INDIA

SEPTEMBER 2007

Prepared by
Chandabhoy & Jassoobhoy
For Private Circulation
 PREFACE
This booklet has been prepared by CHANDABHOY & JASSOOBHOY for the information of
persons considering doing business in India. The material is presented in a summary form and is
intended to serve only as a guide. The assistance of professional advisors is, therefore,
recommended in dealing with specific business and legal questions.
While every care has been taken in the preparation of this booklet, no responsibility can be
accepted for inaccuracies. At the same time it must be remembered that law and practice may
also change.
This guide is dated September 2007 and may be superseded by later publications.
Additional copies of this booklet may be obtained from the Mumbai office of
Chandabhoy & Jassoobhoy
208, Phoenix House, A Wing,
462, Senapati Bapat Marg,
Lower Parel,
Mumbai - 400 013.
Phone: +91 22 2498 1516 / 2496 0045/ 2496 1356
Fax : +91 22 2498 1718
Email : mail@cnj.in

We look forward to helping you to do business in India.

Chandabhoy & Jassoobhoy is a member of UHY (http://www.uhy.com), an international
association of independent accounting and consultancy firms whose organising body is Urbach
Hacker Young International Limited, a UK company. Each member of UHY is a separate and
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by Urbach Hacker Young International Limited or any other member of UHY. Neither Urbach
Hacker Young International Limited nor any member of UHY has any liability for services provided
by other members.

FIRST EDITION 1985

THIS EDITION 2007
 TABLE OF CONTENTS
Page
I. INTRODUCTION

A. Geography 1
B. Population 1
C. Language 1
D. Political Set-up 1
E. Judiciary 1
F. Currency and Banking 1
G. Travel Regulations for Foreign Personnel 2

II. BUSINESS AND INVESTMENT CLIMATE

A. Economic Factors 3
B. India - An attractive Investment Location 4
C. Industrial Licensing 5
D. Foreign Investments in India 8
E. Foreign Technology Agreements 17
F. Direct Investments outside India 17
G. Business Forms 19
H. Finance 21
I. Special Investment Programmes 26

III. BUSINESS LAWS AND LEGISLATION

A. Reserve Bank of India 27

B. Securities Exchange Board of India 27
C. Insurance Regulatory and Development Authority of India 30
D. Telecom Regulatory Authority of India 31
E. Monopolies and Restrictive Trade Practices Act and 31
Competition Act
F. Companies Act and Corporate Governance 32
G. Foreign Exchange Management Act 33
H. Intellectual Property Rights 34
I. Arbitration and Conciliation Act 38
J. Right to Information Act 39
K. Consumer Protection Act 39
L. Labour Laws 40

IV. DIRECT TAXES

A. Income tax 42
B. Administrative Systems 42
C. Assessments 42
D. Advance Ruling 42
E. Residence 42
F. Scope of Total Income 43
G. Taxable Income 43
H. Agricultural Income 43
I. Tax Concessions 43
J. Dividend and Income Distribution Tax 45
K. Special Provisions Relating to Income of Shipping Companies 45
L. Tax Holidays 45
M. Business Loss 48
N. Capital Gains 48
O. Business Reorganisation 49
P. Non Corporate/Individual Tax Rates and Advance Tax 50
Q. Corporate Tax Rates and Advance Tax 50
R. Minimum Alternate Tax 51
S. Scheme of Presumptive Taxation 51
T. Special Provisions for Non-Residents 52
U. Withholding Taxes 54
V. Double Taxation Relief 54
 Page
W. Business Connection 54
X. Transfer Pricing 54
Y. Wealth-tax 55
Z. Salaries and Perquisites 55
AA. Taxation of Employee Stock Option Plans (ESOPs) 56
AB. Fringe Benefit Tax 56

V. INDIRECT TAXES

A. Excise Duty 58
B. Customs Duty 59
C. Octroi Duty 60
D. Stamp Duty 60
E. Sales Tax 60
F. Service Tax 65
G. Securities Transaction Tax 67

VI. ACCOUNTING AND AUDITING

A. Accounting Profession 69
B. Auditing Requirements 69
C. Audit under the Central Government Cost Audit Rules 69
D. Audit under the Income Tax Law 69
E. Accounting Standards and Principles 69

VII. APPENDICES

Appendix I Sector specific guidelines for Foreign Direct 70

Investment
Appendix II Salient features for Investments in EOUs, etc 78
Appendix III Rates of Depreciation 80
Appendix IV Rates of Withholding Taxes 81
Appendix V Upper Limits of Withholding Taxes in India’s 82
Agreements for avoidance of Double Taxation
Appendix VI Accounting Standards and US GAAP/IFRS 85
Statements
 SECTION - I

INTRODUCTION

A. GEOGRAPHY

India is a natural subcontinent flanked by the Himalayas in the north, the Arabian Sea in the
west, the Bay of Bengal in the east and the Indian Ocean in the south. It has a land frontier of
15,200km and a coastline of 7,517km. The Andaman and Nicobar Islands in the Bay of
Bengal and Lakshadweep Islands in the Arabian Sea are parts of the territory of India.

B. POPULATION

India is the second most populous country in the world with 1,095.35 million people in July
2006 (estimated) The literacy rate is 65% with a great degree of regional variation. Nearly
30% of India’s population lives in urban areas and 70% of the India’s population lives in rural
areas. The country has more than 35 cities with population more than 1 million (2001 census)
namely Mumbai, Delhi, Chennai, Bangalore, Hyderabad, Kolkata, Ahmedabad, Pune, Surat,
Kanpur, Jaipur, Lucknow, Nagpur, Patna, Indore, Vadodara, Bhopal, Coimbatore, Ludhiana,
Kochi, Vishakapatnam, Agra, Varanasi, Madurai, Meerut, Nashik, Jabalpur, Jamshedpur,
Asansol, Dhanbad, Faridabad, Allahabad, Amritsar, Vijaywada, Rajkot.

C. LANGUAGE

Hindi is the official language of the Republic. English the associate official language is widely
used for business and is understood almost everywhere in India

D. POLITICAL SET-UP

India is the largest democracy in the world and has adopted a Parliamentary System of
Government with two Legislative Houses. The country is a Union of the national capital
territory, Delhi, 28 states and six union Territories. The Central Government has exclusive
jurisdiction over all matters of national interest such as defence, communication, banking and
currency, international trade and foreign affairs. The State Governments have primary
responsibility for matters like law and order, education, health and agriculture.

The Central Government comprises a council of ministers headed by a Prime Minister. The
Prime Minister is usually the head of the party, which has the support of a majority in the
Parliament. Parliamentary elections are generally held once in five years.

E. JUDICIARY

India has a well-established and independent judicial system. The Supreme Court of India is
the highest court of appeal at New Delhi and High Courts in states, along with subsidiary
district courts enforce the rule of law and ensure the fundamental rights of citizens, which are
guaranteed by the Constitution.

F. CURRENCY AND BANKING

The Indian rupee (INR) is the country’s currency.

The country’s banking system is controlled and monitored by the Reserve Bank of India
(Reserve Bank). The functions of the Reserve Bank are divided into two distinct areas:

• Issue department, which looks after issue of currency;

• Banking department, which regulates and supervises Indian banking.

The commercial banking system in India is fully developed with over 220 commercial banks
cumulatively having over 71,000 offices in various parts of the country.

Page 1 of 86
G. TRAVEL REGULATIONS FOR FOREIGN PERSONNEL

Foreigners desirous of visiting India can do so after obtaining a visa from the Indian Mission in
the country of their residence. They should posses a valid National passport – except in the
case of nationals of Bhutan and Nepal, who may carry only suitable means of identification.

Indian Embassies and Consulates abroad issue visas upto five years with multiple entry
option to foreign nationals for business purposes and for studies in India. For employment
purpose visas are issued for one year, which can be extended for further stay. A foreign
national staying in India for more than 180 days, must obtain a Registration
Certificate/Residential permit from the Foreigners Registration offices of the state where he
would be stationed.

Page 2 of 86
 SECTION - II

BUSINESS AND INVESTMENT CLIMATE

A. ECONOMIC FACTORS
The Indian economy is rapidly integrating with the world economy. A foreign investor who
wishes to undertake business in India will find tremendous opportunities. The industrial policy
offers a great deal of freedom to business houses and entrepreneurs to make their own
investment decisions.
India has gone through more than a decade of economic reforms. Continuity in the economic
liberalisation process and the political consensus that economic change necessitates has
placed India on a growth path.
According to Central Statistical Organisation (CSO) estimates, real Gross Domestic Product
(GDP) grew by an impressive 9% during the financial year 2005-06. The agricultural sector
grew by 6% and the industrial and services sector grew by 9.6% and 9.8% respectively.
According to CSO, GDP growth rate is estimated to be 9.2% for financial year 2006-07.

Foreign exchange reserves

India’s foreign currency assets have been increasing steadily. Foreign currency reserves
(including valuation changes) as at September 21, 2007, were US$ 235.89 billion. In recent
years, India’s balance of payments has been characterised by surplus in both the current and
capital accounts. The steady accumulation of reserves, made possible by a strong balance of
payment position in recent years, establishes India as the sixth largest reserve holder in the
world. These reserves provide an opportunity to engage in further trade reforms.

Exchange rate movements

The Indian foreign exchange market witnessed generally orderly conditions during 2006-07
and the exchange rate for the US$ against the INR moved in the range INR 44.61 to a US$ to
INR 43.59 to a US$ by end March, 2007. Since then, there has been an appreciation in the
rupee and the exchange rate is hovering around the INR 40 mark presently.
The exchange rate policy in recent years has been guided by the broad principles of
monitoring and management with flexibility.

Foreign Direct Investment

• Continuous liberalization in the Foreign Direct Investment (FDI) policy and simplification
of procedures are contributing immensely to attracting increased FDI into India. The fact
that the Government is now annually conducting a review of the FDI Policy and
Procedures has given an added confidence to the foreign investors that their concerns
are addressed on a continuous basis.

• FDI equity inflow during the financial year 2006-07 at nearly US$ 16 billion has been 2.8
times more than the inflow received during the previous year. This is the highest FDI
equity inflow into the country during any financial year since the commencement of
economic reforms. FDI equity inflow in the month of March 2007 was US$ 3.8 billion
which is the highest inflow received so far in a single month. During the first quarter of
financial year 2007-08, the FDI inflows have been US$ 4.9 billion compared to US$ 1.7
billion for the corresponding quarter in 2006-07.

• Major investment of approx. US$ 6.3 billion during the financial year 2006-07 came from
Mauritius. The other countries from where substantial inflows have been received are UK,
USA, Netherlands and Singapore. These five countries together have contributed 83% of
the total FDI equity inflows during 2006-07 as compared to 67% in 2005-06. Mauritius
accounted for 51% in the total FDI inflows during the year 2006-07 compared to 46.4% in
2005-06. Contribution of UK has been 15% in 2006-07 compared to 4.8% in 2005-06.
USA has invested 7% during 2006-07 compared to 9.1% in 2005-06. Both, the
Netherlands and Singapore have contributed 5% each during 2006-07 compared to 1.4%
and 5%, respectively, in the previous year.

Page 3 of 86
 • The five sectors which have attracted highest FDI into India during 2006-07 are services,
electrical equipments (including computer software and electronics), construction
activities, telecommunications and real estate. The construction and real estate sectors
have together received US$ 1.45 billion during the year 2006-07 which is about 12%
compared to 3.4% of the total FDI inflows received during the year 2005-06. The Services
sector has received 38% during the year 2006-07 compared to 10.5% in the previous
year. The share of the electrical equipment sector has been 22% in the year 2006-07
compared to 26.1% in 2005-06 and the telecommunication sector has received 4% in
2006-07 compared to 12.2% in 2005-06.

• The cumulative FDI equity inflows in India during the period August 1991 to March 2007
stood at US$ 54,628 million.

• The top 10 investing countries with respect to FDI equity inflows are Mauritius, UK, USA,
Netherlands, Singapore, Japan, Germany, France, South Korea and Switzerland.

Inflation
While inflation had creeped to over 6% during 2006-07, it is now contained at below 5% levels
and going forward, the resolve is to condition the policy so as to check inflation in the range of
3.5-4%.

Composition of trade
The export growth in 2004-05 was broad with the manufacturing sector, chemical and related
products, leather goods, gems and jewellery and software services being major contributors.
This trend continued in the period April 2005 to March 2006. Import growth was also broad-
based with significant increases in imports of food and allied products, crude oil, capital
goods, raw materials such as iron and steel, non-ferrous metals and metal scrap.
For 2005 – 06 exports were at US$ 105 billion and imports at US$ 157 billion. India recorded
a 23.4% growth rate in exports in comparison to 2004-2005.

India’s major trading partners

The United States of America (USA) continues to be India’s major trading partner with
approximately a 10.6% share in the total trade. Other significant trading partners are:
Country 2005- 06
UAE 5.1
China 7.0
Germany 3.8
UK 3.6
Singapore 3.5

Agriculture
The total food grains production in 2006-07 is expected to be 209.2 million tonnes compared
with 208.6 million tonnes in 2005-2006. The growth is attributed due to near normal rainfall
across the country.

B. INDIA – AN ATTRACTIVE INVESTMENT LOCATION

There are several good reasons for investing in India:

• One of the largest economies in the world with a stable democratic environment
throughout 60 years of independence.

• Large market size with middle class population of 250-350 million, along with increasing
purchasing power reflected by remarkable increase in purchase of consumer durables in
recent years.

• Access to regional international markets through membership of regional integration

frameworks such as the South Asian Association for Regional Cooperation (SAARC).

• Foreign investment is welcome in almost all sectors barring those of strategic concern like
defence and atomic energy.
Page 4 of 86
 • Foreign investment policy is amongst the most liberal and attractive in emerging
economies. Constant policy based initiatives by the Government in specific sectors such
as telecom, ports, airports, etc.

• Indian economy is well suited to small and medium companies which are now finding it
difficult to operate in the saturated western markets.

• India has emerged as an across the board, low cost base, attractive enough to multi
nationals to relocate to. More than 100 Fortune-500 companies now have a presence in
India.

• Large and diversified infrastructure spread across the country.

• Emphasis on technology, innovation and knowledge base.

• Large manufacturing capability, spanning almost all areas of manufacturing activities.

• Developed banking system, commercial banking network of over 71,000 branches,

supported by a number of national and state level financial institutions.

• Vibrant capital market comprising 23 stock exchanges with more than 10,000 listed
companies.

• Introduction of futures trading in selective commodities on 3 National level Exchanges

and 21 regional level exchanges.

• Legal protection for intellectual property rights.

• Import regime conforming to World Trade Organisation commitments removal of

remaining quantitative restrictions on imports of goods into India barring certain items on
grounds of national security, defence and health.

• Increased role of private and foreign investment in the Indian economy.

• Rates of direct and indirect tax are amongst the most competitive.

• Special investment and tax incentive for export in certain sectors such as power,
electronics, software, business process outsourcing and food processing.

• Rupee is fully convertible on current account and is being progressively liberalised on

capital account.

• Availability of skilled manpower and professional managers.

• English is the preferred business language.

• Well developed insurance and financial services sector with established regulatory
authority.

• Well developed accountancy, legal, actuarial and consultancy professions.

• Well established legal system with an independent judiciary.

C. INDUSTRIAL LICENSING

Industrial licenses are regulated under the Industries (Development & Regulation) Act, 1951
(IDR Act). With progressive liberalization and deregulation of the economy the requirement of
industrial licensing have been substantially reduced. At present, industrial licensing for
manufacturing is required only for the following:

• Industries retained under compulsory licensing;

• Manufacture of items reserved for small scale industries (SSI) sector by non-SSI units;

• When the proposed location attracts locational restrictions.

Page 5 of 86
Industries Reserved for the Public Sector

The following industries are reserved for the Public sector:

• Atomic energy;

• The substances specified in the schedule to the notification of the Government of India in
the Department of Atomic Energy number S.O.212(E), dated March 15, 1995;

• Railway transport.

Industries Requiring Compulsory Licensing

The following industries require compulsory license under the IDR Act/appropriate authority:

• Distillation and brewing of alcoholic drinks;

• Cigars and cigarettes of tobacco and manufactured tobacco substitutes;

• Electronic Aerospace and defence equipments: all types;

• Industrial explosives, including detonating fuses, safety fuses, gun powder, nitrocellulose
and matches;

• Hazardous chemicals.

Small Scale Sector

An industrial undertaking is defined as a small scale unit if the capital investment in plant and
machinery does not exceed INR 50 million.

Small scale units can get registered with the Directorate of Industries/District Industries
Centre of the State Government. Such units can manufacture any item and are also free from
locational restrictions.

The Government has reserved the following items for the exclusive manufacture in the small
scale sector:

• Food and Allied Industries;

• Wood and Wood Products;

• Paper Products;

• Plastic Products;

• Injection Moulding Thermo-Plastic Products;

• Chemicals And Chemical Products;

• Natural Essential Oils;

• Organic Chemicals, Drugs and Drug Intermediates;

• Other Chemicals and Chemical Products;

• Glass and Ceramics;

• Mechanical Engineering Excluding Transport Equipment;

Page 6 of 86
• Electrical Machines, Appliances and Apparatus Including Electronics and Electrical
Appliances;

• Electronic Equipments And Components;

• Stationery Items.

Locational Restrictions

Industrial undertakings are free to select the location of their projects. Industrial license is
required if the proposed location in within 25 km of the Standard Urban Area limits of 23 cities
having population of 1 million and more, as per the 1991 census. These cities are: Greater
Mumbai, Kolkata, Delhi, Chennai, Hyderabad, Bangalore, Ahmedabad, Pune, Kanpur,
Nagpur, Lucknow, Surat, Jaipur, Kochi, Coimbatore, Vadodara, Indore, Patna, Madurai,
Bhopal, Vishakhapatnam, Varanasi and Ludhiana.

The locational restriction does not apply:

• If the unit were to be located in an area designated as an “Industrial area” before July 25,
1991;

• In the case of electronics, computer software and printing and any other industry, which
may be notified as a non polluting industry.

The location of industrial units is subject to applicable locational zoning and land use
regulations and environmental regulations.

Procedure for Obtaining Industrial License

Industrial license is granted by the Secretariat for Industrial Assistance (SIA) on the
recommendation of the Licensing Committee. Decisions are usually taken within four to six
weeks of filing the application.

Policy for Industries Exempt From Licensing

Industrial undertakings exempt from industrial license are only required to file an Industrial
Entrepreneur Memorandum (IEM) in the prescribed format.

Carry on Business (COB) License

Small scale units by virtue of their natural growth may exceed the investment limit prescribed
for small scale units. In such cases, these units need to obtain a Carry-on-business (COB)
license based on the best production in the preceding three years. No export obligation is
fixed on the capacity for which the COB license is granted. An application is required to be
made in the prescribed form and payment of requisite fee. However, on further expansion of
the capacity beyond the capacity included in the COB license, the unit would need to obtain
an Industrial license.

Environmental Clearances

Entrepreneurs are required to obtain statutory clearances relating to Pollution Control and
Environment, as may be necessary, for setting up an industrial project for 31 categories of
industries notified by the Ministry of Environment and Forests under the Environmental
Protection Act, 1986. This list includes petrochemical complexes, petroleum refineries,
cement, thermal power plants, bulk drugs, fertilizers, dyes, paper, etc.

However, if the investment in the project is less than INR 1 billion, such environmental
clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals,
asbestos and asbestos products, integrated paint complexes, mining projects, tourism
projects of certain parameters, tarred roads in the Himalayan areas, distilleries, dyes,
foundries and electroplating industries.

Setting up industries in certain locations are considered fragile (e.g. Aravalli Range, coastal
areas, Doon valley, Dahanu, etc.) and are guided by separate guidelines issued by the
Ministry.

Page 7 of 86
D. FOREIGN INVESTMENTS IN INDIA

The Central Government’s liberalization and economic reforms programme aims at rapid and
substantial growth and integration with the global economy in a harmonised manner.
Industrial policy reforms have reduced the industrial licensing requirements, removed
restrictions on investments and expansion, and facilitated easy access to foreign technology
and Foreign Direct Investment (FDI).

Prohibited Investments

No person resident outside India can make investment in a company or a partnership firm or
a proprietary concern or any entity, whether incorporated or not which is engaged or proposes
to engage in the following activities.

(i) Business of chit fund

(ii) Nidhi company

(iii) Trading in transferable development rights

(iv) Retail trading

(v) Atomic energy

(vi) Lottery business

(vii) Gambling and betting

(viii) Agriculture (excluding floriculture, horticulture, development of seeds, animal

husbandry, pisiculture and cultivation of vegetables, mushrooms etc. under controlled
conditions and services related to agro and allied sectors) or plantation activity (Other
than Tea plantations)

(ix) Real estate business or construction of farm houses (excluding development of

townships, construction of residential/commercial premises, roads or bridges)

(x) Partnerships/proprietorships in the Print media sectors

Permitted Investments

In sectors other than those prohibited above, FDI can be made either under the Automatic
route or with the specific prior approval of the Ministry of Finance, Foreign Investment
Promotion Board (FIPB). A person resident outside India (other than a citizen of Pakistan or
Bangladesh) or an entity incorporated outside India (other than an entity incorporated in
Pakistan or Bangladesh) can invest in India subject to the FDI policy.

Procedure under Automatic Route

FDI in sectors/activities to the extent permitted under the Automatic route (in terms of sector
specific guidelines) does not require any prior approval either by the Government or the
Reserve Bank. The investors are only required to notify the Regional office concerned of the
Reserve Bank within 30 days of receipt of inward remittances and file the required documents
with that office within 30 days of issue of shares to foreign investors.

Procedure under Approval Route

FDI in activities not covered under the automatic route requires prior Government approval.
Such proposals are considered by the FIPB.

Applications for all FDI cases, except Non-Resident Indian (NRI) investments, FDI in Export
Oriented Units (EOUs) and in retail trading (single branded product) should be submitted to
the FIPB Unit, Department of Economic Affairs (DEA), Ministry of Finance.

Applications for NRI investment, FDI in EOUs and in retail trading (single branded product)
cases should be submitted to the Secretariat for Industrial Assistance (SIA) in the Department
of Industrial Policy and Promotion (DIPP).
Page 8 of 86
FDI is permitted under the below mentioned categories:

i) Investment under Sector Specific Guidelines

Investments by a person resident outside India can be made under the automatic route if the
investment falls within the sector specific investment guidelines (Refer Appendix I). FIPB
permission is required for investments beyond the sector specific investment guidelines.

ii) Investments In Public/Private Limited Companies

• An Indian company may issue shares or convertible debentures to a person resident

outside India, within sectoral cap guidelines, subject to compliance with the provisions of
the Industrial Policy and Procedures as notified by the SIA in the Ministry of Commerce
and Industry, Government of India, from time to time;

Provided that

i) the activity of the issuer company does not require an industrial licence under the
provisions of the Industries (Development & Regulation) Act, 1951 or under the
locational policy notified by Government of India under the Industrial Policy of 1991
as amended from time to time.

ii) the shares or convertible debentures are not being issued by the Indian company with
a view to acquiring existing shares of any Indian company.

