2014 | INDIA BRIEFING - 1

Issue 21 February 2014

From Dezan Shira & Associates
Taking Advantage of
Indias FDI Reforms
www.india-briefng.com
Recent Changes in
Indian FDI Policy
Establishing a
Business in India
How to Set Up a
Wholly Foreign-Owned
Business in India
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2 - INDIA BRIEFING | 2014
Dear Clients and Readers,
After a turbulent year for Indias economy, strong quarterly growth fgures and
encouraging political developments appear set to make 2014 one of the most
promising years for foreign investors in recent memory. Driven by the expectation
that Indian exports and investment demand will increase steadily alongside a pick-up
in the global economy, Goldman Sachs and the Reserve Bank of India expect GDP
growth will reach 5.5 percent in 2014 and maintain a pace of about 7.5 percent over the
next few years. Indias current account defcit sits at its lowest level in more than four
years, and corporate confdence in the country surpasses both China and the United
States according to Ernst & Youngs annual Capital Confdence Barometer Report.
Making a strategic and informed decision about investing in India requires both an understanding of the diverse
options for investment in the country, and recent changes in FDI policy that open several key business sectors
to increased foreign investment.
In this issue of India Briefng Magazine, we explore important amendments to Indias foreign investment policy,
and outline the various investment options for business establishment including the establishment of a
wholly owned subsidiary company in sectors that permit 100 percent foreign direct investment. Finally, we
explore several taxes that apply to wholly owned subsidiary companies and their operators.
As India ventures into 2014, Dezan Shira & Associates advisors in Delhi and Mumbai are proud to ofer
business advisory services, tax consulting, internal audits, and assistance with business establishment in India.
Best Regards,
Gunjan Sinha
Country Manager
Dezan Shira & Associates, India
Introduction
Issue 21 February 2014
Badri Nath Arya
Watercolour and wash, on paper pasted on cardboard, 98.3 X 65.3 cm
Delhi Art Gallery
info@delhiartgallery.com | www.delhiartgallery.com | +91 11 4600 5300
This Months Cover Art
For Reference
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magazine, please contact:
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2014 | INDIA BRIEFING - 3
Taking Advantage of
Indias FDI Reforms
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in India
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4 - INDIA BRIEFING | 2014
Recent Changes in Indian
FDI Policy
Dezan Shira & Associates, Delhi Ofce
A
mendments in Indian FDI policy last year opened a
number of key business sectors to increased foreign
investment and in several instances eliminate the need
for foreign investors to obtain approval from the Indian
government before investing. Additional 2013 policy
changes that alter the legal defnition of control as pertaining to the
determination of sectorial caps, as well as regulations for single and
multi-brand retail trading are also important for foreign institutional
investors (FII) and frms considering foreign direct investment (FDI).
FDI Routes and Forms
Foreign investment into India falls under one of two FDI routes:
Approval Routes for Foreign Investment
Government Route: For investment in business sectors requiring
prior approval from the Foreign Investment Promotion Board
(FIPB).
Automatic Route: For investment in business sectors that do
not require prior approval from the government, but the fling
of a notifcation after the incorporation of the company and
issue of initial shares.
Foreign investment takes one of two principal forms:
Types of Foreign Investment
Foreign Direct Investment (FDI): The acquisition of shares or other
securities in an Indian company.
Foreign Institutional Investment (FII): Investment by foreign
institutional investors (such as hedge funds, insurance
companies, or mutual funds) registered with the Securities
and Exchange Board of India (SEBI).
These distinctions are important when interpreting recent changes
in foreign investment policy, as foreign investment caps and
approval routes often vary by both industry and investor.
