A guide to establishing presence in India · improving the ease of doing business in India and Startup India, Standup India will further pave the way for growth. Additionally, government’s

A guide to establishing presence in India

2017

2 Doing Business in India

ContentsSection Page

Foreword 3

Introduction 5

Countryprofile 6

KeyeconomicindicatorsofIndia 8

Keysectors:AnOverview 11

Politicalandlegalsystem 14

Foreigninvestment 15

Finance 19

Businessentities 23

Labour 25

Accountingandreportingrequirements 27

Directtax 30

Indirecttax 40

TransferpricinginIndia 42

Glossaryofabbreviations 46

Doing Business in India 3

Foreword

WithGDPgrowthof7.1percentandFDIinflowofUSD60bnin2016-17,Indiaisboth,thefastestgrowingeconomyandthelargestrecipientofFDI,globally.

Overthelastfewyears,thegovernmenthasdeliveredlandmarkstructural reforms which are expected to further propel this growth.ThislistincludesGoodsandServicesTax(GST)whichintegratesIndiaintoasinglemarketandremovesaspateofcomplexindirecttaxes;acompetitionamongstIndia’s29states to improve their ‘Ease of Doing Business’; the ‘India stack’,whichleveragesthenewbiometricidentification(Aadhaar)andmobilepenetrationofabillionplusIndiansfordigital financial transactions; and a sudden withdrawal of all high denomination currency notes along with strengthened legislationandenforcementtotacklecorruptionandunaccountedmoney.

Theperiodbetween31March2015and2017sawanumberof reforms coming together within the ambit of financial regulationsinthecountry.TheIndianequivalentof‘SOX’documentationandauditorattestationofcontrols(ICFR),IndianIFRS(IndAS),andmandatoryrotationofexternalauditorsaresomeofthekeyreformsthatwillalignIndia’spracticestothebestintheworld.

There has never been a time in history where so much has happenedinIndia.AtGrantThorntonIndiaLLP,wearedelighted to be at the forefront of helping shape a more vibrant Indiaworkingwiththegovernment,theleadersofIndiaInc.,and global companies that want to maximise this amazing opportunity.

Vishesh C. ChandiokNationalManagingPartnerGrant Thornton India LLP

PrimeMinisterNarendraModiwonalandslidemandateinMay2014-asinglepartygovernmentwasformedforthefirsttimein30years-onthepromiseofmakingIndiagreatjustlikehehadpreviouslytransformedhishomestate,Gujarat.



Introduction

ThisisaninterestingtimefortheIndianeconomy.Ratedasoneofthemoststableeconomies,Indiacontinuestoshineamidstglobalgloom.LedbytheModigovernment,anumberofeconomic,financialandinstitutionalreformsincludingthe reforms leading to ease of doing business across states havebeenimplemented.Indiaclaimingthe100thspotinWorldBank’srecentlyreleasedEaseofDoingBusinessrankingsisatestimonytothisfact.Thisalsomarksthebiggestimprovementrecordedamong190countriesintheWorldBank’s‘DoingBusiness2018-Reformingtocreatejobs’report.Strictmonetaryactiontakenbythegovernmenttobringbackunaccountedmoneyintothesystempavesthewayforeconomicgrowthbackedwithdigitisation.Bankingregulationsincluding the recent move to replace high value currency notes withnewhigherdenominationshasthepotentialtomaketheeconomymorerobustandcompliant.Thegovernmenthasalsonotified the final regulations related to the insolvency resolution processundertheInsolvencyandBankruptcyCode2016.The law aims to improve the ease of doing business in India by facilitatingsmootherandtime-boundsettlementofinsolvencyandfasterturnaroundofbusinesses,apartfromcreatingadatabaseofserialdefaulters.

Amongreforms,initiativessuchasMakeinIndiacampaign,improvingtheeaseofdoingbusinessinIndiaandStartupIndia,StandupIndiawillfurtherpavethewayforgrowth.Additionally,government’sDigitalIndiaandopeningofbankaccountsformasses via the spread of Jan Dhan Yojna has been a welcome change.

Thegovernmenthasstartedseveraldevelopmentschemes,which,inthelongerrunwillmakethecountrystrongerandmorestable.Inadditiontothis,thepropertymarket,whichwaslargelyconsideredfragmentedandunorganised,wasregulatedbytheenactmentoftheRealEstateRegulationAct(popularlyknownasRERA).AllthestateshadtoimplementtherulesundertheActby1May2017tomaketheregulationarealityacrossthecountry.Thishasbeensupplementedbyinsolvencyandbankruptcylaws,amendmentintheBenamiTransactionsAct,arbitrationandconciliationlaws,andcorporategovernancelaws.

Whilethecountryisnowworkingtowardsthedevelopmentof100smartcities,spreadingfinancialinclusiontoallwillstrengthenthehandsofalargesectionofthepopulation.

However,thebiggestmovebythegovernmentisitsenactmentofalegislationtointroduceanationalvalue-addedtax(namedGoodsandServicesTax)witheffectfromJuly2017,replacingthecurrentmultitudeofcentral,stateandlocallevies.TheGSTregime will create a much more integrated and productive economyinthelongerrun.

Aftertwoquarters,Indianeconomyissettoshine.TheEconomicSurvey2016-17broughtoutbytheGovernmentofIndiainFebruary2017expectseconomicgrowthtoreboundfrom6.75percentin2016-17to7.5percentin2017-18.

TheInternationalMonetaryFund(IMF)alsoexpectsIndia’sGDPtogrowmorethan7percentthisyear,makingIndiatheworld’sfastest-growinglargeeconomy.Amidstslowingglobalgrowth,Indiaremainsabrightspotamongemergingeconomies.TheforecastbyIMFfactorsinthewaveofreformsthatthecountryiswitnessing.AscorroboratedbytheWorldEconomicForum’s(WEF)GlobalCompetitivenessIndexfor2016-17,India’srankinghasimproved16placesto39onaccountofimprovingbusinessenvironmentandinnovation.Followingthecentre’smove,statestooareeyeingsignificantshare of foreign investments demonstrating both cooperative federalismandcompetitivefederalism.AllofthistrulyispoisedtounlockthepotentialforgrowthinIndiaandbuildamorevibranteconomy,andweatGrantThorntoninIndiaareallsettogrowingtogetherwithIndia.WehopethisguidewillsupportyourgrowthplansofeithersettingupbaseorexpandinIndia.Welookforwardtobeingyourgrowthadvisersinthelandofemergingopportunities.

This guide is intended to serve as a primer for companies planningtoentertheIndianmarkettotapsignificantopportunitiesinvarioussectors.Itaimstoprovidebusinessinformationonthecountry’slegal,accountingandtaxationframework.


Country profile

India has emerged as a key investment destination globally. The U.S. Department of Commerce has identified India as one of the world’s top 10 ‘big emerging markets’.

According to the World Investment Report 2017 published by the UNCTAD, India continues to be among the top ten countries in terms of FDI inflows globally and the fourth in developing Asian region.

India’s FDI inflows have increased to USD 44 bn in 2015 as compared to USD 35 bn in 2014, and the growth has been across the board, the report added. Globally, FDI activity has increased by 38 per cent, in a signal that a revival in investment sentiments is on the cards. The FDI inflows in 2016-17 were in excess of USD 60 bn, a new all-time high surpassing the inflows of USD 55.6 bn in 2015-16.