• Issue of non-convertible, optionally convertible or partially convertible debentures or

preference shares are considered as debt and accordingly, guidelines applicable to
External Commercial Borrowings (see section II, H, below) apply;

• If the person purchasing the optionally convertible or partially convertible shares proposes
to be a collaborator or proposes to acquire the entire shareholding of a new Indian
company, prior permission of Central Government is required if there is a previous
venture or tie-up in India through investment in shares or debentures or a technical
collaboration or a trade-mark agreement or investment by whatever name called in the
same field or allied field in which the Indian company issuing the shares is engaged;

• An Indian company may issue rights shares to its existing shareholders who are persons
resident outside India at a price, which is not lower than that of which the offer is made to
resident shareholders;

• An Indian company may issue Bonus shares to its existing non-resident shareholders and
such shares shall be on the same terms and conditions as regards repatriability as are
applicable to the original shares;

• An Indian company may issue preference shares at a coupon rate not exceeding 300
basis points over the prime lending rate of the State Bank of India as at the day of the
board of directors meeting held for issue of such shares.

iii) Investment in Trading Companies

A trading company incorporated in India may issue shares or convertible debentures to the
extent of 51% of its capital under the automatic route to non-residents subject to the condition
that remittance of dividend to the shareholders outside India is made only after the company
has secured registration as an export/trading/star trading/super trading house from the
Director General of Foreign Trade in the Ministry of Commerce.
100% FDI is permitted in the case of trading companies for the following activities:
Automatic route
• Exports;

• Cash and carry wholesale trading.

Page 9 of 86
 Approval route

• Bulk imports with export/expanded warehouse sales;

• Imports of other goods or services provided at least 75% is for the procurement and the
sale of goods and services among the companies of the same group, and not for third
party use or onward transfer/distribution/sales.
 
51% FDI is permitted in the case of trading for single brand product retailing. Single brand
product retailing would mean products which are branded during manufacturing and sold
under the same brand internationally.
The following kinds of trading are also permitted, subject to the provisions of prevalent Export-
Import (EXIM) Policy:
• Companies providing after-sales services (i.e. not trading per se);

• Domestic trading of products, permitted at the wholesale level for trading companies that
wish to market manufactured products on behalf of Joint Ventures (JVs) in which they
have equity participation in India;

• Trading of high-tech items/items requiring specialised after sales service;

• Trading of items for social sector;

• Trading of hightech, medical and diagnostic items;

• Trading of items sourced from the small scale sector in which, based on technology
provided and established quality specifications, a company can market those items under
its brand name;

• Domestic sourcing of products for export;

• Test marketing of items for which a company has manufacturing approval, provided the
test marketing facilities will be used for a period of two years, and investment in setting up
manufacturing facilities starts simultaneously with test marketing;

• FDI up to 100% for e-commerce activities is allowed. Such companies would engage only
in business to business (B2B) e-commerce and not in retail trading.
 
iv) Investments in Small Scale Industrial (SSI) Units

A company which is a SSI limit and which is not engaged in any activity under the prohibited
category, may issue shares or fully convertible debentures/preference shares to a foreign
investor, to the extent of 24% of its paid-up capital. Such a company may issue shares in
excess of 24% of its paid-up capital if:

• It has given up its small scale status;

• It is not engaged or does not propose to engage in manufacture of items reserved for
small scale sector; and

• It complies with the sector specific guidelines.

A SSI unit which is an Export Oriented Undertaking (EOU), or a unit in Free Trade Zone (FTZ)
or in an Export Processing Zone, or in a Software Technology Park (STP) may issue shares
or fully convertible debentures/preference shares, in excess of 24% of its paid up capital, in
compliance with the sector specific guidelines.

v) Investments for setting up Special Economic Zones (SEZ)/ Free Trade Warehousing
Zones (FTWZs)

100% FDI is permitted under automatic route for setting up SEZs and FTWZs subject to
Special Economic Zones Act, 2005 and the Foreign Trade Policy.

Page 10 of 86
vi) Investments In Export Oriented Units (EOU)/Free Trade Zone (FTZ)/Export Processing
Zone (EPZ)

Automatic approval for FDI is permitted in units in EOUs/FTZs/EPZs to the extent of the
sectoral caps referred to in Appendix I. Automatic approval is granted where:

• Activity proposed does not attract compulsory licensing or falls in the services sector
except Research and Development, software and IT enabled services;

• Location is in conformity with the prescribed parameters;

• Units undertake to achieve positive net foreign exchange earnings;

• An EOU may be shifted to a SEZ with due approval provided the EOU unit has achieved
pro-rata obligation under the EOU scheme.

If the unit is amenable to bonding by customs authorities, conversion of existing Domestic

Tariff Area (DTA) units into EOU is also permitted under the automatic route, if the necessary
parameters are satisfied.

Proposals not covered by the automatic route are considered on a case to case basis by the
Board of Approval, Department of Commerce.

vii) Investments in Asset Reconstruction Companies (ARCs)

Persons/entities resident outside India are permitted to invest upto 49% of the equity capital
of ARCs registered with the Reserve Bank.

Investments by FIIs are not permitted in ARCs.

However, general permission has been granted to FIIs registered with the Securities
Exchange Board of India (SEBI) to invest in Security Receipts (SRs) issued by ARCs
registered with the Reserve Bank. FIIs can invest upto 49% of each tranche of scheme of
SRs subject to the condition that investment of a single FII in each tranche of scheme of SRs
shall not exceed 10% of the issue.

viii) Investment in Infrastructure Companies in the Securities Market

Foreign investment is permitted in infrastructure companies in securities market in compliance

with SEBI Regulations, subject to the following conditions:

• Foreign investment upto 49% of the paid up capital with a separate cap for FDI of 26%
and FIIs cap of 23%;

• FDI permitted with specific prior approval of the FIPB;

• FIIs can invest only through purchases in the secondary market.

ix) Investments under a Scheme of Amalgamation/Merger

Where the scheme of merger, amalgamation or reconstruction by way of demerger has been
approved by a court in India, the transferee company or the new company as the case may
be may issue shares to the shareholders of the transferor company resident outside India,
subject to the following conditions:

• The percentage of shareholding of a non-resident in the transferee or new company does

not exceed the percentage specified in the approval granted by the Central Government
or Reserve Bank or the regulations;

• The transferor company or the transferee company or the new company is not engaged in
any activity prohibited under the FDI policy.

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x) Investments in Global Depository Receipt (GDRs)/American Depository Receipts(ADRs)

Indian companies which are eligible to issue shares to persons resident outside India, under the
FDI scheme, are allowed to raise equity capital in the international market by issuing rupee
denominated shares to a non-resident depository for the purpose of issuing of GDRs/ADRs with
the approval of the Ministry of Finance.

An Indian listed company, which is not eligible to raise funds from the Indian capital market
including a company restrained by the SEBI to do so, is not eligible to issue GDRs/ADRs.
Unlisted companies, which have not accessed the GDR/ADR route for raising capital, would
require prior or simultaneous listing in the domestic market. Unlisted companies which have
already issued GDRs/ADRs, have to list in the domestic market on making profit or within three
years of such issue of GDRs/ADRs, whichever is earlier.

There is no restriction on the number or monetary limit of GDRs/ADRs/FCCBs that can be

floated by an Indian company in a financial year. A company engaged in the manufacture of
items covered under the automatic route, the FDI of which after a proposed issue of
GDRs/ADRs/FCCBs is likely to exceed the sectoral caps, would need to obtain prior
government clearance through the FIPB before seeking final approval from the Ministry of
Finance.
There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on
investment in real estate and the stock markets.
GDRs/ADRs are valued as per guidelines and issued on basis of the ratio worked out by the
Indian company in consultation with the Lead Manager. Proceeds from the issue, have to be
kept abroad, pending utilisation. Such proceeds may be invested as per guidelines until such
time.
Under the two way fungibility scheme, an Indian stock broker registered with SEBI can
purchase shares of an Indian company from the market for conversion to GDRs/ADRs based
on instructions from overseas investors.
An Indian company can also sponsor an issue of GDR/ADR by offering its resident
shareholders a choice to submit their shares back to the company so that consequently,
GDRs/ADRs be issued abroad.

xi) Investments by Non-Resident Indians (NRIs)

The Indian government actively encourages investment in India by Indians and persons of
Indian origin resident abroad. NRIs are those who come under any of the following categories:
• Indian citizens who stay abroad for employment or for carrying on business or vocation or
any other purpose in circumstances indicating an indefinite period of stay outside of India;
• Government servants deputed abroad on assignments with foreign governments or
regional/international agencies like the World Bank, the International Bank for
Reconstruction and Development (IBRD), the International Monetary Fund (IMF) and the
World Health Organisation (WHO);
• Officials of State Government and public sector undertakings deputed abroad on
temporary assignments or posted to their branches or offices abroad.
NRIs become residents of India only when they return to India for employment or for carrying on
any business or vocation or for any other purpose indicating an indefinite stay in India, but not
when they come back on short visits for holidays or business.
Facilities available to NRIs are also made available to non-resident foreign citizens of Indian
origin.
A person is deemed to be a person of Indian origin (PIO) if s/he at any time held an Indian
passport, or if s/he, or either of his/her parents, or any of his/her grandparents was an Indian
and a permanent resident in India at any time. A spouse of a citizen of India or of a PIO is
deemed to be of Indian origin though of non-Indian origin.
Portfolio Investment Scheme (PIS) for NRI
Purchase/sale of shares and/or convertible debentures by an NRI on a stock exchange in India
on repatriation and/or non-repatriation basis is permissible subject to the following conditions:
• An NRI may purchase/sell shares and or convertible debentures of an Indian company
through a registered broker on a recognised stock exchange;

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• NRIs have to designate a branch of an authorised dealer for routing of all transactions;
• The paid-up value of shares/each series of convertible debentures of an Indian company,
purchased by each NRI on repatriation and on a non-repatriation basis, does not exceed
5% of the paid-up value of shares/each series of convertible debentures issued by the
company concerned;
• The aggregate value of shares of any company purchased by all NRIs does not exceed
10% of the paid-up capital of the company and in the case of purchase of convertible
debentures, the aggregate paid-up value of each series of debentures purchased by all
NRIs does not exceed 10% of the paid-up value of each series of convertible debentures.
However, the aggregate ceiling of 10% may be raised to 24% if the shareholders in a
general meeting of the Indian company concerned passes a special resolution to that
effect;
• The transaction shall be on delivery basis;
• Payment for purchase is made by inward remittance in foreign exchange through normal
banking channels or out of funds held in NRE/FCNR accounts maintained in India if the
shares debentures are purchased on repatriation basis and by inward remittance or out of
funds held in Non-Resident (External) (NRE)/ Foreign Currency (Non resident) (FCNR)/
Non-resident (ordinary) (NRO)/ Non Resident (Special) Rupee (NRSR)/ Non-Resident
(Non repartriable) (NRNR) accounts maintained in India where the shares debentures are
purchased on non-repatriation basis.
Shares purchased by NRIs under the PIS cannot be transferred by way of sale under a private
arrangement or by way of gift to a person resident in India or outside India, without prior
approval of the Reserve Bank.

NRIs are allowed to invest in Exchange Trade Derivative contracts approved by SEBI out of
rupee funds, on a non repatriation basis, subject to prescribed limits.

Purchase and sale of shares/convertible debentures by NRI on non-repatriation basis

Purchase of shares and debentures of Indian companies is not permissible if the company is
engaged in the following business:
• Chit fund or a nidhi Company;
• Agricultural/plantation activities;
• Real estate business (does not include development of township, construction of
residential/commercial premises, roads, bridges, etc);
• Construction of farm houses;
• Dealing in transfer of development rights.

NRIs can make investment on non-repatriation basis in shares or debentures of an Indian

company whether by public issue, private placement or rights issue, without any limit subject to
the restrictions mentioned above.

The NRI to whom the shares are being transferred should obtain prior permission of the Central
Government to acquire the shares if s/he has a previous venture or tie-up in India through
investment in shares, debentures, technical collaboration, trademark agreement or investment
by whatever name called in the same or allied field in which the Indian Company whose shares
are being transferred, is engaged. This restriction will, however, not apply to transfer of shares
of an Indian company engaged in the information technology sector or transfers to international
financial institutions such as the Asian Development Bank, International Finance Corporation,
Commonwealth Development Corporation and DEG.

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The amount of consideration for the purchase of shares or convertible debentures shall be paid
by way of inward remittance through normal banking channels from abroad or out of funds held
in NRE/FCNR/NRO/NRNR/NRSR account maintained with an authorised dealer.

Purchase by NRI of other securities on repatriation/non-repatriation basis:

An NRI may, without limit, purchase on repatriation basis:

• Dated government securities (other than bearer securities) or treasury bills or units of
domestic mutual funds;

• Bonds issued by a public sector undertaking in India;

• Shares in public sector enterprises being disinvested by the government, provided the
purchase is in accordance with the terms and conditions stipulated in the notice inviting
bids.

An NRI may, without limit, purchase on non-repatriation basis:

• Dated government securities, treasury bills;

• Units of domestic mutual funds, units of money market mutual funds in India.

Payment to purchase shares on non-repatriation basis should be either by inward remittance

through normal banking channels or out of funds held in his NRE/FCNR/NRO account.

Investment in non-corporate business by NRIs:

NRIs/PIOs are permitted to invest in a firm/ proprietorship concerns subject to the following
conditions:

• Amount invested is received either by inward remittance through normal banking

channels or out of the funds in the NRE/FCNR/NRO account maintained with an
authorised dealer/authorised bank in accordance with relevant regulations;

• The firm or the proprietary concern is not engaged in any agricultural/plantation activity or
real estate business i.e. dealing in land and immovable property with a view to earning
profit or income therefrom, or print media sector;

• The amount invested would not be eligible for repatriation outside India;

• NRIs/PIOs are required to obtain permission of the Reserve Bank for investment in a
firm/Sole Proprietorship with repatriation benefits.

xii) Investments by Foreign Institutional Investors (FIIs)

An FII is defined as an institution established or incorporated outside India for making

investments in Indian securities and also includes a sub-account of an FII.
The FIIs who have obtained registration from SEBI and Reserve Bank are permitted to invest
on full repatriation basis under the Portfolio Investment Scheme in the Indian Primary and
Secondary Stock Markets (including OTCEI – the Over the Counter Exchange of India) subject
to the following limits:
• A single FII or an approved sub-account of an FII cannot hold more than 10% of the
issued capital of any company, or 10% of the paid-up value of each series of convertible
debentures;
• The total holdings of all FIIs in any company will be subject to a ceiling of 24% of its total
issued capital of the company or paid-up value of each series of convertible debentures.
The limit of 24% may be increased up to the sectoral cap/statutory ceiling, as applicable,
by the Indian company concerned, by passing a resolution of its board of directors
followed by the passing of a special resolution to that effect by the shareholders of the
company in a general meeting.
An FII is permitted to purchase shares or convertible debentures of an Indian company through
private placement/arrangement subject to the limits specified above.
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 FIIs may invest through the equity or debt route. Under the equity route FIIs can make either
100% investment in the equity related instruments or up to 30% in the debt instruments and
70% in equity instruments. An FII may form a 100% debt fund, which has to be registered with
SEBI. Investment in debt securities are subject to limits stipulated by SEBI, if any.

FIIs can also invest in exchange traded derivative contracts traded on a recognised stock
exchange, tender their securities directly in response to an open offer made in terms of the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997, and lend securities
through an approved intermediary in accordance with the stock lending scheme of SEBI. FIIs
are also permitted to trade in all exchange traded derivative products within specified trading
position limits.

The consideration for the purchase must be remitted by inward remittance from abroad or
through normal banking channels or out of funds held in an account maintained in accordance
with the regulations.

FIIs can also invest in the following:

• Dated government securities;

• Treasury bills;

• Listed non convertible debentures/bonds issued by domestic companies;

• Units of domestic mutual funds;

• Investment in perpetual Debt Instruments and Debt Capital Instruments issued by banks in
India.

The above can be acquired directly from the issuer of such securities or through a recognised
stock exchange, subject to notified limits.

xiii) Investments by Venture Capital Funds (VCF)

Foreign venture capital investor (FVCI)

A FVCI registered with SEBI, may apply to the Reserve Bank for permission to invest in an Indian
Venture Capital Undertaking (IVCU) or in an Indian VCF (IVCF) or in a scheme floated by such
IVCF, subject to the condition that the VCF should also be registered with SEBI.
The registered FVCI may purchase equity/equity-linked instruments/debt instruments, debentures
of an IVCU or of a VCF through initial public offer or private placement or in units of
schemes/funds set up by a VCF.
Venture capital fund and venture capital company (VCC)

An off-shore VCC may contribute up to 100% of the capital of a domestic VCF and may also set
up a domestic asset management company to manage the fund.
VCFs and VCCs are permitted to invest only in unlisted companies and their investment shall be
limited to 40% of the paid-up capital of the domestic unlisted companies.
Investment in a single company by VCFs and VCCs shall not exceed 5% of the paid-up capital of
VCFs and VCCs.
xiv) Investments in Immoveable Property In India

• Acquisition of Immovable Property for carrying on a permitted activity:

A person resident outside India who has a branch, office or other place of business,
(excluding a liaison office) in India for carrying on his business activity, with requisite
approvals wherever necessary, is eligible to acquire immovable property in India which is
necessary for or incidental to carrying on such activity provided that applicable laws are
duly complied with. The entity/concerned person is required to file a declaration with RBI
within 90 days from the date of such acquisition. The non-resident is eligible to transfer by
way of mortgage the said immovable property to an authorized dealer bank as a security for
any borrowing;

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• Citizens of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan
shall not acquire or transfer immovable property in India, other than lease, not exceeding
five years without prior permission of the Reserve Bank;

• Foreign nationals of non-Indian origin resident outside India are not permitted to acquire
any immovable property in India unless such property is acquired by way of inheritance
from a person who was resident in India;

• Foreign nationals of non Indian origin who have acquired immovable property in India with
the specific approval of the Reserve Bank cannot transfer such property without prior
permission of the Reserve Bank;

• Agricultural Land /Plantation/Farmhouse owned or inherited by NRIs and PIOs:

o NRIs and PIOs cannot purchase agricultural land, plantation or a farmhouse.

o NRIs and PIOs may transfer agricultural land/plantation property/farmhouse in India

by way of sale or gift to Indian citizens permanently residing in India. At present
repatriation of sale proceeds is not permissible.

• Immovable property (other than Agricultural land plantation or farmhouse):

o an NRI can acquire by way of purchase, gift or inheritance, immovable property and
transfer immovable property to an NRI/PIO or a person resident in India.

o a PIO can acquire by way of purchase, gift or inheritance and transfer immovable
property by way of sale to a person resident in India or by way of gift to an NRI/PIO or
a person resident in India.

• Repatriation of sale proceeds;

In the event of sale of immovable property in India by a NRI/PIO, the authorized dealer will
allow repatriation of sale proceeds outside India provided:

o the immovable property was acquired by the seller in accordance with the provisions
of the foreign exchange law in force at the time of acquisition by him or the provisions
of Regulations framed under the Foreign Exchange Management Act (FEMA).

o the amount to be repatriated does not exceed (a) the amount paid for acquisition of
the immovable property in foreign exchange received through normal banking
channels or out of funds held in the FCNR Account or (b) the foreign currency
equivalent as on the date of payment, of the amount paid, where such payment was
made from the funds held in the NRE account for acquisition of the property.

o in the case of residential property, the repatriation of sale proceeds is restricted to not
more than two such properties.

o in the case of sale of immovable property purchased out of Rupee funds, authorised
dealers may allow the facility of repatriation of funds out of balances held by
NRIs/PIO in their NRO accounts up to US$1 million per calendar year, subject to
furnishing an undertaking by the remitter and a certificate from a Chartered
Accountant.

xv) Investments under Employee Stock Option Plan (ESOP) Scheme

A listed Indian company may issue shares under the ESOP Scheme to its non-resident
employees or non-resident employees of its joint venture or wholly owned subsidiary abroad,
either directly or through a trust, subject to the following conditions:
• The scheme has been drawn in terms of regulations issued by the SEBI; and

• Face value of the shares to be allotted under the scheme to the non-resident employees
does not exceed 5% of the paid up capital of the issuing company;

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 • If the company is not listed, the provisions of the Indian Companies Act, will have to be
followed. The ESOPs can be issued to non resident employees, other than citizens of
Pakistan or Bangladesh. The issuer company is required to report details of such issues to
the concerned Regional office of the Reserve Bank, within 30 days from the date of issue of
shares under the ESOP.

E. FOREIGN TECHNOLOGY AGREEMENTS

Automatic permission is granted for payments under foreign technology collaboration by

Indian companies where

• In case of foreign technical collaboration wherein technology has been transferred:

o lump sum payment for technical know-how fees is upto US $2 million; and

o royalty payment does not exceed 5% for domestic sales and 8% for exports, without
any restriction on the duration of royalty payment.

• In case of transfer of rights to use trademarks and brand:

o royalty upto 2% of export sales and 1% for local sales for use of trademarks and
brand name even if there is no transfer of technology.

o In case of technology transfer payment of royalty subsumes the payment of royalty

for use of trademark and brand name of the foreign collaborator.

Royalty payment in the following cases requires prior government approval, through the
Project Approval Board (PAB) where only technology transfer is proposed and through the
FIPB, where both financial and technical collaboration are proposed.

F. DIRECT INVESTMENTS OUTSIDE INDIA

Investments outside India are permitted under the below mentioned categories except direct
investment in a foreign entity engaged in real estate business or banking business. Direct
investments in Pakistan are prohibited.

i) Investment in a Joint Venture (JV) or Wholly Owned Subsidiary (WoS)

Investment can be made by a Company or a body created under an Act of Parliament or a

Partnership firm in an overseas JV/WOS engaged in a bonafide business activity upto 400%
of the net worth of the Indian entity.

This ceiling will not be applicable where the investment is made out of the funds held in the
Exchange Earner’s Foreign Exchange (EEFC) account of the Indian entity or out of the funds
raised through an issue of GDRs/ADRs. Further, the ceiling will include the contribution to the
capital of the JV/WoS, loan granted to the JV/WoS and 100% of the specific guarantees (not
open ended guarantees) issued to or on behalf of the JV/WoS.

Where the investment is a partial or full acquisition in an existing foreign company, valuation
of the shares of the foreign company shall be as under:

• Where investment is by way of remittance and is more than US$ 5 million, by a Merchant
banker registered with SEBI or an Investment banker registered with the appropriate
authority in the host country;

• In all other cases, by a Chartered Accountant or a Certified Public Accountant.

In case of investment by way of swap of shares, the valuation of shares will have to be made
by a Merchant banker registered with SEBI or an Investment banker outside India, duly
registered with the appropriate authority, subject to the prior approval of the FIPB.

An Indian party is also permitted to acquire shares of a foreign company engaged in a

bonafide business activity, subject to the scheme for issue of FCCBs and Ordinary Shares
(through Depository Receipt Mechanism), 1993 and guidelines thereunder, and certain other
conditions.

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ii) Investment in Equity/Bonds of an Overseas Listed Company

A listed Indian Company may invest upto 50% of its net worth in shares and rated bonds/fixed
income securities rated not below investment grade by an accredited agency, issued by listed
overseas companies.

