non-operatingholdingcompanies,broadcastingcontentservices(FMradio)andprintmedia(newspaperandperiodicals)

Sectoralcapsand FDIlinkedconditions

FDIincertainsectorsissubjecttosectoralcapssuchasinsurance(49percent),defenceindustrysubjecttoindustrialLicense(49percent),multibrandretailtrading(51percent)andairlines(49percent)

Further,FDIincertainsectorsissubjecttospecifiedconditions−wholesaletrading,singlebrandretailtrading,e-commerce,constructiondevelopment−townships,housingandbuilt-upinfrastructureetc.

FDIlinkedconditions

FDIinthesesectorsissubjecttospecifiedconditions−floriculture,horticulture,apicultureandcultivationofvegetablesandmushroomsundercontrolledconditions,wholesaletrading,singlebrandretailtrading,e-commerce,constructiondevelopment−townships,housingandbuilt-upinfrastructure,printmediaandasset reconstruction companies


FDI is not permitted in the following sectors:• Lotterybusinessincludinggovernment/privatelottery,online

lotteries,etc.• Gamblingandbettingincludingcasinos,etc.• Agriculture(excludingplantations−tea/coffee/rubber/

cardamom/palmoiltree/oliveoiltree)• Activities/sectorsnotopentoprivatesectorinvestment,e.g.,

atomicenergyandrailways(exceptmassrapidtransportsystems)

• Business of chit fund• Nidhicompany• TradinginTransferableDevelopmentRights(TDRs)• Realestatebusiness,orconstructionoffarmhouses(subject

tocertainexceptions)• Manufacturingofcigars,cheroots,cigarillosandcigarettes,

tobacco or tobacco substitutesForeign technology collaboration in any form including licensingforfranchise,trademark,brandnameandmanagementcontractisalsoprohibitedforlotterybusiness,gamblingandbettingactivities.

TomakeIndiaanattractivedestinationforforeigninvestors,theFDIpolicyallowsrepatriationofallprofits,dividends,royalty,andknow-howpayments,freely.

Exchange controlsFEMAreplacedtheForeignExchangeRegulationAct,1973tofacilitateexternaltradeandpayments,andtopromoteorderlydevelopmentandmaintenanceoftheforeignexchangemarketinIndia.

Asperthecurrentforeignexchangecontrolregulations,transactions are divided into current account and capital accounttransactions.Capitalaccounttransactionrefertosuchatransactionwhichalterstheassetsorliabilities,includingcontingentliabilities,outsideIndia,ofapersonresidentinIndia,orassetsorliabilitiesinIndiaofapersonresidentoutsideIndia.Thus,investmentbyabodycorporateoran entity in India and investment therein by a person resident outsideIndiaarecapitalaccounttransactions.

Currentaccounttransactions,ontheotherhand,aretransactionsotherthancapitalaccounttransactions.Suchtransactionscomprise,forinstance,paymentsdueinconnectionwithforeigntrade,othercurrentbusinessservices,

andshort-termbankingandcreditfacilities,intheordinarycourseofbusiness.Broadlyspeaking,currentaccounttransactionsarepermitted,unlessspecificallybarred,andcapitalaccounttransactionsareprohibited,unlessspecificallypermitted.

Capital instrumentsFEMA,readwithrelevantregulationsgoverningFDI,provide,interalia,thatIndiancompaniescanissueequityshares,fullyandmandatorilyconvertibledebentures,fullyandmandatorilyconvertiblepreferencesharesandwarrants(issuedinaccordancewiththeregulationsissuedbySEBI),subjecttothepricingguidelines/valuationnormsandreportingrequirements,toforeigninvestorssubjecttocertainprescribedrequirements.The FDI policy allows optionality clauses in equity shares and compulsorilyandmandatorilyconvertiblepreferenceshares/debenturesissuedtonon-residentinvestorsundertheFDIschemesubjecttocertainconditions.Thepolicyprovidesthatshareswithcall/putoptionsmaybeissuedtonon-residentinvestorsprovidedthenon-residentinvestorisnotguaranteedanyassuredexitpriceatthetimeofmakingtheinvestment.

Generalpermissionisalsoavailableforissuingshares/preferencesharesagainstlumpsumtechnicalknow-howfee,royaltydueforpayment,subjecttoentryroute,sectoralcapandpricingguidelines,andcompliancewithapplicabletaxlaws.Recently,thegovernmentalsoallowedcompaniestoissueequity shares against any other funds payable by the investee company(subjecttobonafidesbeingsatisfiedregardinglegitimacyofdues),remittanceofwhichdoesnotrequirepriorpermissionofthegovernmentorRBIunderFEMAoranyrules/regulationsframedordirectionsissuedthereunder.

Foreign currency loansIntermsoftheFEMAandtherelevantregulationsgoverningExternalCommercialBorrowings(ECBs),IndiancompaniesoperatingincertainspecificsectorsarepermittedtoavailECBfromcertaincategoriesofnon-residentlenderswithaspecifiedminimumaveragematurityperiodforspecifiedenduser,under the general permission or specific permission route as applicable.Importantly,optionallyconvertibleandredeemableinstrumentslikeredeemablepreferenceshares,optionallyconvertible shares and debentures also need to comply with theECBregulations.


Atpresentthereisathree-tracksystemunderwhichIndiancorporatescanavailECBsfromoverseas.Thefollowingtabledepictsthekeyparametersunderthethreetracks:

Parameter Track I (short-medium term foreign currency ECB)

Track II (long-term foreign currency ECB)

Track III (INR denominated)

Minimumaveragematurity Minimumaveragematurityof3/5years

Minimumaveragematurityof10years

INRdenominatedECBwithminimumaveragematurityof3/5years

Recognisedlenders Internationalbanks,internationalcapitalmarkets,foreignequityholders,longtermlenders,suppliersofequipmentetc.

SameasTrackIexceptoverseasbranches/subsidiariesofIndianbanks.

SameasTrackII

Permitted end uses Capital expenditures such as importofcapitalgoods,localsourcingofcapitalgoods,newprojects,expansionormodernisation

All purposes excluding real estate activities,investmentincapitalmarkets,onlending,purchaseofland,etc.

SameasTrackII

Eligibleborrowers Manufacturingcompanies,softwaredevelopmentsector,infrastructuresector,SEZunits,coreinvestmentcompanies,holdingcompanies,infra-relatedNon-BankingFinancialCompanies(NBFCs),etc.

TrackIentities,REITSandInfrastructure Investment Trusts (InvITS)

TrackIIentitiesandallNBFCs,companies engaged in miscellaneous services such asresearchanddevelopment,training and logistics services and not-for-profitentities


Import/export controls Overtheyears,Indiantradepolicyhasundergonefundamentalshiftstocorrectthepreviousanti-importbias,throughthewithdrawalofquantitativerestrictions,reductionandrationalisationoftariffs,liberalisationinthetradeandpaymentsregime,improvementinaccesstoexportincentives,andestablishmentofarealisticandmarket-basedexchangerate.

ExportandimportofgoodsandservicesfromIndiaareallowedunderFEMA,readwiththeForeignExchangeManagement(CurrentAccount)Rulesasamendedfromtimetotime.The said export and import regulations stipulate guidelines pertaining to settlement and payment of export and import transactions,realisationofproceeds,advancereceiptsandpaymentswrittenoffandlimitspermissibleforthem.

The export regulations also set out the obligations for Indian exporters of goods such as submission of certain prescribed declarationsalongwithsupportingdocuments.Whilenoformsareprescribedforexportofservices,neverthelesstheexportproceeds are required to be realised within a stipulated time period(currentlyninemonths).

Similarly,theimportregulationsprovidethemanneranddocumentsrequiredtobefollowedbypersons,firmsandcompaniesformakingpaymentstowardsimportsintoIndia.Further,thesaidregulationsprovidethetimelineswithinwhich remittances against imports should be completed or an approvalbesoughtfromtheAD/RBIpriortotheexpirationoftheduedate.

Overseas direct investmentIndianparties(companyincorporatedinIndiaorabodycreated under an act of Parliament or a partnership firm registeredundertheIndianPartnershipAct1932oraLimitedLiabilityPartnership(LLP)incorporatedundertheLLPAct,2008)areeligibletoundertake‘overseasdirectinvestment’outsideIndiasignifyingalong-terminterestintheforeignentity(jointventureorwhollyownedsubsidiary).

AnIndianpartycanmakeoverseasdirectinvestmentundertheautomatic route in any bonafide activity up to the prescribed limitofitsnetworth(currently400percentofnetworth).Itmaybenotedthatrealestateandbankingbusinessaretheprohibitedsectorsforoverseasdirectinvestment.Overseasinvestment in the financial services sector is subject to specified conditionsincludingasatisfactorytrackrecordoftheinvestingparty,andthepriorapprovaloftheconcernedfinancialregulatorinIndia.

The regulations also prescribe provisions with respect to aspectssuchasissuanceofguarantee,ongoingcomplianceandreportingrequirementsandconditionsfordisinvestment.


Finance

Introduction

Indian financial services sector

ThefinancialsectorinIndiaisintrinsicallystrong,operationallysundry and exhibits competence and flexibility besides being sensitivetoIndia’seconomicaimsofdevelopingamarketoriented,industriousandviableeconomy.Thesectorcanbebroadly classified into two categories:

The organised sector:Comprisesprivate,publicandforeignownedcommercialandcooperativebanks,whichareknownasscheduledbanks,andinsurancesector.

The conventional sector:Comprisesindividualorfamily-ownedmoneylendersandNBFCs.

The force of liberalisation has transformed the structure of the financialsector.Therehavebeensignificantbankingreformsinthecountrysincetheliberalisationoftheeconomy.Thesereformshaveattractedforeignplayersinthebankingandfinancialsector.

TheRBIpolicyratesheavilyinfluencetheIndianfinancialservices.ThecurrentRBIratesason07March2018arebankrate:6.25percent;reporate:6percent;reversereporate:5.75percent.ThereserveratiosareCRR:4percentandSLR:19.5percent.

The Indian financial sector has the following broad categories:

Sr. No. Categories

1 Commercialandretailbanks

2 WhiteLabelAutomatedTellerMachine(WLA)

3 Paymentbanks/wallets

4 NBFC

5 HousingFinanceCompanies(HFC)

6 MicrofinanceInstitutions(MFIs)

7 Insurance companies

8 Capitalmarkets

9 Pension funds

10 Mutualfunds

11 PrivateequityandVentureCapital(VC)funds

12 AssetReconstructionCompanies(ARCs)

13 REIT/InvITfund

14 Angelorstart-upfund


ThebankingsectorisdominatedbyscheduledcommercialbankswhichincludePSUbanks,privatebanksandforeignbanks.Commercialbanksdealinalltypesofcommercialbankingbusinessesincludingcashmanagementsystem,AutomatedTellerMachines(ATMs),creditcards,termandworkingcapitalloans,housingandconsumerfinanceandpurchaseandsaleofforeigncurrencies.Manyfinancialinstitutions are becoming dynamic and entering new domains withinbankingsuchashomeloansfinance,carandretailbanking,etc.andhaveseparatedepartmentsforofferinginvestmentandstructuringservices.