Unchanged FDI Caps
Sector/Industry Investment Cap
Civil Aviation 49%
Defense 26%
Airports 74%+
Print Media 26%
Brownfeld Pharmaceuticals 100%
Multi-Brand Retail 51%
Changes to FDI Caps and Approval Routes
A comparison of the previous and revised policies in key Indian
business sectors are outlined in the chart below:
Sector/
Industry
Previous Policy 2013 Revised Policy
Investment
Cap
Approval
Route
Investment
Cap
Approval
Route
Commodity
Exchanges
49% (FDI + FII)
FDI Cap: 26%
FII Cap : 23%
Government 49%
FDI Cap: 26%
FII Cap : 23%
Automatic
Power
Exchanges
49% (FDI + FII)
FDI Cap: 26%
FII Cap : 23%
Government 49%
FDI Cap: 26%
FII Cap : 23%
Automatic
Asset
Reconstruc-
tion
74% (FDI + FII) Government Up to49% Automatic
49% to 100% Government
Insurance
26% (FDI) Automatic 26%
(FDI + FII)
Automatic
Telecom
Services
Up to49% Automatic Up to49% Automatic
Above 49% and
up to 74%
Government Above 49%
and up to
100%
Government
Courier
Services
100% Government 100% Automatic
Test
Marketing
100% Government 100% Automatic
Petroleum
Refning by
Public Sector
Undertak-
ings
49% Government 49% Automatic
Defense
Production
26%(FDI)

Government 26% Automatic
Above 26% Government
Firms considering investment in India should seek out professional interpretations
of sector and industry FDI cap specifcs. For more information on FDI caps and
establishing a business presence in India, please email India@dezshira.com or visit
www.dezshira.com/ofce/India.
Changes in the Defnition of Control
A changed defnition of control is also expected to apply to FDI
in sectors where a sectorial cap currently exists. Prior to the 2013
amendments, companies were considered to be controlled by
resident Indian citizens if Indian citizens held a 51 percent stake
in the frm and had the power to appoint a majority of directors in
that company.
2014 | INDIA BRIEFING - 5
Recent Changes in Indian FDI Policy
Under the broadened defnition of control introduced this year,
control now includes not only the power to appoint a majority
of directors, but also the ability to control the management or
policy decisions via shareholding, management rights, shareholder
agreements, or voting agreements. Indian citizens must exercise
control under all limbs of this new defnition for a company to be
considered domestically controlled.
Consequently, companies previously considered to be Indian may
now be viewed as foreign controlled and subject to FDI caps and
other restrictions on downstream investment.
Changes in Single and Multi-Brand Retail Trading
While previous FDI policy only permitted one non-resident entity
with ownership of a brand (or rights to a brand) to invest in Indian
companies engaged in the retail trading of that brand, policy
changes now allow multiple non-resident entities to invest in Indian
entities engaged in single-brand retail trading of that brand (as
long as each own or have rights to the brand via a legally binding
agreement).
Additionally, single-brand retail trading investment routes have
been modifed as follows:
Single-Brand Retail Trading
Former Position Revised Position
Cap Route Cap Route
100% Government Up to 49% Automatic
Above 49% and up to
100%
Government
In respect to multi-brand retail trading, changes made in 2012
permitted up to 51 percent FDI with prior government approval.
Conditions for investment, however, required companies to
invest at least 50 percent of the total FDI proceeds into back-end
infrastructure such as manufacturing, processing, packaging,
distribution, logistics, design improvements, quality control,
warehouses, storage, and agriculture market produce infrastructure.
Changes made in 2013 now clarify that at least 50 percent of the
frst US$100 million invested must be in back end infrastructure.
Furthermore, the previous requirement for multi-brand retail trading
companies (MBRTCs) regarding manufacturing and processing 30
percent of products in small industries has been discontinued, and
companies are now permitted to source their products from any
manufacturing or processing entity so long as investment in plant
and machinery is below US$2 million at the frst engagement.
MBRTCs are now also allowed to establish outlets in a wider range
of locations, as the previous restriction to cities with populations
of at least 1 million has been scaled back. State governments now
possess the authority to permit MBRTCs to operate in their region.