Resident individuals may invest in:

• equity shares;

• rated bonds/fixed income securities issued of overseas companies,

at limits as specified in the Liberalised Remittance scheme, which is currently $ 200,000 in a

calendar year.

iii) Investment by Mutual Funds

Mutual Funds registered with SEBI may invest upto a ceiling of US$ 5 billion in

• GDRs/ ADRs of Indian and foreign companies;

• rated debt and money market instruments;

• equity of overseas listed companies;

• government securities;

• derivatives traded on recognized stock exchanges;

• Exchange Traded Funds (ETFs) and overseas mutual funds that make nominal
investments in unlisted overseas securities.

iv) Investment by Domestic Venture Capital Funds (DVCF)

DVCFs registred with SEBI may invest equity and equity linked instruments of off-shore
venture capital underatakings subject to specified limits.

v) Investment in Financial Services Sector

• Investment can be made by a company or a body created under an Act of parliament or a

partnership firm in any entity outside India engaged in financial services activities
provided that the Indian entity:

o has earned net profit during the preceding three financial years from the financial
services activities.

o is registered with the regulatory authority in India for conducting the financial services
activities.

o has obtained approval from the concerned regulatory authorities both in India and
abroad for venturing into such financial sector activity.

o has fulfilled the prudential norms relating to capital adequacy as prescribed by the
concerned regulatory authority in India.

• Any investment by a step down subsidiary of a JV/WoS in the financial services sector
shall be made only after complying with the conditions stipulated above.

vi) Prior approval of the Reserve Bank is required in all other cases of direct investment
abroad.

vii) Overseas Investments by Proprietorship Concerns

Proprietorship concerns and unregistered partnership firms are allowed to set up a JV/WoS
outside India with prior approval of the Reserve Bank, subject to satisfying certain eligibility
criteria.
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 viii) Funding of Investments

Investments may be funded out of one or more of the following sources.

• Drawal of foreign exchange from an authorized dealer (bank);

• Capitalization of exports;

• Swap of shares;

• Proceeds of ECBs/FCCBs;

• Exchange of GDRs/ADRs;

• Balance in EEFC account;

• Proceeds of GDR/ADR.

ix) Transfer/Pledge of Shares

Transfer of shares in JV/WOS are subject to guidelines specified by the Reserve Bank.

An Indian party may transfer, by way of pledge, shares held in a JV or WoS outside India as
security for availing of fund based or non-fund based facilities for itself or for the JV or WoS,
from an authorised dealer of a public financial institution in India.

x) Hedging of Overseas Direct Investment

Indian entities having overseas direct investments are permitted to hedge the exchange risk
arising out of such investments, subject to certain conditions.

G. BUSINESS FORMS

Foreign investors may establish a business presence in India through:

• JV companies in collaboration with an Indian partner and/or by making a public offering;

• Incorporating a wholly owned company with 100% foreign equity;

• Liaison office for carrying on liaison work for normal business activities of overseas parent
companies;

• Project office for execution of approved project/contracts.

Foreign companies engaged in manufacturing and trading activities can open branch offices
to:

• Represent the foreign company in India in various matters such as acting as

buying/selling agents;

• Undertake export and import trading activities;

• Render professional or consultancy services;

• Carrying out research work, in which the parent company is engaged;

• Render services in information technology and development of software in India;

• Render technical support to the products supplied by the parent/group companies;

• Promote possible technical and financial collaborations between Indian and foreign
companies.

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Foreign shipping companies, airlines and banks are permitted to open branches in India on a
reciprocal basis.

Company-appropriate entity

The most appropriate form of business enterprise for a foreign investor is a limited liability
company.

Sole proprietary and partnership are the other business forms prevalent in India but due to
unlimited liability they are not normally found to be suitable by overseas investors.

Under the present policy of the government, all companies must be incorporated in India
under the Companies Act to carry on any business/service activities in the country.

Indian companies are classified into two categories – ‘public’ and ‘private’ companies. A
private company is one which:

• Has a minimum paid-up capital of INR 100,000;

• Restricts the right to transfer its shares;

• Limits the number of its members to 50;

• Prohibits invitation or acceptance of deposits from persons other than its members,
directors or their relatives and prohibiting public subscription to its share capital.

A company is a public company provided it has a minimum paid-up capital of INR 500,000 or
is a private company which is a subsidiary of a public company and is a company other than a
private company as defined above.

The Companies Act has wider regulations for public companies in respect of management,
borrowings and dealings with members and creditors due to greater public participation.

Company formation

The formation of a company requires:

• Selection of a name (which has to be approved by the Registrar of Companies);

• Determination of the state in which the registered office will be situated;

• Drafting of a Memorandum of Association which mention the objects for which the
company is formed and its capital, and the Articles of Association which set out the
regulations for the company’s internal management’;

• Preparation of documents for submission to the Registrar of Companies for registration

along with the requisite fees.

The Registrar’s office verifies the documents submitted and ascertains that all the formalities
necessary for the formation of the company have been complied with. The Registrar then
certifies under his hand that the company is formed. The company thereon emerges as a
legal entity with limited liability. The entire process of registering a company is now done
electronically.

Memorandum and Articles of Association

The Memorandum of Association of a company defines the objects for which the company
exists. The company cannot operate beyond the scope of business activities defined in the
Memorandum. The Memorandum of Association of a public company is signed by a minimum
of seven promoters and by a minimum of two in the case of private company.

The Articles of Association are the internal regulations for the conduct of the company’s
affairs. The articles cannot go beyond the scope of the memorandum.

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 Issue of Shares

The issue of shares requires compliance with various provision of the Companies Act. A
prospectus is a document which offers to the public the shares of a company, requires
detailed disclosure with regard to the company, its directors, its past working and future
projections, contracts which it has entered into, and other details. A company can issue
shares to the public only after a copy of the prospectus has been filed with the Registrar. At
least 90% subscription of the public issue must be collected before allotment.

An Indian company may issue ‘sweat equity shares’ i.e. shares issued by a company to
employees or directors at a discount or for consideration other than cash for providing know-
how or making available rights in the nature of intellectual property rights or value additions, if
approved by its shareholders, subject to certain conditions. Companies can also issue shares
under a Scheme complying with SEBI guidelines on ESOP Schemes.

An Indian company may buy back its own shares if authorised by its Articles of Association
and approved by its shareholders, subject to certain conditions.

Directors and management

The Companies Act, which governs the functioning of companies, requires a company to
have at least two directors, if a private company, or three directors in the case of public
company.

Non-resident directors, other than a non-resident Managing Director, can serve on the Board
of an Indian company. Under the Companies Act, one-third of the directors need not retire by
rotation and therefore, it is not unusual for the foreign investor to have the right to nominate
directors who need not retire by rotation.

Provisions also exist in the Companies Act for the appointment of alternate directors to act in
place of the original director. It is common practice for the foreign investor to have Indian legal
and accounting professionals to act as alternate directors as their nominees to protect the
foreign investor’s interest in Indian companies

H. FINANCE

Currency and banking

The Indian rupee is the country’s currency.

The banking system is controlled and monitored by the Reserve Bank. The functions of the
Reserve Bank are divided into two distinct areas:

• issue department which looks after the issuance of currency; and

• banking department which regulates and supervises Indian banking.

Commercial banks, co-operative banks and regional rural banks broadly make up the banking
system in India. Public sector banks have more branches in rural and semi-urban centres
compared with private banks. Foreign banks, on the other hand, have all of their branches in
urban or metropolitan centres. At present, the Reserve Bank permits foreign banks to operate
as branches of their overseas parents. The public sector banks comprise the State Bank of
India, its seven associates and 19 other banks owned by the government (nationalised
banks). These banks form the dominant group in India and account for approximately 75% of
total assets of the banking industry.

The State Bank of India, the largest commercial bank in India, has Prime Lending rates (PLR)
for credit and term facilities as follows:

Nature of facility Rate of interest % (PLR)

Overdraft/cash credit 11.00
Loan against immovable property 11.00
Term loans in excess of INR 2.50 million 12.75

Note: The above are the PLRs for the State Bank of India – other banks have their own
PLRs in terms of the guidelines laid down by the Reserve Bank.
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Industrial units are financed primarily through the following sources:

• Internal sources i.e. capital and reserves or internal accruals;

• External sources i.e. raising capital by way of debentures or bonds or term borrowings;

• Borrowings for working capital;

• Government subsidies.

Capital issue

Capital issues by companies are supervised by the SEBI, which is empowered to regulate the
financial structure of joint stock companies and acts as a safeguard for the investing public.
Minimum limits for promoter’s contribution are laid down for all issues of capital to the public.

Stock market and listing requirements

India has a vibrant capital market comprising 23 stock exchanges with more than 10,000
listed companies. SEBI monitors the stock market in India.

OTCEI operates as an alternative to the stock market. OTCEI allows listing of companies with
minimum paid up capital of INR 3 million and minimum offer to the public should be 25% of
the issued capital or INR 2 million worth of shares in face value.

The National Stock Exchange has been set up in Mumbai to provide online nationwide trading
facilities for shares and for the wholesale debt and capital markets.

Term borrowings

India has a well-organised capital market with several financial agencies, which provide term
borrowings, guarantees and underwriting facilities to the industrial sector. The principal
agencies for term borrowings are the All India Financial Institutions, the Commercial Banks
and State Financial Corporations.

Venture capital (VC)

VC is money provided by professionals who invest alongside management in young, rapidly

growing companies that have the potential to develop into significant economic contributors.
VC is an important source of equity for start-up companies.

Venture capitalists generally:

• Finance new and rapidly growing companies;

• Purchase equity securities;

• Assist in the development of new products or services;

• Add value to the company through active participation;

• Take higher risks with the expectation of higher rewards;

• Have a long-term orientation;

These funds are regulated by the SEBI Regulations. According to the SEBI Regulations, a VC
fund means a fund established in the form of a company or trust, which raises monies through
loans, donations, the issue of securities or units as the case may be, and makes or proposes
to make investments in accordance with these regulations.

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Credit rating

Credit rating is a requirement for debenture issue, fixed deposits and commercial paper
programmes. Credit rating is presently done by six agencies - the Credit Rating Information
Services of India Limited, the Investment Information and Credit Rating Agency of India,
Credit Analysis and Research Ltd, Duff & Phelps Credit Rating India Private Ltd., ONICRA
Credit Rating Agency of India Ltd. and Fitch Ratings India Private Limited.

Mutual funds

Unit Trust of India, India’s first mutual fund, was established in 1964. Banks, financial
institutions, insurance companies, and companies in the private sector including foreign
companies have established mutual funds in India. The aggregate assets under management
by mutual funds as on March 2007 are INR 32,638.8 million.

The Indian mutual fund industry is at a stage of growth at this point in time and it is only in the
last few years that the typical Indian investor has discovered the mutual fund vehicle as an
option for earning steady income on his savings. The total assets under management by the
entire mutual fund industry constitutes around 11% of the deposits held by the banking
industry.

The entry of the private sector into the Mutual fund industry started with the opening up of the
Indian economy in the early 1990’s. A number of foreign mutual funds have set up operations
in India.

While there has been almost 100% growth in the last five years, the potential for development
is enormous, there being just over 30 mutual funds in India as compared to over 800 in the
USA. However, with the growing savings of the middle and lower middle and lower middle
strata of the Indian society, the industry is poised for growth.

External Commercial Borrowing (ECB)

ECB refers to commercial loans in the form of bank loans, buyer’s credit, supplier’s credit,
securitised instruments availed from non-resident lenders with a minimum average maturity of
three years. The policy for ECBs is also applicable to raising funds through issue of FCCBs.
FCCBs are to be issued in accordance with the Issue of Foreign Currency Convertible Bonds
and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, and
subscribed to by non-residents.

ECB can be accessed under the following routes:

• Automatic route;

• Approval route.

Automatic route

• Eligible borrowers

o Corporates registered under the Companies Act, except financial intermediaries

(such as banks, financial institutions, housing finance companies and non banking
financial companies). Individuals, trusts and non profit organisations cannot raise
ECBs.

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 o Non government organisations (NGOs) engaged in micro finance activities.

o Units in SEZ.

• Maximum amount of ECB that can be raised by a corporate in a financial year is US$ 500
million, or its equivalent subject to:

o ECB with minimum average maturity of three years for an amount up to US$ 20
million, or its equivalent.

o ECB with minimum average maturity of five years for an amount above US$ 20
million and up to US$ 500 million, or its equivalent.

• NGOs engaged in micro finance activities can raise ECB up to US$ 5 million or its
equivalent, during a financial year;

• ECB up to US$ 20 million can have call/put option provided the minimum average
maturity of three years is complied before exercising call/put option.

Approval Route

• Eligible borrowers:

o Financial institutions dealing exclusively with infrastructure or export finance.

o Specified banks and financial institutions.

o NBFCs raising ECBs with a minimum average maturity of five years.

o Issue of FCCBs by Housing Finance Companies satisfying certain criteria.

o Special Purpose Vehicles or any other entity notified by the Reserve Bank, set up to
finance infrastructure companies/projects.

o Cases falling outside the purview of the Automatic route.

• Corporates can avail of ECB of an additional amount of US$ 250 million with average
maturity of 10 years under the Approval route, over and above the limit of US$ 500 million
under the Automatic route.

All-in cost ceilings

All-in cost includes rate of interest, other fees and expenses in foreign currency except
commitment fee, pre-payment fee, and fees payable in Indian rupees.

Minimum average maturity period All-in cost ceilings over six month
LIBOR
Three years and up to five years 150 basis points
More than five years 250 basis points

Recognised Lenders

Borrowers can raise ECB from internationally recognised sources such as:

• International banks;

• International capital markets;

• Multilateral financial institutions;

• Export credit agencies;

• Suppliers’ of equipments;

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• Foreign collaborators;

• Foreign equity holders.

End use restrictions

The Reserve Bank has set out end use restrictions of the funds raised under the ECB route
as follows:

• Import of capital goods; new projects, modernisation/expansion of existing units;

• Power;

• Telecommunication;

• Railways;

• Roads and bridges;

• Sea ports and airports;

• Industrial parks; and

• Urban infrastructure;

• Investment in overseas JVs/WoS subject to guidelines;

• Acquisition of disinvestment of shares by the Government in Public Sector Undertakings

(PSUs);

• By NGOs for micro finance activities including lending to self help groups.

ECB proceeds cannot be used for:

• On lending;

• Investment in the capital market;

• Acquisition of a company;

• Real estate;

• Working capital;

• General corporate purposes;

• Repayment of existing Rupee loans.

ECB of more than US$ 20 million is permitted only to meet the foreign currency expenditure
for permissible end use and the funds are required to be parked overseas and not remitted to
India. ECB upto US$ 20 million for permissible end use Rupee expenditure would require
approval from the Reserve Bank under the Approval route.

Prepayment

Prepayment of ECB up to US$ 500 million may be allowed by authorised dealer without prior
approval from the Reserve Bank. However, the stipulated minimum average maturity period,
as applicable for the loan, must be complied with. Prepayments in excess of US$ 500 million
require prior Reserve Bank approval.

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I. SPECIAL INVESTMENT PROGRAMMES

Special schemes are available for setting up export oriented units for the electronics/IT sector.
Various incentives and concessions are available under these schemes. The schemes are:
• Export oriented units (EOU)/ Electronics hardware technology parks (EHTP)/ Software
technology parks (STP) scheme;

• Special economic zones (SEZ) scheme.

The government of India introduced the concept of SEZ in 2001-02 with a view to provide an
internationally competitive hassle free environment for exports. Eight Export Processing
Zones (EPZs) have been upgraded into SEZ. SEZ are designated as a duty-free enclave and
treated as foreign territory for trade operations and duties and tariffs purposes.

Salient features of the above schemes are given in Appendix II.

Establishment of branch offices/units in SEZ

The Reserve Bank has given general permission to foreign companies to establish branch
offices/units in SEZ for undertaking manufacturing and services activities subject to the
following conditions:
• Such units are functioning in those sectors where 100% FDI is permitted;

• Such units comply with Part XI of the Indian Companies Act;

• Such units function on a stand alone basis.

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 SECTION - III
BUSINESS LAWS AND LEGISLATION

A. RESERVE BANK OF INDIA

The Reserve Bank of India (Reserve Bank) was established on April 1, 1935 in accordance
with the provisions of the Reserve Bank of India Act 1934. The objectives are to regulate the
issue of bank notes, regulate the banking industry keeping reserves with a view to securing
monetary stability in India, and to operate the currency and credit system of the country to its
advantage.

The Reserve Bank has a multifaceted role and acts in the following various capacities:

• Monetary Authority: to formulate, implement and monitor the monetary policy in order to
maintain price stability and ensure adequate flow of credit to productive sectors;

• Regulator and supervisor of the financial system: to prescribe the broad parameters of
banking operations within which the country’s banking and financial system function in
order to maintain public confidence in the system, protect depositors’ interests and
provide cost-effective banking services to the public;

• Manager of Exchange Control: to manage the Foreign Exchange Management Act 1999,
in order to facilitate external trade and payment and promote orderly development and
maintenance of the foreign exchange market in India;

• Issuer of currency: to issue and exchange or destroy currency and coins not fit for
circulation in order to give the public the adequate quantity of supplies of currency notes
and coins and in good quality;

• Banker to the Government: performs a merchant banking function for the central and the
state governments and also acts as their banker;

• Banker to banks: maintains banking accounts of all scheduled banks.

B. SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (SEBI) regulates and promotes an orderly
development of the capital market in India.

SEBI has three primary functions:

• To deal with all matters relating to the development and regulation of the securities
market and investor protection, and advise government on these matters;

• To prepare comprehensive legislation for the regulation and development of the securities
market;

• To carry out such functions as may be delegated by the Central Government for the
development and regulation of the securities market.

Mutual funds, merchant bankers, FIIs, portfolio managers, stockbrokers, sub-brokers, share
transfer agents, bankers and registrars to public issue, underwriters, investment advisors and
any other intermediaries who may be associated with the securities market in any manner
have been brought under the purview of the regulatory powers of SEBI.

Some of the important rules, regulations and guidelines issued by SEBI are:

• SEBI (Insider Trading) Regulations 1992

• SEBI (Merchant Bankers) Rules/Regulations 1992

• SEBI (Mutual Funds) Regulations 1996

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• SEBI (Portfolio Managers) Rules/Regulations 1993

• SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets)
Regulations 2003

• SEBI (Depositories and Participants) Regulations 1996

• SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 1997

• SEBI (Buy Back of Securities) Regulations 1998

• SEBI (Stock Brokers and Sub-brokers) Rules/Regulations 1992

• SEBI (Underwriters) Rules/Regulations 1993

• SEBI (Debentures Trustees) Rules/Regulations 1993

• SEBI (Bankers to an Issue) Rules/Regulation 1994

• SEBI (Registrars to an Issue and Share Transfer Agents) Rules/Regulations 1993

• SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines 1999

• SEBI (Credit Rating Agencies) Regulations 1999

• SEBI (Collective Investment Schemes) Regulations 1999

• Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities)
Rules 1999

• SEBI (Custodian of Securities) Regulations 1996

• SEBI (Venture Capital Funds) Regulations 1996

• SEBI (Foreign Institutional Investors) Regulations 2006

• SEBI (Procedure for Board Meetings) 2001

• SEBI (Foreign Venture Capital Investors) Regulations 2000

• SEBI (Issue of Sweat Equity) Regulations 2000

• SEBI (Procedure for Holding Enquiry by Enquiry officer and Imposing penalty)
Regulations 2002

• SEBI ( Ombudsman ) Regulations 2003

• SEBI (Central Database of Market Participants) Regulations 2003

• SEBI (Self Regulatory Organizations) Regulations 2004

• SEBI (Criteria for Fit and Proper Person) Regulations 2004

• SEBI (Interest Liability Regularisation) Scheme 2004

• Guidelines for Opening of Trading Terminals Abroad

• SEBI (Delisting of Securities) Guidelines 2003

• SEBI (Informal Guidance) Scheme 2003

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• Guidelines for Anti-money laundering measures.

• SEBI (Disclosure and Investor Protection) Guidelines 2000

• SEBI (Regulatory Fee on Stock Exchanges) Regulations 2006

Among the key SEBI Regulations are the following:

SEBI Insider Trading Regulations

The SEBI (Prohibition of Insider Trading) Regulations, 1992 incorporate several disclosure
and other reporting requirements, the onus of which is cast on the company, its Directors,
employees and also on intermediaries such as investment bankers, lawyers, auditors, brokers
etc. These Regulations seek to curb insider trading, price rigging, unfair practices, etc. by
those possessions of certain vital and confidential information.

All listed companies must frame a Code of Internal Procedures and Conduct on the lines of
the specified Model Code to Prevent Insider Trading.

Stock brokers, sub-brokers, transfer agents, investment bankers, registrars, bankers to a

public issue, investment advisers, portfolio managers, asset management companies,
Trustees of mutual funds, professional firms such as auditors, accountancy firms, law firms,
analysts, consultants, etc., assisting or advising listed companies are covered by this
requirement.

SEBI Takeover Regulations

The Takeover Regulations apply when there is an acquisition of equity shares/voting

power/control of a listed company in excess of the specified limits. Based on the limits, the
Acquirer has to comply with reporting requirements or acquire shares from the public. The
person acquiring the shares/voting power/control is an Acquirer and the company whose
shares are being acquired is the Target Company.

Disclosure on Acquisition

• Acquirer acquires (in addition to shares already held by him) >= 5%/10%/14%/54%/74%
shares/voting power in a listed company;

• Acquirer must disclose his holding at each stage to the target company and stock
exchanges within two days of acquisition;

• Target Company must in turn disclose the same to the stock exchanges.

Any Acquirer who acquires shares/voting in excess of the limits have to make a Public
Announcement (PA) (i.e. an advertisement) through a merchant banker specifying that he
desires to acquire a minimum of 20% of the voting capital of the company from the public.

A PA required to be made when:

• Acquisition (in addition to shares already held) of shares/voting power upto 15% by an
Acquirer/Persons Acting in Concert (PACs);

• Acquisition of shares/voting power >= 5% in any financial year by an Acquirer/PACs

already holding >= 15% but <= 55% (popularly known as “Creeping Acquisition”);

• Acquisition of any shares/voting power by an Acquirer/PACs already holding >= 55% but
<=75%;

• Acquisition of control over a Target Company (with or without shares/voting power).

SEBI has taken a decision to permit creeping acquisitions upto 75% from the existing 55%.
However, the relevant Regulations have not yet been amended.

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 Acquisition could be direct or indirect, i.e., by acquiring an unlisted company, via the vehicle
of a foreign company, etc.

For an indirect acquisition, the PA is to be made within three months of the

restructuring/acquisition.

The PA must contain the Minimum Offer Price calculated as under:

For Frequently Traded Shares For Infrequently Traded Shares

Highest of : Highest of:

Negotiated price between Acquirer and Negotiated price between Acquirer and
shareholders of Target Company. shareholders of Target Company.

Acquisition price paid by Acquirer in 26 weeks Acquisition price paid by Acquirer in 26

prior to PA. weeks prior to PA.

Higher of the average of: Other parameters such as:

• Weekly high/low of closing prices during 26 • Book Value

weeks prior to the PA ; or

• Average of daily high/low of closing prices • EPS

during the 2 weeks prior to the PA.
• P/E Multiple vis-à-vis Industry
Average

The offer price may be paid in cash, listed equity shares/rated secured instruments of the
Acquirer.