Summary OutlinedbelowarekeyfactsandstatisticsthatmakeIndiaafavourable business destination worldwide:• A growing middle class • An abundant supply of raw material• Anextensiverailandroadnetwork• World’slargestworkingpopulationintheagegroupof25-45

years • LargepoolofskilledEnglishspeakingmanpower• Lowerlabourcostandhence,reducedcostof

manufacturingespeciallyincomparisontonon-Asiancountries

• Geographicallocation,whichmakesIndiaclosertomarketsincludingMiddleEast,SouthAsiaandEurope

Main ports of entry: Chennai,JawaharLalNehru,Kandla,Kochi,Mormugao,Kolkata,Mumbai,Paradip,Tuticorin,Ennore,VishakhapatnamandNewMangalore1

Major international airports: Chennai,NewDelhi,Mumbai,Hyderabad,Kolkata,Bangalore,Goa and Thiruvananthapuram


Geographical locationIndia forms a natural subcontinent with the Himalayan mountainrangetotheNorth,andtheIndianOcean,theArabianSeaandtheBayofBengaltotheSouth,WestandEast,respectively.ThecountryisborderedbyPakistanonthenorthwest,China,BhutanandNepalonthenortheast,andBangladeshandMyanmarontheEast.Nearthecountry’ssoutherntip,acrossthePalkStrait,liesSriLanka.

Indiahasalandfrontierofover15,000kilometres,stretchingfromtheHimalayasinthenorthtothePalkStraitsinthesouth,andfromtheArabianSeaintheWesttotheBayofBengalintheEast.Ithasalongcoastlinespanningover7,000kilometres.The climate varies from tropical in the south to temperate in the north.

Population and standard of livingIndia is the second most populated country in the world withapopulationof1.324bn(WorldBank,2016estimates).Accordingtothe2011populationcensus,thereare35citiesinIndiawithapopulationofmorethanamillion,withMumbai,DelhiandKolkatahavingpopulationover10million.Around70percentofthecountry’spopulationresidesinruralandsemi-ruralareas.OneofthemainreasonsthatIndiaisconsideredasanattractive,high-growthmarketisitslargepoolofuntappedanduppermiddleclasspopulation.Also,thestandardoflivingin metropolitan cities of the country is comparable to the best inotherdevelopingnations.

Asperestimates,250mnpeoplearesettojoinIndia’sworkforceby2030.Withasignificantchunkofpopulationshiftingintotheworkingagegroup,thereisacorrespondingincreaseindisposableincomeandconsumptiondemand.Infact,itisestimatedthatIndiawillhave247,800newmillionairesby2025

DiversityIndiaisrichinhistory,culture,religionanddiversity.Thereare22officiallyrecognisedlanguagesspokeninIndiaacrossits29statesand7unionterritories.Indiaissecularthroughitsconstitution with people from all faiths residing here including Hindus,Muslims,Sikhs,Christians,BuddhistsandJains.

EducationThe education system in India is considered as one of the best globally.Thesystemcomprisespublicandprivateschools,universitiesandotherinstitutionsforhigherlearning(MBA,PhD,MSc,etc.)Theseinstitutionsarecommittedtoimpartexcellentacademicandvocationaltraining,andencourageparticipationinsportsandotherextra-curricularactivities.ThecurrentliteracyrateinIndiastandsat74.04percent.The country offers quality education comparable to global standardsinfieldsincludingfinance,consulting,literature,computerengineering&programming,science&technology,medicine,dentistryandbusinessmanagementandadministration.TheIndianInstitutesofTechnology(IITs)andIndianInstitutesofManagement(IIMs)arerecognisedworld-overaspremierhighereducationalinstitutions.

CurrencyTheIndianRupee(INR)istheofficialcurrencyoftheRepublicofIndia.TheReserveBankofIndia(RBI)isthenationalandsolecurrencyissuingauthorityinthecountry.Theexchangerateoftherupeeismainlymarketdetermined.TheRBItakesakeeninterestinthefinancialmarketsofthecountryandothercountriesgloballytodeterminesuitablemonetary,regulatoryandothermeasures.ThecurrentRBIreferencerateforINR/1USDis64.07(28August2017).*

Key economic statisticsIndia’s economic policies are designed to attract significant capitalinflowsinthecountryonasustainedbasis,andencouragetechnologicalcollaborationwithforeignfirms.Policyinitiativestakenoverthepastfewyearshaveresultedin significant inflow of foreign investment in all areas of the economy,exceptthepublicsector.

Sources: WorldBank,indexmundi.com,Ministryofcommerceandindustry,PIB,India

1MinistryofShipping:http://shipping.gov.in/writereaddata/l892s/27963559-Perspectiveplans.pdf

India is a Union of States with a parliamentary system of government Statistics (2016)

Population 1.324bn(2016)

Area 3.29mnsquarekilometres

GDP(current) USD2.264trillion

GDP – per capita USD1,709.39

Exports USD22115.03mn

Imports USD31955.94mn

Literacy rate 74.04%(Census2011)

Life expectancy 68.35years

Urbanpopulation 33%

Local currency IndianRupee(INR)


Key economic indicators of IndiaGDP and key fiscal indicators• Atarate7.1percent,Indiahasbeenoneofthefastest

growinglargeeconomygloballyin2016-17.Thegrowthhasbeensupportedbythecontributionofkeysectorsincludingagriculture,manufacturingandfinancialservices.However,falteringprivateinvestment,weakcapitalgoodsgrowthandlowerexportswereaconcern.TheGDPgrewby7.4percentand7.6percentin2014-15and2015-16,respectively

• During2015-16,thefiscaldeficitofthecountrystoodatUSD81.2958bn,whichisequivalentto3.5percentofthecountry’sGDP.In2014-15,thecorrespondingfigurewasUSD80.0321bn(RevenueEstimate),whichisequivalentto4.1percentofthe country’s GDP

• Revenuedeficitstoodat2.8percentofGDPforFY2015-16

External factor and per capita national income• ExportsfromIndiajumpedyear-on-yeartoUSD24.5bnin

Februaryof2017,thebiggestgainsinceOctober2011.Thiswas primarily on account of the firming up of the rupee against slowingglobaleconomy.

• Incomparisontothepreviousfiscalyear,thecountry’sexportsjumpedby17.5percent.

• India is the third largest economy in the world in terms of purchasingpowerparity(Source:InternationalMonetaryFund).

• ImportstoIndiaincreasedtoUSD33.4bninFebruary2017,thebiggestgainsinceNovember2014,registeringasurgeof21.8percent.

• AccordingtoFirstAdvanceEstimatesprovidedbytheCSO,inrealterms(at2011-12prices)during2016-17,thepercapitaincomeislikelytoattainalevelofINR81,805ascomparedtoINR77,435fortheyear2015-16.Thegrowthrateinpercapitaincomeisestimatedat5.6percentduring2016-17,asagainst6.2percentinthepreviousyear.