Investing
The issuance of shares by Indian companies falls under the
compliance guidelines outlined in the Foreign Exchange
Management Act (FEMA). Companies seeking capital through the
public route should base the issuance price on SEBI guidelines.
Unlisted companies seeking capital may not issue private shares
at a price less than fair value based on the discounted cash fow
method, and price will be determined by a SEBI registered merchant
or chartered accountant. The acquisition of unlisted shares by a
non-resident from an Indian resident must be exchanged at market
price based on the SEBI guidelines.
Units operating in SEZs may issue shares at a price based on the
valuation against the import of capital goods. This valuation must
receive approval from a Development Commissioner Committee
and the appropriate customs ofcials. Shares must be ofcially issued
within 180 days of receipt of invested capital, or the funds must be
refunded to investors.
Upon the issuance of shares to foreign investors, the issuing
company has 30 days to fle Form FC GPR, which outlines the
companys activities and relevant details, through the appropriate
regional ofce of the RBI. A certifcate declaring compliance with
the Companies Act 1956 and Companies Act 2013, as applicable
from time to time, shall be submitted at the same time. The issuing
company shall also obtain a certifcate confrming the price of issue
is in line with the prescribed guidelines.
Possible Changes for this Year
A number of changes in FDI caps have already been hinted at for
this year. FDI caps and FII prohibition in the defense sector may
soon be relaxed for investment promoting the development of
state-of-the-art military technology, and more recent developments
suggest India may even move to liberalize business-to-consumer
e-commerce, railways and the construction industry in the near
future after FDI slowed considerably in the April-November period
of the current fscal year. In bonds, the government may transition
from a fxed ceiling on FII in government securities to instead link
limits to proportion of GDP. The government has already clarifed
that the existing 26 percent cap on foreign investment in the
insurance sector also applies to intermediaries such as brokers,
third party administrators and surveyors.
Whatever the changes, foreign investors should be familiar with
Indian investment regulations and compliance requirements before
moving to invest in regulated sectors. Despite Indias liberalized
investment environment, the nation still ranks among the most
difcult countries in which to start and conduct business according
to the World Bank. As such, firms and individuals considering
investment in the country should strongly consider consulting a
professional services frm before attempting to navigate Indias
foreign investment environment.
6 - INDIA BRIEFING | 2014
Establishing a Business in India
Dezan Shira & Associates, Delhi Ofce
P
rospective companies and investors seeking to take
advantage of Indias liberalized FDI caps must carefully
consider their options for investment in the country, and
available avenues for establishing a business presence.
Here, we outline the functions and requirements for
three entities that can be established when a business enters India
or expands its scope of operations. The fourth option, wholly owned
subsidiaries (private limited companies), will be discussed in the
following article. Here, we discuss the following:
1) Liaison Ofces
2) Branch Ofces
3) Project Ofces
Liaison Ofces
Foreign companies can open a liaison ofce in India to facilitate
and promote the parent companys business activities, and act as
a communications channel between the foreign parent company
and Indian companies. Unable to engage in commercial, trading,
or industrial activities, liaison ofces must be sustained by private,
inward remittances received from their foreign parent company.
A liaison ofce is permitted to engage in the following activities:
Facilitate communication between the overseas head company
and parties in India to establish market opportunities
Promote imports/exports between countries
Establish fnancial and technical cooperation between overseas
and Indian companies
Represent the overseas head company in India
The Foreign Exchange Management Act (FEMA) governs the
application and approval process for the establishment of a liaison
or branch ofce. Under the Act, foreign enterprises must receive
specifc approval from the RBI to operate a liaison ofce in the
country. Applications are to be submitted through Form FNC
(Application for Establishment of Branch/Liaison Ofce in India).