Other Conditions

• Every Acquirer must provide for an Escrow Account of 25% of the consideration for offer
sizes < INR 1 billion and 10% for the excess consideration above INR1 billion;

• The Escrow may consist of cash with a bank, bank guarantee, securities with margin;

• Various obligations are cast upon the Acquirer, Target Company and the merchant
banker;

• An offer once made can only be withdrawn if any statutory approval has been refused,
the sole Acquirer has died or special circumstances exist which SEBI deems fit;

• If the offer results in public shareholding falling below 10%, then the Acquirer shall buyout
the remaining shares as per the SEBI Delisting Guidelines or within six months it shall
raise the public shareholding by an offer for sale or by a fresh issue.

Competitive Bids

• Any other person can make a competitive PA within 21 days of the first PA;

• This Bid must be equal to the present + proposed shareholding of the first Acquirer;

• The first Acquirer can revise his offer pursuant to the competitive bid within 14 days;

• Both Acquirers can make upward revisions in the price and number of shares till seven
days before the closure of the offer.

C. INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY OF INDIA (IRDA)

IRDA was constituted by an act of Parliament. The main objective of IRDA is to protect the
interests of the policyholders, and to regulate, promote and ensure orderly growth in the
insurance industry. The powers and functions of the authority include the following:

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 • To issue applicants with a certificate of registration and either renew, modify, withdraw,
suspend or cancel such registration;

• To protect the interests of the policy holders in matters concerning the assignment of
policy, nomination by policy holders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance;

• To specify requisite qualifications, code of conduct and practical training for insurance
intermediaries and agents;

• To specify the code of conduct for surveyors and loss assessors;

• To promote efficiency in the conduct of insurance business;

• To promote and regulate professional organisations connected with the insurance and re-
insurance business’

• To call information from, undertake the inspection of, conduct enquiries and investigations
including audit of the insurers, intermediaries, insurance intermediaries and other
organisations connected with the insurance business;

• To control and regulate rates, advantages, terms and conditions that may be offered by
insurers in respect of general insurance business which is not controlled and regulated by
the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);

• To specify the form and manner in which books of account shall be maintained and the
statement of accounts shall be rendered by insurers and other insurance intermediaries;

• To regulate investment of funds by insurance companies;

• To regulate maintenance of margin of solvency;

• To adjudicate disputes between insurers and intermediaries or insurance intermediaries;

• To supervise the functioning of the Tariff Advisory Committee;

• To specify the percentage of premium income of the insurer to finance schemes for
promoting and regulating professional organizations;

• To specify the percentage of life insurance business and general insurance business to
be undertaken by the insurer in the rural or social sector.

D. THE TELECOM REGULATORY AUTHORITY OF INDIA (TRAI)

The TRAI was formed in January 1997 with a view to providing an effective regulatory
framework and adequate safeguards to ensure fair competition and protection of consumer
interests. The government is committed to a strong and independent regulator with
comprehensive powers and clear authority to effectively perform its functions. TRAI’s mission
is to create and nurture conditions for the growth of telecommunications including
broadcasting and cable services in the country in a manner and at a pace which will enable
India to play a leading role in the emerging global information society.

TRAI has been empowered to provide recommendations on various aspects related to the
functioning of telecom service providers and to discharge certain regulatory functions. The
recommendations of TRAI are required to be sought by the government on the need and
timing of the introduction of new service providers and the terms and conditions of licence.
The consultation with TRAI is mandatory. TRAI has been working on the complex problem of
obtaining a sound framework for competition between multiple technologies and vendors.

E. MONOPOLIES AND RESTRICITIVE TRADE PRATICES ACT AND THE COMPETITION

ACT

The Monopolies and Restrictive Trade Practices Act (MRTP), 1969 is an important piece of
economic legislation, which in certain respects is similar to the anti trust legislation in other
countries and is meant to control unfair and/or restrictive business practice.

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 The Competition Act will replace the MRTP Act, when notified by the Central Government.

The Competition Act has been enacted to establish a Commission to prevent practices having
adverse effect on competition, to promote and sustain competition in markets, to protect the
interests of the consumers and to ensure freedom of trade activity carried on in markets in
India.

The Competition Act, when enacted seeks to regulate the following:

• Prohibiting enterprises or persons or their associations from entering into certain

agreements which cause or are likely to cause an adverse effect on competition in India;

• Abuse of the dominant position by an enterprise;

• Forming of ‘combination’ of enterprises and/or persons by way of acquisitions, mergers or

amalgamations which cause or are likely to cause an adverse effect on competition in
India.

However, to date except for the formation and establishment of the Competition Commission
of India, no substantive provisions of the Competition Act has as yet been notified by the
Central Government.

F. COMPANIES ACT AND CORPORATE GOVERNANCE

The Companies Act regulates the formation, financing, functioning and winding up of
companies. The Companies Act prescribes regulatory mechanism regarding all relevant
aspects including organisational, financial and managerial aspects of companies. In the
functioning of the corporate sector, although freedom of companies is important, protection of
investors and shareholders is equally important. The main objects of the Companies Act are:

• To protect the interests of the large number of shareholders as there exists separation of
ownership from management in a company;

• To safeguard interests of creditors;

• To help development of companies on healthy lines;

• To help attainment of the social and economic objectives of the government of India;

• To equip the government with adequate powers of intervention, in the affairs of a

company in public interest as prescribed by law to protect the interest of all stakeholders.

Synergies exist between the Companies Act and the regulations issued by the SEBI in
common matters relating to governance, management, issue of securities, investor protection,
etc.

Specifically, the Companies Act inter alia provides for the following:

• Incorporation of companies and related matters;

• Issue of prospectus and other matters relating to issue of shares and debentures and
miscellaneous provisions relating thereto;

• Registration of charges;

• Management and administration, which deal with the following matters:

o Registered office.

o Commencement of new businesses.

o Register of members and debenture holders, including foreign registers.

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 o Meetings and proceedings.

o Managerial remuneration.

o Dividend payments.

o Accounts and audit.

o Investigation of the affairs of a company.

o Appointment of the Board of Directors, conduct of Board meetings, powers of the

Board, disclosures of interest, remuneration and compensation, etc.

• Provisions relating to company secretaries and managers;

• Powers of the Central Government to remove managerial personnel on recommendation

of the Tribunal;

• Arbitration, compromises, arrangements (including amalgamations) and reconstructions;

• Prevention of oppression and management;

• Revival and rehabilitation of sick industrial companies;

• Winding up proceedings;

• Incorporation of Producer companies and related matters – a producer company is a

company engaged in agriculture or any other primary activity or service which promotes
the interests of farmers or consumers;

• Companies incorporated outside and carrying on business in India.

Corporate Governance

With a view to encourage companies to adopt good corporate governance practices leading
to more transparent, ethical and fair business conduct, following provisions have been made:

• Director’s Responsibility Statement to be included in the Director’s Report;

• Constitution of an Audit Committee;

• Debarring a person to act as a Director of a Company if default in filing Annual Returns,

Accounts, or repayment of deposits/debentures/interest/dividend has taken place;

• Appointment of a Director in maximum 15 companies;

• Clause 49 of the Listing Agreement with Stock Exchanges providing for promoting and
raising the standards of corporate governance in companies.

G. FOREIGN EXCHANGE MANAGEMENT ACT

The Foreign Exchange Management Act (FEMA) replaced the Foreign Exchange Regulation
Act (FERA) in 2000 and was enacted with the objective of facilitating external trade and
payments and promoting the orderly development and maintenance of foreign exchange
markets in India. The FEMA extends to the whole of India and also applies to branches,
offices and agencies located outside India that are owned and controlled by a person resident
in India. The Reserve Bank supervises compliance with the FEMA by specifying Regulations
and issuing directions. The Central Government is empowered to make requisite Rules.

As the FEMA regulates transactions between residents and non-residents, residential status
is of utmost importance. Residential status under the FEMA is determined by the intent of the
person to stay in India for an indefinite period of time as against physical stay.

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 A “capital account transaction” is a transaction that alters the assets and liabilities, including
contingent liabilities outside India, of persons resident in India, or assets and liabilities in
India, of persons resident outside India, and includes transactions specifically referred to in
the FEMA. The Reserve Bank has issued Regulations to specify:

• Any class or classes of capital account transactions that are permissible;

• The limit upto which foreign exchange will be admissible in the case of such transactions.

However, the Reserve Bank is not permitted to impose any restriction on the drawing of
foreign exchange for payments due on account of the amortisation of loans or for the
depreciation of direct investments in the ordinary course of business.

The Reserve Bank has issued Regulations which prohibit, restrict and regulate the following:

• Transfer or issue of any foreign security by a person resident outside India;

• Transfer or issue of any security by a person resident outside India;

• Transfer or issue of any security or foreign security by any branch, office or agency in
India on behalf of a person resident outside India;

• Any borrowing or lending in foreign exchange in whatever form or by whatever name

called;

• Any borrowing or lending in rupees in whatever form or by whatever name called between
a person resident in India and a person resident outside India;

• Deposits between persons resident in India and persons resident outside India;

• The export, import or holding of currency or currency notes;

• The transfer of immovable property outside India, other than by way of a lease exceeding
five years, by a person resident in India;

• The acquisition or transfer of immovable property in India, other than by way of a lease
exceeding five years, by a person resident outside India;

• The giving of a guarantee or surety with respect to any debt, obligation or other liability
incurred;

• The establishment of a branch, office or other place of by a person resident outside India
for carrying out any activity.

A “current account transaction” is a transaction other than a capital account transaction. The
Central Government has framed Rules under which current account transactions have been
broadly classified as:

• Transactions that are prohibited;

• Transactions that require the prior approval of the Central Government;

• Transactions exceeding specified monetary limits, which require prior Reserve Bank
approval.

H. INTELLECTUAL PROPERTY RIGHTS

Intellectual property refers to the creation of mind, i.e. invention, industrial designs for articles,
literary and artistic work, names and symbols used in commerce. The law governing
intellectual property rights is an umbrella term which encompasses within its fold, various
statute laws such as:

• The Patents Act 1970

• The Copyright Act 1957

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• The Trademarks Act 1999

• The Design’s Act 2000

• The Geographical Indications of Goods (Registration and Protection) Act 1999 (passed by
the Parliament but as yet to be implemented)

• The Semiconductors of Integrated Circuits Layout Design Act 2000

• Protection of Plant varieties and Farmer’s Right Act 2001

• Information Technology Act

• Biological Diversity Act 2002

Summarised provisions of the laws relating to trademarks, copyright, patents, the

geographical indication of goods and industrial design, which form the core segments of the
law of intellectual property, are highlighted below.

Trademarks

The Trademarks Act enables the registration and protection of trademarks, brands and trade
names and prevents the fraudulent use of trademarks on merchandise.

A trademark is a visual symbol. It can be in the form of a work, a device or a label applied to
commercial articles with a view to indicating to the purchasing public that they are the goods
manufactured or dealt with by a particular person as distinguished from goods of a similar
nature. Trademarks are essentially a product of an economy where competition is involved
between the manufacturers of similar products. Though not compulsory, registration of
trademarks is advisable for better protection under law.

Services have also been included for protection as Servicemarks. Such registration is
relevant to protection of non tangible products.

Registration of a trademark, which resembles existing well-known trademarks, is not

permissible. A registered trademark can be protected in perpetuity subject only to the
condition that it is used or renewed periodically and that action is taken against the infringer.

Additionally,

• Foreign-owned trademarks may be used for the sale of goods in India;

• Trademarks are registered for maximum of 10 years from the date of application;

• Subsequent registration may be renewed for a 10 year period or for a lifetime on payment
of the prescribed fee;

• Passing-off actions may protect unregistered trademarks;

• Registered trademarks may be protected under statute or by passing-off actions by an

injunctory suit or opposition against trademarks in the process of registration.

Patents

Patent is a legal right granted by the government for a period of seven years in respect of
inventions relating to food, medicine or drugs, and for 14 years for other products.

The Act provides that the following cannot be patented:

• Any invention which is frivolous, or which claims anything obviously contrary to well
established natural laws;

• An invention the primary or intended use of which could be contrary to law or morality or
injurious to public health;

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• Mere discovery of a scientific principle or the formulation of an abstract theory;

• The mere discovery of any new property or new use for a known substance or of the
mere use of a known process, machine or apparatus, unless such known process results
in a new product or employs atleast one new reactant;

• A substance obtained by mere admixture resulting only in the aggregation of the

properties of the components thereof or a process for producing such substance;

• Mere arrangement or rearrangement or duplication of known devices, each functioning

independently of one another in a known way;

• A method or process of testing applicable during the process of manufacture for rendering
the machine, apparatus or other equipment more efficient or for the improvement or
restoration of the existing machine, apparatus or other equipment or for the improvement
or control of manufacture;

• Method for agriculture/horticulture;

• Any process for the medicinal, surgical, curative, prophylactic or other treatment of human
beings or any process for a similar treatment of animals or plants to render them free of
disease or to increase their economic value or that of the products.

The Patents Act provides for the granting of exclusive rights to sell or distribute an article or
substance in respect of the following:

• Any new invention, which is not obvious;

• Any new and useful art, process, or method of manufacture; machine apparatus or other
article; or substance produced by manufacture.

India is a signatory to the Patent Co-operation Treaty.

The Patents Act provides for international applications under the Patent Co-operation Treaty.
The term of patent shall be twenty years from the international filing date accorded under the
Patent Co-operation Treaty.

Copyright

Copyright in India is governed and protected by the Copyright Act of 1957. India is a member
of the Universal Copyright Convention and the Berne Convention. Indian copyright owners
can protect their copyright in any country since India is a member of both these conventions.

The Act provides for the registration of works. However, non-registration does not generally
affect the rights of the owners of copyright. It is a self–sustaining right independent of
registration.

Copyright means the exclusive right to do or authorize others to do certain acts in relation to
the following:

• Original work involving skill, labour and judgement in respect of literary works such as
books and publications, including computer software;

• Artistic works whether usable as trademarks or not;

• Engineering drawings, industrial drawings;

• Sound recordings;

• Musical works;

• Cinematographic films;

• Broadcasting reproduction rights.

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The object of copyright law is to encourage authors, composers, artists and designers to
create original works by rewarding them with the exclusive right, for a limited period, to exploit
the work for monetary gain.

There is no copyright in ideas. Copyright subsists only in the form of expression in which the
idea is reduced to work as specified above. Since there is no copyright in an idea there shall
be no infringement if an idea is adopted and put in one’s own work and which is substantially
a variant of the original.

The owner of the copyright in an existing work, or the prospective owner of the copyright in a
future work, may assign the copyright to any person either wholly or partially and either
generally or subject to limitations, and either for the whole term of the copyright or any part
thereof. The assignment of copyright in any future work shall take effect only when the work
comes into existence. To be valid, the assignment of copyright must be reduced to writing and
signed by the assignor or by his duly authorised agent.

The term of copyright in the case of published literary, dramatic, musical and artistic works
(other than photographs) published within the lifetime of the author, subsists until 60 years
beginning from the next calendar year following the year in which the author dies.

The term of copyright subsists until 60 years beginning from the calendar year following the
year in which the work is first published for the following works:

• Any anonymous and pseudonymous work;

• Any posthumous work;

• Any photographs;

• Any cinematograph films;

• Any sound recordings;

• Any government work;

• Any works of public undertakings;

• Any works of international organisations.

Industrial designs

Designs which, when applied to articles, lend aesthetic appeal to goods are protected by the
Design Act 2000. The designs, which are new and original designs having aesthetic value
and not having been previously known or published in India or elsewhere, are entitled to
registration under the Act. Designs that improvise any function of an article are not
registrable under the Act.

The Design Act of 1911, for the purpose of registration, classified goods into 14 classes.
However, the Design Act of 2000 follows the Locarno Classification.

The object of design registration is to ensure that persons other than the originator are not
using the design without the permission of the originator. The right conferred by registration of
a design is called copyright. The Design Act governs copyright in an industrial design or
product design. If a design is registered under the Act it is not eligible for protection under the
Copyright Act even though it may be an original artistic work.

Geographical indications of goods

The Geographical Indications of Goods (Registration and Protection) Act (GI Act) was passed
by parliament in December 1999, and the Geographical Indications of Goods (Registration
and Protection) Rules 2002 were notified on March 8, 2002. The legislation was brought into
force on September 15, 2003 as notified by the government of India.

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 The GI Act has been introduced to conform to the Trade-Related Aspects of Intellectual
Property Rights (TRIPS) Agreement. The GI Act seeks to provide registration and better
protection of geographical indication relating to goods in India, and is designed to protect the
use of such geographical indication from infringement by others, and protect the consumers
from confusion and deception. Procedure for registration is similar to the Trademarks Act.
The term of Registration is 10 years, renewable thereafter.

The term ‘geographical indication’ in relation to goods, means an indication which identifies
such goods as agricultural goods, natural goods or manufactured goods as originating, or
having been manufactured in the territory of country, or a region or locality in that territory,
where a given quality, reputation or other characteristic of such goods is essentially
attributable to its geographical origin and in the case where such goods are manufactured,
one of the activities of either the production or processing or preparation of the goods
concerned takes place in such territory, region or locality as the case may be.

The GI Act prohibits the registration of geographical indications:

• The use of which is likely to deceive or cause confusion;

• The use of which would be contrary to any law in force at the time;

• Which comprises or contains scandalous or obscene matter;

• Which comprises or contains any matter likely to hurt the religious feelings of any class or
section of citizens of India;

• Which would otherwise be disentitled to protection in a court;

• Which are determined to be generic names or indications of goods and are therefore not
protected in the country of origin or which have fallen into disuse in that country;

• Which, although literally true as to the territory, region or locality in which goods originate,
falsely represent the fact that the goods originated in another territory, region or locality.

I. ARBITRATION & CONCILIATION ACT 1996

Arbitration is a mechanism for expeditious redressal of disputes. With there being increasing
pressure on civil courts due to pending cases and a complex civil procedure code, arbitration
is becoming increasingly popular as an alternative dispute resolution mechanism.

An arbitration may take place between parties in terms of an agreement in writing, which
could be in the form of a separate agreement in writing or a clause in an existing agreement.
Exchange of communication which can form part of a record like letters, telegrams, etc., can
also be treated as a written agreement.

Certain statues exclude the jurisdiction of private arbitration. The following matters cannot be
referred to arbitration:

• Insolvency matters;

• Matrimonial cases;

• Testamentary matters;

• Industrial disputes;

• Criminal proceedings;

• Matters relating to Charitable trusts.

The parties to an arbitration may decide on the number of arbitrators, except that this shall not
be an even number. If parties fail, sole Arbitrator appointed by Chief Justice. However, if the
provisions of a statute provide differently, such provisions shall prevail.

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 The parties are free to agree to any location and procedure for conducting the arbitral
proceedings as long as such procedure does not violate the principals of natural justice.

An Arbitral Tribunal must make an award in accordance with the substantive laws in force.
Such award must be made by a majority of the Arbitrators. During the proceedings, the
Tribunal may use mediation or conciliation to encourage the settlement between the parties.

An arbitral award must be in writing and state the reasons for the award, unless it is an award
of consent of the parties. The award may include interest until the date of the award.

An award may be set aside by making an application within three months, for specified
reasons.

An award, not set aside, may be enforced in the same manner as a decree under the code of
civil procedure.

J. THE RIGHT TO INFORMATION ACT, 2005

An Act to provide for setting out the practical regime of right to information for citizens to
secure access to information under the control of public authorities, in order to promote
transparency and accountability in the working of every public authority, the constitution of a
Central Information Commission and State Information Commissions and for matters
connected therewith or incidental thereto.

A long awaited step in achieving transparency in administration had been taken legislatively
and one of the precursors of such a Central Act has been the Freedom of Information Act and
the Maharashtra Right to Information Act, 2002.

The salient features of the Act are:

• This Act replaces the Freedom of Information Act, 2002 and to the extent of occupied field
is also replacing the Acts like the Maharashtra Right to Information Act, 2002;

• The Act seeks to streamline the administration in order that the various functionaries of
the Government adapt themselves to the obligation of furnishing information as called for;

• It provides for an independent apparatus or instrumentality for enabling the citizens to

obtain information about the functioning of various Government functionaries;

• By definition and otherwise, it has spelt out the contents of the obligation to furnish
information as also has made distinction as to the matters to which the obligation is not
attached while matters are enlisted which are exempted for being furnished as and by
way of information to the requesting member of the public;

• The Act provides for:

o hierarchy of instrumentalities with inbuilt provisions for Appeal.

o provides remedy to third party as defined in the Act.

o bars jurisdiction of Civil Courts.

o exempting organisations to which this Act may not apply.

o empowering the Central Government to prepare educational programmes etc.

o made distinction in terms of period available and excluded for getting information.

K. CONSUMER PROTECTION ACT, 1986

An Act which provides for better protection of the interests of consumers and for that purpose
to make provision for the establishment of consumer councils and other authorities for the
settlement of consumers’ disputes and for matters connected therewith.

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L. LABOUR LAWS

Factories Act

The Factories Act provides for the health, safety, welfare, service conditions and other
aspects of workers in factories. The Act is enforced by the State Government who frame rules
that ensure that local conditions are reflected in enforcement.

The Act also regulates the safeguards to be adopted for the use and handling of hazardous
substances.

The Factories Act extends to whole of India and is applicable to all 'factories' including
government factories.

The Act applies to all factories employing more than 10 people and working with the aid of
power or employing 20 people and working without the aid of power.
Factory however does not include a mine covered under the Mines Act, a mobile unit of the
armed forces, a railway shed or a hotel, restaurant or eating place.

The Act covers all workers employed in the factory premises or precincts directly or through
an agency including a contractor, involved in any manufacture.

Industrial Disputes Act

The Industrial Disputes Act provides for the investigation and settlement of industrial disputes
in an industrial establishment relating to lockouts, layoffs, retrenchment etc. It provides the
machinery for the reconciliation and adjudication of disputes or differences between the
employees and the employers. Industrial undertaking includes an undertaking carrying any
business, trade, manufacture, etc.

The Act lays down the conditions that shall be complied before the termination/retrenchment
or layoff of a workman who has been in continuous service for not less than one year under
an employer. The workman shall be given one month’s notice in writing, indicating the
reasons for retrenchment and the period of the notice that has expired or the workman has
been paid, in lieu of such notice, wages for the period of the notice. The workman shall also
be paid compensation equivalent to 15 days’ average pay for each completed year of
continuous service. A notice shall also be served on the appropriate Government.

Payment of Bonus Act

The Payment of Bonus Act provides for the payment of bonus to persons employed in certain
establishments on the basis of profits or on the basis of production or productivity. The Act is
applicable to establishments employing 20 or more persons. The minimum bonus, which an
employer is required to pay even if he suffers losses during the accounting year is 8.33% of
the salary.

Payment of Gratuity Act

The Payment of Gratuity Act provides for a scheme for the payment of gratuity to all
employees in all establishments employing 10 or more employees to all types of workers.
Gratuity is payable to an employee on his retirement/resignation at the rate of 15 days salary
of the employee for each completed year of service subject to a maximum of INR 350,000.