In2016,inanendeavourtopromoteacashlesseconomy,thegovernment announced demonetisation of existing currency notesthroughtheRBI.ThedemonetisationprocessisexpectedtohaveapositiveimpactontheIndianeconomy,channelisingidlemoneythroughlegitimatebankingchannels.Hence,growingdepositsinthebanksmayresultinloweringtheinterestrates,furtherdroppingthelendingratesaswell.Thiswouldfurtherhelpinpromotingretailactivitiesintheeconomy.

WLAATMsset-up,ownedandoperatedbynon-bankentitiesarecalledWLAs.TheyprovidebankingservicestothecustomersofbanksinIndiabasedonthecards(debit/credit/prepaid)issuedbybanks.TheUnionCabinethasapproved100percentFDIundertheautomaticroutefornon-bankentitiesthatoperateWLA,subjecttocertainconditionsasprescribed.

Payment banks/walletsPaymentsbanksareanewmodelofbanksconceptualisedbytheRBIforfinancialinclusionbyproviding(i)smallsavingsaccountsand(ii)payments/remittanceservicestomigrantlabourworkforce,lowincomehouseholds,smallbusinesses,otherunorganisedsectorentitiesandotherusers.Theyreachcustomers mainly through the mobile phones rather than conventionalbanks.PaymentsbanksaregovernedbythefinalguidelinesreleasedbytheRBIforpaymentsbankson27November2015.

AirtelhaslaunchedIndia’sfirstlivepaymentsbank.Further,withpaymentsbanksusingsmartphonesandbiometricsystem(AadhaarCardenabledbankaccounts),theuseofcurrencycirculationintheseareastoowilldecreasedrastically.

NBFCsNBFCsarefinancialinstitutionsthatprovidecertaintypesofbankingservices,butdonotholdafullbankinglicence.NBFCsunder their criteria are permitted to offer substitutes to the

bankingservicessuchasloansandcreditfacilities,etc.Theyaregenerallyengagedinnon-fundbasedactivitiesthatkeepthem outside the scope of traditional oversight required under bankingregulations.

TheNBFCsectorinIndiahasundergoneasignificanttransformationoverthepastfewyears,withNBFCloansexpanding16.6percentintheyear,twiceasfastasthe8.8percentcreditgrowthacrossthebankingsectoronanaggregatelevel.

HFCThemandateoftheRBIistopromotehousingfinanceinstitutionstoimprove/strengthenthecreditdeliverynetworkforhousingfinanceinthecountry.HFCsareexpectedtoregulate the housing finance system of the country to prevent the affairs of any housing finance institution being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the housing finance institutions.

The biggest highlight of the government was to bring housing loansofuptoINR5mnunderaffordablehousingandINR2.8mninurbanandINR2.5mninothercentresunderprioritysectorlending.ThedecisionoftheRBItoincreaseLoanToValue(LTV)ratioto90percentforloansuptoINR3mnorlesswasanotherpositivesteptoenableHFCstolendmoretotheLow-andModerate-Income(LMI)group.

MFIThePrimeMinisterofIndiahaslaunchedtheMicroUnitDevelopmentandRefinanceAgency(MUDRA)tofundandpromoteMFIs,whichwouldinturnprovideloanstosmallandvulnerablesectionsofthebusinesscommunity.MFIsare the pivotal overseas organisations in each country that makeindividualmicrocreditloansdirectlytovillagers,microentrepreneurs,impoverishedwomenandpoorfamilies.Asadedicatedcreditdeliverychannelforvastunbanked/under-bankedsegments,NBFC-MFIshavebeenplayingasignificantroleintakingforwardthefinancialinclusionagendaofthegovernmentofIndia.

Insurance companiesTheInsuranceRegulatoryandDevelopmentAuthorityofIndia(IRDA),aspartofitsendeavourtoincreaseinsurancesectorgrowth,hasallowedanewdistributionavenuecalledthe‘pointofsale’person,whowillbeallowedtosellsimplestandardisedinsuranceproductsinthenon-lifeandhealthinsurancesegments,whicharelargelypre-underwritten.Therelaxation


intheFDIlimitto49percentintheinsurancesectorandpermissionforoffshorereinsurancetoentertheIndianmarketswouldassistIndiabecomethelargestinsurancemarketintheworld.OverfivereinsurancelicenceshavebeengrantedinIndiatopromotethereinsurancebusinessactivities.

ThegrossmarketsizeofIndia’sinsurancesectorisprojectedtotouchUSD350-400bnby2020,withtheIndianinsuranceindustry planning to increase the penetration level in the marketfromthecurrent3.9percentto5percentby2020.

Capital marketsTheIndiancapitalmarketcomprisesequity,debt,foreignexchange,derivativemarketsandfuturesmarketsincommodities.Further,inapotentialmovetoencourageforeigninvestmentintothedebtmarkets,theRBIreleasedadraftcircularon16May2016proposingtoexpandthebasketofpermissibleinstrumentsforForeignPortfolioInvestors(FPI)toincludeunlisteddebtsecuritiesaswell.

AccordingtotheDIPP,thetotalFDIinvestmentsIndiareceivedinFY2016-17wasUSD60.08bn.FPIs’netinvestmentsstoodatUSD8.58bninMarch2017,themaingrowthdriverforFPIsbeingtheequitymarket.

Pension fundsPensionfundsarecreatedbyanemployertomakecontributionsoffundssetasideforaworker’sfuturebenefit.WiththepassagepassageofthePensionFundRegulatoryandDevelopmentAuthority(PFRDA)Act2013,theinvestmentcorpusinIndia’spensionsectorisexpectedtocrossUSD1trillionby2025.Foreigninvestmentinthepensionsectorispermittedupto49percent.

Mutual fundsMutualfundsarepopularinIndia,becausetheyoffertheability to easily invest in increasingly complicated financial markets.Alargepartofthesuccessofmutualfundsistheadvantagestheyofferintermsofdiversification,professionalmanagementandliquidity.

Afterthetighteningofregulation,andwithrisingincomes,IndianowhasseveralfundhouseswithrecordAssetsUnderManagement(AUM)ofoverINR13,000bnatlastcount,andseverallakhunitholders.

Other sources of financePrivate equity and VC fundsInIndia,VCisregulatedbySEBI.Aventurecapitalmaybesetup by a company or a trust after a certificate of registration isgrantedbySEBI.AVCcanraisemoneyfromanyIndianorNon-ResidentIndian(NRI).Recently,SEBIproposedtoenhancetheinvestmentlimitforVentureCapitalFunds(VCFs)from10percentto25percentinoffshoreventurecapitalundertakingswithanIndianconnection.

Overthelastfewyears,Indiahasemergedasthethirdlargestbaseforstart-upsintheworld,aftertheUSandtheUK.Oneofthemostcommonwaysastart-upraisesmoneyforitsseedcapitalandfurtherfundingisbyventurecapital.AlternativeInvestmentFunds(AIF)refertoanyprivatelypooledinvestmentthatmaybefromIndianorforeignsourcesknownas‘privateplacement’.

In2015,theRBInotifiedaregulationwhichallowedforeigninvestmentandsimplifiedtheprocedureforinvestmentinAIFs.ThismovehasbeenapplaudedbytheAIFindustry,whichisrelativelynewinIndia.Withafreshinflowofforeigninvestment,therewillbeacceleratedgrowthindomesticAIFs,whichyieldbetter returns to investors as well as better investments for new andemergingbusinesses,socialventuresandinfrastructure.

ARCsARCshavebeencreatedtobringaboutasystemforrecoveringNPAsfromthebooksofsecuredlendersandunlockingthevalueofNPAs.Tohelptackletheissueofdecliningassetqualityofbanks,100percentFDIisallowedinARCsundertheautomaticroute.

REITs/InvIT fund REITorInVITisanalternatefund-raisingmechanismofferedtocapital-intensiveindustriesforcompaniesthatownincome-producingrealestateorinfrastructure.Assuch,theunitholdersofaREIT/InvITearnashareoftheincomeproducedthroughrealestateinvestment,withoutactuallyhavingtogooutandbuyorfinanceproperty.SEBIrelaxedtherulesforREITandInvITbyallowingthemtoinvestmoreinunder-constructionprojects,rationalisedunitholderconsentonrelatedpartytransactionsandremovedrestrictionsonSpecialPurpose


Vehicles(SPVs)toinvestinotherSPVsholdingtheassets.

Angel or start-up fund Angel investors are experienced entrepreneurs who have beenthroughthesamephaseandunderstandwhatittakestocreateabigcompanyfromanidea.Therearearound280investorsthatareapartofthisnetwork.Themainsectorsthatprominentlyinvolveangelinvestmentaree-commerce,

informationtechnology,healthcare,agricultureandthemobilesegmentofthetelecommunicationssector.


Business entities

IntroductionA foreign company has the following business entity options through which it can establish its presence in India:

These forms of business entities are discussed in detail as follows:

Unincorporatedentities • LiaisonOffice(LO)• BranchOffice(BO)• Projectoffice• Partnershipfirm

Incorporated entities • LLP• Limitedcompanypublic/private

LO Aforeigncompany(abodycorporateincorporatedoutsideIndia,includingafirmorotherassociationofindividuals)mayestablishitsLOinIndiabymakinganapplicationtotheAuthorisedDealerBank(ADBank)iftheprincipalbusinessoftheentityresidentoutsideIndiafallsundersectorswhere100percentFDIispermittedintermsoftheFDIpolicy.Incertaincases,theapplicationistobemadetotheRBIandprocessedinconsultationwiththegovernment,forinstance,wheretheapplicantisanNGOandwhentheapplicantisfromcertainspecified countries and setting up the LO in specified states in Indiaetc.

An LO is suitable for a foreign company which wishes to set up a representative office as a first step to explore and understand thebusinessandinvestmentclimateinthecountry.Thisofficeserves as a communication channel between the parent companyoverseasanditspresent/prospectivecustomersinIndia.TheLOcanalsobesetuptoestablishbusinesscontactsorgathermarketintelligencetopromotetheproductsorservicesoftheoverseasparentcompany.TheLOcannotundertakeanybusinessactivityorearnanyincomeinIndia.

BOAforeigncompanymayestablishitsBOinIndiabymakinganapplicationitsADbankinmostcases.TheBOshouldbeengagedintheactivityinwhichtheparententityisengaged,andpermissibleactivitiesforaBOincludeexporting/importinggoods,renderingprofessionalorconsultancyservices,undertakingresearchwork,promotingtechnicalorfinancialcollaborations,representingtheparentcompanyinIndiaandactingasbuying/sellingagentinIndia,renderinginformationtechnologyservicesandrenderingtechnicalsupport.

ABOisnotpermittedtoundertakeanymanufacturingactivityinthecountryexceptwheretheBOisset-upinaspecialeconomiczone.