The approval process generally takes 20 to 24 weeks and permission
to operate a liaison ofce is granted for a three-year period, which
can be extended at a later date. An enterprise must also meet the
following conditions before qualifying for the establishment of a
liaison ofce:
Must have a three-year record of proftable operations in the
home country
Must have a minimum net worth of US$50,000 verifed by the
most recent audited balance sheet or account statement
If a company does not meet these requirements, but a subsidiary
of a company that does, the parent company may submit a Letter
of Comfort on the subsidiarys behalf. A company must submit
a Certificate of Incorporation or Memorandum & Articles of
Association, and a copy of the parent companys latest audited
balance sheet. The liaison ofce must also obtain a Permanent
Account Number (PAN) from the Income Tax Authorities.
Within 30 days of establishment, the liaison ofce must register with
the Registrar of Companies (RoC) by fling Form 44 through the
Ministry of Corporate Afairs online portal. The following
documents must also be provided:
A copy of the liaison ofce charter or Memorandum & Articles of
Association in English
Full address for the enterprises principal place of operation outside
of India
Name and address of the liaison ofce in India
List of directors
Name and address of the companys ofcial representative based
in India (e.g. the person authorized to accept delivery of notices
and documents served to the company)
Each year, the liaison ofce must fle an Annual Activity Certifcate
(AAC), prepared by a chartered accountant, to the RBI verifying the
ofces activities are within its charter. An AAC should also be fled
with the Directorate General of Income Tax within 60 days of the
close of the fnancial year.
Branch Ofces
Foreign companies, including those engaged in manufacturing and
trading activities, are able to establish branch ofces to carry out
business activities substantially the same as those carried out by
their parent company. Branches are permitted to carry out trading
activities, but may not engage in manufacturing activities on their
ownthese may be subcontracted to Indian manufacturers. Branch
ofces operating in SEZs, however, are permitted to undertake
manufacturing and service activities in sectors with 100 percent
FDI approval.
2014 | INDIA BRIEFING - 7
Establishing a Business in India
Branch ofces are permitted to engage in the following activities:
Export/import of goods
Rendering professional or consultancy services, IT services, or
technical product support
Carrying out research work
Representing the parent company as a buying/selling agent or
in order to establish technical or fnancial collaborations with
Indian companies
Operating as a foreign airline or shipping company
The FEMA also governs the application and approval process for the
establishment of a branch ofce, requiring that companies receive
approval from the RBI to establish a branch ofce. Permission to
operate a branch ofce is granted for a three-year period, which
can be extended at a later date. An enterprise must also meet the
following conditions before
qualifying for the establishment of a branch ofce:
Must have a fve-year record of proftable operations in the home
country
Must have a minimum net worth of US$100,000 verifed by the
most recent audited balance sheet or account statement
If a company does not meet these requirements, but is a subsidiary of
a company that does, the parent company may also submit a Letter
of Comfort on the subsidiarys behalf during the application process.
The process for establishing a branch ofce is identical to that
required for a liaison ofce, and the same documents including Form
FNC, the Certifcate of Incorporation or Memorandum & Articles of
Association, and an audited balance sheet must be submitted. A
PAN must also be acquired, and the ofce must register with the
Registrar of Companies through the Ministry of Corporate Afairs
online portal.
Each year, the branch ofce must also fle an AAC, prepared by a
chartered accountant, to the RBI verifying the ofces activities were
within its charter. An AAC should also be fled with the Directorate
General of Income Tax within 60 days from the end of the fnancial
year.
All profts earned by the branch ofce may be remitted from India,
and will be subject to payment of all applicable taxes.
Project Ofces
If a foreign company has secured a contract from an Indian company
to execute a project in India and has attained the appropriate
funding source or governmental clearance, a project ofce may be
established. One of the following criteria must be met in order to
obtain permission to establish a project ofce:
The project is funded directly by inward remittance from the
overseas head company
The project is funded by a bilateral or multilateral international
fnancial agency such as the World Bank or IMF
The project has received clearance by the relevant authorities
within India
The Indian company awarding the contract has received a term
loan for the project
If none of the above criteria are met, an overseas company looking
to establish a project ofce in India must make a specifc request
with the Central Ofce of the RBI for approval.