Payment of Wages Act

The Payment of Wages Act regulates issues relating to time limits within which wages shall
be distributed to employees and that no deductions other than those authorized by the law
are made by the employers.

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Minimum Wages Act

The Minimum Wages Act prescribes minimum wages for all employees in all establishments
or working at home in certain employments specified in the schedule of the Act. Central and
state governments revise minimum wages specified in the schedule. The minimum wages
paid are as under:

Particulars Amount per month (INR)

Unskilled Worker 3,350

Semiskilled Worker 3,450
Skilled Worker 3,550

Employees Provident Fund Act (PF Act)

The PF Act seeks to ensure the financial security of the employees in an establishment by
providing for a system of compulsory savings towards an employee’s retirement. The Act is
applicable to an organization which has a more than 20 employees. Provident Fund is
deducted at 12% of the salary (basic + dearness allowance) paid to an employee in a month.
Employers are required to contribute an equal amount towards provident fund and deposit the
same with the authorities.

Employees earning more than INR 6,500 of basic plus dearness allowance are not entitled for
a matching contribution from the employer.

Employees Pension Scheme

The EPF Pension Scheme under the Employees Provident Fund Act, provides for monthly
pension to employees on their superannuation, and for pensions to widows and children of
employees.

The EPF Pension Scheme Applies to all factories and establishments to which the Employees
Provident Fund Act applies.

Employee State Insurance Act (ESI Act)

The ESI Act provides for certain benefits to employees (and dependants, in some cases) in
case of sickness, maternity, medial reasons, disablement and employment injury through
government hospitals. The Act is applicable to all organisation which have more than ten
employees.

The employees entitled to the ESIC benefits are those earning a salary (basic + dearness
allowance + overtime) not exceeding INR 10,000 per month.

Monthly contributions towards ESIC are 1.75% of employee’s salary and a matching
contribution from the employer of 4.75% of the employee’s salary.

Workmen’s Compensation Act

The Workmen’s Compensation Act provides that compensation shall be provided to a

workman for any injury suffered during the course of his employment or to his dependents in
the case of his death. The Act provides for the rate at which compensation shall be paid to an
employee.

Maharashtra State Tax on Professions (Profession Tax Act)

The Profession tax Act is a state subject and every state is empowered to enact legislation in
this regard. The Act extends to every person engaged actively or otherwise in any profession,
trade, calling or employment and falling within the specified classes specified in the Act. Tax
is payable to the state government as prescribed. As regards persons earning salary or
wages, the employer will deduct profession tax from the salaries or wages. An employer, too,
is required to pay the tax as prescribed.

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 SECTION – IV

TAXATION

A. INCOME TAX
India’s income tax regime is governed by the Income Tax Act 1961 (IT Act) and the rules
framed thereunder. The Indian Constitution prohibits states from imposing tax on income
other than income derived from agriculture.

B. ADMINISTRATIVE SYSTEM
At the apex of the income tax department is the Central Board of Direct Taxes (CBDT). The
CBDT is part of the Finance Ministry and administers direct tax laws. The CBDT is a large
organisation with commissioners in charge of specified areas assisted by deputy
commissioners and officers, who issue assessment orders and collect taxes.
C. ASSESSMENTS
All taxpayers are required to file a Return of Income form on or before specified dates for
each tax year. Tax on income is assessed for a tax year commencing April 1, at the rates in
force for the relevant assessment year. Assessment year is the year commencing on April 1,
immediately succeeding the tax year.
Assessments of more than 90% non-corporate taxpayers are completed in a summary
manner by accepting the returns furnished by them. Assessments in the remaining cases are
made after detailed scrutiny and investigation.
Assessment of a non-resident can be made either directly or through his agent. In some
cases, an income tax officer can treat a person in India as an agent of a non-resident and
collect taxes from the non-resident through that agent.
D. ADVANCE RULING
A person can seek an advance ruling on determination (including a question of law or fact):
• In relation to a transaction undertaken or proposed, with a non resident applicant; or
• Of tax liability of a non-resident in respect of a transaction undertaken or proposed to be
undertaken, by the resident applicant with a non-resident; or
• Determination or decision of an issue relating to computing of total income pending
before any income tax authority or the Appellate Tribunal.
An advance ruling would be binding for the specific transaction on the tax authorities and the
applicant who has sought it. The advance ruling would be binding unless there is a change in
the law or in the facts. Advance rulings are communicated within six months from the date of
application.
E. RESIDENCE
The liability to tax under the IT Act depends upon the residential status of the taxpayer,
irrespective of his/her nationality or domicile.
An individual is said to be resident in India in a tax year if he/she is:
• In India for a period or periods amounting to 182 days or more in a tax year; or

• In India for an aggregate period of 60 days or more (182 days in certain cases) in the tax
year and has been in India for an aggregate period of 365 days or more in the four tax
years preceding that tax year.

A person is said to be ‘resident but not ordinary resident’ (NOR) in India in any tax year if
such person is:

• An individual who has been non-resident in India in nine out of ten tax years preceding
that tax year; or who has during the seven tax years preceding that tax year, been in India
for a period or periods aggregating to 729 days or less;

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 • A manager of Hindu Undivided Family (HUF) who has been non-resident in nine out of
ten tax years preceding that tax year; or who has during the seven tax years preceding
that tax year, been in India for a period or periods aggregating to 729 days or less.

A non-resident is a person who is not resident in India.

A company, whether Indian or foreign, is said to be resident in India if the control and
management of its affairs is situated wholly in India. A foreign company will have part of its
management and control outside India and, hence, will be a non-resident.

F. SCOPE OF TOTAL INCOME

A resident pays tax in India on his/her global income.
A non-resident is taxable on his/her income received in India and also on income sourced in
India. There are certain provisions in the IT Act that deem income to accrue or arise in India
(i.e. sourced in India).
A ‘resident but not ordinary resident’ is not liable to tax in respect of income which accrues
outside India unless that income is derived from a business controlled in or a profession set
up in India.
G. TAXABLE INCOME
The income of the taxpayer is determined under five heads - salaries, income from house
property, profits and gains of business or profession, capital gains and income from other
sources. Specific deductions are available under each source and there are specific rules as
to what constitutes income from each source. The tax charged is at the rates in force for the
relevant tax year.
The IT Act provides for setting off of losses and carry forward of unabsorbed losses under
various heads of income, which are referred to below.

The consequent adjusted income is the gross total income. Gross total income less certain
specified deductions and tax incentives provided under the IT Act is the total taxable income
of a taxpayer.

Certain types of income and receipts are fully exempt from tax and do not form part of gross
total income.

H. AGRICULTURAL INCOME
Agriculture is a state subject and there is no central income tax on agricultural income.
However, agricultural income is aggregated with other income for the purpose of determining
the rate of tax applicable to other income.

I. TAX CONCESSIONS
The IT Act offers several tax incentives to industrial units in the country in computing taxable
income from business and profession. These incentives reduce the tax incidence
substantially.
Depreciation Allowance
Depreciation is available at specified rates on tangible and intangible capital assets (except
land) owned by a tax payer and used for the purposes of business or profession.
Tangible assets are classified into four blocks – buildings, furniture and fixtures, plant and
machinery and ships. Intangible assets include know-how, patents, copyrights, trademarks,
licenses, franchises or any other business or commercial rights of a similar nature.
Depreciation is restricted to 50% of the rates in the year of acquisition if the asset is used for
less than 180 days. Depreciation can also be claimed on fractional ownership of assets.
An additional 20% depreciation is allowed in case of any new machinery or plant (other than
ships and aircrafts), which has been acquired and installed after March 31, 2005 by an
assessee engaged in the business of manufacture or production of any article or thing ,
subject to satisfying specified conditions.
It is mandatory to claim depreciation allowance. Depreciation that is not absorbed can be
carried forward and set off against income in subsequent years without any time limit.

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The IT Act permits depreciation allowance on a written down value method. However, in
respect of assets acquired on or after April 1, 1997 by undertakings engaged in the business
of generation or generation and distribution of power, the tax payer may opt to claim
depreciation under the straight line method on individual asset instead of a block of assets.
Such option once exercised cannot be reversed.
Rates of depreciation prescribed for assets falling within each block, are given in Appendix
III.

Deduction for assessee engaged in tea, etc business

Deduction will be allowed to an assessee engaged in the business of growing and

manufacturing tea or coffee or rubber to the extent of 40% of the profits computed under the
head ‘profits and gains of business and profession’ or the amount deposited with the National
Bank for Agriculture and Rural Development (NABARD), or in a deposit account opened in
accordance with a specified scheme, whichever is less. The amount is required to be
deposited within six months from the end of the financial year or before the due date filing of
the return of income.

Deduction for assessee engaged in the business of Petroleum and natural gas

Deduction will be allowed to an assessee engaged in the business of prospecting for,

extracting or producing petroleum or natural gas in India, to the extent of 20% of the profits
computed under the head ‘profits and gains of business or profession’ or the amount
deposited with the State Bank of India or in a ‘Site restoration account’ opened in accordance
with a specified scheme, whichever is less.

Deduction of expenditure on scientific research

Any expenditure incurred on scientific research, which is related to business, shall be allowed
as a deduction from the taxable income. Contributions made to national laboratories or to
approved scientific research associations, universities, colleges or institutions engaged in
scientific, social or statistical research is allowed at a weighted rate of 125%. Weighted
deduction of 150% is allowed to companies engaged in the business of biotechnology or in
the business of manufacture or production of any drugs, pharmaceuticals, electronic
equipments, computers, telecommunication equipments, chemicals or any other notified
article.

Deduction of expenditure on eligible projects/schemes

Any expenditure incurred by a taxpayer by way of payment to a public sector company or a

local authority or to an approved association or institution for carrying out eligible projects or
schemes such as social and economic welfare of, or the upliftment of the general public is
allowed as a deduction.

Deduction of expenditure incurred in case of amalgamation or demerger

Any Indian company which has incurred expenditure on or after April 1, 1999, wholly for the
purpose of amalgamation or demerger of an undertaking, will be allowed a deduction over a
period of five years in equal instalments from the year in which the amalgamation or
demerger takes place.

Expenditure for obtaining licence to operate telecommunication services

Payments made to acquire a license for operating telecommunication services can be

amortised over the duration for which the licence in force.

Voluntary retirement expenses

Deduction in respect of payments made to employees on voluntary retirement, in accordance

with prescribed guidelines, shall be allowed as a deduction in five equal instalments starting
from the tax year in which expenditure is incurred.

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 Expenditure by way of payment to association or institution for carrying out rural development

Deduction is allowed in respect of amount paid to any association or institution which has the
object of rural development, or training for implementing programmes of rural development, or
any contribution made to a rural development fund or the National Urban Poverty Eradication
Fund set up and notified by the Central Government.

Expenditure on prospecting for certain minerals

Deduction can be claimed by an assessee in respect of expenditure incurred on prospecting

for the development of certain minerals listed in Schedule VII of the IT Act. The deduction
can be claimed in respect of expenditure incurred during a period of five years until the year in
which commercial production is commenced, and can be claimed over a period of 10 years in
equal instalments from the year in which commercial production starts.

J. DIVIDEND AND INCOME DISTRIBUTION TAX (DT)

Domestic companies are required to pay tax on dividends declared distributed or paid at 17%
(including 10% surcharge and 3% education cess).

Mutual Funds (other than equity oriented funds) are required to pay tax on distributed income
as follows:

• by a money market mutual fund or liquid funds:

o 28.33% (including 10% surcharge and 3% education cess)

• by a fund other than a money market mutual fund or liquid fund:

o 14.16% (including 10% surcharge and 3% education cess) on income distribution to

an individual or HUF;

o 22.66% (including 10% surcharge and 3% education cess) on income distribution to

others

Equity oriented funds are exempt from tax on income distributed

Dividend or income on which tax has been paid as above is not taxed again in the hands of
the recipient.

K. SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING COMPANIES

Under the Tonnage Tax Scheme (TTS – a scheme of presumptive taxation), Indian shipping
companies have to exercise the option to be assessed either under the TTS or under the
normal provisions of the IT Act, subject to fulfilling various criteria.

L. TAX HOLIDAYS

The IT Act provides for tax holidays to certain industrial undertakings/enterprises engaged in
specified sector/activities. These are summarized below.

A. Tax holiday of 100% of profits for any 10 consecutive years (at the option of the tax
payer) out of the first 15 years of operation.

Nature of activity Business commencing

Development, operation and maintaining a specified After March 31, 1995

infrastructure facility, by an enterprise owned by a
company or a consortium of companies
(The block period stated above is 20 years.)

Development, operation and maintaining a notified Before April 1, 2009

Industrial park or Special Economic Zone (SEZ)

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 Nature of activity Business commencing

Power generation and/or distribution, transmission Before April 1, 2010

and distribution by laying networks or substantial
renovation/modernization of networks

Laying/operating cross country natural gas After March 31, 2007

distribution network by an enterprise owned by a
company or a consortium of companies

Developer of SEZ After March 31, 2005

Commercial production of mineral oil by an After March 31, 1997

enterprise located in any part of India except the
North Eastern Region
(Tax concession only for the initial 7 years)

Refining of mineral oil After September 30, 1998

(Tax concession only for the initial 7 years)

B. Staggered tax concessions available to undertakings/units/companies:

Nature of activity Tax concession Period Business

(% of profits) commencing

Handling, processing, storage and 100% First 5 years After

transportation of food grains, March 31,
preservation and packaging of fruits 30% Next 5 years 2001
and vegetables (25% if tax payer
other than
company)

Operating and maintaining hospitals 100% First 5 years Construction

in rural areas complete
before March
31, 2008

Manufacture of any article or thing

- not specified in the 13th Schedule
of the IT Act;
- specified in the 14th Schedule of
the IT Act;
and/or substantial expansion
undertaken by such undertaking in
any Export Processing Zone,
Integrated Infrastructure
Development Centre, Industrial
Growth Centre or Industrial Park,
Software Technology Park or
Industrial Area or Theme Park
located in:

a) state of Sikkim; 100% First 10 Before

years March 31,
b) state of Himachal Pradesh or 100% First 5 years 2012
Uttaranchal 30% Next 5 years
(25% if tax payer
other than
company)

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 Nature of activity Tax concession Period Business
(% of profits) commencing

Building, owning and operating 100% First 5 years Between

hotels and convention centres in April 1, 2007
specified areas and March
31, 2010

Manufacture or produce and eligible 100% First 10 Between

article or thing or carry on eligible years April 1, 2007
business in North Eastern states and March
31, 2017

Collecting and processing or treating 100% First 5 years Anytime

of bio-degradable waste for
generating power or producing bio-
fertilizers, bio-pesticides or other
biological agents or for producing
bio-gas or making pellets or
briquettes for fuel or organic manure

Manufacture or produce any article 30% of additional 3 years from -

or thing wages to new year in
workmen which
employment
provided

Income of Off-shore Banking units 100% First 5 years Anytime

and International Financial Service
centre in SEZ 50% Next 5 years

C. Special tax concessions for export profits of 100% Export oriented undertakings,
units in Free Trade Zones, Special Economic Zone

Nature of activity Tax concession Period Concession

(% of profits) ends in tax
year
Export of articles or things or computer 100% First 5 years
software manufactured by an
undertaking in a Free Trade Zone
(FTZ) or Export Processing Zone 50% Next 2 years
(EPZ) March 31,
50% of the Next 3 years 2009
amount of profit
credited to a
special Reserve
account

Export of articles or things 100% First 5 years -

manufactured or services provided, by
a unit in a SEZ
50% of profits Next 5 years

50% of the Next 5 years

amount of profit
credited to a
special Reserve
account

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 Nature of activity Tax concession Period Concession
(% of profits) ends in tax
year
Export of articles or things or computer 100% of First 10 March 31,
software pro rated export years 2009
profits

Export of eligible articles or things 100% of - March 31,

manufactured without imported raw pro rated export 2009
material profits

M. BUSINESS LOSS

The IT Act provides conditions for set off of losses and carry forward of unabsorbed losses,
as under:

In respect of losses in a tax year computed under any head of income:

Nature of Loss Set off against Unabsorbed loss carry

forward time limit
Computed under any Income computed under any -
head of Income other head of Income
Business income Income computed under any Eight
other head of income,
except Salary income
Speculation business Speculation business Four
income
Short term capital loss Capital gains Eight
Long terms capital loss Long term capital gain Eight

N. CAPITAL GAINS

Profits and gains from the transfer of capital assets other than those held for business
purposes, are charged to tax as ‘capital gains’ in the year in which the transfer takes place.

Capital gains are classified as long term capital gains if they arise from the transfer of capital
assets:

• In the case of shares held in a company, or other securities listed on a recognised stock
exchange in India or units of specified mutual funds or zero coupon bonds, for a period of
12 months or more;

• In the case of other assets, held for a period of 36 months or more.

Capital gain arising on transfer of a capital asset, being a unit of the Unit Scheme 1964 is
exempt from income tax.

Income from long term capital gains arising from the transfer of equity shares in a company
through a recognized stock exchange in India or a unit of an equity oriented fund (such
transaction being charged to Securities Transaction Tax, as referred to on Section V, G
hereafter), is exempt from income tax.

Long term capital gains are calculated after deducting from sale proceeds the indexed cost of
acquisition, the indexed cost of improvement and expenditure incurred in connection with the
transfer. The indexed cost of acquisition and indexed cost of improvement refer to costs duly
indexed and adjusted for inflation as prescribed in the Act. Bonds and debentures (other than
capital indexed bonds issued by the government) are not eligible for cost indexation. The
benefits of indexation are not available to non-residents assessees.

For the purpose of computation of capital gains, the assessee has the option to take either
the actual cost or the fair market value of the asset (other than depreciable asset), as of
April 1,1981, as the cost of acquisition where the capital asset became the property of the
assessee by any mode specified in the IT Act.

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 In the case of an assessee who is a non-resident, capital gains arising from transfer of capital
assets, being the shares or debentures of an Indian company, shall be calculated by
converting the cost of acquisition, expenses incurred for the transfer and sale consideration
into the same foreign currency as was utilised for the purchase of shares or debentures. The
capital gains so computed will be converted into Indian currency on the date of transfer.

Profits arising on the transfer of intangible assets such as goodwill of a business, the right to
manufacture, produce or process any article or thing, the right to carry on any business,
tenancy rights, stage carriage permits or loom hours, trade mark or brand name associated
with a business, are chargeable to tax as capital gains.

In the case of land and buildings, where consideration declared as a result of the transfer of
land or buildings or both is less than the value adopted by any state government authority, for
the purpose of payment of stamp duty, the value is deemed to be the consideration for the
transfer. Capital gains are required to be computed accordingly. The IT Act provides for
reference of disputed value to a valuation officer.

Gains arising in the following transactions, among others, are chargeable to tax as capital
gains:

• Gains arising on buy-back of shares;

• Gains arising on the transfer of securities acquired under stock option scheme or as
‘sweat equity’;

• Insurance compensation on account of the destruction or damage of a capital asset;

• Profits or gains arising on the sale of one or more undertakings as a ‘slump sale’;

• Gains arising to shareholders on the distribution of assets by companies in liquidation;

• Gains arising on the conversion of capital asset into stock in trade;

• Gains arising on the transfer of a capital asset by a partner of the firm by way of capital
contribution or otherwise;

• Gains arising on the transfer of a capital asset by way of distribution on dissolution or

otherwise of a firm or association of persons;

• Gains arising out of the transfer of a capital asset by way of compulsory acquisition under
any law.

The IT Act provides for reduction of long term capital gains income to the extent the net
consideration/capital gains are invested in specified assets and held for atleast three years.

Long term capital gains are taxed at the rate of 20% in the case of all resident taxpayers.
However, in case of long term capital gains on transfer of listed securities or units of any
mutual fund or zero coupon bonds, the tax rate would be restricted to 10% of such capital
gain computed without the benefit of indexation or at the rate of 20% of such capital gain
computed with the benefit of indexation, whichever is more beneficial to the tax payer.

Short term capital gains are clubbed together with income of the tax payer from other heads
and charged to tax at normal rates of tax. However, short term capital gains arising on sale of
equity shares in a company or units of an equity oriented fund (such transaction being
charged to Securities Transaction Tax, as referred to in Section V, G hereafter) are taxed at
10%.

O. BUSINESS REORGANISATION

Under the IT Act, demergers and amalgamations are recognised as a means of business
reorganisation under the IT Act. Tax benefits and concessions available to an undertaking
continue upon its transfer to a resulting company under a scheme of demerger.

Transfer of capital asset, by the demerged company to the resulting Indian company in a
demerger, is not chargeable to capital gains tax.

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 Transfer of a capital asset in a scheme of amalgamation, by the amalgamating company to
the resulting amalgamated Indian company, is not chargeable to tax.

Consideration received by way of the issue of shares by the resulting company, in a scheme
of demerger, to the shareholders of the demerged company, on demerger of an undertaking,
is not chargeable to capital gains tax.

Transfer by a shareholder in a scheme of amalgamation of shares in an amalgamating

company in consideration for the shares in the amalgamated Indian Company, is not
chargeable to tax.

Benefits of unabsorbed business loss and/or unabsorbed depreciation of the amalgamating

company/undertaking can be taken by the amalgamated company/resulting company, subject
to certain conditions.

Undertakings established in the free trade zone, 100% export-oriented undertaking and units
set up in SEZs would continue to be eligible for deduction under the respective sections in the
event of transfer of the undertaking in the scheme of amalgamation or demerger. The
deduction will be given to the amalgamated or the resulting company.

P. NON CORPORATE/INDIVIDUAL TAX RATES AND ADVANCE TAX

Income tax rates for individuals, irrespective of residential status:

Taxable income Rates of income – tax for tax year 2007-08

INR INR INR
0 – 110,000 NIL
110,001 – 150,000 10% of excess over 110,000
150,001 - 250,000 4,000 + 20% of excess over 150,000
Above 250,000 24,000 + 30% of excess over 250,000

Note: Surcharge at 10% of tax payable where taxable income exceeds INR 1million.
Education cess of 3% is levied on tax plus surcharge, if any.

Individuals/HUFs are allowed a deduction from total income upto INR 100,000 in respect of
specified investments.

Minimum net total income not chargeable to tax in case of women assessees is INR 145,000.

Minimum net total income not chargeable to tax in case of an individual who is of 65 years or
more is INR 195,000.

Advance tax

Non-corporate taxpayers are required to estimate their net tax and to make advance payments
in three instalments as given below:

Due date of instalments Amount payable as a % of net tax liability

On or before September 15 At least 30%
On or before December 15 At least 60%
On or before March 15 Balance amount

Q. CORPORATE TAX RATES AND ADVANCE TAX

The corporate tax year is the year ending March 31 and is taxed at the rates applicable in the
assessment year commencing on the succeeding April 1. The current corporate tax rates are:

Nature of company Basic tax Surcharge Education Cess (on tax

rate plus surcharge)
Domestic 30% 10% 3%
Foreign 40% 2.5% 3%

Note: Surcharge is levied only when total income exceeds INR 10 million.

A foreign company, under the IT Act, is a company which is not a domestic company.

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 Income of a foreign company and non-residents from royalty, fees for technical services, is
taxed at 10% based on the date of the agreement entered into after June 1, 2005.