Growth rates in GDP at factor cost

Source:CSO

7.1%GDP growth in2016-17

21.8%increase in imports in2017

6.9%

7.4%

7.6%

7.1%

0.0% 2.0% 4.0% 6.0% 8.0%

2013-14

2014-15

2015-16

2016-17


Money and credit• AsrecordedinJanuary2017,thegrossbankcreditforFY

2016-2017stoodatINR67113bn(USD1,047.5bn)(Source:RBI)

• ThegrossfixedcapitalformationaveragedUSD74.7bnduringtheperiod2001-2016.Inthefourthquarterof2016,ithasreachedINR87.98bn(USD1.4bn)(Source:MinistryofStatisticsandProgrammeImplementation)

• India’scurrentaccountdeficitstoodat0.6percentoftheGDPinthethirdquarteroftheyear2016ascomparedto1.7percentoftheGDPinthesameperiodayearago.(Source:RBI)

• ExternalDebtinIndiaincreasedtoUSD484300mninthethirdquarteroftheyear2016fromUSD479658mninthesecondquarteroftheyear2016.Therisewasduetoincreaseinlongtermborrowingsandglobalslowdown.(Source:RBI)

• India’sforeignreservestouchedUSD364.11bninsecondweekofMarch2017.However,towardstheendofFebruary2017,theforeigncurrencyassets(FCAs),whichformamajorityofthecountry’sforeignexchangereserves,droppedbyUSD59.1mntoUSD339.72bn.Goldreserveshowever,remainedunchanged.(Source:RBI)

• Indiabecametheninthlargest(accordingtoWorldInvestmentReport,2017)recipientofFDIin2016intheworld,grossingUSD55.46bnfollowingaseriesofreformsbythegovernment,ascomparedtoUSD44bnin2015(Source:WorldInvestmentReport2016bytheUnitedNationsConferenceforTradeandDevelopment)

• PMModi’sdemonetisationdrivecontinuestopushelectronictransactions.Goingforward,thiswillalsospurthegrowthoffintechcompanies.

Source:OfficeoftheEconomicAdvisor,GovernmentofIndia;DepartmentOfIndustrialPolicy&Promotion(DIPP)

9thlargest recipient ofFDIin2016globally

177.6

181.2

176.7

183.3184.6

160.0

165.0

170.0

175.0

180.0

185.0

190.0

2013-14 2014-15 2015-16 Dec-16 Jan-17

Wholesale Price Index: Base Year 2004-2005 Key fiscal indicators (per cent of GDP)

4.7

4.13.9

3.5

3.23.12.9 2.8

2.11.9

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

2013-14 2014-15 2015-16 2016-17(RE) 2017-18 (BE)

Key fiscal indicators (per cent of GDP)

Series 1 Series 2



Key sectors: An overview

Government’s‘MakeinIndia’campaignhasputmanufacturingattheforefront.Thesectorencompassesanumberofsub-sectorssuchasmetalsandmining,industrialmanufacturing,chemicals,engineering,telecomandautomotive,amongothers.ItisexpectedthatManufacturingwillcontributesignificantlytothecountry’sgrowthinthecomingdecade.

India is the seventh largest producer of automobiles in the worldandthefourthlargestmarketbyvolume.Thesectorcontributes7.1percenttotheGDPandemploys19mnpeople.Around31percentofsmallcarssoldgloballyaremanufacturedinIndia.Indiaistheworld’slargestmotorcyclemanufacturer.Thetwo-wheelerssegmentcontributes81per

centmarketshareandleadsthemarketonaccountofhugedomesticdemandfromtheyouthandthemiddleclassbuyer.Thus automotive sector and its manufacturing remains a strong sectorofgrowthforthecountry.

India is also a prominent auto exporter and fifth largest manufacturer of commercial vehicles and the second largest manufactureroftwo-wheelersworldwide.Theexpandingeconomic activity has started to have an impact on the commercialvehiclesegment.Itisexpectedtoregisteradoubledigitgrowthinthenextoneyear.SomeofthekeyforeignplayersareSuzuki,Honda,Nissan,Piaggio,Volkswagen,Renault,Hyundai,GeneralMotors,BMW,FordandToyota.

TheoverallIndianhealthcaremarketiswortharoundUSD100bnandisexpectedtogrowtoUSD280bnby2020,ataCAGRof22.9percent.Healthcaredelivery,whichincludeshospitals,nursinghomesanddiagnosticscentres,andpharmaceuticals,constitutes65percentoftheoverallmarket.TheHealthcareInformationTechnology(IT)marketwhichisvaluedatUSD1bncurrentlyisexpectedtogrow1.5timesby2020.

TheIndianmedicaltourismindustry,currentlypeggedatUSD3bnperannum,withtouristarrivalsestimatedat230,000,isexpectedtoreachUSD6bnby2018,withthenumberofmedicaltouristssettodoubleoverthenextfouryears.ThehospitalanddiagnosticcentresattractedFDIworthUSD3.59bnbetweenApril2000andMarch2016,accordingtodatareleasedbytheDIPP.India’suniversalhealthplanthataimstooffer guaranteed benefits to a sixth of the world’s population willcostanestimatedRs1.6tn(USD23.72bn)overthenextfouryears.

TheIndianpharmaceuticalindustryisestimatedtobeUSD30bn,growingbyaCAGRof16.5percentduringthelastfiveyears(FY2011-16).Indiacontinuestobeamongthelargest producers and exporters of generic drug formulations intheworld,accountingforaround20percentoftotalglobalgenericdrugexports.However,exports,particularlytoregulatedmarkets,havebeenaffectedonaccountofthecontinualUSFDAalertsonIndianmanufacturingstandardsand

facilitiesandUSaloneaccountsforabout40percentofIndia’sdrugexports.Pricingcontrolbeingextendedtoincludemoreandmoreessentialdrugs,arealsodiscouragingmultinationalcompaniesfromintroducingpatenteddrugsinIndia.However,effortsarebeingtakentopromotelocalmanufacturingandreducing dependence on imports of API from China through thenewbulkdrugpolicytobeinitiated,andthestrongMakeinIndiapushinthesector.

TheMedicalTechnologysectorinIndiavaluedatUSD6.3bnin2013atendconsumerpricesandisgrowingat10-12percentperyear.CurrentlytheIndianmedicaldevicesindustryrepresentsjustover1.3percentoftheglobalmedicaldevicemarket.TheIndianmedicaldevicesindustryconsistsofsmallandmediumcompaniesprimarilyfocusingtheirR&Deffortsand manufacturing capabilities for affordable medical devices such as disposables and medical suppliers – which comeunderlowpriced,highvolumemarketsegments.Requirementofhighendmedicalequipment–nearly75percent,aremetbyimports.Thecountry’sMakeInIndiainitiativeis being implemented through a ‘policy push’ to encourage local manufacturing and shift from an import dependent to anexportorientedmarket.TheindustryeagerlyawaitstheimplementationoftheDraftMedicalDevicesbill2016,alongoutstandinginitiativewhichattemptstocarveouttheMedicalTechnologysectorfromPharma.

Manufacturing and Automotive

Healthcare


India is the world’s largest sourcing destination for the IT industry,accountingforapproximately67percentoftheUSD124-130bnmarket.Theindustryhasaworkforceofabout10mn.Moreimportantly,theindustryhasledtheeconomictransformation of the country and altered the perception of Indiaintheglobaleconomy.TheITindustryhasalsocreatedsignificantdemandintheIndianeducationsector,especiallyforengineeringandcomputerscience.

TheIndianITandITeSindustryisdividedintofourmajorsegments–ITservices,BusinessProcessManagement(BPM),softwareproductsandengineeringservices,andhardware.TheIndianITsectorisexpectedtogrowatarateof12-14percentforFY2016-17inconstantcurrencyterms.ThesectorisalsoexpectedtotripleitscurrentannualrevenuetoreachUSD350bnbyFY2025.

