Doing Business in India

• choice of entity
• foreign exchange policy
• investment policy
• trade policy
• certain company law provisions
• other issues relating to intellectual property, labour and tax; and finally
• a few do’s and don’ts
   

Depending upon the proposed strategy and as per the government’s investment policy, a foreign investor may opt for setting up either an Indian company (a wholly-owned subsidiary or a joint venture company) or any of the liaison, branch or project office in India. 

As per the current policy, prior permission of the government is required for Foreign Direct Investment (“FDI”) in certain specified sectors and situations. FDI upto 100 percent is permitted in most areas, with or without prior government approval. In the phase of liberalization and to meet the commitments of the World Trade Organizations of opening up of the economy, there are only certain areas where prior government approval is required. Especially over the last couple of years, many sectors of the economy have been opened up for investment and the caps of investments are being constantly reviewed to increase foreign participation. The prevailing level of percentages approved for investment in various sectors by foreign investor, under the automatic route (where no prior approval of the government is required), are published in the manual released by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry and amended from time to time by notifications and press notes.

All foreign exchange transactions are regulated by the Reserve Bank of India (“RBI”)  and governed by the Foreign Exchange Management Act, 1999 (“FEMA”).

Companies are incorporated in India under the Companies Act, 1956 and are required to comply with its provisions. For instance, an alternate to a director who is unable to attend any Board Meeting(s) may be appointed if the Articles of Association of the company so provide. The foreign investor must be well-aware of a few labour law legislations applicable to establishments and employees. Labour laws in India are numerous and pro-employee. Non-manufacturing units have less labour legislations to comply with. Employee benefit legislations cover provident fund, bonus, gratuity, employee state insurance.

To ensure greater degree of accountability and transparency in the operations and management of a public company and to protect the interests of all its stakeholders, the Securities and Exchange Board of India (“SEBI”) laid down a set of regulations. In light of the multi-million dollar corporate scandals that have surfaced in India, the need for corporate governance cannot be emphasized enough. Clause 49 of the Listing Agreement (entered into between a listed company and the stock exchange on which its shares are listed) embodies this very principle of corporate governance. Provisions of Clause 49 are mandatory for all listed companies in India and any non-compliance attracts heavy penalty for the defaulting company.

The trade mark and patent laws provide protection to trade marks and patents registered in foreign countries. A trade mark is registered for ten years while a patent is granted for twenty years. Product patents regime has been introduced in India by implementing amendments made to the Patents Act, 1970.

Taxes are levied directly or indirectly. Direct taxes are levied under the Income Tax Act, 1961 (“IT Act”) and include tax on income arising out of, for instance, royalty, capital gains, fee for technical services, accruing from operations in India. India has entered into Double Taxation Avoidance Agreement (“DTAA”) with a number of foreign countries. In case of foreign transactions, the provisions of DTAA between India and the country from which the business activity originates generally govern such taxation. However, starting April 01, 2012, the IT Act is expected to be replaced by the Direct Tax Code (“DTC”), which is a “newer” legislation aimed at simplifying the complex taxation regime of India.  Indirect taxes are levied in the form of customs and excise duty and sales tax. Sales tax on similar goods varies from state to state in India. In order to ensure parity of tax levied in different states across India, many states had introduced Value Added Tax (“VAT”) from April 1, 2005 replacing the prior sales tax system. It is considered to be a uniformly administered tax, which will help eliminate the system of differential rates of taxation and will harmonize the tax regime in India, thereby ensuring that the goods sold in one state in India fetch the same price as being sold at any other place in the country. However, the government is reviewing the various indirect tax laws and has enacted the Goods and Services Act (“GST”) to centralize all indirect tax legislations and provide uniformity in procedure. GST is expected to come into force in phases from April 01, 2012 along with the DTC.