The project office should notify the relevant regional Director
General of Police within fve days of the ofces establishment.
Within two months of the project ofces establishment, the overseas
company must also submit a report to the relevant regional ofce
of the RBI through the authorized dealer branch bank (AD) that will
be used by the foreign company. This report should include:
Name and address of the overseas company
Reference number and date of project contract
Particulars of the authority awarding the project contract
Total amount of the contract
Brief details of both the project undertaken and authorized dealer
branch bank
Project details, including project office tenure and contact
information
Each year, the project ofce will be required to submit a Project
Status report compiled by a chartered accountant to the companys
AD branch. This report ensures the activities undertaken by the
project ofce conforms with the activities permitted by the RBI.
Project ofces may open a non-interest bearing foreign currency
banking account with an authorized dealer branch in India for
project expenses and credits. The ofce may maintain both a foreign
currency account and a rupee account while operating in India.
Project ofces are allowed occasional remittances to their parent
companies and must provide a chartered accountant certifcate
verifying the ofces can still meet their liabilities. Following project
completion, the project ofce may repatriate any capital surplus
once all tax liabilities have been paid, a fnal audit of the project
accounts has been completed, and a document verifying the
remittable surplus provided.
Dezan Shira & Associates ofers business advisory and tax
consulting services for clients across emerging Asia. For more
information, please visit www.dezshira.com/services
8 - INDIA BRIEFING | 2014
Establishing a Wholly Owned Subsidiary
Under Indian Law, foreign investors are able to establish wholly
owned subsidiary companies (WOS) in the form of private limited
companies if they operate in sectors that permit 100 percent
foreign direct investment (FDI). With Indias recent loosening of
FDI caps, companies are now also able to establish WOS in the
telecom services and asset reconstruction sectors. Establishing a
private limited company can be a lengthy and complicated process
involving multiple steps.
First, a minimum of two directors must be appointed and registered
through Indias e-fling system for Director Identifcation Numbers
(DIN). Minimum requirements for the establishment of a private
limited company include the existence of two directors, two
shareholders (who may be the same person as the directors), and
a minimum share capital of INR 100,000 (1 Lakh).
Second, a suitable name must be selected that indicates the main
objectives of the company, and submitted with the RoC along with
a brief description of the businesss proposed functions to verify
both the names appropriateness and availability. Upon successful
name registration, the applicant company has 60 days to fle its
Memorandum of Association (MOA) and Articles of Association
(AOA), and proceed with formal incorporation flings. Both the MOA
and AOA must be stamped with the appropriate duty after the
needed RoC fees and stamp duty have been paid, and both forms
signed by at least two subscribers with a witness.
Within this 10-day time window, the following documents must also
be fled with the Ministry of Corporate Afairs web portal along
with the requisite fling fees:
Form 1 - Application for incorporation along with the MOA and
AOA
Form 18 - Notice of situation for the registered ofce (proof of
address, etc.)
Form 32 - Details of the companys board of directors
Upon successful submission of the above documents, the RoC will
issue a Certifcate of Incorporation and a Corporate Identifcation
Number (Corporate Identity). The process generally takes 7 to 8
weeks to complete, and private limited companies are permitted
to commence business immediately following their successful
incorporation.
Applicable Taxes
While India has been liberalizing its governing policies since 1991,
the countrys tax structure remains among the most complex and
difcult to navigate in the world. Understanding the wide variety
of laws, regulations and procedures can be confusing for even the
savviest of business operators. Foreign companies that do not seek
specialized advice often end up overpaying on taxes or on the
associated penalties and interest that go along with them. What
follows is a brief description of the various taxes which should be
taken into consideration when incorporating a private limited WOS
company in India.