TheIndianMediaandEntertainment(M&E)industryisasunrisesectorfortheeconomyandismakinghighgrowthstrides.ThissectorisexpectedtogrowataCompoundAnnualGrowthRate(CAGR)of14.3percenttotouchINR2.26tn(USD33.7bn)by2020,whilerevenuesfromadvertisingisexpectedtogrowat15.9percenttoINR994bn(USD15.5bn).Indiaisoneofthehighestspendingandfastestgrowingadvertisingmarketsglobally.Thecountry’sexpenditureonadvertisingisexpectedtogrowmorethan12percentin2016,andaccelerateto13.9

percentin2017,onthebackofpopularsportingeventslikeT20CricketWorldCup,theIndianPremierLeague(IPL)andthemediablitzonStateelections.Televisionsegment,whichcontinuestoholdhighestshareofspending,isexpectedtogrowby12.5percentin2017,ledbyincreasedspendingbypackagedconsumergoodsbrandsande-commercecompanies.

TheGovernmentofIndiahassupportedMediaandEntertainment industry’s growth through various initiatives such as digitising the cable distribution sector to attract greaterinstitutionalfunding,increasingFDIlimitfrom74percentto100percentincableandDTHsatelliteplatforms,andgranting industry status to the film industry for easy access to institutionalfinance.Also,theGovernmentlaunchedtheDigitalIndia programme to provide several government services to the people using IT and to integrate the government departments andthepeopleofIndia.Theadoptionofkeytechnologiesacross sectors spurred by the ‘Digital India Initiative’ could help boostIndia’sGrossDomesticProduct(GDP)byUSD550bntoUSD1trillionby2025.InIndia,government’sDigitalIndia,MakeinIndiainitiativesdominatedtheIndianITindustryin2015thatalsoboostedthestart-uprevolutioninthecountry.

The Indian retail and consumer industry is broadly segregated intourbanandruralmarkets,attractingplayersfromacrosstheworld.Thesectorhasgrownatanannualrateof5.7percentbetween2005and2015.AnnualgrowthintheIndianconsumptionmarketisestimatedtobe6.7percentduring2015to2020and7.1percentduring2021to2025.Themaximumconsumerspendingislikelytooccurinfood,housing,consumerdurables,andtransportandcommunicationsectors.India will be an interesting arena in the next few years for globalretailers.Withnewlargeformatmallsprovidinganchorspacetomanyinternationalfashionretailers,theconsumerwillbenefitwithaplethoraofchoices.Further,thecurrentandexpected real estate correction along with economic reforms

suchasGSTandinfrastructuredevelopmentschemeswillalsoofferthebrandsanaddedincentivetostayinvestedinIndia.

TheGovernmentofIndiahasallowed100percentFDIunderthe automatic route in online retail of goods and services throughthemarketplacemodel,therebyprovidingclarityontheexistingbusinessesofe-commercecompaniesoperatinginIndia.Manystategovernments,corporateandeducationalorganisationsareworkingtowardsprovidingtrainingandeducationtocreateaskilledworkforceof500millionpeopleby2022.UnionCabinetreformslikeimplementationoftheGoodsandServicesTax(GST)andSeventhPayCommissionareexpected to give a boost to consumer durable sector in India duringFY2017-18.

Technology, Media and Entertainment

Consumer products


Housingisonethebasicneedsofthepopulation.Thesectornot only employs the second most number of people directly andindirectlyinthecountrybutalsosupportsaround250ancillaryindustries.Thesectorcontributesmorethan6percenttothecountry’sGDP.However,thereisahugedemand-supply gap in the housing segment with a projected need of around18mnaffordablehousingunitsandovertheyearsthesectorhasremainedlargelyun-organised,whichhassignificantlyimpactedtheperceptionofthesector.Withinlastcoupleofyears,Governmenthasinitiatedvariousreforms-‘Housingforallby2022’scheme,creationof100smartcities,

relaxationsinFDInormstoattractinvestments&REITsregime.Apartfromthis,governmenthasfinallybeenabletoenactRERAandawardinfrastructurestatustoaffordablehousingsegment.

The plethora of these reforms not only have the ability to change the landscape of the sector in terms of bringing in muchneededtransparencyandaccountability,butalsoattract significant amount of investments for the sector – both overseas&domestic.

Lastyear’sdemonetisationdrivebytheIndianGovernment,whichaimstodrivethecountrytowardsacashlesseconomy,isreflectiveoftherapidlychangingscenariointhecountry.This,alongwithmanymorepolicychangesandreformsprovidesfinancialservicesafirmstanding.Whilethereareconcernsrelatedtohighlevelsofnon-performingassets(NPAs)withbanksandotherfinancialinstitutions,thereisasilverlining.RBI,alongwiththegovernment,hastakenanumberof initiatives for enhancing the accessibility and financial inclusionofallinthecountry.BankaccountpenetrationinIndiaincreasedfrom35percentin2011to53percentin2014.WithinitiativessuchasJanDhanYojana,thenumberofunbankedpopulationwithoutanybankaccountsinIndiahas

comedowntoaround233mnbytheendof2015,reflectingadropof58percentoverthelastfouryears.Asrecordedin2015,Indiahashadatotalof1,440mndepositbankaccountsand1,170mnsavingbankaccountsin2015.Thecountryalsohasaround144mnofborroweraccounts.Withrisinglevelsofdigitisationandtechnologyadoption,financialservicesisexpectedtodeepenitspenetrationandreachinthecountry.Consequently,theIndianBankingindustryhasthepotentialtobecomefifthlargestbytheendofFY2020andthirdlargestbytheendofFY2025.TheBankingandFinancialIndustryisexpectedtorecruitaround8.4mn,andthesectorisexpectedtobeamongthetopemploymentcreatorsin2016.

Real estate and construction

Financial Services


Indiaisthelargestdemocracyintheworld.Itisestimatedthatthecountry,today,hasmorethan200politicalparties.Onefeature of the political parties in India is the dominant role playedbytheirleaders.Therearebothnationalandregionalparties,oneofwhichistheIndianNationalCongress(INC)thathasbeenledmainlybytheNehru-Gandhifamilysincetheindependenceofthecountry.Tocompeteonanationallevel,manypoliticalpartiesformalliances.ThetwomainalliancesinthecountryareNationalDemocraticAlliance(NDA)-acoalitionledbytheBharatiyaJanataParty(BJP),andUnitedProgressiveAlliance(UPA),acoalitionledbytheINC.

Structure of the governmentIndiaisthelargestmulti-partydemocracyintheworld.Itis a sovereign socialist secular democratic republic with a parliamentarysystemofgovernment,andaconstitution.TheConstitution of India provides for a parliamentary form of governmentwhich,althoughhascertainunitaryfeatures,isfederalinstructure.ThecounciloftheParliamentoftheUnionconsistsoftwolegislativehouses-theRajyaSabha(UpperHouse),whichrepresentsthestatesoftheIndianfederation,andtheLokSabha(LowerHouse),whichrepresentsthepeopleofIndiaasawhole.Atpresent,thecountryisaUnionof29statesandsevenUnionTerritories(UTs).Eachstateisgovernedby a government comprising elected representatives of the public.

TheCentralandStategovernmentscompriseacouncilofministersheadedbyaPrimeMinisterandaChiefMinister,respectively.TheheadofthestateisthePresidentofIndia,whiletheheadofthegovernmentisthePrimeMinister.ThePrimeMinisterandtheChiefMinisterareusuallytheheadsofthepoliticalpartiesthatareelectedbythepeople.TheyhavesupportofallthemajoritymembersintheParliament.ElectionsfortheState,CentreandUTsareheldaftereveryfiveyears.