Project officeA foreign company may open a project office in India without priorapprovalfromtheRBI,providedithassecuredacontractfrom an Indian company to execute a project in India and mettheprescribedconditions.Oncetheprojectexecutioniscompleted,asperthetermsofthecontractsawarded,theprojectofficewouldhavetobecloseddown.


Partnership firmsUnderthecurrentFDIpolicyandtheForeignExchangeManagementLaw,foreigninvestmentintoIndianpartnershipfirms(otherthanbynon-residentIndiansorpersonsofIndianorigin)requirespriorpermissionfromtheRBI.Apartnershipisanassociationoftwoormorepersonstocarryonasco-ownersofabusinessforprofit.Eachpartnerofapartnershiphasunlimitedliability.

LLPsAnLLPisahybridbetweenapartnershipfirmandacompany.Itisaseparatelegalentity,liabletothefullextentofitsassets,with the liability of the partners being limited to their agreed contributionintheLLP.ForeigninvestmentintoanLLPispermittedundertheautomaticroute(withoutrequiringpriorapproval)inthosesectorsinwhich100percentFDIisallowed.However,itshouldbenotedthatLLPsarenotpermittedtoraiseECBs.

An LLP is governed as per the LLP agreement between the partners,andintheabsenceofsuchagreementtheLLPwouldbegovernedbytheframeworkprovidedintheLimitedLiabilityPartnershipAct,2008.ThisActdescribesthemattersrelatingto mutual rights and duties of partners of the LLP and of the limitedliabilitypartnershipanditspartners.Importantly,theActmakesitmandatorytohavetwodesignatedindividualpartners,atleastoneofwhomshouldberesidinginIndia.

Any existing private company or existing unlisted public company can be converted into LLP by complying with therelevantprovisionsoftheLLPAct,2008.Taxneutralityconditionshavebeenstipulatedforsuchconversion.

Limited companyAlimitedcompanyisanincorporatedentity,whichisaseparatelegalentitydistinctfromitsmembers/shareholders.Asmentionedabove,foreigninvestmentinIndiaisgovernedbytheFDIpolicyofthegovernmentaswellastheForeignExchangeManagementLaw.Asperthecurrentpolicy,allcompaniesin India have to be incorporated under the provisions of the CompaniesAct,2013.

WitheffectfromMay2015,theminimumcapitalrequirementforcompanieshasbeendoneawaywith.

Private company: A minimum of two members and two directors are needed to establish a private company with at leastonedirectorbeingresidentinIndia.

Public company: A public company can be incorporated with minimum three directors and seven members with at least one directorbeingresidentinIndia.

Foreign investors while deciding to set up an entity in India as aprivatevis-à-visapubliccompanyconsiderseveralfactorssuch as:• While a private company can provide for restrictions on

transfer of its shares by inserting suitable clauses in the ArticlesofAssociation,nosuchrestrictionscanbeputontransferofsharesinapubliccompany,whicharefreelytransferable.

• A private company as the name suggests cannot invite publictosubscribeitssecurities.

• The compliances applicable to a private company under theCompaniesAct2013arefewerascomparedtothoseapplicabletoapubliccompany,suchasformationofvariousgovernancecommittees,secretarialaudits,appointment of independent directors and ceilings of managerialremuneration.


Labour

Employment contractIndia has adopted various measures to regulate the conditions underwhichfixed-termemploymentcontractsarewritten,appliedandinterpreted.LabourisaconcurrenttopicintheIndianConstitution−itissubjecttolegislationfrombothstateandcentralgovernments.TheIndianContractsAct,1872definestheterm‘contract’asanagreementlegallyenforceablebylaw.Theremustbealawfulofferandalawfulacceptancetoresultinanagreement.

Customary working hours and holidaysThenormalworkinghoursinafactoryperdayareeight.TheusualworkinghoursinIndiaare9amto5:30pmor9:30amto6pm.Incaseofcorporates,itissevenhoursperday,sixdaysaweek.Indiansubsidiariesofmultinationalcorporationsusuallyfollowafiveday,eighthourperdayweek.Normally,10daysofcasualleaveand20-30daysofprivilegeleaveisallowedinayear.MayDay,whichisknownastheInternationalWorkersDay,iscelebratedeveryyearon01MayinIndia.

Minimum wageTherearelawsinIndiaforworkersinmostsectorstoreceiveaminimumwage.Itisoneofthemostimportantaspectsofstartinganewlineofworkorrunninganorganisationsuccessfully.ThelawwhichenforcestheemployerstopaythesetminimumwagesinIndiaisknownastheMinimumWagesAct,1948.ThemaingoalofthisActistopreventtheexploitationofaworker.

Work permits for foreign workersAforeignnationalcomingtoIndiatoworkisrequiredtogetanemploymentvisa.Employmentvisasareusuallygrantedforoneyearorthetermoftheemployment/projectcontractandthetimeperiodcanbeextendedonceinIndia.Allforeigners(includingforeignersofIndianorigin)visitingIndiaonlong-termvisas(Student,Medical,ResearchandEmploymentVisaofmorethan180days)arerequiredtogetthemselvesregisteredwiththeForeignersRegionalRegistrationOfficer(FRRO).TheFRROregistrationprocesshasrecentlybeendigitalisedwiththeintroductionofane-FRROportalwithanaimtoprovidefaceless,cashlessandpaperlessservicetoforeignnationals.

PersonsofIndianOrigin(PIOs)whofallwithinacertaincategory,asspecified,whohavemigratedfromIndiaandacquiredcitizenshipofaforeigncountryotherthanPakistanand Bangladesh are eligible to avail the Overseas Citizen of India(OCI)statusaslongastheirhomecountriesallowdualcitizenshipinsomeformortheotherundertheirlocallaws.

Persons registered as OCI do not have the right to vote or the eligibilitytocontestforelectionstopublic/governmentoffices,etc.RegisteredOCIsshallbeentitledtothefollowingbenefits:• Multipleentry,multi-purposelife-longvisatovisitIndia• Exemptionfromreportingtopoliceauthoritiesforanylength

of stay in India• ParitywithNRIsinfinancial,economicandeducational

fields,exceptintheacquisitionofagriculturalorplantationproperties

A person registered as OCI for five years is eligible to apply for Indiancitizenshipifhe/shehasbeenresidinginIndiaforoneyearoutofthefiveyearsbeforemakingtherequest.

Social securitySocialsecurityisvalidonlyforthoseindividualswhoareemployedintheorganisedsector.TheEmployees’StateInsuranceSchemeprovidesmedicalcareandotherbenefitsforemployeesorlabourersearninglessthanUSD300amonth(INR21,000).

TheEmployees’ProvidentFundOrganisation(EPFO)isastatutorybodyundertheMinistryofLabourandEmployment,GovernmentofIndia,whichadministerssocialsecurityregulationsinIndia.Itismandatoryforallemployerswhoemploymorethan20peopletoapplythefundforthebenefitoftheirworkers.Itcoversallthepensionsandthesurvivorbenefitsintheeventofanyemployee’sdeath.Allemployeesarerequiredtocontribute12percentoftheirsalarytoEPFO.(VideFinanceAct,2018,reducedrateof8percentapplicableforwomenemployeesforfirstthreeyearsoftheiremployment).Thisisautomaticallydeductedbytheemployer.Employeesearnatax-freeinterestoncontributionsmadetothefund.EvenforeignorinternationalworkerswhoareemployedinIndiaaresubjecttothetermsofthisfund.Recently,theFinanceMinistryallowedEPFOtoinvest15percentofitscorpusinexchangetradedfunds.

Indiaalsohasasocialsecurityagreement,whichisabilateralagreementbetweentwogovernments.ThisagreementservestoprotecttheinterestsofIndiancitizensworkinginthefollowingcountries:• Australia• Austria• Belgium• CzechRepublic• Canada• Denmark• France


• Finland• Germany• Hungary• Japan• RepublicofKorea• Luxembourg• Netherlands• Norway• Portugal• SwissConfederation• Sweden

Sickness and pension arrangementsIt is compulsory for an employer to provide medical facilities toitsworkforcebycontributingtowardsEmployees’StateInsuranceSchemeasapplicable.

TheemployercontributestowardsaProvidentFundSchemeand a certain portion of the contribution is appropriated towardsaPensionScheme,whichprovidespensionbenefitstotheemployeesandtheirfamilymembers.Workersarealsoentitled to gratuity on completion of five years of continuous service.However,contributiontowardsaProvidentFundSchemeisnotrequiredifthenumberofemployeesinthatorganisationdoesnotexceed20.

Trade unionsThe trade unions in India are generally divided on political lines.Tradeunionshavestruggledhardtoachieveanadequatemeasureofprotectionagainstexploitation.Thetradeunionsworktoprotecttheinterestoftheworkersanddiscusskeyworkplace-relatedissueswiththemanagementsuchaswagesandbenefits.

ThesixmajorCentralTradeUnions(CTU)inIndiaaretheUnitedTradeUnionCongress(UTUC),BhartiyaMazdoorSangh(BMS),HindMazdoorSang(HMS),AllIndiaTradeUnionCongress(AITUC),CentreofIndianTradeUnions(CITU)andtheIndianNationalTradeUnionCongress(INTUC).Atradeunionwillbe recognised if it functions for more than a year after its registration.Incaseanorganisationhasmorethanoneunion,forittoberecognised,itmusthaveatleast15percentofworkersasitsmembers.

Source:MinistryofLabourandEmployment,MinistryofOverseasIndianAffairs


Accounting, reporting and audit requirementsSummaryInIndia,accounting,reportingandauditingrequirementsofbusiness entities are primarily governed by the regulations issuedbytheInstituteofCharteredAccountantsofIndia(ICAI),theSecuritiesandExchangeBoardofIndia(SEBI),theMinistryofCorporateAffairs(MCA)andtheCentralBoardofDirectTaxes(CBDT).

The ICAI has issued accounting standards that are applicable toallentitiesengagedincommercial,industrialorbusinessactivities.Thelegalrecognitiontothesestandardshasbeen given by the central government by notification of the standardsundertheCompaniesAct,2013(2013Act).The2013ActisanactoftheParliamentofIndiawhichgovernstheincorporationofacompany,mannerofconductingtheaffairsofacompany,responsibilitiesofitsboardofdirectorsandotherprovisionsincludingwindingup.Italsoprescribesthefinancial reporting and auditing requirements to be followed by all companies including foreign companies as defined in the 2013Act.

ThecompanieslistedonarecognisedstockexchangeinIndiaaregovernedbyrulesandregulationsissuedbytheSEBIfromtimetotime.Inaddition,thereisindustry-specificguidancerelating to financial reporting issued by the relevant authorities suchastheRBI.

Thefollowingsub-sectionsdiscusssomeofthecommonrequirements:

Records to be maintainedEverycompanyshouldfollowaccrualbasisofaccounting.The2013Actrequiresthattherecordscanalsobemaintainedinelectronic mode in the prescribed manner and are required to beretainedforaminimumperiodofeightyears.Further,thecentral government has the power to direct the company to retainthestatutorybooksforlongerperiods,incertaincases.