Type of
Company
Taxable Income
Below INR
10 Million
Exceeds INR
10 Million
Exceeds INR
100 Million
Domestic
company
30% 32.45%
(30% plus
surcharge
of 5%, plus
education cess
of 3%)
33.99%
(30% plus
surcharge of
10 %, plus
education cess
of 3%)
Foreign
company
40% 42.02%
(40% plus
surcharge
of 2%, plus
education cess
of 3%)
43.26%
(40% plus
surcharge
of 5 %, plus
education cess
of 3%)
Tax on the Distribution of Dividends
Corporate entities are subject to a tax on the distribution of
dividends. However, in the case of shareholder dividends, the
associated income is exempt from tax. The current efective rate
of the Dividend Distribution Tax is 16.995 percent (15 percent plus
a 10 percent surcharge and an education cess of 3 percent). No
exemption from payment of the DDT is granted for the profts
relating to SEZ developers.
To avoid a situation of double taxation being created by the DDT, it is
permitted that, for the purpose of computing the tax, any dividend
received by a domestic company during any fnancial year from its
subsidiary shall be allowed to be deducted from the dividend to be
distributed. This is provided the dividend received by the domestic
company has been subject to DDT and the domestic company is
not the subsidiary of any other company.
How to Set Up a Wholly Foreign-
Owned Business in India
Dezan Shira & Associates, Mumbai Ofce
2014 | INDIA BRIEFING - 9
How to Set Up a Wholly Foreign-Owned Business in India
Minimum Alternate Tax (MAT)
All companies declaring low or zero profits are subject to the
Minimum Alternate Tax (MAT). Presently, MAT is levied at 18.5 percent
of book profts plus the applicable surcharges and education cess.
The MAT is levied on companies whose tax payable under normal
income tax provisions is less than 18.5 percent of book profts.
Additionally, MAT is applicable to SEZ developers/units for income
arising on or after April 1, 2012.
Taxation of Royalties/Technical Fees
Under domestic tax law, the royalties/technical fees that are payable
to non-residents with a permanent establishment in India are taxed
on a diferent basis compared to non-residents without permanent
establishment in India. Concessional tax rates apply if the agreement
relates to a matter that has been approved by the government of
India. The payments made are subject to tax avoidance agreements
entered into by the non-residents country.
Wealth Tax
Wealth tax is calculated on March 31st of every year (referred to as
the valuation date). Wealth tax is charged to both individuals and
companies at the rate of 1 percent of the amount by which the net
wealth exceeds INR 3,000,000.
The term net wealth is basically defned as the excess value of
certain assets over accumulated debt. Assets include guest and
residential houses, motorcars, jewelry/ bullion/utensils of gold and
silver, yachts, boats, aircraft, urban land and cash in hand. A debt is
an obligation to pay a defned sum of money arising from the assets
included in net wealth.
Indirect Taxes
Customs Duty
Customs duty is levied by the central government on the import
and export of goods from India. The rate of customs duty applied to
imported and exported products depends on its classifcation under
the Customs Tarif Act. (CTA) In the case of exports from India, duty
is levied only on a very limited list of goods. The Customs Tarif is
aligned with the internationally recognized Harmonized Commodity
Description and Coding System of Tarif Nomenclature promulgated
by the World Customs Organization. The Indian central government
has the power to exempt any specifed goods from the whole or
part of the customs duties.
In addition, preferential/concessional rates of customs duty
are available under the various bilateral and multilateral trade
agreements entered into by India. Customs duty is levied on the
transaction value of the imported or exported goods. Under the
Customs Act 1962, transaction value is the sole basis of valuation
for the purposes of import and export. Although India has adopted
general principles of valuation for goods that are in accordance with
the World Trade Organizations agreement on customs valuation, the
central government has established independent Customs Valuation
Rules applicable to the import and export of goods. India has no
uniform rate of customs duty, thus duty applicable to any product
is based on a number of components. The types of customs duties
are as follows:
Basic Customs Duty (BCD) - BCD is the basic component of customs
duty levied at the efective rate stipulated in the First Schedule to
the Customs Tarif Act, 1985 (CTA) and applied to the landed value
of the goods.