NewDelhiisthenationalcapitalofIndia.TheseatoftheCentralgovernmentisNewDelhi.AlltheotherStategovernments have primary responsibility for matters such as lawandorder,education,healthandagriculture.Currently,Mr.NarendraModiisthePrimeMinisterofIndia.IndiaisamemberofmajorinternationalorganisationsincludingSouthAsianAssociationforRegionalCooperation(SAARC),Brazil,Russia,India,ChinaandSouthAfrica(BRICS),andtheCommonwealthofNations,amongothers.

Judiciary and lawIndiahasawell-established,independentjudicialsystem.TheSupremeCourtofIndiaisbasedinNewDelhi.Ineachstate,thereisaHighCourtinitscapitalcity.TheStatesalsohaveseveraldistrictcourts.

IndiaderivesmostofitsjudicialframeworkfromtheEnglishlegalsystem.ThemaingoaloftheIndianlawistoprotectthepromotionofbusinessentities,provideahealthyindustrialandsocialenvironmentandensurerobustlabourprotection.Till1991,manytradebarrierswereinplacesoastopromotethelocalindustry,butsince1991manybarrierswereliftedtopromotetheinfluxofforeigninvestorsinthecountry.

Political and legal system

Source:GrantThorntonDealTracker

Introduction


Foreign investment

IntroductionForeigninvestorskeentosetupoperationsinIndiaarerequiredtocomply,interalia,withtheforeignexchangecontrollawsofthecountry,particularlytheconsolidatedFDIPolicy,issuedbytheGovernmentofIndiafromtimetotime.Accordingly,theCompaniesAct2013,ForeignExchangeManagementAct,1999(FEMA)andtheRegulationsthereundergovernthesetting-upofincorporatedentities(jointventuresorwholly-ownedsubsidiaries)andofunincorporatedentities(branch,liaisonorprojectoffices).

Foreign direct investment policyIn recognition of the important role played by FDI in acceleratingtheeconomicgrowthofthecountry,thegovernment initiated a slew of economic and financial reforms in1991.Indiaisnowusheringinthesecondgenerationreformsaimed at furthering the integration of the Indian economy with theglobaleconomy.

FDIisfreelyallowedinsomesectors,inthecountry,includingtheservicessector.FDIispermitted,subjecttocertainspecified

conditions.Ontheotherhand,inafewsectors,theexistingandnotifiedsectoralpolicydoesnotpermitFDIbeyondaceiling.

Forcertainclassofitems/activities,FDIcanbebroughtinthroughthe‘automaticroute’withoutseekinganypriorapprovalfromthecentralgovernmentorfromthecentralbankofIndiai.e.theReserveBankofIndia.Fortheremainingitems/activities,FDIcanbebroughtinafterobtaininganapprovalfromthegovernment.TheapprovingauthorityusedtobetheFIPBwhichusedtofunctionundertheMinistryofFinance.ThegovernmenthasabolishedFIPBwitheffectfromMay2017.New proposals for FDI under approval route are now directly handledbytheconcernedministries.Towardsthisend,theDIPPhasissuedthe‘StandardOperatingProcedures’(SOP)forprocessingFDIproposals.ThisSOPclearlylaysdownthe procedure to submit the online application through the FIPBportal(nowknownastheForeignInvestmentFacilitationPortal).

The table below gives an indicative summary of the sectoral FDI policy:

FDI Policy Parameter Sectors

Automatic route FDIupto100percentpermittedunderautomaticrouteinmostservices,manufacturing,infrastructuresectorandservices,B2Btrading

Approval route

FDIintheseactivitiesispermittedonlywithpriorgovernmentapprovale.g.non-operatingholdingcompanies,broadcastingcontentservices(FMRadio),printmedia(newspaperandperiodicals),privatesecurityagencies,satelliteservices,FDIbeyond49percentindefenceandbeyond74percentinexistingpharma companies

SectoralcapsFDIinthesesectorsissubjecttosectoralcapssuchasinsurance(49percent),defenceindustrysubjecttoindustriallicense(49percent),broadcastingcontentservices–FMradio/news&currentaffairsTVchannels(49percent),multibrandretailtrading(51percent),airlines(49percent)

FDIlinkedconditions

FDIinthesesectorsissubjecttospecifiedconditions–floriculture,horticulture,apicultureandcultivationofvegetables&mushroomsundercontrolledconditions,wholesaletrading,singlebrandretailtrading,e-commerce,constructiondevelopment–townships,housingandbuiltupinfrastructure,printmedia,assetreconstruction companies


FDI is not permitted in the following sectors:• Lotterybusinessincludinggovernment/privatelottery,

onlinelotteries,etc.• Gamblingandbettingincludingcasinos,etc.• Agriculture(excludingplantations-tea/coffee/rubber/

cardamom/palmoiltree/oliveoiltree)• Activities/sectorsnotopentoprivatesectorinvestmente.g.

atomicenergyandrailways(exceptmassrapidtransportsystems)

• Business of chit fund• Nidhi company• Tradingintransferabledevelopmentrights(TDRs)• Realestatebusiness,orconstructionoffarmhouses(subject

tocertainexceptions)• Manufacturingofcigars,cheroots,cigarillosandcigarettes,

tobacco or tobacco substitutesForeign technology collaboration in any form including licensingforfranchise,trademark,brandnameandmanagementcontractisalsoprohibitedforlotterybusiness,gamblingandbettingactivities.

TomakeIndiaanattractivedestinationforforeigninvestors,theFDIpolicyallowsrepatriationofallprofits,dividends,royalty,andknow-howpayments,freely.

Exchange controlsFEMAreplacedtheForeignExchangeRegulationAct,1973tofacilitateexternaltradeandpayments,andtopromoteorderlydevelopmentandmaintenanceoftheforeignexchangemarketinIndia.

Asperthecurrentforeignexchangecontrolregulations,transactions are divided into current account and capital accounttransactions.Capitalaccounttransactionreferstosuchatransactionwhichalterstheassetsorliabilities,includingcontingentliabilities,outsideIndia,ofapersonresident in India; or assets or liabilities in India of a person residentoutsideIndia.Thus,investmentbyabodycorporateoran entity in India and investment therein by a person resident outsideIndiaarecapitalaccounttransactions.

Currentaccounttransactions,ontheotherhand,aretransactionsotherthancapitalaccounttransaction.Suchtransactionscomprise,forinstance,paymentsdueinconnectionwithforeigntrade,othercurrentbusinessservices,

andshort-termbankingandcreditfacilities,intheordinarycourseofbusiness.Broadlyspeaking,currentaccounttransactionsarepermitted,unlessspecificallybarred,andcapitalaccounttransactionsareprohibited,unlessspecificallypermitted.

Capital instrumentsFEMA,readwithrelevantregulationsgoverningFDIprovide,interalia,thatIndiancompaniescanissueequityshares,fullyandmandatorilyconvertibledebentures,fullyandmandatorilyconvertiblepreferencesharesandwarrants,subjecttothepricingguidelines/valuationnormsandreportingrequirements,toforeigninvestorssubjecttocertainprescribedrequirements.The FDI policy allows optionality clauses in equity shares and compulsorilyandmandatorilyconvertiblepreferenceshares/debenturesissuedtonon-residentinvestorsundertheFDISchemesubjecttocertainconditions.Thepolicyprovidesthatshareswithcall/putoptionsmaybeissuedtonon-residentinvestorsprovidedthenon-residentinvestorisnotguaranteedanyassuredexitpriceatthetimeofmakingtheinvestment.