Preparation of financial statementsEverycompanyisrequiredtopreparebothseparateandconsolidated financial statements on an annual basis in accordancewiththeaccountingframeworkapplicabletothecompany.Further,alistedcompanyisalsorequiredtopublishquarterlyorhalfyearly,asthecasemaybe,interimfinancialinformation,subjectedtoreview,intheformatsprescribedbySEBIwithintheprescribedtimelines.

Contents of financial statementsThe2013Actlaysdowntheformatforpresentationoffinancialstatementsofcompaniesexceptinsurance,bankingandelectricity companies and other classes of companies for which formoffinancialstatementsisspecifiedbythegoverningact.Financialstatementscomprisebalancesheet,statementofprofitandloss,cashflowstatement,astatementofchangesinequity(ifapplicable)andrelatednotes.

ConsolidationThe 2013 Act mandates the preparation of consolidated financial statements if a company has one or more subsidiaries unless the following conditions complied with:• Itisawholly-ownedsubsidiaryorpartiallyownedsubsidiary

ofanothercompanyandallitsothermembers,includingthosenototherwiseentitledtovote,havebeenintimatedinwriting and they do not object to the fact that company is notpresentingconsolidatedfinancialstatements.

• Its securities are neither listed nor in the process of listing on anystockexchange,inIndiaoroutsideIndia.

• Its ultimate or any intermediary holding company files consolidated financial statements with the registrar which are in compliance with the applicable accounting standards.

Audit of financial statementsEverycompanyinIndia,irrespectiveofitssize,musthaveitsfinancial statements audited by a Chartered Accountant in practice(memberoftheICAI).Theauditsarerequiredtobeconducted in accordance with the auditing standards issued by the ICAI and notified by the central government under the 2013Act.Inaddition,theIncome-taxAct,1961mandatesaudits of taxpayers meeting certain specified thresholds to be conductedbyaCharteredAccountantinpractice(memberoftheICAI).

Auditing standardsTheStandardsofAuditingissuedbytheICAIaresubstantiallysimilar to the auditing standards issued by the International AuditingandAssuranceStandardsBoard(IAASB)oftheInternationalFederationofAccountants(IFAC).

Reporting on internal financial controlsIncaseofalistedcompany,directorsarerequiredtolaydowninternal financial controls to be followed by the company and report annually whether such internal financial controls wereadequateandoperatingeffectively.Incaseofother


companies,directorsarerequiredtoreportwhethersuchinternalfinancialcontrolswereadequate.

Incaseofallcompanies,auditorsarerequiredtoreportwhether internal financial controls over financial reporting in relation to separate and consolidated financial statements wereadequateinoperatingeffectively.

The2013Actdoesnotprescribeaninternalcontrolframeworkforthepurposeofreportingbyauditorsanddirectors.

Mandatory firm rotationToreducetherisksofexcessivelong-termfamiliarity,the2013Act prohibits auditor appointment for a period of more than five consecutiveyears(inthecaseofindividualasanauditor)or10consecutiveyears(inthecaseofanauditfirmasanauditor)bylistedandcertainotherclassofcompanies.Individual/auditfirm as an auditor that has completed the above prescribed period of appointment is eligible for appointment as auditors afteraperiodoffiveyearsfromthecompletionoftheabove-mentionedperiod.

Inspection of recordsThebooksofaccountsandotherrecordsareopentoinspectionbyanydirector,RegistrarofCompaniesandothergovernment authorities such as those involved with excise and salestax.

Accounting yearUnderthe2013Act,companiesarerequiredtoadoptauniformfinancialyearendingon31Marchunlessspecificallypermittedbytheauthorities.Similarly,theaccountingyearmustendon31Marcheveryyearforincome-taxpurposes.

Filing of financial statements/resultsAcompanyisrequiredtoholdanAnnualGeneralMeeting(AGM)withinsixmonthsoftheendofthefinancialyear,andfilingofthefinancialstatementswiththeRegistrarofCompaniesisrequiredwithin30daysoftheAGM.Further,listedcompaniesalsoneedtofiletheaudited(orreviewed,asapplicable)financialresultswiththestockexchangewithin60daysincaseofannualperiodsand45daysincaseofquarterlyperiodsexceptlastquarter.

Language in which business records are required to be maintainedThereisnoprescribedlanguageformaintenanceofbooksandbusinessrecords.ItcanbemaintainedinanyIndianlanguage.CompaniesgenerallymaintaintheiraccountsinEnglish.

Maintenanceofaccountingrecordsinaforeigncurrencyandpresentationoffinancialstatements.

Theaccountingrecords,whetherelectronicormanual,havetobekeptinIndiancurrency.However,theforeigncurrencyamountsmayalsobedisclosed.

Accounting frameworkThe2013Actprescribestwoaccountingframeworks:IndianAccountingStandards(IndAS),whicharebasedonInternationalFinancialReportingStandards(IFRS)asissuedbytheInternationalAccountingStandardsBoardwithcertaincarve-outs,mandatoryforcertainclassofcompanies,andstandardsthataresubstantiallydifferentfromIndAS.Companies are required to determine the relevant accounting frameworkaspertheapplicablelaw.Further,companymayirrevocablyopttoprepareIndAScompliantfinancialstatementsfortheaccountingperiodsbeginningonorafter01April2015.

TheMCAhasnotified39IndAS,whicharebasedonIFRSwithcertaincarve-outs.IndASareapplicabletocompaniesinthemannerspecifiedintheroadmapissuedbytheMCA.ThefollowingistheroadmapformandatoryadoptionofIndASbyallcompaniesotherthaninsurancecompanies,bankingcompaniesandNBFCs:• TheapplicabilityofIndASismademandatoryunderPhase

IforcompanieswhosenetworthisINR5bnormoreforaccountingperiodsbeginningonorafter01April2016,withcomparativesfortheperiodending31March2016orthereafter.

• UnderPhaseII,IndASaremademandatoryforaccountingperiodsbeginningonorafter01April2017,withcomparativesbeginningforperiodending31March2017orthereafterforcompanieshavingnetworthmorethanINR2.5bn,butlessthanINR5bn.

• UnderbothPhaseIandPhaseII,IndASwouldbemandatorily applicable to companies whose equity and debt securities are listed or are in the process of listing on anystockexchangeinIndiaoroutsideIndia,aswellastotheholding,subsidiary,jointventureorassociatecompaniesofthecompaniescoveredabove.

Separateroadmapshavebeenissuedforbanks,insurancecompaniesandNBFCstotransitiontoIndAS;theearliestperiodisaccountingperiodbeginningonorafter01April2018.

ROC filingTheMCArequiresfilingoffinancialstatementswiththe


RegistrarofCompanies,usingtheeXtensibleBusinessReportingLanguage(XBRL)taxonomy,forthefollowingcompanies:• all companies listed in India and their Indian subsidiaries;• allcompanieshavingapaidupcapitalofINR50mnand

above; and• allcompanieshavingaturnoverofINR1bnandabove.

All the remaining companies are required to fill the prescribed forms.

TheXBRLdocumentsoffinancialstatementsarerequiredtobecertifiedbyaCharteredAccountantorCompanySecretaryorCostAccountantinwholetimepractice.

Income Computation and Disclosure Standards (ICDS)In view of the significant developments in convergence with IFRS,ICDSwerenotifiedundertheIncome-taxAct,whichare,inprinciple,closertotheexistingIndianGAAPthantheIFRS-basedIndAS.Thesestandardsareeffectivefromthecurrentfinancialyear(2016-17)itselfandarerequiredtobefollowedby all taxpayers following the mercantile system of accounting for the purpose of computation of income from business and ‘otherincome’chargeabletotax.


Direct tax

Income tax is chargeable on taxable income computed in accordancewiththeprovisionsoftheIncome-taxAct,1961(hereinafterreferredtoasthe‘Income-taxAct’).Incomecanbebrought within the tax net under the following heads of income:

1.Income from salary

2.Income from house property

3.Profitsandgainsfrombusinessandprofession(PGBP-businessincome)

4.Capital gains

5.Incomefromothersources(Incomenotspecificallycoveredunderaboveheadsofincomelikeinterestanddividend.)

All taxpayers are required to follow a uniform tax year from 01Aprilto31Marchfortaxpurposes,referredtoas‘previousyear’,irrespectiveofthefinancialyearfollowedforaccountingpurposes.

Indiafollowsamixofsource-basedandresidence-basedtaxation.GlobalincomeofaresidentistaxableinIndia.However,non-residentsaretaxableoncertainIndia-sourcedincome.

Taxation of individualsDependinguponthedurationofphysicalpresenceinIndia,anindividual can be:• ResidentandOrdinarilyResident(ROR)• ResidentandNon-OrdinarilyResident(RNOR)• Non-Resident(NR)

Scopeoftaxationofanindividualisasfollows:• RORsaretaxableontheirworldwideincome• RNORsandNRsaretaxablefortheirIndia-sourcedincome

Thepersonaltaxratesforthefinancialyear2018-19areasfollows:

Income slabs (USD) Income slabs (INR) Rate of tax (%)

UptoUSD3,750* UptoINR250,000 Nil

USD3,750to USD7,500

250,000to500,000 5%oftheamountoftotal income exceeding INR2,50,000

USD7,500to USD15,000

500,000to1,000,000 INR12,500+20%ofthe amount of total incomeexceedingINR500,000

AboveUSD15,000 Above1,000,000 INR112,500+30%ofthe amount of total incomeexceedingINR1,000,000

*Minimumexemptionlimitfor:

Seniorcitizens(age60yearsandabovebutlessthan80years):INR300,000(USD4,500)

Veryseniorcitizens(age80yearsandabove):INR500,000(USD7,500)

*USDratetakenat66.66


All rates mentioned in this chapter are exclusive of applicable surchargeandHealthandEducationCess.Pleaserefertothesectionon‘Rateofsurchargeandcess’forfurtherdetails.

Taxation of partnership firm (including LLP)Scopeoftaxableincomeofafirmisasfollows:• Resident:Taxedonworldwideincome• Non-resident:Taxedonincome(a)received/deemedtohave

beenreceivedinIndiaor(b)accrued/deemedtohavebeenaccrued in India

A firm is said to be resident in India in every case except where during that year the control and management of its affairs are situatedwhollyoutsideIndia.

Thetaxrateforthefinancialyear2018-19is30percent.

Taxation of companiesScopeoftaxableincomeofacompanyisasfollows:• Resident*:Taxedonworldwideincome• Non-resident:Taxedonincome(a)received/deemedtohave

beenreceivedinIndiaor(b)accrued/deemedtohavebeenaccrued in India

*FromFY2016-17onwards,acompanyshallbearesidentinIndiaifitisanIndiancompanyoritsPlaceofEffectiveManagement(PoEM)isinIndia.PoEMhasbeendefinedtomeanaplacewherekeymanagementandcommercialdecisions that are necessary for the conduct of business of an entityasawholeare,insubstance,made.TheIndianrevenueauthorities have also released guidelines for determination of PoEMofaforeigncompanyinIndia.