Countervailing Duty (CVD) - CVD is equivalent to, and is charged
to counter the effect of, the excise duty applicable on goods
manufactured in India. CVD is calculated on the landed value of the
goods and the applicable BCD.
Educational Cess (EC) - EC at 2 percent and Secondary & Higher
Education Cess (SHEC) at 1 percent are also levied on the CVD.
Further, EC at 2 percent and SHEC at 1% are also levied on the
aggregate customs duties. An Additional Duty of Customs (ADC) at
4 percent is also charged.
Duties of Excise
Central Value Added Tax (CENVAT) is a tax levied by the central
government on the manufacture or production of movable and
marketable goods in India. The rate at which excise duty is leviable
on the goods depends on the classifcation of the goods under the
Excise Tarif. The Excise Tarif is primarily based on the eight digit
Harmonized System Code. The excise duty on most consumer goods
is charged based on the MRP printed on the goods packaging.
Abatements are admissible at rates ranging from 20 percent to 50
percent of the MSRP for the purposes of charging Basic Excise Duty
(BED). Goods other than those covered by an MSRP assessment are
generally charged based on the transaction value of the goods sold
to an independent buyer. In addition, the central government has the
power to fx tarif values in order to charge ad valorem (according to
value) duties on specifc goods. Occasionally, notifcations granting
partial or complete exemption to specifed goods from payment of
excise duties are also issued. EC at 2 percent and SHEC at 1 percent
are applicable on the aggregate excise duties.
The central excise duty is a modifed form of Value Added Tax (VAT)
where a manufacturer is allowed credit on the excise duty paid on
locally sourced goods as well as on the CVD paid on imported goods.
The CENVAT credit can be utilized for payment of excise duty on the
clearance of dutiable fnal products manufactured in India. In light
of the integration of the goods and services tax initiated in 2004,
manufacturers of dutiable fnal products are eligible to apply CENVAT
credit to the service taxes paid on input services used in or in relation
to the manufacture of fnal products as well as on clearances of fnal
products up until the point of removal.
10 - INDIA BRIEFING | 2014
How to Set Up a Wholly Foreign-Owned Business in India
In addition, CENVAT credit is allowed on the following input services:
1. Services used in relation to setting up, modernization, renovation
or repairs of a factory, the premises of a service provider or an
ofce relating to such a factory or premises
2. Advertisement or sales promotion services
3. Services relating to the procurement of inputs
4. Activities relating to businesses such as accounting, auditing,
fnancing, recruitment and quality control, coaching and training,
computer networking, credit rating, share registry and security,
inward transportation of inputs or capital goods, and outward
transportation
A manufacturer of dutiable and exempt goods, using common
inputs or input services and opting not to maintain separate
accounts, may choose between reversing the credit attributable to
the inputs and input services used for manufacture of the exempted
goods, to be worked out in a manner prescribed in the rules, or
paying a percentage of the value of the exempted goods.
VAT
On April 1, 2005, the state level sales tax was replaced by VAT in the
majority of the states in India. The states of Tamil Nadu, Pondicherry
and Uttar Pradesh have all replaced the state sales tax regime with
a VAT.
Under the VAT regime, the VAT paid on goods purchased within the
state is eligible for VAT credit. The input VAT credit can be utilized
against the VAT/Central Sales Tax payable on the sale of goods. This
ensures that only the value addition is taxed. Currently, there is no VAT
on imports into India. Exports are zero rated. This means that while
exports are not charged VAT, VAT charged on inputs purchased and
used in the manufacture of export goods or goods purchased for
export is available to the purchaser as a refund. State VAT is charged
at varying rates: 1 percent, 4 percent , 5 percent and 20 percent.
Turnover thresholds have been implemented so as to keep small
traders out of the VAT regime. A tax under a composition scheme,
at a lower rate, may be levied on small traders in lieu of the VAT.