Generalpermissionisalsoavailableforissuingshares/preferencesharesagainstlumpsumtechnicalknow-howfee,royaltydueforpayment,subjecttoentryroute,sectoralcapandpricingguidelines,andcompliancewithapplicabletaxlaws.Lastyear,thegovernmentalsoallowedcompaniesto issue equity shares against any other funds payable by theinvesteecompany(subjecttobonafidesbeingsatisfiedregardinglegitimacyofdues),remittanceofwhichdoesnotrequirepriorpermissionofthegovernmentorRBIunderFEMAoranyrules/regulationsframedordirectionsissuedthereunder.

Foreign Currency LoansIntermsoftheFEMAandtherelevantregulationsgoverningExternalCommercialBorrowings(ECBs),Indiancompaniesoperating in certain specific sectors are permitted to avail ECB fromcertaincategoriesofnon-residentlenderswithaspecifiedminimumaveragematurityperiodforspecifiedendusers,under the general permission or specific permission route as applicable.Importantly,optionallyconvertibleandredeemableinstrumentslikeredeemablepreferenceshares,optionallyconvertiblesharesanddebentures,alsoneedtocomplywiththeECBregulations.


AtpresentthereisathreetracksystemunderwhichIndiancorporatescanavailECBsfromoverseas.Thefollowingtabledepictsthekeyparametersunderthethreetracks:

Parameter Track I (short-medium term foreign currency ECB)

Track II (long-term foreign currency ECB)

Track III (INR denominated)

Minimumaveragematurity Minimumaveragematurityof3/5years.

Minimumaveragematurityof10years.

IndianRupee(INR)denominatedECB with minimum average maturityof3/5years.

Recognisedlenders Internationalbanks,internationalcapitalmarkets,foreignequityholders,longtermlenders,suppliersofequipmentetc.

SameasTrackIexceptoverseasbranches/subsidiariesofIndianbanks.

SameasTrackII

Permitted end uses Capital expenditures such as importofcapitalgoods,localsourcingofcapitalgoods,newprojects,expansionormodernisation

All purposes excluding real estate activities,investmentincapitalmarkets,onlending,purchaseofland,etc.

SameasTrackII

Eligible borrowers Manufacturingcompanies,softwaredevelopmentsector,infrastructuresector,SEZunits,coreinvestmentcompanies,holdingcompanies,infra-relatedNBFCs,etc.

TrackIentities,RealEstateInvestment Trusts and Infrastructure Investment Trusts

TrackIIentitiesandallNBFCs,companies engaged in miscellaneous services such asresearchanddevelopment,training and logistics services and notforprofitentities


Import/export controls Overtheyears,Indiantradepolicyhasundergonefundamentalshiftstocorrectthepreviousanti-importbias,throughthewithdrawalofquantitativerestrictions,reductionandrationalisationoftariffs,liberalisationinthetradeandpaymentsregime,improvementinaccesstoexportincentives,andestablishmentofarealisticandmarket-basedexchangerate.

Export and import of goods and services from India is allowed underFEMA,readwiththeForeignExchangeManagement(CurrentAccount)Rulesasamendedfromtimetotime.ThesaidExportandImportRegulationsstipulate,guidelinespertaining to settlement and payment of export and import transactions,realisationofproceeds,advancereceiptsandpaymentswrittenoffandlimitspermissibleforthesame.

TheExportRegulationsalsosetouttheobligationsforIndianexporters of goods such as submission of certain prescribed declarationsalongwithsupportingdocuments.Whilenoformsare prescribed for export of services nevertheless the export proceeds are required to be realised within a stipulated time period(currentlyninemonths).

Similarly,theimportregulationsprovidethemanneranddocumentsrequiredtobefollowedbypersons,firmsandcompaniesformakingpaymentstowardsimportsintoIndia.Further,thesaidregulationsprovidethetimelineswithinwhich remittances against imports should be completed or an approvalbesoughtfromtheAD/ReserveBankofIndiapriortotheexpirationoftheduedate.

Overseas direct investmentIndianParties(companyincorporatedinIndiaorabodycreated under an Act of Parliament or a partnership firm registeredundertheIndianPartnershipAct1932oraLimitedLiabilityPartnership(LLP)incorporatedundertheLLPAct,2008)areeligibletoundertake‘overseasdirectinvestment’outsideIndiasignifyingalong-terminterestintheforeignentity(jointventureorwhollyownedsubsidiary).

AnIndianPartycanmakeoverseasdirectinvestmentundertheautomatic route in any bonafide activity up to the prescribed limitofitsnetworth(currently400percentofnetworth).Itmaybenotedthatrealestateandbankingbusinessaretheprohibitedsectorsforoverseasdirectinvestment.Overseasinvestment in financial services sector is subject to specified conditionsincludingasatisfactorytrackrecordoftheinvestingparty,andwithpriorapprovaloftheconcernedfinancialregulatorinIndia.

The regulations also prescribe provisions with respect to aspectssuchasissuanceofguarantee,ongoingcomplianceandreportingrequirementsandconditionsfordisinvestment.


Finance

Introduction

Indian financial services sector

FinancialsectorinIndiaisintrinsicallystrong,operationallysundry and exhibits competence and flexibility besides being sensitivetoIndia’seconomicaimsofdevelopingamarketoriented,industriousandviableeconomy.Thesectorcanbebroadly classified into two categories:

The organised sector:Comprisesprivate,publicandforeignownedcommercialandcooperativebanks,whichareknownasscheduledbanksandinsurancesector.

The conventional sector:Comprisesindividualorfamily-ownedmoneylendersandnon-bankingfinancialcompanies(NBFCs).

The force of liberalisation has transformed the structure of financialindustry.Therehavebeensignificantbankingreformsinthecountrysincetheliberalisationoftheeconomy.Thesereformshaveattractedforeignplayersinthebankingandfinancialsector.

TheRBIpolicyratesheavilyinfluencetheIndianFinancialServices.ThecurrentRBIratesasonAugust28,2017areBankrate:6.25percent;Reporate:6.25percent;ReverseReporate:5.75percent.ThereserveratiosareCRR:4percentandSLR:20percent.

Indian financial sector has the following broad categories:

Sr. No. Categories

1 CommercialandRetailBanks

2 WhiteLabelAutomatedTellerMachine(WLA)

3 Paymentbanks/wallets

4 Non-bankingfinancialcompanies(NBFC)

5 Housingfinancecompanies(HFC)

6 Microfinanceinstitutions(MFIs)

7 Insurance companies

8 Capitalmarkets

9 Pension funds

10 Mutualfunds

11 PrivateequityandVentureCapital(VC)funds

12 Assetreconstructioncompanies(ARCs)

13 Realestateinvestmenttrusts(REITs)/Infrastructureinvestmenttrust(InVIT)fund

14 Angelorstart-upfund


Thebankingsectorisdominatedbyscheduledcommercialbanks.Commercialbanksdealinalltypesofcommercialbankingbusinessesincludingcashmanagementsystem,automatedtellermachines(ATMs),creditcards,termandworkingcapitalloans,housingandconsumerfinanceandpurchaseandsaleofforeigncurrencies.Manyfinancialinstitutions are becoming dynamic and entering new domains withinbankingsuchashomeloansfinance,carfinance,retailbanking,etc.andhaveseparatedepartmentsforofferinginvestmentandstructuringservices.