Tax rate for domestic company

Thecorporatetaxratesforthefinancialyear2018-19areasfollows:

Sr.No Prescribed conditions Tax rate

(a) Total turnover or the gross receipts in the FY2016-17doesnotexceedINR2,500mn (USD39mn)

25%

(b) Otherthancorporatesfallingunder(a)above 30%

Domesticcompaniessetuponorafter01March2016andengaged solely in manufacture or production have an option to betaxedat25percentsubjecttofulfilmentofcertainspecifiedconditions(Pleaserefertothesectionon‘Taxincentivesformanufacturingcompanies’forfurtherdetails).

Tax rate for foreign company

Thecorporatetaxrateforaforeigncompanyis40percent.

Rate of surcharge and cess

Rate of surcharge

Taxpayer

Net income (USD)

<INR10mn (USD0.15mn)

INR10-100mn(USD0.15mn-1.50mn)

>INR100mn(USD1.50mn)

Domestic company

Nil 7% 12%

Foreign Nil 2% 5%

TaxpayerNet income (INR)

>INR5mn(USD0.075mn) <INR10mn(USD0.15mn)

>10mn(USD0.15mn)

Individuals/Association of Persons (AoP)

10% 15%

Firm/LLP/localauthority

Nil 12%

Rate of Health and Education Cess

AHealthandEducationCess*of4percentisapplicableonalltaxpayersandalllevelsofincome,andiscomputedontheamountoftaxcomputed,inclusiveofsurcharge(whereverapplicable).

*TheFinanceAct,2018hasreplacedtheEducationCess(2%)andSecondaryandHigherEducationCess(1%)applicableuntilFY2017-18withHealthandEducationCessonincome-taxinclusiveofsurcharge(whereverapplicable)calculatedattherateof4percent.


Minimum Alternate Tax (MAT)/Alternate Minimum Tax (AMT)Indiahasaminimumtaxregime,wherebyMAT/AMTispayablebycorporates/otherpersonsonprofitsasperbooks(subjecttospecifiedadjustments)/adjustedtotalincome,wheretaxpayable on total income under the normal provisions of Income-taxActislessthanMAT/AMT.

Type of taxpayer

Rate of tax (%)

Applicability Credit availability

Company 18.5%ofbookprofits

MATisleviablewhere tax payable on the total income is less than18.5percentofbookprofits.

The excess of MATovernormaltax is treated as credit,whichcanbesetoffinany15subsequentyears against normal tax liability subject to prescribed limitation.

LLP claiming certain specifieddeductions

Persons (otherthancompany andLLP)claiming certain specifieddeductions$

18.5%onadjusted total income

AMTisleviablewhere tax payable on the total income is lessthan18.5per cent of adjusted total income.

The excess of AMTovernormaltax is treated as credit,whichcanbesetoffinany15subsequentyears against normal tax liability subject to prescribed limitation.

$ItisapplicablewhentheadjustedtotalincomeexceedsUSD0.03mn(INR2mn).

MATprovisionsapplytoaforeigncompanyonlyifithasapermanentestablishmentinIndia(inaccordancewiththeprovisionsofrelevanttaxtreaty)orincasewherethereisnotaxtreatyavailable,ifitisrequiredtoseekregistrationunderanylawforthetimebeinginforcerelatingtocompanies.

Taxation of dividendsIncome distributed in the form of dividends by domestic companiesischargeabletoaDividendDistributionTax(DDT).Suchdividendincomeisgenerallyexemptfromtaxinthehandsoftherecipients.DDTisrequiredtobecalculatedonthegrossed-upamount.

*Deductionofdividendsreceivedfromasubsidiaryisallowed,subjecttocertainconditions,forcomputingDDT.However,nocreditofDDTpaidonthedividendreceivedisallowedundertheIndianlaws.Further,DDTisnotataxdeductibleexpense.

Particular Rate of tax (%) Basis for levy

Domestic company paying dividend

15%asDDT Dividendsdeclared,distributed or paid after specifiedadjustments*

Wherearesidentassessee(exceptdomesticcompaniesandspecifiedcharitableinstitutions)receivesaggregatedividendinexcessofINR1mn(USD15,000)fromdomesticcompanies,taxattherateof10percentontheamountofdividendinexcessofINR1mnshallbelevied.

Dividend received from a foreign company is taxable in the hands of Indian shareholders at their effective tax rates.However,inthecaseofdividendsreceivedbyanIndian company from a foreign company in which the Indiancompanyholds26percentormoreequity,taxataconcessionalrateof15percentislevied.However,incomputingdividendincomefromsuchforeigncompany,nodeductionofanyexpenditureisallowed.

Taxation on income distributed by way of buy-back of unlisted sharesTaxisleviedattherateof20percentonthe‘distributedincome’ paid by unlisted companies to their shareholders on buy-backofitsownshares.

‘Distributedincome’iscomputedasthedifferencebetweentheamountpaidasconsiderationforbuyingbacktheunlistedshares and the consideration received by the company at the time of issuing such shares computed in accordance with prescribedrules.Suchtaxwouldbepaidbythecompanywhilebuyingbackitsownshares.

Incomefrombuy-backofsharesisexemptinthehandsoftheshareholders.

Capital gains taxCapitalgainstaxisleviedontransferofacapitalasset.Capital gains is computed by deducting the cost of acquisition fromthesaleconsideration.ThecapitalgainsarecategorisedintoShort-TermCapitalGain(STCG)andLong-TermCapitalGain(LTCG)dependingontheperiodofholdingoftheassettransferred.

Incaseofnon-residentinvestors,gainfromtransferofshares/debentures of an Indian company is computed in foreign exchange used for the investment and then converted in Indian rupeesonthedateoftransfer,thusprovidingforadjustmentoffluctuationinforeignexchange.


STCG

Status of taxpayer Type of asset Rate of tax

Applicable to both residentsandnon-residents

Equitysharesorunitsofanequity-oriented fund or unit of a business trustonwhichSTTispaid*

15%

Applicable to both residentsandnon-residents

Capital assets other than those mentioned above

a.SlabratesforindividualandHUFs b.Applicabletaxrateforthose not covered above suchas40%forforeigncompanies

LTCG

Status of taxpayer Type of asset Rate of tax

Both residents and non-residents

Equityshares,unitofequity oriented fund or unit of business trustonwhichSTTispaid*

10%**

Residents Listed securities (otherthanaunit)onwhichSTTisnotpaid*orZeroCouponBond(ZCB)

Lower of: a.20%with‘indexation’(indexationisnotavailableonZCB);or b.10%without‘indexation’

Residents Capital assets other than those covered above

20%

Non-residents Listed securities (otherthanaunit)onwhichSTTisnotpaidorZCB

10%aftertakinginto account foreign exchangefluctuation.However,forexfluctuationisnotavailable on zero coupon bonds

Non-residents Sharesanddebentures other than covered above fornon-residents

10%withouttakinginto account foreign exchangefluctuation

Non-residents Capital assets other than those covered abovefornon-residents

20%

*ThebenefitshallalsobeavailableifSTTisnotpaidbuttransactionisundertakenonarecognisedstockexchangelocatedinaninternationalfinancialservicecentreandconsiderationisinforeigncurrency.

**AspertheFinanceAct,2018,theexistingtaxexemptiononLTCGarisingontransferofalistedequityshareoraunitofanequityorientedfundetc.(subjecttoSTT)hasbeenwithdrawn.AnyLTCGarisingfromsuchtransfersmadeonorafter01April2018andinexcessofINR0.1mnshallbetaxedat10percent.Further,LTCGearnedupto31January2018hasbeengrandfathered.

There is a separate computation mechanism to compute capitalgainsfordepreciablebusinessassets,whichformpartofblockofassetsheldbyataxpayer.

Taxation of NRsNRsaretaxableontheincomereceivedoraccruinginIndiaandincomedeemedtohavebeenreceivedoraccruedinIndia.Deemed accrual provides for taxation on the following terms:

Business income: Businessincomeofanon-residentistaxableinIndiaifithas‘businessconnection’inIndia.Theterm‘businessconnection’isconceptuallysimilartoPermanentEstablishment(PE)asdefinedintaxtreaties.Profitsfromabusinessincomeofanon-resident,attributabletooperationscarriedoutinIndia,aretaxableinIndia.

TheFinanceAct,2018(w.e.f.FY2018-19)haswidenedtheterm‘businessconnection’toincludeinitsambit(a)‘significanteconomicpresence’and(b)anybusinessactivitycarriedthroughapersonwho habitually plays the principle role leading to conclusion of contractsbyanon-resident.

Theterminologyof‘significanteconomicpresence’wasintroducedtotaxnon-residentswhooperatedwithouthavingaphysicalpresenceinIndialikee-commercecompaniesandotherdigitisedformofbusinesses.

Fees for Technical Services (FTS):Feesformanagerial,technicalorconsultancyservicesrenderedbyanNRaretaxableinIndia(whereanNRdoesnothaveaPEinIndia)attherateof10percentofgrossreceipt.

Royalty income:Royaltypayabletoanon-residentistaxableattherateof10percentofgrossreceipts.SpecificprovisionsoftheIncome-taxActseektotaxpaymentsforuseofcomputersoftwareandtelecommunicationchargesasroyalty.

Interest income: Taxattherateof20percentisapplicableoninterestpayablebyanIndiancompanytoanNRformoniesborrowedinforeigncurrency.Alowerwithholdingrateof5percent is applicable on interest payable on external commercial borrowings,long-termbondsandrupeedenominatedbondsissuedbefore01July2020.Similarly,lowerrateofwithholdingof5percentisavailableforinterestpayabletoaFIIoraQualifiedForeignInvestor(QFI)onarupeedenominatedbondof an Indian company or a government security issued before 01July2020,subjecttocertainotherconditions.

Capital gains:GainsaccruedtoanNRonaccountoftransferofacapitalassetsituatedinIndiaaretaxableinIndia.


AspertheindirecttransferprovisionsintheIncome-taxAct,shares or an interest in a foreign company shall be deemed to besituatedinIndiaifsuchsharesorinterestderives,directlyorindirectly,itsvaluesubstantiallyfromassetslocatedinIndia.

IfaPEofanon-residentisformedinIndia,theaforesaidincomes would be taxable on a net basis at the rate applicable toforeigncompanies.

Tax treaty benefit:Anon-residentcoveredbyataxtreatycanbetaxedunderthetaxtreatyortheIncome-taxAct,whicheverismorebeneficial.Indiahasavastnetworkoffavourabletaxtreaties.Tilldate,Indiahasenteredintocomprehensivetaxtreatieswith96countries.Recently,IndiahasenteredintoataxtreatywithHongKong.

Tax treaties with various countries provide benefits in the form of capital gains exemption on transfer of shares of Indiancompanies.However,intherecentpasttaxtreatieswithMauritius,SingaporeandCyprushavebeenrevisedto withdraw capital gains exemption on transfer of shares acquiredonorafter01April2017,whilesimultaneouslygrandfatheringtaxbenefittothesharesacquiredbefore01April2017.Further,taxtreatieswithAustralia,US,UK,Singaporeetc.providerestrictivetaxtreatmentforincomefromFTS.