Service Tax
Service tax was initially introduced in 1994 and was based on the
positive list of services, wherein the specifed services were made
taxable. During the announcement of the 2012 budget, a new
service tax regime was introduced wherein all services will be taxed
unless they are specifed within the negative list or are otherwise
exempted.
The negative list of services means that all services, excluding those
specifed in the negative list, will be subject to service tax. However,
in addition to items included in the negative list, there may be certain
exemptions, abatements and composition schemes issued by the
Central Board of Excise and Customs (CBEC).The Mega Exemption
Notifcation issued by the CBEC and the guidance paper on the new
approach to service tax mentions 38 services that will be service tax
exempt. All the other services, except those in the negative list, will
be subject to service tax.
Services in the Negative List Category
1. Services relating to agriculture by way of:
Agricultural operations directly related to production of
any agricultural produce including cultivation, harvesting,
threshing, plant protection or seed testing
Supply of farm labor
Processes carried out at an agricultural farm and such like
operations which do not alter essential characteristics of
agricultural produce but make it only marketable for the
primary market
Renting or leasing of agricultural machinery or vacant land with
or without a structure incidental to its use
Loading, unloading, packing, storage or warehousing of
agricultural produce
Agricultural extension services
Services by any Agricultural Produce Marketing Committee or
Board or services provided by a commission agent for sale or
purchase of agricultural produce
2. Transmission or distribution of electricity by an electricity
transmission or distribution utility.
3. Services by way of transportation of goods:
By road, except the services of a goods transportation or
courier agency
By an aircraft or a vessel from a place outside India up to the
customs station of clearance in India
By inland waterways
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Annual Audit and
Compliance in China
2014 | INDIA BRIEFING - 11
Indias 2014 Business Outlook
Indias path to economic recovery is inevitably paved with countless opportunities and risks. In contrast
to China, which is a one-party state, India is a democracy and has not been able to elect a majority
government in over twenty years. Such issues prevent India from making immediate reforms; yet
perhaps these issues also enable it to take a more considered approach to its development. We have
already seen the aftermath of the incredible growth of Chinamass pollution and growing degradation
of the countryside and natural resources. By contrast, Indias wavering 5 to 7 percent growth has seemed
rather sluggish. I believe that is a more sustainable and preferable growth pattern.
However, as Indias current account defcit contracts from its highest levels since the 1991 fnancial crisis,
the Indian government will likely continue to liberalize FDI policy in an attempt to shrink the nations
trade defcit and attract foreign investors. Regardless of whether the INC or BJP come to power in this
years general election, investors can expect to see widespread liberalization of FDI policy continue,
mirroring Indias post-1991 deregulation. Potentially, even business-to-consumer e-commerce, railways
and the construction industry will open up to foreign investment.
Opening up these highly sought-after sectors to foreign investment will fulfll bullish growth predictions
from the International Monetary Fund, World Bank, Ernst & Young and others regarding India becoming
one of the most attractive investment destinations in 2014.
With every business opportunity comes a risk. India ranks among the most difcult countries in which
to conduct business according to the World Bank, and navigating foreign investment in India can be
daunting. That said, it is not an impossibility, as our own frm well knows!
In terms of comparing China with India (as I am often asked to do) the administrative aspect of India
presents greater challenges than Chinas relatively slick processes, especially at the city and provincial
levels. Yet overall, I have found although the business administration systems of each are diferent, in
terms of frustrations they are similar.
Firms seeking to take advantage of Indias increasingly liberal FDI environment should ensure they seek
out the appropriate tax experts, accountants and business advisors. India is inheriting the work force
dividend of cheap young labor that China has had over the past twenty years, and the demographics
dictate that India is developing into a must have destination rather than an alternative.
Chris Devonshire-Ellis
Founding Partner,
Dezan Shira & Associates
Managing Partner, India Ofces
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