Executive Summary

          The process of economic reforms in India was initiated in 1991. Since then there has been a constant endeavor to create a foreign investor friendly climate by simplifying procedures for entry and operations. This elementary guide attempts to present an overview of issues/procedures relevant for a foreign investor viz. 

	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 participation1. 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")² 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 labor law legislations applicable to establishments and employees. Labor laws in India are numerous and pro-employee. Non-manufacturing units have less labor legislations to comply with. Employee benefit legislations cover bonus, gratuity, employee state insurance.

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

          Taxes are levied directly or indirectly. Direct taxes 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 governs such taxation. 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 have 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, there has been lack of clarity in its implementation, which should smoothen out with time. Download