AnNRisrequiredtofurnishaTaxResidencyCertificate,whichisissuedbytherevenueauthoritiesofhis/herstateofresidence.Inaddition,thenon-residentisrequiredtofurnishcertainadditionalinformation,asprescribed.

Equalisation levyAnequalisationlevyof6percentoftheamountofconsiderationforspecifiedservices,i.e.,onlineadvertisement,provisionfordigitaladvertisingspaceetc.payabletoanon-resident(nothavingaPEinIndia),istobedeductedbytheremitterwitheffectfrom01June2016.Thelevyhasbeenintroduced to tax digital services rendered by foreign service providerswithouthavingapresenceinIndia.

Security Transaction Tax (STT)STTisleviedonvarioussecuritytransactionscarriedoutthrougharecognisedstockexchangeinIndia.Areducedrateof capital gains is prescribed for the transactions which have beensubjectedtoSTT.

Commodities Transaction Tax (CTT)CTTisleviedalongthelinesofSTT.CTTisleviedontaxablecommoditiestradedatrecognisedassociations.

Wealth tax WealthtaxhasbeenabolishedvideFinanceAct,2015.

Gift taxIndiadoesnotlevygifttaxunderaseparatestatute.However,certainreceiptsofsumofmoneyorproperty(includingimmovableormovableproperty,sharesandsecuritiesetc.)byany person without adequate consideration are taxed as other incomeinthehandsoftherecipient.Further,theIncome-taxActseekstotaxsharepremiumreceivedinexcessoffairmarketvalueinthehandsoftheissuerofshares.

Estate dutyNoestateordeathdutyischarged.

Computation of business incomeBusinessincomeisgenerallytaxableonthenetbasis,i.e.,grossincomelessallowabletaxdeductions.Expenseslaidoutandexpendedforbusinesspurposes(otherthancapitalexpenses)aredeductiblefromtheincomeofthetaxpayerforincome-taxpurposes.ThedeductibilityisfurthersubjecttoexceptionsandfulfilmentofconditionsasstatedintheIncome-taxActsuchaswitholdingtax.

The following principles are generally applied for examining the admissibility of an expense:• Expenseshouldbeincurredforthebusiness• Expenseshouldbeincurredinthepreviousyear• Expenseshouldnotbeofapersonalnature• Expenseshouldbeofarevenuenature−expensesofa

capital nature are not allowed• Expenseshouldnotbeforapurposeprohibitedbylaw

Certain expenses are specifically disallowed or the quantum of deductionisrestricted.Theseinclude:• Income-tax• ExpenditureincurredonCSRactivities• Expenditureforthepurposeofearningexemptincome• Expensesincurredincashbeyondspecifiedlimit.• Provisionfortaxes,duties,interestonloansfrompublic

financialinstitutionsorontermloansfromascheduledbankand certain contributions to statutory funds on behalf of employees,notactuallypaid.However,suchexpenditureisdeductibleintheyearinwhichitisactuallypaid.

Depreciation of capital assets is allowed on the basis of the reducingbalancemethodusingvaryingrates,dependingonthenatureofassets.Allsimilartypesofassetseligibleforthe


samerateofdepreciationareclubbedtogetherina‘block’anddepreciationischargedonthevalueofthatblock.Depreciationisavailableforafullyear,irrespectiveoftheactualperiodofuseoftheasset.However,intheyearofacquisitionoftheasset,depreciation is allowed at half the normal rates if the asset is usedforlessthan180daysinthatyear.

Further,additionaldepreciationattherateof20percentinthecaseofanynewplantandmachinery(otherthanshipsandaircraft)shallbeallowedprovidedsuchplantandmachineryhas been acquired and installed by the assessee engaged in the business of manufacture; or production of any article or a thing; or in the business of generation or generation and distributionofpower.

Depreciationonintangibleassetssuchasknow-how,patents,copyrights,trademarks,licences,franchisesorothersimilarbusinessorcommercialrightsisalsoavailable.

Theratesofdepreciationfordifferentblocksofassetsareasfollows:

Blocks of assets Rates

Residentialbuildingsexcepthotelsandboardinghouses 5%

Buildingsmeantfornon-residentialpurposessuchashotels and boarding houses

10%

Furnitureandfittings 10%

General plant and machinery 15%

Intangible assets 25%

Computers 40%

ICDSThecentralgovernmenthasnotifiedICDS,whichprescribethedetailed provisions to be applied while computing tax under the heads profits and gains from business and profession and otherincome.ThesestandardsareapplicablefromFY2016-17onwards.

DelhiHighCourtstruckdownvariousclausesofseveralICDSonthegroundsthattheywereinconsistentwiththeprovisionsoftheAct.SuchICDSwerespecificallyintroducedwithintheIncome-taxActbytheFinanceAct,2018toremoveinconsistencies

Set-off of business loss and unabsorbed depreciationBusinesslosses,otherthanfromspeculationbusiness,arepermitted to be set off against income from any other source (exceptincomefromemployment,i.e.,salaryincome)inthesameyear.Businesslosseswhichcouldnotbesosetoffarepermitted to be carried forward for setting off against business profitsarisingintheeightsubsequentyears.Unabsorbeddepreciation is permitted to be carried forward for an unlimited period.

Key direct tax incentives/tax holidaysIndia provides various tax incentives in the form of higher deduction/taxexemptions.Thebenefitsofmostofthetaxincentiveshavebeengraduallyphasedout.

Research and development activitiesTheIncome-taxActprovidesfordeductionforexpenditureincurredonscientificresearchrangingfrom100percentto150percentoftheamountofexpenditure.Mostoftheweighteddeductionswillbephasedoutw.e.f.FY2020-21.

Patent box regime• In order to encourage indigenous research and development

activities,royaltyincomeoftheeligibleassesseesinrespectof a patent developed and registered in India shall be taxableat10percentonthegrossamountofroyalty.

• An‘eligibleassessee’meansanIndianresidentwhoisthe true and first inventor of the invention and whose name appears on the patent register as the patentee in accordancewiththePatentsAct,1970.

Tax incentives for manufacturing companies• Domesticcompaniessetuponorafter01March2016,

engaged in the business of manufacture or production of anyarticle/thinghaveanoptiontopaytaxesonalowercorporateincometaxrateof25percent.Thetotalincomeof such companies should be computed in the prescribed manner and the company shall not be eligible for any other taxincentives.

• 100percentdeductionofprofitsandgainsavailablefor10consecutiveyearstoanyundertakinginvolvedinthemanufactureandproductionofanyarticle/thing,locatedinNorth-Easternstates(providedtheundertakingcommencesmanufacturingby31March2017)andcarryingonanyeligiblebusiness.

• Adeductionof15percentofthecostofcertainprescribed


assets provided to assessees engaged in manufacturing or productionofanyarticle/thinginanynotifiedbackwardareasinAndhraPradesh,Telangana,BiharandWestBengal.

Special Economic Zones (SEZs)AnSEZisaspecificallydelineatedduty-freeenclavedeemedtobeaforeignterritoryforpurposesoftradeoperations,dutiesandtariffs.

The deductions are:• To SEZ developer:For100percentofprofitsandgains

derivedfromdevelopingandmaintaininganSEZfor10consecutiveassessmentyearsoutof15yearscommencingfromtheyearinwhichanSEZhasbeennotifiedbythecentralgovernment.ThedeductionshallnotbeavailablewheredevelopmentofSEZbeginsonorafter 01April2017.

• To SEZ unit: For profits and gains derived by its unit set up in anySEZthatcommencesmanufactureorproductionofanyarticle/thingorstartsprovidingservicesonorbefore 31March2020asfollows:i. 100percentexportprofitsforthefirstfiveyearsii. 50percentofexportprofitsforthenextfiveyearsiii.Upto50percentofexportprofitsforthenextfiveyears

(subjecttotransferofprofitstoaspecialreserve)

Start-ups• 100percentdeductionoftheprofitsearnedbyaneligible

start-upinanyofthethreeconsecutiveyearsoutoftheinitialsevenyearsofitsoperations.

• The deduction is however available only to a new entity which is not set up by way of the splitting up or restructuring ofanexistingundertaking.

• Thestart-upshouldbeengagedinabusinesswhichinvolvesinnovation,developmentorimprovementofproductsorprocessesorservices,orascalablebusinessmodelwithahighpotentialofemploymentgenerationorwealthcreation.

• Thestart-upshouldholdacertificateofeligiblebusinessfromtheInter-MinisterialBoardofCertificationasprescribedby the DIPP

− The DIPP has recently prescribed the forms required to besubmittedtotheInter-MinisterialBoardofCertificationfor approval to claim tax holiday and for exclusion of start-upsfromfairvaluationonissueofshares.

• Further,thestart-upshouldnothaveaturnoverexceeding USD3.74mn(INR250mn)intheyear(s)inwhichdeductionisclaimed.

Business-specific incentives for capital expenditure• 100percentdeductiononcapitalexpenditureavailable

for the following categories of specified businesses which commence operations its operation on or after specified dates:

− Layingdownoroperatingcross-countrynaturalgasorcrude pipeline

− Laying down and operating slurry pipeline for transportation of iron ore

− Settingupandoperatingsemi-conductorandwaferfabrication manufacturing facility

− Building and operating a hotel of two stars or above − Bee-keepingandproductionofhoneyandbeeswax − Settingupandoperatinganinlandcontainerdepotora

container freight station − Developing or operating and maintaining a new

infrastructurefacilityonorafter1April2017• 150percentdeduction(restrictedto100percentwith

effectfrom01April2017)oncapitalexpenditureshallbeavailable for the following categories of specified businesses which commence operations on or after specified dates:

− Settingupandoperatingacoldchainfacility − Settingupandoperatingawarehousingfacilityfor

storage of agricultural produce − Buildingandoperatingahospitalwithatleast100beds

for patients − Developing and building a housing project under specific

schemes − Production of fertilizer

Corporate tax complianceWithholding taxTheIncome-taxActcastsanobligationoneachtaxpayertowithholdtaxonspecifiedpayments,including,amongothers,on the following:• Salaries• Interest• Rent• Commissionorbrokerage• Payments to contractors• Professional/technicalfees/royalty• Consideration payable on transfer of immovable property

Allpaymentstonon-residents,whicharetaxableinIndiaattracttaxwithholding.

Indian tax withholding provisions also extend to payments madebyNRs.Thus,incertainsituations,anNRmaking


paymenttoanothernon-resident/residentisrequiredtoundertaketaxwithholdingaspertheIndianregulations.

Further,thedeductee,i.e.,thepersonwhosereceiptsaresubjecttotaxwithholding,needstodisclosehis/herPermanentAccountNumber(PAN).Incasethepersonfailstodoso,withholding tax rate would be the higher of the following rates• TherateprescribedintheIncome-taxAct;or• Attherateinforce,i.e.,theratementionedintheFinance

Act,2018;or• 20percent

However,theincreasedrateofwithholdingtaxwouldnottriggerforcertainpaymentstoNRsnothavingPANiftheNRfurnishesprescribedinformation.