Advance tax by corporate assesses

Companies are required to pay income tax in advance for each tax year in four instalments
on or before specified dates as given below:

Due date of instalments Amount payable as a % of net tax liability

June 15 At least 15%
September 15 At least 45%
December 15 At least 75%
March 15 Balance amount

R. MINIMUM ALTERNATE TAX (MAT)

If the tax liability of a company is less than 10% of its book profits, such book profits are
deemed to be the total income chargeable to tax at the rate of 10%, plus surcharge of 10%
and further education cess of 3% on the tax and surcharge.

‘Book profits’ means the net profit for the relevant tax year as shown in the profit and loss
account prepared in accordance with the provisions of the Companies Act 1956 as increased
or reduced by the specified adjustments.

MAT paid can be carried forward for set off against tax payable under the other provisions of
the IT Act, in seven subsequent years.

S. SCHEME OF PRESUMPTIVE TAXATION

Special provision is available under the Indian IT Act in the case of determination of income in
the following cases.

Nature of Business Taxable Income

Civil Construction 8% of Gross Receipts

Hiring & Leasing of goods carriage
-INR 3,500 per month per vehicle for heavy
vehicle [provided, it applies to not more than 10
goods vehicle.]
-INR 3,150per month per vehicle for other
vehicle.

Retail Business 5% of the total turnover

Shipping business in the case of non -7.5% of the amount paid/payable in or

residents residents out of India to the assessee on
account of carriage of passenger, livestock
mails goods shipped at any port in India; and

-amount received/deemed to be received for

these carriage of passenger, livestock or goods
shipped at any port outside India.

Amount paid/payable received/ receivable

Business of exploration of minerals oils
includes demurrage charges, handling charges
or any other amount of similar nature
10% of the aggregate amount paid/payable
whether in India or out of India to an assessee
or to any person on his behalf on account of
provision of services and facilities, supply of
plant and machinery on hire for extraction of
mineral oils in India or outside India.

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 Nature of Business Taxable Income
Amount received and deemed to be received in
India on behalf of the assessee on account of
provision of services and facilities, supply of
plant and machinery on hire for extraction of
mineral oils outside India.

There is certain exception to the provision as

Business of operation of aircraft in the
case of non-residents.
contained in Section 42, 44D, 115A or 293A of
the IT Act.
-5% of the aggregate of the amount payable
(whether in India or outside India) to an
assessee or to any person on his behalf on
account of carriage of passengers livestock,
mails or goods from any place in India; and

- amount received or deemed to be received in

India by or on behalf of the assessee for the
carriage of goods, passengers, livestock and
mail from any place outside India

Foreign Companies engaged in the An assessee, being a foreign company engaged

business of Civil Construction etc in
certain turnkey power projects
in the business of civil construction, or the
business of erection of plant and machinery on
testing and commissioning thereof, in
connection with turnkey power project approved
by Central Government an amount equal to 10%
of the amount paid/payable in or out of India to
the said assessee or to any person on his behalf
of account of such work shall be deemed to be
income computed under the heads profit & gain
of business or profession.

T. SPECIAL PROVISIONS FOR NON-RESIDENTS

Computation of Taxable Income Of Non-Residents Engaged In Specified Business

Taxable income of non-resident individuals and foreign companies is calculated at a flat rate
varying from 5% to 10% of the amount paid or payable (whether in or outside India), or an
amount received or deemed to be received in India by or on behalf of the taxpayer on account
of the following:

• Business of operation of aircraft;

• Shipping business;

• Business of civil construction for turnkey power projects;

• Business of providing services or facilities in connection with or supplying plant and

machinery on hire used in the prospecting for or extraction or production of mineral oils.

Taxation of Income of Non-Residents,etc

Income Taxpayer Rate of tax

i) Taxable dividend (i.e. other than those Non resident or Foreign 20%
on which Distribution tax is paid); Company
ii) Interest on Foreign Currency debt;
iii) Income received from mutual fund units
or UTI units purchased in foreign
Currency

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 Income Taxpayer Rate of tax
i) Income received from units purchased Overseas Financial 10%
in foreign currency; Organisation (Off-shore
ii) Long term capital gain arising from the Fund)
transfer of units purchased in foreign
currency

i) Interest on notified Bonds of any Indian Non-resident 10%

Company or Public Sector Company
bonds purchased in foreign currency;
ii) Taxable dividend on Global Depository
Receipts (GDRs) purchased in foreign
currency;
iii) Long term capital gain arising from the
transfer of bonds or GDRs

i) Taxable dividend on GDRs issued by Resident employee of an 10%

Indian Company in accordance with Indian Company or its
notified Employee Stock Option Scheme subsidiary engaged in
purchased in foreign currency specified knowledge
ii) Long term capital gain arising from the based industry (IT or IT
transfer of GDRs related or service)
i) Taxable dividend on securities; Foreign Institutional 20%
ii) Long term capital gain arising from the Investor 10%
transfer of such securities;
iii) Short term capital gain arising from the 10%
transfer of such Securities if Securities
transaction tax is paid;
iv) Short term capital gain arising from the 30%
transfer of such Securities other than (iii)

Winnings from lotteries, crossword puzzles, Any Non-resident 30%

races including horse races, card game and
other game of any sort or gambling or
betting of any form or nature whatsoever
i) Participation in any specified game or Foreign national who is 10%
sports; Non-Resident
ii) Advertisement;
iii) Contribution of articles relating to any
game or sports in India in newspaper,
magazines or journals

Income by way of amount guarantee to be Non-resident Sports 10%

paid or payable in relation to any specified Association or Institution
game or sports played in India

Royalty / Fees for technical services Non-resident or Foreign 10%

received pursuant to an agreement on or Company
after June 1, 2005

Income from units of an open-ended equity Non-resident or Foreign Tax Free

oriented fund of the Unit Trust of India or of Company
Mutual Funds.

Anonymous donations received on behalf Any Non-resident 30%

of any university or other educational
institution or any hospital or any fund or any
specified trust or institution

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U. WITHHOLDING TAXES

Every person, other than an individual not subject to audit under the IT Act, who makes
certain payments including salary, interest, contract payments, rent, commission, brokerage
and fees for professional and technical services is required to deduct tax at source at
prescribed rates. Refer Appendix IV. In the case of a non-resident and foreign company, tax
is deducted at source at the rates prescribed for the particular source of income. No
deduction is allowable in respect of payments made for interest, royalty, and fees for technical
services to non-residents or foreign companies, whether within India or outside India, without
deduction and payment of tax.

An application can be made to the tax authorities for permission to withhold taxes at a rate
lower than those prescribed under the IT Act in the case where the income of a non-resident
or resident is not chargeable to tax in India or is taxable at rates lower than that prescribed for
withholding taxes.

Taxes withheld must be deposited and returns for the same must be filed within the specified
time limits. Full tax credit is granted to the payee of tax deducted at source upon production
of a tax deduction certificate against the final tax liability of the payee

V. DOUBLE TAXATION RELIEF

The government has entered into comprehensive agreements with various countries to avoid
the double taxation of income. Agreements have also been entered with certain countries to
avoid double taxation in respect of income from shipping and air transport.

Unilateral relief is available in India from double taxation where there is no Double Taxation
Avoidance Agreement. This relief is by way of deduction, from the Indian income tax, of a
sum which is calculated on the doubly taxed income at the lower of the rate of tax or the rate
of tax of the other country where tax has been paid.

Tax rates under various treaties are given in Appendix V.

W. BUSINESS CONNECTION

The term ‘business connection’ under the IT Act is significant for a non-resident because any
profit earned by a non-resident is taxable in India if it is earned through or from any business
connection in India.

Business connection normally encompasses:

• A business in India;

• A connection with the non-resident and that business;

• A direct or indirect earning of income by virtue of or through that connection.

A ‘business connection’ requires an element of continuity. An isolated transaction is not

regarded as a business connection. The existence of a business connection is a question of
fact and would be based upon the circumstances of each case.

X. TRANSFER PRICING

The IT Act contains provisions relating to transfer pricing in an international transaction with an
associated enterprise where either party to the transaction is a non-resident.

Income arising from an ‘international transaction’ between ‘associated enterprises’ is to be

computed at arm’s length price.

In accordance with internationally accepted principles, it has been provided that any income
arising from an international transaction or an outgoing like expenses or interest from the
international transaction between associated enterprises, shall be computed having regard to
the arm’s length price, which is the price that would have been charged in the transaction if it
had been entered into by unrelated parties in similar conditions.

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 The arm’s length price shall be determined by one of the methods described below:

• Comparable uncontrolled price method;

• Resale price method;

• Cost plus method;

• Profit split method;

• Transactional net margin method;

• Any other prescribed method,

The taxpayer can select the most appropriate method to be applied to any given transaction,
but such selection has to be made taking into account the factors prescribed in the Income
Tax Rules. With a view to allowing a degree of flexibility in adopting the arm’s length price, the
IT Act provides that where the most appropriate method results in more than one price, a price
which differs from the arithmetical mean by an amount not exceeding 5% of such mean, may
be taken to be arm’s length price, at the option of the assessee.

The primary onus is on the taxpayer to determine an arm’s length price in accordance with the
rules, and to substantiate it with the prescribed documentation, where such onus is discharged
by the assessee and the data used for determining the arm’s length price is reliable and
correct, there can be no intervention by the Assessing officer.

Detailed documentation in respect of international transactions must be maintained.

Accountants’ reports are to be completed and filed in the prescribed format before the due
dates for filing tax returns.

Y. WEALTH TAX

Wealth tax in India under the Wealth Tax Act 1957 is payable each year on the taxable wealth
and depends upon residential status, citizenship and the location of assets.

Taxable wealth includes residential and farm houses, (one property is exempt for individuals)
motor cars, jewellery, bullion, utensils of gold or silver, yachts, boats, aircraft, urban land and
cash exceeding specified limits as reduced by debts owed and incurred in relation to such
assets.

A resident Indian citizen pays tax on his global net wealth. A non-resident pays tax on his net
wealth in India.

A foreign citizen, whether resident in India or abroad, pays wealth tax only on his net wealth in
India.

Wealth tax, in the case of individuals and companies, is chargeable at 1% of the net taxable
wealth exceeding INR 1.5 million (plus surcharge at 10% and further education cess of 3% on
the tax plus surcharge).

Z. SALARIES AND PERQUISITES

Salary includes, salary due from the current employer, previous employer, advance salary
and arrears of salary. It also includes wages, annuity, pension, gratuity fees, commission,
perquisites and profits in lieu of salary, leave salary.

Perquisites includes value of accumulation and any benefit granted or provided free of cost or
at concessional rate.

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 Separate rules govern for the valuation of perquisites:

Nature of perquisite/benefit Perquisite value

Accommodation -15% of salary in cities if the population exceeds

2.5 million
-10% of salary in cities if the population exceed 1
million
-7.5% of salary in other cases.

Provision of Sweeper/Gardener/Hel Actual cost incurred by the employer.

per/Watchman

Provision for value of Gas, Electricity Actual cost incurred by the employer.
and Water

Provision of educational facilities Cost of providing such facility by the employer.

Provision of interest free/concessional
loan
Provision of assets like Computers,
Laptop and other moveable asset
No perquisite if the value of such benefit does not
exceed INR 1,000 per month per child but limited
to 2 children.
Difference in the rate of interest between SBI
Prime Lending Rate and the actual interest
charged by the employer.
10% of the actual cost per annum.

Transfer of movable assets
Vehicle and driver
Cost less 10% of the wear and tear for each year
of use amount paid by the employee at the time of
transfer.
Not charged as perquisites as employer is paying
Fringe Benefit tax on such expenses.

Medical expenses/reimbursements Specified payments made by an employer

towards reimbursements of medical
expenses/medical insurance premium of an
employee are not considered perquisites.

AA. TAXATION OF EMPLOYEE STOCK OPTION PLANS (ESOPs)

The Central Board of Direct Taxes (CBDT) will be issuing guidelines shortly on the taxability
of the ESOPs.

AB. FRINGE BENEFIT TAX

Fringe Benefit Tax (“FBT”) is payable at the rate of 30% of the value of fringe benefits (plus
surcharge and education cess) provided or deemed to have been provided by an employer to
his employee. FBT shall be charged in addition to the Income tax charged for every
assessment year and shall be payable by the employer even if no income tax is payable by
the employer under other provisions of the Income tax Act.

Employer includes a firm, association of persons (AOP), body of individuals (BOI), artificial
judicial persons, trust, local authority but excludes individuals and political parties.

FBT however is not applicable in the case of free or subsidized transport or any such
allowance provided by the employer to his employees from the place of residence to the
place of employment.

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FBT is payable on the value of Fringe Benefits provided or deemed to have been provided as
under:

Fringe Benefits Value of Fringe Benefits

Any free or concessional air ticket 100%
provided by the employer for private
journeys of the employees or their family
members
Any contribution by an employer to an Excess of INR 100,000 contribution per
approved superannuation fund for employee
employees
Deemed Fringe Benefits
Entertainment 20%
Provision of hospitality to any person 20%
(except to his employees in the office or
factory)
Conference (not being fee for 20%
participation by the employees in any
conference)
Sales Promotion including publicity 20%
20%
Employee Welfare
Conveyance 20%
Tours & Travels including foreign travel 5%
Use of hotels, boarding & lodging 20%
facilities
Festival celebration 50%
Repairs, running (including fuel)& 20%
maintenance of motor cars and the
amount of depreciation
Use of Telephone (including mobile 20%
phone) other than expenses on leased
telephone lines
Maintenance of any accommodation in 20%
the nature of guest house (other than the
accommodation used for training
purpose)
Use of health club, sports & similar 50%
facilities
Use of any other club facilities 50%
Gifts 50%
Scholarship to the children of employee 50%
Advance tax is payable at the specified % of the FBT determined on the estimate of total FBT
to be provided or deemed to have been provided to the employees.

Due Date % of FBT Payable

Corporation June 15 15%
September 15 45%
December 15 75%
March 15 100%

Others September 15 30%

December 15 60%
March 15 100%

A return of FBT is to be filed alongwith the annual income tax return each year.

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 SECTION – V

INDIRECT TAXES

India has the following indirect taxes.

A. EXCISE DUTY
Central Excise Duty

Excise Duty is levied on goods manufactured or produced in India. It is levied under the
authority of the Central Excise Act, 1944 at the rates prescribed in the First Schedule and
Second Schedule to the Central Excise Tariff Act, 1985 as periodically amended. The
effective rates may be lower pursuant to general/specific notifications issued by the
Government granting whole or partial exemption from duty.

The duty, in most cases, is levied on the basis of value of the excisable goods. Value, for this
purpose, (with effect from July 1, 2000), is the ‘Transaction Value’ which is the value/ price:

• For delivery at the time and place of removal;

• Where buyer is not a related person; and
• Price is the sole consideration.

Excise Duty is payable by the manufacturer but is, commercially, recovered from the buyer as
a part of consideration for sale of goods. Duty to pay is fastened on manufacturing, but for
administrative purpose it is collected at the time of clearance.

To avoid cascading effect, a scheme known as CENVAT has been in force from effective
April 1, 2000. Under the CENVAT Scheme, a manufacturer can avail of the credit of the
Central Excise Duties or Additional Duties of Customs (CVD) including Education Cess paid
on specified inputs and capital goods used in the manufacture of excisable goods and utilise it
in discharging duty on finished excisable goods. The credit mechanism has been further
expanded to allow inter-sectoral credit of tax paid on goods and services (Service Tax
discussed below).

Types of Excise Duties

Excise duties are of following types:

Basic Excise Duty

Basic Excise duty also termed as CENVAT is levied at the rates specified in First Schedule to
the Central Excise Tariff Act,1985. The present general rate is 16%. This duty is applicable to
almost all excisable goods. There is partial exemption to a few products.

Education Cess and Secondary and Higher Education Cess

Education cess of 2% and a Secondary and Higher Education Cess of 1% are imposed on
aggregate of the excise duties.

Duties under other Acts

Some duties and cesses are levied on manufactured products under other Acts. The
administrative machinery of central excise is used to collect those taxes. Provisions of Central
Excise Act and Rules have been made applicable for levy and collection of these duties/
cesses. Some of such duties are National Calamity Contingent Duty, Additional Duty on
Goods of Special Importance, Additional Excise Duty on pan masala and tobacco products,
Duty on Medical and Toilet preparations, Additional duty on mineral products, etc.

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B. CUSTOMS DUTY

Customs duties are levied on import of goods in the country under authority of Customs Act,
1962 and in certain instances on exports. It is levied at the rates specified in the Customs
Tariff Act, 1975 (CTA). The effective rates of customs duties may vary pursuant to general
and/or specific exemption or concession notifications issued by the Government.

Types of duties

Under the custom laws, the effective rate of duty is approx. 34.13%. The following are the
various types of duties which are leviable.

Basic Duty

The peak rate of customs duty on non-agricultural goods is 10%.

Additional Duty

It also referred to as Countervailing Duty (CVD). This duty is equivalent to excise duty leviable
on a like product manufactured in India. If a like product is not manufactured or produced in
India, the excise duty that would be leviable on that product had it been manufactured or
produced in India is applied. If the product is leviable to duty at different rates, the highest rate
among those rates is applied. Such duty is leviable on the value of goods plus basic custom
duty payable. Current rate applicable to most of the industrial products is 16%.

Special Additional Duty

It is also referred to as Special CVD. This duty counterbalances sales tax, Value Added Tax
(VAT), local tax or other charges leviable on like articles on its sale, purchase or transaction in
India. Such duty does not exceed 4% of the value of the article.

Education Cess

An Education Cess of 2% is also levied on imports with effect from July 9, 2004.

Secondary and Higher Education Cess

A Secondary and Higher Education Cess at the rate of 1% of the aggregate duties of
customs has been imposed. This is in addition to the Education Cess.

General

In addition, anti-dumping and safeguard duties are levied on specified products for specified
periods. Special excise duties are also levied on certain products listed in various schedules
of CTA.

The importer is required to pay customs duty at the time of clearance of goods from port/
airport. The rate of duty depends on the classification of goods, which is based on
internationally accepted Harmonized System of Nomenclature.

The duty is largely levied on ad-valorem basis i.e. based on the value of the goods. The Duty
is levied on the ‘Transaction value’ which is the value of the imported goods between
unrelated persons.

In addition to ad-valorem duties, for some products CTA has prescribed specific rates of
duties i.e. the rate of duty is specific in rupee terms and not based on value.

Special Valuation Branch (SVB) investigates transactions involving imports between ‘related’
parties. The SVB examines and rules on the correctness of the value adopted.

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C. OCTROI DUTY
Octroi duty is a tax levied on the entry of goods within city limits.

D. STAMP DUTY
Stamp Duty is imposed on execution of specified instruments. Stamp Duty is charged on the
instrument and not on the transaction. The levy is governed by the Indian Stamp Act, 1899 or
the respective State Stamp Acts. Some states have enacted separate legislations, whereas
some have adopted Indian Stamp Act with or without modifications. The rates of Stamp Duty
vary from State to State.
The Bombay Stamp Act, 1958 and certain provisions of the Indian Stamp Act, 1899 applies to
the state of Maharashtra. The instruments executed in the state and enlisted in the Schedule
to the Act are chargeable to stamp duty at the applicable rate. Instruments executed outside
the state are liable to duty only on their receipt in the state, provided it relates to property
situated in the state or a matter or thing to be done in the state. All other instruments would
be charged under the Indian Stamp Act, or not at all.
An instrument is defined to include every document by which any right or liability is or is
purported to be created, transferred, limited, extended, extinguished or recorded. However, it
does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit,
policy of insurance, transfer of share, debenture, proxy and receipt which are under purview
of the Indian Stamp Act as applicable to Maharashtra.
Other provisions are:
• Stamp duty can be paid by way of adhesive or impressed stamps on the instruments;
• The stamp papers must be in the name of one of the parties to the transaction;
• The date of issue of the stamp paper must be not more than six months prior to the
date of the transaction;
• The cost of the stamp duty is a matter of agreement between the parties to the
transaction. However, the Act provides for methods to break the deadlock in specified
cases;
• Some of the important articles governing stamp duty on certain documents is
mentioned in Schedule I of the Stamp Act. Depending upon the instrument, the duty
may be payable based on the true market value of the property, area, or any other
criteria;
• Any person can apply to the Collector of Stamps for adjudication of the stamp duty
payable on the instrument.
• All instruments chargeable with duty and executed by any person in Maharashtra
shall be stamped before, or at the time of execution or immediately thereafter or on
the next working day following the day of execution.
Any instrument which is inadequately/not stamped is inadmissible as evidence for any
purpose. Such instruments can be admissible only on payment of the requisite amount of
duty alongwith interest at 2% per month, subject to the penalty not exceeding twice the
amount of duty.
E. SALES TAX

Sales Tax is a levy on purchase and sale of goods in India or in the state movement of goods.
Sales Tax is levied under authority of both Central Legislation (Central Sales Tax) and State
Governments Legislations (Local Sales Tax). Central Sales Tax is governed by the Central
Sales Tax Act, 1956 which covers inter-state transactions of sale of goods as well as exempts
transactions of import of goods into or export of goods out of India. The Local Sales Tax is
governed by the respective State Sales Tax Acts, under which tax is levied on intra-state
transactions of sales.

Under the Sales Tax scenario there is a cascading effect because of lack of full set-off/credit
mechanism. To plug this loophole and to bring the Indian indirect tax structure in tune with the
WTO standards, majority of State Governments in consensus with the Central Government
have implemented Value Added Tax (VAT) with effect from April 1, 2005. The State Sales
Tax system has been replaced by the Value Added Tax system. .
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Value Added Tax Act

The Maharashtra VAT Act, 2002 (“the VAT Act”) came into force on April 1, 2005. Under the
VAT Act, a dealer is liable to pay tax on the basis of turnover of sales or purchases within the
State. The term dealer includes persons who buy or sell goods in the state whether for
commission, remuneration or otherwise in the course of their business, a broker, commission
agent, auctioneer, public charitable trusts, clubs, association of persons, departments of
union government and state government, Customs department, port trusts, railways,
insurance and financial corporations, transport corporations, local authorities, shipping and
construction companies, airlines, advertising agencies and also any corporation, company,
body or authority, which is owned, constituted or subject to administrative control of the
Central Government, any State Government or any local authority.

However, an agriculturist, educational institution and transporters are deemed not to be a

dealer, subject to fulfillment of specified conditions.

The following dealers are liable to pay VAT:

• Existing dealers on April 2005 holding a valid registration certificate, whose turnover
exceeds the specified limits;

• Existing dealers, holding a valid registration certificate, whose turnover has not exceeded
the specified limits during the financial year 2004-05, but have opted to continue their
registration certificate by applying to the assessing officer;

• Dealers whose turnover of sales exceeds the prescribed limits after April 1, 2005;

Turnover limits for the purpose of Liability/Registration

Category of dealer Total turnover of sales Turnover of taxable goods

INR purchased or sold
INR

Importer 1,00,000 10,000

Others 5,00,000 10,000

Indicative rates of tax are as follows:

Nature of goods Rate of tax

Essential commodities Nil

Gold, silver, precious stones, pearls, etc. 1%

Declared goods, industrial inputs, and such other specified 4%

goods

Foreign liquor, country liquor, liquor imported from Foreign 20%

countries and molasses.
Certain Petroleum products Varies from 10% to 34% and
(in few cases specific duty of
INR 1 per litre also
applicable.)
All other goods, not covered above (Revenue Neutral 12.50%
Rate)

Every registered dealer is required to file a correct, complete and self-consistent return, in
prescribed form, by the due date.

