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India Entry Strategy

Does India have exchange control restrictions?

Yes, Foreign Exchange Management Act (‘FEMA’) governs inbound as well as out-bound investments. Indian Rupee is partly convertible. It is convertible on “current” account and non-convertible on “capital” account. In one sense, rupee is already almost fully convertible.

• i. Rupee rates in the Foreign Exchange market are market determined and not Reserve Bank of India (‘RBI’) prescribed.

• ii. Most of the transactions for inward foreign investment are liberalised.

• iii. For outward investments, upto US $ 15 million, automatic permission is available.

Larger outward investments are also permissible if one can satisfy RBI about the project. A few areas are left because of which one has to use the word “almost” fully convertible.

• i. Speculation in Foreign Exchange is not free.

• ii. There are still some procedural issues which can be simplified.

• iii. There are still some “business decisions” which RBI monitors. Like valuation of shares in case of sale by collaborators.

Still, all Foreign Exchange dealing in India can be done only by “authorised persons” only.

Are there any locational restrictions in setting up units in India?

Undertakings are free to select the location of a project. In cases of cities with population of more than one million, the proposed location should be atleast 25 km away from the Standard Urban area limits of that city unless it is to be located in an area designated as ‘industrial area’. Electronics, computer software and printing are exempt from such location restrictions.

The location of industrial units is further regulated by the local zoning and land use regulations as also the environmental regulations.

What is India's policy on Foreign Direct Investment ('FDI')?

Indian regulations allow investment in all industries expect those in the negative list. Additionally, there are sectoral caps for investing in certain industries. FDI is not permitted beyond these caps. FDI can be brought into India through the Automatic Route under the Reserve Bank of India and for certain activities through government approval. A foreign enterprise can plan the following modes for doing business in India

  • Joint Venture with an Indian Partner
  • India Wholly Owned Subsidiary
  • India Technology Collaboration
  • India Project Office
  • India Liaison Office
  • India Branch Office

What is India's policy on investment by Non-Resident Indians ('NRI') and OverseasCorporate Bodies ('OCB')?


Investments by NRIs and OCBs in which the NRIs hold at least 60 percent equity are treated as Foreign Direct Investment (‘FDI’). For all sectors excluding those falling under government approval, NRIs and OCBs are allowed to bring investment through the automatic route under the Reserve Bank of India (‘RBI’). Other proposals require approval from the government through a special cell called Foreign Investment Promotion Board (‘FIPB’).

What is the policy on transfer of technology to Indian companies?

India encourages foreign technology agreements in all industries. The Reserve Bank of India (the apex exchange control authority in India) grants automatic approval to foreign companies for transfer of technology subject to the following limits:

  • Lumpsum technology fee upto USD 2 million;
  • Royalty payments upto 5 percent on domestic sales and 8 percent on export sales subject to an overall ceiling of 8 percent of total sales.

In case of consideration higher than the above limits, the Indian government approves such agreements on a case by case basis.

What is the rate of corporate taxation? Are there any other taxes on profits?

For the current year (Fiscal Year 2005-2006), rate of corporate tax is 30 percent for domestic companies plus a surcharge of 10 per cent. Foreign companies are chargeable to tax at 40 percent plus a surcharge of 2.5 percent. In addition, Education Cess of 2 per cent over and above tax so arrived would also be levied. India has entered into Double Tax Avoidance Agreements with various countries, which provide favourable tax positions.

In addition, corporate are required to pay tax @ 12.5 percent at the time of distribution of dividends to their shareholders plus surcharge and education cess.

What are the other taxes apart from corporate taxes?

Some of the main taxes apart from corporate taxes are as follows:

  • Customs/Import duty is levied on imported products. This tax is a tariff – type tax payable at the time of entry of products into India. Peak rate of customs duty on non-agricultural goods is 15 percent,subject to certain exceptions.
  • Excise duty is levied on manufacture of goods within India. This is also a tariff type tax and is payable on an ad valorem (i.e. a fixed percentage of the cost of production) basis.
  • Sales tax is levied on the sale of a product that is produced or imported and sold for the first time. Either the central or the state government levies sales tax.
  • Service tax is levied on specified services and is like excise duty except that excise duty is levied only on goods/products.

What is the overall policy of India towards infrastructure?

India realises that development of infrastructure is crucial to India’s growth strategy. To this end India has sectoral policies to attract private/foreign investment in areas like power, telecommunications, road and highways, ports, oil and gas, etc.

Investing companies in infrastructure/ service sector:

In respect of the companies in infrastructure/service sector, where there is a prescribed cap for foreign investment, only the direct investment will be considered for the prescribed cap and foreign investment in an investing company will not be set off against this cap provided the foreign direct investment in such investing company does not exceed 49% and the management of the investing company is with the Indian owners. The automatic route is not available.

What are Small Scale Undertakings? Are there any restrictions on investing in these undertakings?

An industrial undertaking is defined as a small scale unit where the investment in fixed assets (classified as in plant and machinery) does not exceed Rs. 10 million. Such units can manufacture any item including those notified as exclusively reserved for manufacture by the small scale sector. Foreign equity in such units is restricted to 24 percent of total equity. However, one can invest upto 100 percent in case the entire production is to be exported from India.

Is there a requirement to seek Environmental Clearances?

Yes, statutory clearance relating to pollution control and environment for setting up an industrial project is required under the Environment Protection Act. Industries like petro-chemical complexes, petroleum refineries, cement, power plants, bulk drugs, fertilisers, dyer, paper, etc require such clearance.

What is the Foreign Direct Investment policy on Venture Capital Fund ('VCF') and Venture Capital Company ('VCC')?

Offshore Venture Capital Funds/Companies are allowed to invest in domestic venture capital undertaking as well as other companies through the automatic route, subject only to SEBI regulations and sector specific caps on FDI.

What is the Foreign Direct Investment ('FDI') policy on Trading?

FDI in trading upto 51 percent is permitted under the automatic route provided it is primarily export activities and the undertaking enjoys classification as an export house/trading house/ super trading house/ star trading house. Further 100 percent FDI is permitted in trading (through the FIPB route) in the following areas:

  • Exports
  • Bulk imports with export/exbonded warehouse sales
  • Cash and carry wholesale trading
  • Other import of goods or services subject to certain conditions.

What is the typical distribution channels in the Indian market?

The conventional distribution channel employed in India is a pyramidal structure involving movement of goods from carrying and forwarding (C&F) agents to wholesalers and distributors down to retailers. About 12 million retail outlets give India the largest retail outlet density in the world. The new supply chain systems include cutting down on intermediaries as in direct marketing or network marketing.

What is the size and potential of the rural markets in India?

The rural consumer class is growing at 3-4 per cent per annum and adding about 1.2 million new customers every year. Spread over 630,000 villages, India’s rural population generates one third of the national income. Apart from growth in demand for agricultural inputs, rising rural disposable incomes have also spurred the demand for fast moving consumer goods and consumer durables.

What has been the “structural shift” in the Indian economy?

Manufacturing is no longer the dominant sector of the GDP. Also, the share of agriculture has gone down from a high of 70 per cent in the sixties to just about 27 per cent today. The value added services sector has emerged as the growth engine of the economy.

What is the scope for the retailing industry in India?

The present size of the retail industry in India is around USD 180 billion. This is expected to touch USD 450-500 billion by 2010. Within the retail sector, grocery constitutes the biggest component with about 50 per cent share. Apparel is another high growth area in the retail sector.