Quarterlyreturns(inprescribedformdependingonthenatureofpayment)needtobefiledwithrespecttotaxeswithheldduringtherelevantquarter.

Extensiveprovisionsarebuiltinforenforcingcompliancewithtaxwithholdingobligations.Interestandpenaltiesmaybeleviedincaseofnon-compliancewithwithholdingtaxobligations.

Advance taxEverytaxpayerisrequiredtopayhis/hertaxliabilityfortheyearduringthepreviousyearitself,ininstallmentsprescribed.Thetaxliabilityistobeworkedoutonthebasisofanestimateofcurrentyearincome,andtheincometaxthereonshallbecalculated at the rates in force during the relevant previous year.Interestisleviedfornon-compliancewithadvancetaxprovisions.

Self-assessment taxEverytaxpayerisliabletocomputetherequiredtaxpayable(ifany)onthebasisofactualincome,afterconsideringthecreditfortheadvancetaxpaidandtaxesdeductedatsource.Self-assessmenttaxispayablebeforefilingthereturnofincome.

PANEveryperson(asperthecriteriaprescribedintheIncome-taxAct)isrequiredtomakeanapplicationfortheallotmentoftaxregistrationnumber,termedasPAN.TheapplicationistobemadeinForm49A/Form49AA(dependingupontheresidentialand/orregistrationstatusofanassessee).

Thisnumberistobequotedonalltaxreturns,correspondencewith the tax authorities and documents relating to the prescribedcategoriesoftransactions.FailuretoquotePAN

by the income recipient may result in a higher rate of tax withholding.

AspertheFinanceAct,2018,non-individualresidentpersonswhichenterintoafinancialtransactionamountingtoINR0.25mnormoreshallberequiredtoobtainPAN.Also,inordertolinkthefinancialtransactionsundertakenbysuchentitieswithnaturalpersons,itisproposedthatmanagingdirector,director,partner,trustee,principalofficerorsimilarpersoncompetenttoactonbehalfofsuchentityshallalsoberequiredtoobtainPAN.

Tax Deduction and Collection Account Number (TAN)EverypersonresponsibleforwithholdingtaxinaccordancewiththeprovisionsoftheIncome-taxActisrequiredtomakean application for the allotment of withholding tax registration numberwhichiscalledtheTAN.TheapplicationistobemadeinForm49Bwithinonemonthfromtheendofthemonthinwhichthetaxisdeducted.

Recently,therequirementforobtainingPANandTANhasbeeneasedforcorporateassessees.Acommonapplicationmaybesubmittedbythecompanyforincorporation,PANandTANthroughtheMCAportal.

Tax return filingAll taxpayers are required to file a return of income for a previousyearwithintheprescribedduedates.

However,NRsearningonlyinterestanddividendincomearenotrequiredtofileareturnofincomeinIndia.

Different due dates have been prescribed for this purpose undertheIncome-taxAct,whichareasbelow:

In case of:

• a company • aperson(otherthanacompany)whose

accounts are required to be audited under the Income-taxActorunderanyotherlawinforceduring the period

• aworkingpartnerofafirmwhoseaccountsarerequiredtobeauditedundertheIncome-taxActor under any other law in force during the period

30thdayofSeptemberof the assessment year

• a taxpayer who is required to file an accountant’s report under the transfer pricing regulations

30thdayofNovemberof the assessment year

• any other assesse 31stdayofJuly of the assessment year


AmaximumfeesofINR10,000(USD150)isprescribedwherereturnofincomeisfiledafterprescribedduedates.Further,interestattherateof1percentontheamountoftaxontotalincome is prescribed for every month of default in furnishing thereturnofincome.

General Anti-Avoidance Rules (GAAR)TocontrolImpermissibleAvoidanceArrangement(IAA)enteredintobyapersontoavoidtaxes,theprovisionsofGAARhavebeenintroducedinIndia.Itisnotedthatanarrangementwouldbe considered an IAA where its main purpose is to obtain a tax benefit.AnagreementwillalsobetreatedasanIAAifitlacks‘commercialsubstance’anddoesnotmeetthecriteriaofbeingabonafidebusinesstransactionintheordinarycourse.

Notwithstandingtheabove,GAARprovisionswillnotapplytoan arrangement where the tax benefit arising in aggregate doesnotexceedINR30mn.

GAARdealswithaggressivetaxplanninginvolvingtheuseofsophisticatedstructures.TheprovisionsofGAARareeffective 01April2017.

Direct tax enforcement in India

Filling the return of income

Appeal to filed with the

appellate authorities

Scrutiny audit of return

of income initiated by Assessing

Officer (AO)*

Demand (if any) to be paid within

30 days from date of receipt of assessment order

Audit of return of income

completed by AO and order

passed

*AOcanmakeareferencetotheTransferPricingOfficer(TPO)forTransferPricing(TP)audit.The TPO completes TP audit on receipt of reference from AO and forwards the TPO order to

theAOformergingitwiththeassessmentorderoncompletionoftheauditofreturnofincome.

Ittakesabout21to33months(dependinguponwhetherareferenceismadetoTPO)tocompleteanauditfromtheend

oftheassessmentyear.Thisperiodisproposedtobegraduallyreducedto12monthsovernextthreeyears.

E-assessment Initially,thecentralgovernmenthadintroducede-assessmentproceduresin2016onapilotbasiswhichwasfurtherextendedin2017.Asapartofthispilot,therevenueauthoritieshavebeenissuinge-noticesforscrutinyassessmentstotheassessees.

Subsequently,TheFinanceAct,2018hasamendedtheIncome-tax Act to enable the central government to notify a new e-assessmentschemeforscrutinyassessmentstobecarriedout without any personal interface between the taxpayer and therevenueauthorities.

Direct tax dispute resolution processDisputeresolutionisamulti-layeredprocessinIndia.

Assessment order passed

by AO

High Court

Commissioner (Appeals)**

Supreme Court

Appellate Tribunal

Appeal within 120 days

**Alternatively,applicationmaybefiledwiththedisputeresolutionpanelobjectingtovariationsproposedbytheAOtotheincomeofthetaxpayer.

Theentirelitigation,tilltheSupremeCourtlevel,generallygetssettledoveraperiodof10years.

Other alternatives to resolve tax litigation• Settlementcommission• Advancerulingfortransactions(includingproposedones)

involvingnon-residentsandcertainresidents.• MAP:Analternatemechanismundertaxtreatiesforresolving

international tax disputes by the competent authorities of eachstate.


Goods and Services TaxThe Government of India made possible the introduction of thenation’sbiggesttaxreform−GST.Itaimstomitigatethecascading or double taxation by way of single point taxation systemwithfreeflowofinputcredits.

Scope of GSTGSTistobeleviedonsupplyofallgoodsandservicesexceptthesupplyofalcoholforhumanconsumption.LevyofGSTonpetroleumcrude,high-speeddiesel,motorspirit(commonlyknownaspetrol),naturalgasandaviationturbinefuelhasbeen postponed and to be notified by the government at a laterdate.

Dual structure levyGSTisadualstructurewhereinbothcentreandstates/UTshave the power to levy the tax on supplies on goods and services.Theduallevystructurewillbeasunder:

• CentralGoodsandServicesTax(CGST)tobeleviedbythe

centreandStateGoodsandServicesTax(SGST)/UnionTerritoryGoodsandServicesTax(UTGST)tobeleviedbyrespectivestates/unionterritoriesonallsupplieswithinastate/unionterritory;

• IntegratedGoodsandServicesTax(IGST)tobeleviedbycentreonallsuppliesbetweenthetwodifferentstates/unionterritories.Further,IGSTisalsotobeleviedonexport/importofgoodsorservicesfrom/toIndia.

• CompensationCess(Cess)tobeleviedonspecifiedsupplies for the purpose to compensate the states for the lossofrevenueonaccountofimplementationofGST.

Nature of supplyLevyofCGSTandSGST/UTGSTorIGSTwilldependuponthenatureofsupply.SeparateprovisionsforgoodsandserviceshavebeenincorporatedunderGSTlawtoidentifythenatureofsupply.Locationofsupplierandtheplaceofsupplyofgoods or services are the two factors to determine the nature of supply.

Indirect tax

IntroductionofGSTon01July2017wasasignificantreformintheindirecttaxationofthenation.AbsorbingalargenumberofCentralandStatetaxesmainlycentralexcise,ServiceTax,ValueAddedTax,CentralSalesTax,EntryTax,Octroi,EntertainmentTax,LuxuryTax,CountervailingDutyandSpecialAdditionalDutyonCustomsinitself,GSThasledthewayforacommonnationalmarket.Keyindirecttaxesapplicableinthecountryare:

• GST – Tax on supplies of goods and services

• Customs Duty – Duty imposed on import of goods to India

• Professional Tax–Taxonprofessions,trades,callingsandemployments


• Intra-statesupply:Locationofsupplierandplaceofsupplyofgoodsorservicesarewithinthesamestate/unionterritory

• Inter-statesupply:Locationofsupplierandplaceofsupplyofgoodsorservicesarewithdifferentstates/unionterritory

Point of levy under GSTThe earlier indirect taxes prevailing in India entailed multiple pointsoflevy.Forinstance,excisedutywasleviedonthemanufactureofgoods.Servicetaxwasleviedontheprovisionoftaxableservices.VATwasleviedonthesaleofgoods.

ThetriggeringpointforlevyofGSTisthesupply.Provisionsfordeterminingthetimeofsupplyhavebeenprovided,bothinrespectofgoodsandservices.Hence,thetaxincidencewouldbeatthe‘timeofsupply’asagainstthemultiplepointsoflevyundertheearlierregime.

Tax rates under GSTAllgoodsandservicesarefittedintoafour-tierratestructureof5,12,18and28percent.Whileessentialitemslikefoodgrainswillattractazerorate,demeritandluxurygoodswillattractthehighestrateandmayattractcessalso.

Anti-profiteeringOneofthemajorobjectivesforimplementationofGSTwastoprovideafreeflowoftheinputtaxcredits,whichshouldresultinareductioninthepricesofgoodsandservices.Tosafeguardtheconsumers,anti-profiteeringprovisionshavebeenincorporatedunderGST,castingresponsibilitiesonthe suppliers to reduce their prices of goods and services on account of benefit of reduced tax rate or availability of input taxcredits.Suppliersnotcomplyingwiththeanti-profiteeringprovisions are liable for penal consequences and also cancellationofregistrationunderGST.

Customs DutyCustomsduty,afederalgovernmentlevyis,leviableonimport/exportofgoodsto/fromIndia.Thetaxableeventforlevyisimport/exportandimport/exportdutyispayableatthetimeofimport/exportofgoodsto/fromIndia.IndiafollowstheHarmonisedSystemofNomenclature(HSN)classificationrules,andthegoodsareclassifiedunderdifferentchapter/tariffheadings,primarilyaccordingtotheirdescription,componentsanduse.Thedutiesortaxesapplicableonimportshall comprise:

• Basiccustomsduty–BCD(standardrateof10percent)• Customscess(leviableoncomponentofBCDat3percent)• IGSTat18percent(leviableontotalvalueofBCDplus

customscess)

Currently,theeffectivestandardrateofcustomsdutythat is applicable on the import of goods is approximately around30.15percentwithinputtaxcreditofIGST,subjecttoexemption/concessionasmaybeavailable/notifiedfromtimeto time and Free Trade Agreements entered into by India with othercountries.However,currently,thereisnoexportdutyleviableongoodsexportedfromIndia,exceptforafewgoodssuchasminerals(whicharescarcelyavailable).