The tax payable, if any, as per return, shall be paid into the government treasury along with
the return.

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The dealer is entitled to claim refund of the excess payment made in respect of the period for
which return has been filed, or may carry forward the same for adjustment towards the tax
payable as per the returns to be filed for any subsequent period.

Refunds can be adjusted in subsequent months return. However, refunds cannot be adjusted
against liability of the subsequent year. However, refunds for financial year 2006–07 can be
adjusted against the liability for financial year 2007–08 as a special case.

All registered dealers are entitled to set off the VAT paid on inputs like raw material, finished
goods and packing material, within the State of Maharashtra against their output tax liabilities.

The set off is subject to the following:

• Set off is allowed only to a registered dealer;

• Valid Tax Invoice is necessary to claim set off;

• Proper accounts to be maintained;

• The set off on eligible goods has to be claimed in the tax period in which the goods have
been purchased.

No set offs shall be admissible in respect of:

• Purchase of motor vehicles (being passenger vehicles);

• Purchase of motor spirit (other than by a dealer in motor spirit);

• Purchase of Crude Oil, used by an oil refinery for refining;

• Any purchase of consumables or capital assets by a job worker (labour job); whose only
sales are waste or scrap of goods obtained from such labour job;

• Any purchase made by a dealer holding Entitlement Certificate under a Package Scheme
of Incentives;

• Any purchase of goods of incorporeal or intangible nature other than Import License,
export permit or licence or quota, credit of duty entitlement pass book, SIM cards,
software in hands of software dealer, Copyright which is resold within 12 months of the
date of purchase;

• Purchases by way of works contracts in building construction;

• Purchases of building material, which are not resold but used in the activity of building
construction.

If during a tax period (month/quarter/six months) the tax on total turnover of sales is less than
the amount of input tax credit, then such excess amount of credit may either be adjusted by
the dealer against his tax liability under the CST Act for the same period or may be carried
forward to the next period. The excess credit may be carried forward in this manner till the
end of the accounting year. The balance, if any, thereafter can be claimed as a refund from
the department.

No tax is payable on export of goods out of India. However, a set off is available of input tax
paid on purchases, from within the State of Maharashtra, used in such exports. The VAT paid
on purchase (inputs), may be adjusted against the VAT/CST liability or claimed as a refund.

Works Contracts Tax

States also levy tax on transactions which are ‘deemed sales’ like works contracts and
leases. A works contract essentially comprises of a contract for carrying out work involving
supply of labour and material, property in which passes during execution of the contract.

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The rate of tax, on such deemed sales of goods, used in the execution of works contract, is
the same as prescribed in the relevant schedules, to the respective goods. However the sale
price of such goods has to be determined in accordance with the provisions contained in the
Maharashtra Value Added Tax Rules, 2005.

Accordingly, the value of goods at the time of the transfer of property in the goods (whether
as goods or in some other form) involved in the execution of works contract has to be
determined by effecting the following deductions from the value of entire contract in so for
as the amounts relating to the deduction pertain to the said works contract:

• Labour and service charges for the execution of the works;

• Amounts paid by way of price for sub-contract, if any, to subcontractors;

• Charges for planning, designing and architect's fees;

• Charges for obtaining on hire or otherwise, machinery and tools for the execution of the
works contract;

• Cost of consumables such as water, electricity, fuel used in the execution of works
contract, the property in which is not transferred in the course of execution of the works
contract;

• Cost of establishment of the contractor to the extent to which it is relatable to supply of

the said labour and services;

• Other similar expenses relatable to the said supply of labour and services, where the
labour and services are subsequent to the said transfer of property;

• Profit earned by the contractor to the extent it is relatable to the supply of said labour
and services,

Where the contractor has not maintained accounts which enable a proper evaluation of the
different deductions as above or where the Commissioner finds that the accounts
maintained by the contractor are not sufficiently clear or intelligible, the contractor or, as the
case may be, the Commissioner may in lieu of the deductions as above provide a lump sum
deduction as prescribed and determine accordingly the sale price of the goods at the time of
the said transfer of property.

Under the Works Contract Composition Scheme, a dealer, may, at his option, choose to pay
tax @ 5% on Civil Contracts (as notified) or in case of other contracts 8% on the total
contract value. (After deducting therefrom the amount paid towards sub-contract, if any).

However, in respect of such contract/s, where the dealer has chosen to pay tax by way of
composition, the amount of set off available on inputs will be restricted to 64% of the total
amount of set off for respective goods used in such contracts.

Tax is required to be deducted at source and paid as prescribed.

Tax on Right to Use Goods (Leasing and Hiring)

Earlier the tax on leasing and/or hiring charges were payable under the Maharashtra Tax on
Right to Use Goods Act. Presently, all such transactions of ‘deemed sale’ are liable to tax
under the MVAT Act at the same rate of tax as prescribed in the Schedules.

The MVAT Act requires certain dealers/persons to get their accounts audited by an
accountant within the prescribed period from the end of the year. The report of such audit is
required to be furnished in the prescribed format.

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The Central Sales Tax Act, 1956

Every dealer is liable to pay tax under the Central Sales Tax Act, on sales of goods (other
than Electrical Energy) effected by him in the course of interstate trade or commerce during
the year. The tax is payable if the sale or purchase:

• Occasions the movement of goods from one state to another; or

• Is effected by a transfer of documents of title to the goods during their movement from
one state to another.

Further, the dealer is liable to pay tax under this Act on sale of taxable goods effected by
him in the course of interstate trade or commerce, notwithstanding that the turnover limit of
sales or purchases for registration and liability for tax has not been exceeded under the
State Tax Laws of the relevant State.

No tax is payable under this Act, on any transaction of sale in the course of exports outside
of India. Further, although the sale is effected by transfer of documents of title to such
goods during their movement from one state to another and attracts tax liability, any
subsequent sale during such movement effected by transfer of documents of title to such
goods to a registered dealer, provided the prescribed declarations are obtained from the
supplier and the purchaser of such goods.

A single interstate sale of any amount effected by a dealer attracts tax liability under the
Central Sales Tax Act and consequential liability for obtaining certificate of registration. The
application for registration shall be made within 30 days from the date on which the first
interstate sale is effected. However, the dealers registered under the State Sales Tax Act
may get registration under this Act even without effecting any interstate sale.

Rates of tax on sale in the course of interstate trade or commerce are prescribed by the Act,
as follows:

With form “C” Without form “C”

Goods specified in registration 3% or local rate Local rate
certificate of the registered dealer
All other sales - Local rate

Transfer of goods from one state to another to one’s own place and business is exempt from
levy of tax. A declaration in Form ‘F’ must be obtained from the branch.

Transactions of export of goods outside India or import of goods from out of India are
exempt from tax.

Dealers effecting sales in the course of interstate trade are required to obtain a declaration
in Form ‘C’ from the purchaser of goods to apply concessional rate.

The purchasing dealer is required to get these forms from the prescribed authority under his
seal and signature. The dealer issuing the forms shall keep a record of forms used by him.

‘C’ form declarations can be issued by dealers registered under the Central Sales Tax Act,
in respect of those goods only; which are included in the relevant list of their Registration
certificate under the Central Sales Tax Act, for resale, for packing, for use in the
manufacture or processing of goods for sale, or for use in mining or for use in telecom
industry or for use in the generation or distribution of electricity or any other form of power.

The tax is to be collected by the registered dealer, who sells goods in the course of
interstate trade or commerce and shall be paid to the Government treasury, along with a
return, within the time as may be prescribed by the State Government in the local Act.

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F. SERVICE TAX
Service Tax is levied on specified categories of services. Service Tax is a Union levy and is
governed by Chapter V of Finance Act, 1994 (the Act) as amended from time to time. The
rate of Service Tax 12.36% (Service Tax 12% plus Education Cess of 2% and Secondary and
Higher Education Cess of 1%). Service Tax is charged on the gross value of services.
Generally, it is payable on receipt basis i.e. liability to pay arises on receipt of value for
services charged. It is payable by the service provider and is recovered from the recipient of
services. Service tax affects a person in the following ways:

i) As a Service Provider:

An assessee may be liable for Service Tax on rendition of any of the 100 categories of
services provided or to be provided (includes advances received).

ii) As a Service Receiver:

• Services received from persons based outside India;

• Insurance companies are liable to pay Service Tax in respect of services provided by
insurance agents;

• Mutual Fund/Asset Management Companies to pay Service Tax on mutual fund

distribution services;

• Sponsor of an event to pay service tax in case of sponsorship services;

• Transportation of goods by road service.

Person includes individual, H.U.F., partnership firms, companies, body of individuals (BOI),
association of persons (AOP).

Service Tax is not applicable where the service providers’ taxable service does not exceed
INR 800,000 in a financial year.

Services provided by overseas service providers has been brought within the purview of
Service Tax. In such case the recipient of the services in India would be liable to register and
pay service tax (popularly referred to as reverse charge mechanism).

For the purpose of taxability services provided from outside India and received in India have
been categorized as follows:

• Based on location of Property includes 13 services, which are provided in relation to

immovable property, the services shall be considered as imported if the immovable
property is situated in India;

• Based on Performance includes 50 services, which shall be considered as imported

and liable to tax if the services are wholly or partly performed in India;

• Based on Location of Service Recipient includes 35 services, which shall be

considered as imported and liable in case the recipient of service is located in India
and the services are used in relation to commerce or industry (i.e., commercial use).

The Government has introduced the concept of Export of Services with effect from March 15,
2005, whereby services exported by an Indian entity are not liable to Service Tax on
fulfillment of certain conditions.

In addition to others, following conditions are relevant to constitute exports:

• The service is provided from India and used outside India;

• Payment for such service is received by the service provider in convertible foreign
exchange.

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Export of Service Rules 2005: Taxable services may be exported without payment of Service
tax. The rules have categorized the services under the following three categories.

• Based on location of Property includes 13 services, which are provided in relation to

immovable property, the services shall be considered as exported if the immovable
property is situated outside India;

• Based on Performance includes 50 services, which shall be considered as exported if the

services are wholly or partly performed outside India;

• Based on Location of Service Recipient includes 36 services, which shall be considered

as exported:

o Where the services are provided and used in or in relation to business or commerce
the services shall be considered as exported if the recipient of the service is located
outside India. However, if such a recipient of service has any commercial
establishment or office in India, the services shall be considered to be exported only if
the order for provision of such services is made by the recipient of the service from
any of his commercial establishment or any office located outside India.

o Where the services are not provided and used in or in relation to business or
commerce (such as for personal use), the services shall be considered as exported if
the recipient of the service is located outside India at the time of provision of such
services.

Service tax rebate is given on the following services subject to certain conditions.

Nature of Service Abatement of “gross amount

charged”

Mandap Keepers
• Mandap keepers providing catering services i.e. 40%
supply of food
• Hotels providing mandap keeper services
including catering services i.e. supply of food 40%

Tour operator providing

• Package tour (i.e. accommodation cum transport,
part of tour) 60%
• Non-package tour (say transport) 60%
• Only accommodation booking forming part of a
tour 90%

Rent-a-cab scheme operator 60%

Convention services along with catering services 40%

Outdoor catering (involving supply of food) 50%

Pandal and Shamiana Services including catering 30%

services

Erection, commissioning or installation under a 67%

contract for supplying plant, machinery or equipment
and erection commission or installation of such plant,
machinery or equipment.

Transport of goods by road in a goods carriage 75%

Commercial or Industrial Construction service 67%

Construction of complex 67%

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 Registration:

Ordinarily, every person liable to pay Service Tax is required to register itself with Service Tax
Authorities and comply with procedural requirements like paying taxes, filing returns, etc. in
situations governed by the reverse charge mechanism provisions, the recipient/ specified
person is required to register.

A person liable for payment of service tax should register within 30 days from the date of
commencement of business of providing of taxable service.

Additionally, certain persons have been specified as having to obtain registration

compulsorily. Any provider of taxable service whose aggregate value of taxable service in a
financial year exceeds INR 700,000 is required to make an application for registration within a
period of 30 days of exceeding the aggregate value of taxable service of INR 700,000.

Payment of Service Tax:

Entities Payable as amounts received Payable by

during the period
Individuals, April 1 –June 30 July 5
Proprietary July 1 –September 30 October 5
Concerns, October 1 –December 31 January 5
Partnership Firms January 1 –March 31 March 31

AOP, BOI, Companies April to February 5th of the following month

March March 31

Returns

• For the period April 1 to September 30 – By October 25;

• For the period October 1 to March 31 – By April 25.

Non-filing or returns in time will attract a late fee of INR 2,000.

G. SECURITIES TRANSACTION TAX

Securities transaction tax at the specified rates of the value of the securities transacted on a
recognized stock exchange in India is levied as follows:
Taxable securities transaction Rate Payable by
Purchase of an equity share in a company or a unit of an 0.125% Purchaser
equity oriented fund, where the transaction of such
purchase is entered into in a recognised stock exchange
and the contract for the purchase of such share or unit is
settled by the actual delivery or transfer of such share or
unit.
Sale of an equity share in a company or a unit of an 0.125% Seller
equity oriented fund, where the transaction of such sale is
entered into in a recognised stock exchange and the
contract for the sale of such share or unit is settled by the
actual delivery or transfer of such share or unit.
Sale of an equity share in a company or a unit of an 0.025% Seller
equity oriented fund, where the transaction of such sale is
entered into in a recognised stock exchange and the
contract for the sale of such share or unit is settled by the
actual delivery or transfer of such share or unit.
Sale of a derivative, where the transaction of such sale is 0.017% Seller
entered into in a recognised stock exchange.
Sale of a unit of an equity oriented fund to the mutual 0.25% Seller
fund.

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The securities transaction tax is collected by the stock exchange and remitted to the
exchequer.
The securities, on which such tax is levied, include:
• Shares, bonds, debentures etc or other marketable securities of a like nature, in or of any
incorporated company or other body corporate;
• Derivatives;
• Units or any other instrument issued by any collective investment scheme to the
investors in such schemes;
• Security receipts defined under the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act 2002;
• Government securities;
• Other notified instruments;
• In the case of option contracts, the value of the transaction would include the strike price
and the premium;
• The authorities under the IT Act shall administer the Securities transaction tax.

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 SECTION - VI

ACCOUNTING AND AUDITING

A. ACCOUNTING PROFESSION

The Institute of Chartered Accountants of India (ICAI) is the professional body which
represents the accountancy profession of national and international levels. Regional councils
and local chapters of the ICAI, which are spread all over India, undertake the task of
continuing professional education.

B. AUDITING REQUIREMENTS

Auditing the accounts of a Company is compulsory under the Companies Act 1956.
Companies prepare their financial statements based on historical cost as per the provisions of
the Companies Act 1956. These financial statements are required to be audited by Chartered
Accountants and an Audit the Annual Report, circulated to the members every year, generally
consists of:

• Directors Report;

• Auditor’s Report;

• Balance Sheet;

• Profit and Loss Account;

• Cash Flow Statement.

C. AUDIT UNDER THE CENTRAL GOVERNMENT COST AUDIT RULES

The central government may direct certain companies for Cost Audit of accounts. The cost
auditor must be a cost accountant under the Cost and Works Accountant Act, 1959.

D. AUDIT UNDER INCOME TAX LAW

The Income tax Act, 1961 requires a tax audit to be conducted by a Chartered Accountant for
tax payers with sales from business in excess of INR 4 million a year, or with gross receipts
from a profession in excess of INR 1 million. An audit report is also required to be issued by a
charted accountant in order to claim tax incentives/holiday benefits.

E. ACCOUNTING STANDARDS AND PRINCIPLES

Statements of accounting standards are issued by the Accounting Standard Board of the ICAI
which prescribes methods of accounting approved by the ICAI for application to financial
statements (For corresponding reference to US GAAP/IFRS, refer Appendix VI). The
accounting standards are notified by the Accounting Standards Board (ASB) in the Ministry of
Company Affairs, Government of India. In addition to accounting standards, generally
accepted accounting principles and guidance notes are issued by the ICAI. The ICAI is
committed to be fully compliant with the IFRS by April 1, 2011.

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 Appendix I

Sector specific guidelines for Foreign Direct Investment

Sector Investment Description of

Cap Activity/Items/Conditions
1. Private Sector Banking 74% Subject to guidelines issued by RBI from
time to time.
2. Non-Banking Financial Companies 100% FDI/NRI investments allowed in the
following 19 NBFC activities shall be as
per the levels indicated below:
a) Activities covered
1. Merchant Banking
2. Under writing
3. Portfolio Management Services
4. Investment Advisory Services
5. Financial Consultancy
6. Stock-broking
7. Asset Management
8. Venture Capital
9. Custodial Services
10. Factoring
11. Credit Reference Agencies
12. Credit Rating Agencies
13. Leasing & Finance
14. Housing Finance
15. Forex-broking
16. Credit Card Business
17. Money-changing Business
18. Micro-credit
19. Rural credit
b) Minimum Capitalization norms for
fund based NBFCs

i) for FDI upto 51%, US $ 0.5 million

to be brought in upfront

ii) If the FDI is above 51 % and upto

75 %, US $5 million to be brought
upfront

iii) If the FDI is above 75 % and upto

100 %, US $ 50 million out of which
$ 7.5 million to be brought in upfront
and the balance in 24 months
c) Minimum Capitalization norms for
non-fund based activities

Minimum Capitalization norm of US

$0.5 million is applicable in respect
of non-fund based NBFCs with
foreign investment.

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 Sector Investment Description of
Cap Activity/Items/Conditions
d) Foreign investors can set up
100% operating subsidiaries
without the condition to disinvest a
minimum of 25% of its equity to
Indian entities, subject to bringing
in US$ 50 million as at (b) (iii)
above (without any restriction on
number of operating subsidiaries
without bringing in additional
capital.)
e) Joint Venture operating NBFCs
that have 75% or less than 75%
foreign investment will also be
allowed to set up subsidiaries for
undertaking other NBFC activities,
subject to the subsidiaries also
complying with the applicable
minimum capital inflow i.e., (b)(i)
and (b)(ii) above.

f) FDI in the NBFC sector is put on

automatic route subject to
compliance with guidelines of the
Reserve Bank of India. RBI would
issue appropriate guidelines in this
regard.
3. Insurance 26% FDI upto 26% in the Insurance sector is
allowed on the automatic route subject
to obtaining license from Insurance
Regulatory & Development Authority
(IRDA)
4. Telecommunications 49% i) In basic, Cellular, Value Added
Services, and Global Mobile
Personal Communications by
Satellite, FDI is limited to 49%
subject to licensing and security
requirements and adherence by
the companies (who are investing
and the companies in which the
investment is being made) to the
license conditions for foreign
equity cap and lock-in period for
transfer and addition of equity and
other license provisions.

ii) ISPs with gateways, radio paging

and end-to- end bandwidth, FDI is
permitted upto 74% with FDI,
beyond 49% requiring
Government approval. These
services would be subject to
licensing and security
requirements.

iii) No equity cap is applicable to

manufacturing activities.

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 Sector Investment Description of
Cap Activity/Items/Conditions
iv) FDI upto 100% is allowed for the
following activities in the telecom
sector:
a) ISPs not providing gateways
(both for satellite and submarine
cables)
b) Infrastructure Providers
providing dark fibre (IP Category
1)
c) Electronic Mail, and
d) Voice Mail

The above would be subject to the

following conditions:

a) FDI upto 100% is allowed subject

to the condition that such
companies would divest 26% of
their equity in favour of Indian
public in 5 years, if these
companies are listed in other parts
of the world.

b) The above services would be

subject to licensing and security
requirements, wherever required

c) Proposal for FDI beyond 49%

shall be considered by FIPB on
case-to-case basis.
5. i) Petroleum Refining 100% FDI permitted upto 100% in case of
(Private Sector) private Indian companies.

ii) Petroleum Product 100% Subject to the existing sectoral policy

Marketing and regulatory framework in the oil-
marketing sector.

iii) Oil Exploration in both small and 100% Subject to and under the policy of
medium sized fields Government on private participation in

a) exploration of oil, and

b) the discovered fields of national oil

companies.

iv) Petroleum Product 100% Subject to and under the Government

Pipelines Policy and Regulations thereof.
6. Housing and Real Estate 100% Only NRIs are allowed to invest in the
areas listed below:

a) Development of serviced plots and

construction of built-up residential
premises

b) Investment in real estate covering

construction of residential and
commercial premises including
business centers and offices

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 Appendix I (contd)

Sector Investment Description of Activity/Items/Conditions

Cap
c) Development of townships

d) City and regional level urban infrastructure

facilities, including both roads and bridges.

e) Investment in manufacture of building

materials

f) Investment in participatory ventures in (a) to

(e) above

g) Investment in housing finance institutions

which is also opened to FDI as an NBFC.
7. Coal and Lignite i) Private Indian companies setting up or
operating power projects as well as coal and
lignite mines for captive consumption are
allowed FDI upto 100%.
ii) 100% FDI is allowed for setting up coal
processing plants subject to the condition
that the company shall not do coal mining
and shall not sell washed coal or sized coal
from its coal processing plants in the open
market and shall supply the washed or sized
coal to those parties who are supplying raw
coal to coal processing plants for washing or
sizing.

iii) FDI upto 74% is allowed for exploration or

mining of coal or lignite for captive
consumption.

iv) In all the above cases, FDI is allowed upto

50% under the automatic route subject to the
condition that such investment shall not
exceed 49% of the equity of a PSU.
8. Venture Capital Fund Off-shore Venture Capital Funds/companies are
(VCF) and Venture allowed to invest in domestic venture capital
Capital Company (VCC) undertaking as well as other companies through
the automatic route, subject only to SEBI
regulations and sector specific caps on FDI.
9. Trading Trading is permitted under automatic route with
FDI upto 51% provided it is primarily export
activities, and the undertaking is an export house/
trading house / super trading house/ star trading
house.
i) FDI is permitted in case of trading
companies for the following activities:
Automatic Route – 100%
a) exports;

b) cash and carry wholesale trading;

FIPB Route – 100%

a) bulk imports with export/ ex-bonded
warehouse sales;

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 Appendix I (contd)

Sector Investment Description of Activity/Items/Conditions

Cap
b) other import of goods or services
provided at least 75% is for procurement
and sale of the same group and not for
third party use or onward transfer/
distribution/sales.
FIPB Route – 51%
a) Single brand product retailing.

ii) The following kinds of trading are also

permitted, subject to provisions of Exim
Policy.
a) Companies for providing after sales
services (that is not trading per se);
b) Domestic trading of products of JVs is
permitted at the wholesale level for such
trading companies who wish to market
manufactured products on behalf of their
Joint ventures in which they have equity
participation in India;
c) Trading of hi-tech items/items requiring
specialized after sales service;
d) Trading of items for social sector;
e) Trading of hi-tech, medical and
diagnostic items;
f) Trading of items sourced from the small
scale sector under which, based on
technology provided and laid down
quality specifications, a company can
market that item under its brand name;
g) Domestic sourcing of products for
exports;
h) Test marketing of such items for which a
company has approval for manufacture
provided such test marketing facility will
be for a period of two years, and
investment in setting up manufacturing
facilities commences simultaneously
with test marketing;
i) FDI upto 100% permitted for e-commerce
activities Such companies would
engage only in business to business
(B2B) e-commerce and not in retail
trading.
10. Power 100% FDI allowed upto 100 % in respect of projects
relating to electricity generation, transmission and
distribution, other than atomic reactor power
plants. There is no limit on the project cost and
quantum of foreign direct investment.