Recently,inanendeavourtopromoteacashlesseconomy,thegovernment announced demonetisation of existing currency notesthroughRBI.ThedemonetisationprocessisexpectedtohaveapositiveimpactontheIndianeconomy,channelisingidlemoneythroughlegitimatebankingchannels.Hence,growingdepositsinthebanksmayresultinloweringtheinterestrates,furtherdroppingthelendingratesaswell.Thiswouldfurtherhelpinpromotingretailactivitiesintheeconomy.

White label automated teller machine (WLA)ATM’sset-up,ownedandoperatedbynon-bankentitiesarecalledWLAs.TheyprovidebankingservicestothecustomersofbanksinIndia,basedonthecards(debit/credit/prepaid)issuedbybanks.TheUnionCabinethasapproved100percentFDIundertheautomaticroutefornon-bankentitiesthatoperateWLA,subjecttocertainconditionsasprescribed.

Payment banks/ walletsPaymentsbanksareanewmodelofbanksconceptualisedbytheRBIforfinancialinclusionbyproviding(i)smallsavingsaccountsand(ii)payments/remittanceservicestomigrantlabourworkforce,lowincomehouseholds,smallbusinesses,otherunorganisedsectorentitiesandotherusers.Ithasreached customers mainly through the mobile phones rather thanconventionalbanks.PaymentsbanksaregovernedbythefinalguidelinesreleasedbytheRBIforpaymentbanksonNovember27,2015.

AirtelhaslaunchedIndia’sfirstlivepaymentsbank.Further,withpaymentbanksusingtechnology-mobilephonesandbiometricsystem(AadharCardenabledbankaccounts),theuse of currency circulation in these areas too will decrease drastically.

Non-banking financial companies (NBFC)NBFCs,arefinancialinstitutionsthatprovidecertaintypesofbankingservices,however,doesnotholdafullbankinglicense.NBFCs under their permissibility criterias are permitted to

offersubstitutetothebankingservicessuchasloans,creditfacilities,etc.rathergenerallyengagedinnon-fundbasedactivitiesthatkeepthemoutsidethescopeoftraditionaloversightrequiredunderbankingregulations.

NBFC sector in India has undergone a significant transformationoverthepastfewyears,withNBFCloansexpanding16.6percentintheyear,twiceasfastasthe8.8percentcreditgrowthacrossthebankingsectoronanaggregatelevel.

Housing finance companies (HFC)ThemandateoftheRBIistopromotehousingfinanceinstitutionstoimprove/strengthenthecreditdeliverynetworkforhousingfinanceinthecountry.HFCsareexpectedtoregulate the housing finance system of the country to prevent the affairs of any housing finance institution being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the housing finance institutions.

The biggest highlight of the government was to bring housing loansofuptoINR5mnunderaffordablehousing,INR2.8mninurbanandINR2.5mninothercentresunderprioritysectorlending.ThedecisionoftheRBItoincreaseloantovalue(LTV)ratioto90percentforloansuptoINR3mnorlesswasanotherpositivesteptoenableHFCstolendmoretolow-andmoderate-income(LMI)group.

Microfinance institutions (MFIs)ThePrimeMinisterofIndiahaslaunchedtheMicroUnitDevelopmentandRefinanceAgency(MUDRA)tofundandpromoteMFIs,whichwouldinturnprovideloanstosmallandvulnerablesectionsofthebusinesscommunity.MFIsare the pivotal overseas organisations in each country that makeindividualmicrocreditloansdirectlytovillagers,microentrepreneurs,impoverishedwomenandpoorfamilies.Asadedicatedcreditdeliverychannelforvastunbanked/under-bankedsegments,NBFC-MFIshavebeenplayingasignificantroleintakingforwardthefinancialinclusionagendaoftheGovernmentofIndia.

Insurance companiesTheInsuranceRegulatoryandDevelopmentAuthorityofIndia(IRDA),aspartofitsendeavourtoincreaseinsurancesectorgrowth,hasallowedanewdistributionavenuecalledthe‘pointofsale’person,whowillbeallowedtosellsimplestandardisedinsuranceproductsinthenon-lifeandhealthinsurancesegments,whicharelargelypre-underwritten.Therelaxation


intheFDIlimitto49percentintheinsurancesectorandpermissionforoffshorereinsurancetoentertheIndianmarketswouldassistIndiabecomethelargestinsurancemarketintheworld.OverfivereinsurancelicenceshavebeengrantedinIndiatopromotethereinsurancebusinessactivities.

ThegrossmarketsizeofIndia’sinsurancesectorisprojectedtotouchUSD350-400bnby2020,withtheIndianinsuranceindustry planning to increase the penetration level in the marketfromthecurrent3.9percentto5percentby2020.

Capital marketsTheIndiancapitalmarketcomprisesequity,debt,foreignexchange,derivativemarketsandfuturesmarketsincommodities.Further,inapotentialmovetoencourageforeigninvestmentintothedebtmarkets,theRBIreleaseddraftcircularon16May2016proposingtoexpandthebasketofpermissibleinstrumentsforforeignportfolioinvestors(‘FPI’)toincludeunlisteddebtsecuritiesaswell.

AccordingtotheDIPP,thetotalFDIinvestmentsIndiareceivedinFY2016-17wasUSD60.08bn.FPIsnetinvestmentsstoodatUSD8.58bninMarch2017,themaingrowthdriverforFPIsbeingtheequitymarket.

Pension fundsPensionFundsarecreatedbyanemployertomakecontributionsoffundssetasideforaworker’sfuturebenefit.ThepassageofthePensionFundRegulatoryandDevelopmentAuthority(PFRDA)Act2013,investmentcorpusinIndia’spensionsectorisexpectedtocrossUSD1trillionby2025.Foreigninvestmentinthepensionsectorispermittedupto49percent.

Mutual fundsMutualfundsarepopularinIndia,becausetheyoffertheability to easily invest in increasingly complicated financial markets.Alargepartofthesuccessofmutualfundsisalsotheadvantagestheyofferintermsofdiversification,professionalmanagementandliquidity.

Afterthetighteningofregulation,andwithrisingincomes,IndianowhasseveralfundhouseswithrecordAssetsUnderManagement(AUM)ofoverINR13,000bnatlastcount,andseverallakhunitholders.

Other sources of financePrivate equity and venture capital (VC) fundsInIndia,VCisregulatedbySEBI.Aventurecapitalmaybesetup by a company or a trust after a certificate of registration isgrantedbySEBI.AVCcanraisemoneyfromanyIndianornon-residentIndian(NRI).Recently,SEBIproposedtoenhancetheinvestmentlimitforventurecapitalfunds(VCFs)from10percentto25percentinoffshoreventurecapitalundertakingswithanIndianconnection.

Overthelastfewyears,Indiahasemergedasthethirdlargestbaseforstart-upsintheworld,aftertheUSandtheUK.Oneofthemostcommonwaysastartupraisesmoneyforitsseedcapitalandfurtherfundingisbyventurecapital.AlternativeInvestmentFunds(AIF)referstoanyprivatelypooledinvestmentthatmaybefromIndianorforeignsourcesknownas‘privateplacement’.