Professional taxProfessionaltaxisaleviedbythestateonprofessions,trades,acallingoremploymentinastate.Thus,everypersonwhois engaged in any of the activities mentioned above is liable topayprofessionaltax.Notallthestategovernmentslevyprofessionaltaxcurrently.Instateswheresuchalevyexists,every enterprise and employee earning a salary is required to registerandpayprofessionaltax.


BackgroundGlobalisation and increased integration between economies worldwide has paved way for global business operations and subsequentlycomplexinter-companytransactions.Thesetransactions could lead to base erosion and shifting of profits toopaquetaxjurisdictions.Therefore,transferpricingisunderconstantscrutinyoftaxauthoritiesglobally.

IndianTransferPricingRegulations(TPRegulations)wereintroducedinIndiain2001toavoidshiftingofprofitsfromIndia to another jurisdiction due to international transactions withrelatedparties,i.e.,AssociatedEnterprise(s)(AEs).Further,thescopeofTPRegulationswasextendedtoincludeSpecifiedDomesticTransactions(SDT)witheffectfrom2012.

LegislationAsperTPRegulations,internationaltransactionsandSDTsbetweenAEsshouldcomplywiththearm’slengthprincipal,i.e.,apricewhichisappliedorproposedtobeappliedinatransactionbetweenpersonsotherthanAEs,inuncontrolledconditions.

International transactionTheActdefinestheterm‘internationaltransaction’tomeanatransactionbetweentwoormoreAEs,eitherorbothofwhomarenon-residents,inthenatureofpurchase,saleorleaseoftangibleorintangibleproperty,orprovisionofservices,financing or any other transaction having a bearing on the profits,income,lossesorassetsofsuchenterprisesoranycostcontributionagreement.

Further the definition of international transaction also includes ‘deemedinternationaltransaction’,whichmeansthatatransaction entered into by an enterprise with a person other thananAE(whetherresidentornon-resident)shallbedeemedasaninternationaltransaction,if:• there exists a prior agreement between such other person

and the associated enterprise; or• thetermsofsuchatransactionare,insubstance,

determined between such other person and the associated enterprise.

SDTsTransferpricingprovisionswerealsointroducedforSDTsoastocurbtheshiftofprofitsbetweenresidententities.Thenatureoftransactionincludestransactionenteredintowithentities/withinbusinessunitsclaimingtaxexemptions.SDTprovisionsare applicable where the aggregate of such transactions exceedsasumofUSD3mn6(INR200mn)inayear.

AEs International transactionsIntheIndianTPRegulations,thedefinitionofAEsisbroadlysimilartothedefinitionintheOrganisationforEconomic Co-operationandDevelopment(OECD)TPGuidelines.AEs in relation to another enterprise mean enterprise:• whichparticipate,directlyorindirectly,orthroughone

ormoreintermediaries,inthemanagementorcontrolorcapital of the other enterprise; and

• inrespectofwhich,oneormorepersonswhoparticipate,directlyorindirectly,orthroughoneormoreintermediaries,initsmanagementorcontrolorcapital,arethesamepersonswhoparticipate,directlyorindirectly,orthroughoneormoreintermediaries,inthemanagementorcontrolorcapitaloftheotherenterprise.

Further,theActprescribes13situationswheretwoormoreenterprisesareconsideredasAEs.

SDTAEsforthepurposeofSDTareanyentitiescloselyconnected,toentitiesclaimingcertainspecifiedtaxholidays/exemptionsbenefit.

MethodologiesTheArm’sLengthPrice(ALP)inrelationtoaninternationaltransactionandSDTisrequiredtobedeterminedbyanyofthefollowing methods: • ComparableUncontrolledPrice(CUP)method• ResalePriceMethod(RPM)• CostPlusMethod(CPM)• ProfitSplitMethod(PSM)• TransactionalNetMarginMethod(TNMM)• Any other method as prescribed TheTPRegulationsdonotprescribeanyprioritycriteriaintermsofselection/applicationofmethods.

Transfer pricing in India

6ThelimitisapplicablefromFY2015-16.Earlier,thelimitwasUSD0.75mn(INR50mn)


ALPThe ALP means price charged or would have been charged for a transaction between independent parties under similar situation.TheTPRegulationprescribestheuseofeithertherangeconcept(35thto65thpercentile)orarithmeticmeandepending on the method applied and number of comparables selected.

Compliance requirement

Compliance requirement Due date of submission

Obtain accountant’s report in Form 3CEB

Accountant’s report is a brief summary of international transaction(s)andSDTalong with the method used to justify the arm’s lengthnature.This document is to be certified by a Chartered Accountant or a firm of Chartered Accountants

30 November of each assessment year for international transactions or SDTundertakenduringtherelevantfinancialyear (April–March)

TP documentation (TP study)

TP study is a detailed documentation(requirementsareinlinewiththeOECDguidelines)relatingtointernationaltransaction(s)orSDTwhichisused to justify their arm’s length nature.Thisdocumentationistobemaintained,andupdatedonanannualbasis,iftheaggregatevalue of the international transaction(s) entered into the enterprise exceeds USD 0.1 mn (INR 10 mn)

Enterpriseisrequiredtomaintain contemporaneous documentation and needs to submit documentation on request by the Income Tax Department

Country-by-Country (CbC) reportingInordertomeetthecommitmenttoBaseErosionandProfitShifting(BEPS)initiativeofG-20andtheOECD,anewsectionhas been inserted in the Act which mandates the requirement ofCbCreportinginlinewithAction13oftheBEPSactionplans.

These regulations require an Indian entity which is part of a MultinationalEnterprise(MNE)grouptomaintainthefollowinggroupinformationbywayofthreefiles(inadditiontotheinformation already required in relation to international transactions):

• MasterFile(MF)• Local file • CbCReporting(CbCR)isrequiredtobefiledbytheparent

entityofanMNEgroupwithannualconsolidatedgrouprevenue in the immediately preceding accounting year of morethan€750mn(INR55bn,USD830.50mnapprox.)

TheMFandCbCR(asapplicable)arerequiredtobefiledby31Marcheachyear.

7OECDTransferPricingguidelinesforMultinationalEnterprises&TaxAdministrations,July2010


Compliance timeline

Beginning of tax year

Due date for maintaining TP documentation & e-filingaccountantsreport

Limitation for completing TP assessment

Time period for maintenance of documentation for FY2017-18

Limitation for initiating assessment by AO

Draft order of AO

Close of tax year

1 Apr 2017

30 Sep 2019

1 Aug 2021

30 Sep 2021

31 Mar 2018

31 Mar 2027

30 Nov 2018


Safe harbour rules‘Safeharbour’isdefinedasthecircumstancesinwhichtheincome-taxauthoritiesshallacceptthetransferpricethatisdeclaredbytheassessee.SafeharbourrulesareeffectiveinIndiafromthefinancialyear2012-13,andareavailableforaperiodofthreeyears.Atpresent,safeharbourruleshavebeenprescribed for the following transactions:• Provision of software development services• ProvisionofIT-enabledservices• Providing corporate guarantee• ContractR&Dservicesrelatingtosoftwaredevelopment• Manufactureandexportofcoreautocomponents• Manufactureandexportofnon-coreautocomponents• Lowvalueaddingintra-groupservices

Penalty provisionsPenaltyprovisionsforthefollowingnon-complianceshavebeenprescribed by the Act:• Underreportingandmisreportingofincome• Failure to maintain statutory TP documents• Failure to report a transaction in the accountant’s report• FailuretofurnishMF• Failure to furnish the accountant’s report

TP audit TPauditisconductedbytheTPO,aspecialisedofficerfromtherevenuedepartment.IftheregularAOofataxpayerconsidersitnecessaryorexpedientsotodo,he/shemaywiththepreviousapprovaloftheCommissioner,refertothe computation of the ALP in relation to the international transactionsorSDTofthetaxpayertotheTPO.

The taxpayer has the option of approaching the dispute resolution panel or filing appeal before the Commissioner of Income-tax(Appeals).

SafeharbourrulesandAPAaredispute-avoidancemechanismsandMAPisadisputeresolutionmechanism.

Advance Pricing Agreement (APA) The APA programme was introduced in the Indian TP Regulationsin2012.UndertheAPAschemeavailablefromFY2013-14,anypersoncanenterintoanagreementwiththeboard,aftertheapprovalofthecentralgovernment,fordetermining the ALP or for specifying the manner in which the ALP is to be determined in relation to an international transactiontobeenteredintobythatperson.

APA can be entered in relation to an international transaction only.TheAPAcanbeunilateral,bilateralormultilateral.

In2014,roll-backprovisionswereintroducedintheIndianAPAscheme,whichenablepersonsenteringintoanAPAtoroll-backthe results of the APA to a period not exceeding four preceding years from the year from which the APA is proposed to be applicable.

Mutual Agreement Procedure (MAP) Inordertoavoiddoubletaxation,MAPhasprovedtobeaneffective method where the revenue authorities of two different nationstrytoresolveadisputetogether.

UnderMAP,anagreementwhichseekstoavoideconomicdouble taxation or conflicting taxation would be reached betweenthetaxauthorities.Also,underMAP,disputesareresolved through competent authorities of the contracting states.


Glossary of abbreviations

AMT: AlternateMinimumTax

AO: Assessing Officer

AoP: Association of Persons

APA: Advance Pricing Agreement

BCD: Basic Customs Duty

CAGR: CompoundAnnualGrowthRate

CBDT: Central Board of Direct Taxes

CD: Countervailing Duty

CSO: CentralStatisticsOffice

DIPP: Department of Industrial Policy & Promotion

FEMA: ForeignExchangeManagementAct1999

Fintech: Financial Technology

FIPB: Foreign Investment Promotion Board

GAAR: GeneralAnti-AvoidanceRules

GST: GoodsandServicesTax

ICDS: IncomeComputationandDisclosureStandards

IT&ITeS: InformationTechnology&InformationTechnologyEnabledServices

MAT: MinimumAlternateTax

NBFC: Non-BankingFinancialCompany

RBI: ReserveBankofIndia

REIT: RealEstateInvestmentTrust

RNOR: ResidentandNon-OrdinarilyResident

ROR: ResidentandOrdinarilyResident

SDT: SpecifiedDomesticTransaction

SEBI: SecuritiesandExchangeBoardofIndia

TP: Transfer Pricing

TPO: Transfer Pricing Officer

USFDA: UnitedStatesFoodandDrugAdministration


Acknowledgements

Editorial review Design

Rohit Nautiyal Tanmay Mathur

Gurpreet Singh

For further information, please contact:

Spriha Jayati [email protected]+919323744249


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