11. Drugs & 100% FDI permitted upto 100% for manufacture of drugs
Pharmaceuticals and pharmaceuticals provided the activity does
not attract compulsory licensing or involve use of
recombinant DNA technology and specific
cell/tissue targeted formulations. FDI proposals
for the manufacture of licensable drugs and
pharmaceuticals and bulk drugs produced by
recombinant DNA technology and specific
cell/tissue targeted formulations will require prior
Govt. approval.

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 Appendix I (contd)

Sector Investment Description of Activity/Items/Conditions

Cap
12. Road and highways, 100% In projects for construction and maintenance of
Ports and harbours roads, highways, vehicular bridges, toll roads,
vehicular tunnels, ports and harbours.
13. Hotel & Tourism 100% The term hotels include restaurants, beach resorts
and other tourist complexes providing
accommodation and/ or catering and food facilities
to tourists. Tourism related industry include travel
agencies, tour operating agencies and tourist
transport operating agencies, units providing
facilities for cultural, adventure and wild life
experience to tourists, surface, air and water
transport facilities to tourists, leisure,
entertainment, amusement, sports and health
units for tourists and Convention/Seminar units
and organisations.

For foreign technology agreements, automatic

approval is granted if

i) Upto 3% of the capital cost of the project is

proposed to be paid for technical and
consultancy including fees for architects’
design, supervision, etc.

ii) Upto 3% of the net turnover is payable for

franchising and marketing/publicity support
fee, and

iii) Upto 10% of gross operating profit is payable

for management fee, including incentive fee.
14. Mining 74% i) For exploration and mining of diamonds and
precious stones, FDI is allowed upto 74%
under automatic route

100% ii) For exploration and mining of gold and silver

and minerals other than diamonds and
precious stones, metallurgy and processing
FDI is allowed upto 100 % under automatic
route

iii)Press Note 18 (1998 series) dated 14/12/98

would not be applicable for setting up 100 %
owned subsidiaries in so far as the mining
sector is concerned, subject to a declaration
from the applicant that he has no existing
joint venture for the same area and/or the
particular mineral.
15. Advertising 100% Advertising sector - FDI upto 100% allowed on the
automatic route

16. Films 100% Film Sector (Film production, exhibition and

distribution including related services/products)
FDI upto 100% allowed on the automatic route
with no entry-level condition
17. Airports 74% Govt. approval required beyond 74%

Page 75 of 86
 Appendix I (contd)

Sector Investment Description of Activity/Items/Conditions

Cap
18. Mass Rapid 100% FDI upto 100% is permitted on the automatic
Transport Systems route in mass rapid transport system in all metros
including associated real estate development
Pollution Control & 100% In both manufacture of pollution control equipment
19. Management and consultancy for integration of pollution control
systems is permitted on the automatic route

20. Special Economic Zones 100% All manufacturing activities except:

i) Arms and ammunition , Explosives and allied
items of defence equipments, Defence
aircrafts and warships,
ii) Atomic substances, Narcotics and
Psychotropic Substances and hazardous
Chemicals,
iii) Distillation and brewing of Alcoholic drinks
and
iv) Cigarette/cigars and manufactured tobacco
substitutes.
21. Any other Sector/ Activity 100% If not included in this Annexure

22. Air Transport Services 100% for No direct or indirect equity participation by foreign
(Domestic Airlines) NRIs airlines is allowed
49% for
others
23. Townships, housing, 100% The investment shall be subject to the following
built-up infrastructure and guidelines:
construction i) Minimum area to be developed under each
development projects. project shall be as under :
The sector would include,
but not be restricted to a) In case of development of serviced
housing, commercial housing plots – 10 hectares.
premises, hotels, resorts, b) In case of construction - development
educational institutions, project - 50,000 sq.mtrs.
recreational facilities, city c) In case of combination project, any one of
and regional level the above two conditions.
infrastructure. ii) The investment shall be subject to the
following conditions:
a) Minimum capitalization of US $ 10 Million
for wholly owned subsidiaries and US $ 5
Million for joint ventures with Indian
partners. The funds would have to be
brought in within six months of
commencement of business of the
Company.
b) Original investment cannot be repatriated
before a period of three years from
completion of minimum capitalization.
However, the investor may be permitted
to exit earlier with prior approval of the
Government through the FIPB.

Page 76 of 86
 Appendix I (contd)

Sector Investment Description of Activity/Items/Conditions

Cap
iii) At least 50% of the project must be developed
within a period of five years from the date of
obtaining all statutory clearances. The
investor shall not be permitted to sell
undeveloped plots.

iv) The project shall conform to the norms and

standards, as laid down in the applicable
building control regulations, bye-laws, rules,
and other regulations of the State
Government / Municipal /Local Body
concerned.

v) The investor shall be responsible for

obtaining all necessary approvals, including
those of the building / layout plans,
developing internal and peripheral areas and
other infrastructure facilities, payment of
development, external development and
other charges and complying with all other
requirements as prescribed under applicable
rules / bye-laws /regulations of the State
Government / Municipal /Local Body
concerned.

vi) The State Government / Municipal / Local

Body concerned, which approves the building
/development plans, shall monitor
compliance of the above conditions by the
developer.

Note: For the purpose of these guidelines,

"undeveloped plots" will mean where roads, water
supply, street lighting, drainage, sewerage, and
other conveniences, as applicable under
prescribed regulations, have not been made
available. It will be necessary that the investor
provides this infrastructure and obtains the
completion certificate from the concerned local
body / service agency before he would be allowed
to dispose of serviced housing plots.

Page 77 of 86

Salient features of Export oriented units (EOUs), Electronics hardware technology parks
(EHTPs), Software technology parks (STPs) and Special economic zones (SEZs) Schemes
EOU/EHTP/STP unit
Foreign equity permissible 100%, with repatriation benefits.
Approvals Single window clearance for all
activities. Separate procedure of
approvals, where licensing is
required.
Duty free imports Capital goods, raw materials,
permissible components and other inputs,
imported or procured from DTA or
bonded warehouses in DTA.Units
may import /procure from DTA,
duty free, certain specified goods
for creating a central facility for use
by software units. Facility can be
used units for export of software.
Leasing of capital goods Pursuant to a contract, capital
goods may be sourced from a
domestic/foreign leasing company
without payment of duty.
Exports Entire production of goods and
services, including repair, re-
making, reconditioning and re-
engineering.Trading units are not
covered under these schemes.
Export obligations Unit shall be a positive Net Foreign
Exchange (NFE) Earner, which
shall be calculated cumulatively in
blocks of 5 years, starting from
commencement of production.
Supplies of Information Technology
Agreement (ITA-1) and notified
zero duty items manufactured by
these units in the Domestic Tariff
Area (DTA) shall be counted
towards fulfillment of export
obligation.
DTA sales 50% of FOB value of exports at
25% of basic customs duty plus full
CVD. DTA sales beyond this
entitlement are permissible against
payment of full duties provided the
unit has achieved positive NFE.
Investment criteria For EOUs – INR 10 million.
Appendix II
SEZ unit
100%, with repatriation benefits.
Single window clearance for all
activities. Separate procedure of
approvals, where licensing is
required.
Capital goods, raw materials,
components and other inputs,
imported or procured from DTA.
Units may import /procure from
DTA, duty free, all types of goods
for creating a central facility for use
by units. Facility can be used by
DTA units for export of software.
Pursuant to a contract, capital
goods may be sourced from a
domestic/foreign leasing company
without payment of duty.
Export of goods and services
including agro – products, partly
processed goods, sub –
assemblies and components and
by – products, rejects and waste
scrap arising out of the production
process.
Unit shall be a positive Net Foreign
Exchange (NFE) Earner, which
shall be calculated cumulatively in
blocks of 5 years, starting from
commencement of production.
Supplies of Information Technology
Agreement (ITA-1) and notified
zero duty items manufactured by
these units in the Domestic Tariff
Area (DTA) shall be counted
towards fulfillment of export
obligation.
DTA sales permissible on payment
of applicable duty.
NIL
Page 78 of 86

EOU/EHTP/STP unit
Income tax benefits Export profits 100% tax exempt
upto 2009 – 10.
Central sales tax Refundable.
Supplies from DTA Deemed export.
Other benefits/incentives
Appendix II (contd)
SEZ unit
100% Income Tax exemption on
export profits is available to SEZ
units for 5 years, 50% for next 5
years and 50% of ploughed back
profits for 5 years thereafter.
Exempted.
Physical export.
a) Exemption from service tax
b) Full freedom in allocation of
developed plots to approved
SEZ units on purely commercial
basis.
c) Full authority to provide services
like water, electricity, security,
restaurants and recreation
centres on commercial terms.
d) Facility to develop township
within the SEZ with residential
areas, markets, play grounds,
clubs and recreation centres.
Page 79 of 86
 Appendix III

Rates of Depreciation as per the Income Tax Act on a written down value method

Sr. Nature of the Asset Rates

No.
1. Buildings other than the item below 10%
1.1 Building used as residential one except hotels and 5%
boarding houses
1.2. Building forming part of water supply project or water 100%
treatment project which are put into use as infrastructure
facilities under section (801A)(4)
1.3. Temporary Structures 100%
2. Furniture & Fixtures includes electrical fittings 10%
3. Machinery
3.1 General Items 15%
3.2 Motor cars other than those used for running them on hire 15%
and acquired after 1st April 1990
3.3 Aeroplanes – Aeroengines 40%
3.4 Motor buses and Motor lorries running them on hire 30%
3.5 Commercial vehicle 30%
3.6 Moulds issued in rubber industries and refractories 30%
3.7 Air Pollution Equipment 100%
3.8 Water Pollution Equipment 100%
3.9 Machineries and Plant used in semi conductor industries 30%
3.10 Life saving medical equipment 40%
3.11 Containers made of glass/Plastic used as re-fillers 50%
3.12 Computer including software 60%
3.13 Machinery and plant used in water treatment system 100%
3.14 Wooden part used in artificial silk manufacturing units 100%
3.15 Cinematograph films – bulbs of studio lights 100%
3.16 Wooden match frames of Match factories 100%
3.17 Tube winding ropes, haulage ropes, safety lamps 100%
3.18 Salt –works, salt pans – reservoirs 100%
3.19 Flour mill, rollers 100%
Iron – Steel industry – Rolling mills rolls 80%
Sugar works – Rollers 80%
3.20 Energy saving devices being
A. Instrumentation and monitoring system 80%
B. Waste heat recovery equipment 80%
C. Co. Generators systems 80%
D. Specialized boilers and furnace 80%
E. Electrical Equipment 80%
F. Burners 80%
G. Other Equipments 80%
3.21 Gas cylinders including values and regulations 60%
3.22 Glass melting furnaces 60%
3.23 Plant used in Mineral oils concerns 60%
3.24 Renewable energy devices 80%
3.25 Books issued by assessee – carrying on a profession
a) Books of annual publication 100%
b) Books other than items stated above 60%
c) Books owned by the assessee running them as a library 100%
4. Ship
i) General which includes dredgers, tugs, barges, survey 20%
launchers and fishing vessels
ii) Vessels used in inland waters 20%
iii) Vessels used in inland waters as speed boats 20%
5. Intangible assets being know-how, patents copyrights, 25%
trademarks licences, franchises or any other business or
commercial rights of similar nature

Page 80 of 86
 Appendix IV

Rates of Withholding Taxes

Sr. Particulars Payment Rate of Tax deduction at source

No. threshold
(INR)
1. Interest on securities
i) Non Corporates 10%
ii) Corporates 20%
No TDS if the interest amount is not exceeding INR 2,500
2. Interest other than interest on
securities
i) Non Corporates 10%
ii) Corporates 20%
No TDS if the interest amount is not exceeding INR 10,000 in the case of deposits in banks
including Co-op. banks, cooperative societies engaging in the business of banking and post
offices.
No TDS if payment is made to the legal heirs
3. For Winning from Lotteries and 5,000 30%
Crossworld Puzzles
4. For Winning from Horse races 2,500 30%
5. Contractors/Sub Contractor and 20,000 per Contractor 2%
Advt. Contractor contract or Sub contractor 1%
contracts
aggregating more Advertisement 1%
than 50,000 in a
tax year
6. Insurance Commission 5,000 Non-Corporates 10%
Corporates 20%
7. Payment of Commission out of 2,000 20%
NSC/80CCB savings
instruments
8. Payments made at the time of 20%
re-purchase of units
9. Payment of commission, fees, 1,000 10%
etc., on sale of lottery tickets
10. Brokerage Commission 2,500 10%
11. Rent 120,000 For the use of machinery,
plant or equipment 10%

For the use of any land or

building (including factory
building) or land appurtenant
to a building (including
factory building) or furniture
or fittings:
- to Individuals/HUF 15%
- to others 20%
12. Professional Services 20,000 10%
13. Payment of enhanced 100,000 10%
compensation

Note: Surcharge is levied at 10% of the rate of tax.

Education cess of 3% is levied on the rate of tax including surcharge.

Page 81 of 86
 Appendix V

Upper limits of withholding taxes in India’s agreements for avoidance of double taxation
Dividends Interest Royalty Fees for technical
(inbound) services
Name of the Right of Rate Right of Rate Right of Rate Right of Rate
country the the the state the state
state to state to to tax to tax
tax tax
Australia Both 15% Both 15% Both 10%, Source 10%,
15%, 15%,
20% 20%
Armenia Both 10% Both 10% Both 10% Both 10%
Austria 10% 10% Both 10% Both 10%
Bangladesh Both 10%, Both 10% Both 10% **
15%
Belarus Both 10%, Both 10% Both 15% Both 15%
15%
Belgium Both 15% Both 10%, Both 10% Both 10%
15%
Brazil Both 15% Both 15% Both 25% **
15%
Bulgaria Both 15% Both 15% Both 15%, Both 20%
20%
Canada Both 15%, Both 15% Both 10%, Both 10%,
25% 15%, 15%,
20% 20%
China Both 10% Both 10% Both 10% Both 10%
Cyprus Both 10%, Both 10% Both 15% Both 10%
15%
Czech Republic Both 10% Both 10% Both 10% Both 10%
Denmark Both 15%, Both 10% Both 20% Both 20%
25% +
15%
+
Egypt (UAR) Source * Source * Source * **
Finland Both 15% Both 10% Both 10%, Both 10%,
+ + 15%, 15%,
20% 20%
French republic Both 10% Both 10% Both 10% Both 10%
Germany Both 10% Both 10% Both 10% Both 10%
Greece Source * Source * Source * **
Hungary Both Both 10% Both Both 10%
(new 10% 10%
contribut
ion)
Indonesia Both 10%, Both 10% Both 15% **
15%
Ireland Both 10% Both 10% Both 10% Both 10%
Israel Both 10% Both 10% Both 10% Both 10%
Italy Both 15%, Both 15% Both 20% Both 20%
25% +
Japan Both 15% Both 10%, Both 20% Both 20%
15%
Jordan Both 10% Both 10% Both 20% Both 20%
Kazakhstan Both 10% Both 10% Both 10% Both 10%
Kenya Both 15% Both 15% Both 20% Both **
+ +
Korea Both 15%, Both 15%, Both 15% Both 15%
(South ) 20% 10%

Page 82 of 86
 Appendix V (contd)
Dividends Interest Royalty Fees for technical
(inbound) services
Name of the Right of Rate Right Rate Right of Rate Right of Rate
country the of the the state the state
state to state to tax to tax
tax to tax
Kyrgyz Both 10% Both 10% Both 15% Both 15%
Republic
Libya Source *+ Source *+ Source *+ **
Malaysia Source 10% Source Source ** 10%
10% 10%
Malta Both 10%, Both 10% Both 15% Both 10%
15%
Mauritius Both 5% , Both $ Both 15% ***
15%
+
Mongolia Both 15% Both 15% Both 15% Both 15%
Morocco Both 10% Both 10% Both 10% Both 10%

Namibia Both 10% Both 10% Both 10% Both 10%

Nepal Both 10%, Both 10%, Both 15% **
15% 15%
Netherlands Both 15% Both 10% Both 10% Both 10%
15%
20%
New Zealand Both 15% Both 10% Both 10% Both 10%
Norway Both 15%, Both 15% Both + Both (or 10% +
(new 25% lower rate)
contribut
ion)
Oman Both 10%, Both 10% Both 15% Both 15%
12.5%
Philippines Both 15%, Both 10%, Both 15% ***
20% 15%
Poland Both 15% Both 15% Both 22.5 Both 22.5%
%
Portugal Both 10%, Both 10% Both 10% Both 10%
15%
Qatar Both 5%, Both 10% Both 10% Both 10%
10%
Republic of Both 10% Both 10% Both 10% Both 10%
South Africa
Romania Both 15%, Both 15% Both 22.5 Both 22.5%
20% %
Russia Both 10% Both 10% Both 10% Both 10%
Singapore Both 10%, Both 10%, Both 15%, Both 15%
15% 15% 10% 10%
Spain Both 15% Both 15% Both 10% Both 20%
20%
Sri Lanka Both 15%+ Both 10% Both 10% ***
Sweden Both 10% Both 10% Both 10% Both 10%
Switzerland Both 10% Both 10% Both 10% Both 10%
Syria Residen * Both 7.5% Both 10% **
ce + +
Sudan Both 10% Both 10% Both 10% Both 10%
Tanzania Both 10%+, Both 12.5 Both 20% Both *
15%+ %+ +
Thailand Both 15%, Both 10%, Both 15% Both *
20% +
25%

Page 83 of 86
 Appendix V (contd)
Dividends Interest Royalty Fees for technical
(inbound) services
Name of the Right of Rate Right Rate Right of Rate Right of Rate
country the of the the state the state
state to state to tax to tax
tax to tax
Trinidad and Both 10% Both 10% Both 10% Both 10%
Tobago
Turkmenistan Both 10% Both 10% Both 10% Both 10%
Turkey Both 15% Both 10%, Both 15% Both 15%
15%
United Both 15% Both 15% Both 10%, Both 10%,
Kingdom 15%, 15%,
20% 20%
USA Both 15% Both 10% Both 10%, Both 10%,
15%, 15%,
20% 20%
Uzbekistan Both 15% Both 15% Both 15% Both 15%
+
United Arab Both 5% Both 5% Both 10% ***
Emirates
Ukraine Both 10% Both 10% Both 10% Both 10%
15%
Uganda Both 10% Both 10% Both 10% Both 10%
Vietnam Both 10% Both 10% Both 10% Both 10%
Zambia Both 5%+ Both 10% Both 10% **
15%+ + +

* Not mentioned - tax law in the state, which has the right to tax, shall prevail.
** No separate provision as per domestic law.
*** In the country of residence .As per domestic law.
+ Beneficial ownership may not be required.
$ Interest exempt if beneficially owned by government or bank carrying bonafide banking business. In
other cases rate is as per domestic law.
NOTE:
1) Royalties and fees for technical services received by a foreign company are taxed at 20% in
India, if they are received in pursuance of an agreement made after May 31, 1997
2) Royalties and fees for technical services received by a foreign company are taxed at 10% in
India, if they are received in pursuance of an agreement made after May 31, 2005.

Page 84 of 86
 Appendix VI
List of Accounting Standards (AS) along with reference of associated US- GAAP & IFRS

AS Title of the AS * US GAAP Reference IFRS

Reference

AS 1 Disclosure of Accounting Policies SFAS 16, 111, 154 IAS 8

AS 2 Valuation of Inventories SFAS 48 , 49 , 151, 153 IAS 2

AS 3 Cash Flow Statements SFAS 95, 102, 104, IAS 7

115, 117, 133 , 149

AS 4 Contingencies and Events Occurring after the SFAS 1 IAS 10

Balance Sheet Date

AS 5 Net Profit or Loss for the Period, Prior Period SFAS 16, 111 & 154 IAS 8
Items and Changes in Accounting Policies

AS 6 Depreciation Accounting SFAS 2,34, 42, 58, 62, IAS 16

68, 109, 141, 142,
143,144, 146, 147 &
153
( Related Standards under US – GAAP are
stated under AS -10 ))
AS 7 Accounting for Construction Contracts SFAS 109 IAS 11

AS 8 Accounting for Research and Development SFAS 2 IAS 38

AS 9 Revenue Recognition SFAS 5,45,48,66, 67 , IAS 18

91,98, 109, 144 & 152

AS 10 Accounting for Fixed Assets SFAS 2,34, 42, 58, 62, IAS 16
( includes related standards on depreciation 68, 109, 141, 142,
under US – GAAP ) 143,144, 146, 147 &
153

AS 11 Accounting for the Effects of Changes in SFAS 52 & 133 IAS 21

Foreign Exchange Rates

AS 12 Accounting for Government Grants SFAS 16 IAS 20

AS 13 Accounting for Investments SFAS 52,65, 80, 94,95, IAS 39 & 40

102, 107, 109,111,112,
115 , 126,127, 130,
133, 137, 138, 140, 142
144, 145 , 149 & 155

AS 14 Accounting for Amalgamations SFAS 94, 140 , 141& IFRS 3

142

AS 15 Accounting for Retirement Benefits in the SFAS 5, 87, 88, 106, IAS 19
Financial Statements of Employers 112, 130 , 132 ( r ), 144,
149

Page 85 of 86
 Appendix VI (contd)

AS Title of the AS * US GAAP Reference IFRS

Reference
AS 16 Borrowing Costs SFAS 34 IAS 23

AS 17 Segment Reporting SFAS 131 IFRS 8

AS 18 Related Party Disclosures SFAS 57 IAS 24

AS 19 Leases SFAS 13, 22, 23, 27, 28, IAS 17

29, 66, 77, 91, 98, 140,
143, 144, 145 & 146

AS 20 Earnings Per Share SFAS 128 , 129 & 150 IAS 33

AS 21 Consolidated Financial Statements SFAS 141 IFRS 3

IAS 27
AS 22 Accounting for Taxes on Income SFAS 5, 6, 12, 37, 52, IAS 12
109

AS 23 Accounting for Investments in Associates in SFAS 94, 140, 141, 142 IAS 28
Consolidated Financial Statements

AS 24 Discontinuing Operations SFAS 144 IFRS 5

AS 25 Interim Financial Reporting SFAS 16 ,69, 95 ,109 , 128 IAS 34

, 130 , 131 , 132 ( r ), 154

AS 26 Intangible Assets SFAS 142 IAS 38

AS 27 Financial Reporting of Interest in Joint SFAS 140 IAS 31

Ventures

AS 28 Impairment of Assets SFAS 142 IAS 36

SFAS 131
AS 29 Provisions Contingent Liabilities, Contingent SFAS 5, 6, 11, 43, 48 , 78 IAS 37
Assets. & 112

* All SFAS’s have to be read along with related APB’s, ARB’s, FIN’s EITF’s, SOP’s, and FSP’s

Page 86 of 86