In2015,theRBInotifiedregulationwhichallowedforeigninvestmentandsimplifiedtheprocedureforinvestmentinAIFs.ThismovehasbeenapplaudedbytheAIFindustry,whichisrelativelynewinIndia.Withafreshinflowofforeigninvestment,therewillbeacceleratedgrowthindomesticAIFs,whichyieldbetter returns to investors as well as better investments for new andemergingbusinesses,socialventuresandinfrastructure.

Asset Reconstruction Companies (ARCs)ARCshavebeencreatedtobringaboutasystemforrecoveringNonPerformingAssets(NPAs)fromthebooksofsecuredlendersandunlockingthevalueofNPAs.100percentFDIisallowedinARCsunderautomaticroutetohelptackletheissueofdecliningassetqualityofbanks.

REITs/InVIT fund REITorInVITisanalternatefundraisingmechanismofferedtocapitalintensiveindustriesforcompaniesthatownincome-producingrealestateorinfrastructure.Assuch,theunitholdersofaREIT/InVITearnashareoftheincomeproducedthroughrealestateinvestment,withoutactuallyhavingtogooutandbuyorfinanceproperty.SEBIrelaxedrulesforREITandInVITbyallowingthemtoinvestmoreinunder-constructionprojects,rationalised unit holder consent on related party transactions andremovedrestrictionsonspecialpurposevehicle(SPV)toinvestinotherSPVsholdingtheassets.


Angel or Start-up Fund Angel investors are experienced entrepreneurs who have beenthroughthesamephaseandunderstandwhatittakestocreateabigcompanyfromanidea.Therearearound280investorsthatareapartofthisnetwork.Themainsectorsthatprominentlyinvolveangelinvestmentaree-commerce,informationtechnology,healthcare,agricultureandthemobilesegmentofthetelecommunicationssector.


Business entities

IntroductionA foreign company has the following business entity options through which it can establish its presence in India:

These forms of business entities are discussed in detail as follows:

Unincorporatedentities • Liaisonoffice• Branchoffice• Projectoffice• Partnershipfirm

Incorporated entities • LimitedLiabilityPartnershipfirm(LLP)• Limitedcompany(Public/Private)

Liaison office Aforeigncompany(abodycorporateincorporatedoutsideIndia,includingafirmorotherassociationofindividuals)mayestablishitsliaisonoffice(LO)inIndiabymakinganapplicationtotheAuthorisedDealerBank(ADBank)iftheprincipal business of the entity resident outside India falls undersectorswhere100percentFDIispermittedintermsoftheFDIpolicy.Incertaincases,theapplicationistobemadetotheRBIandprocessedinconsultationwiththegovernmentforinstancewheretheapplicantisanNGO,applicantisfromcertain specified countries and setting up the LO in specified statesinIndiaetc.

AnLOissuitableforaforeigncompany,whichwishestosetupa representative office as a first step to explore and understand thebusinessandinvestmentclimateinthecountry.Thisofficeserves as a communication channel between the parent companyoverseasanditspresent/prospectivecustomersinIndia.TheLOcanalsobesetuptoestablishbusinesscontactsorgathermarketintelligencetopromotetheproductsorservicesoftheoverseasparentcompany.TheLOcannotundertakeanybusinessactivityorearnanyincomeinIndia.

Branch officeAforeigncompanymayestablishitsbranchoffice(BO)inIndiabymakinganapplicationtotheirADBankinmostcases.The BO should be engaged in the activity in which the parent entity is engaged and permissible activities for a BO include export/importofgoods,renderingprofessionalorconsultancyservices,undertakingresearchwork,promotingtechnicalorfinancialcollaborations,representingtheparentcompanyinIndiaandactingasbuying/sellingagentinIndia,renderinginformation technology services and rendering technical support.

TheBOisnotpermittedtoundertakeanymanufacturingactivityinthecountryexceptwheretheBOisset-upinaspecialeconomiczone.

Project officeA foreign company may open a project office in India without priorapprovalfromtheRBI,providedithassecuredacontractfrom an Indian company to execute a project in India and mettheprescribedconditions.Oncetheprojectexecutioniscompleted,asperthetermsofthecontractsawarded,theprojectofficewouldhavetobecloseddown.


Partnership firmsUnderthecurrentFDIpolicyandtheForeignExchangeManagementLaw,foreigninvestmentintoIndianpartnershipfirms(otherthanbynon-residentIndiansorpersonsofIndianorigin)requirespriorpermissionfromtheRBI.Apartnershipisanassociationoftwoormorepersonstocarryonasco-ownersofabusinessforprofit.Eachpartnerofapartnershiphasunlimitedliability.

Limited Liability PartnershipsAlimitedliabilitypartnership(LLP)isahybridbetweenpartnershipfirmandcompany.Itisaseparatelegalentity,liabletothefullextentofitsassets,withtheliabilityofthepartnersbeinglimitedtotheiragreedcontributionintheLLP.Foreign investment into a LLP is permitted under automatic route(withoutrequiringpriorapproval)inthosesectorsinwhich100percentFDIisallowed.However,itshouldbenotedthatLLPsarenotpermittedtoraiseECBs.

An LLP is governed as per the LLP agreement between the partners and in the absence of such agreement the LLP would begovernedbytheframeworkprovidedintheLimitedLiabilityPartnershipAct,2008.ThisActdescribesthemattersrelatingto mutual rights and duties of partners of the LLP and of the limitedliabilitypartnershipanditspartners.Importantly,theActmakesitmandatorytohavetwodesignatedindividualpartners,atleastoneofwhomshouldberesidinginIndia.

Any existing private company or existing unlisted public company can be converted into LLP by complying with the relevantprovisionsofLLPAct,2008.Taxneutralityconditionshavebeenstipulatedforsuchconversion.

Limited companyAlimitedcompanyisanincorporatedentity,whichisaseparatelegalentitydistinctfromitsmembers/shareholders.Asmentionedabove,foreigninvestmentinIndiaisgovernedby the FDI policy of the government as well as the Foreign ExchangeManagementLaw.Asperthecurrentpolicy,all companies in India have to be incorporated under the provisionsoftheCompaniesAct,2013.

WitheffectfromMay2015,theminimumcapitalrequirementforthecompanieshasbeendoneawaywith.Customarypracticeistosetupacompanywithaminimumpaid-upcapitalofINR1,00,000.

Private company: A minimum of two members and two directors are needed to establish a private company with at leastonedirectorbeingresidentinIndia.

Public company: A public company can be incorporated with minimum three directors and seven members with at least one directorbeingresidentinIndia.

Foreign investors while deciding to set up an entity in India as aprivatevis-à-visapubliccompanyconsiderseveralfactorssuch as:• While the private company can provide for restrictions on

transfer of its shares can by inserting suitable clauses in theArticlesofAssociation,however,nosuchrestrictionscanbeputontransferofsharesinpubliccompany,sharesofpubliccompanyarefreelytransferable.

• A private company as the name suggests cannot invite publictosubscribeitssecurities.

• The compliances applicable to a private company under theCompaniesAct2013arefewerascomparedtothoseapplicable to a Public Company such as formation ofvariousgovernancecommittees,secretarialaudits,appointmentofindependentdirectors,ceilingsofmanagerialremuneration,etc.


Labour

Employment ContractIndia has adopted various measures to regulate the conditions underwhichfixed-termemploymentcontractsarewritten,applied,andinterpreted.LabourisaconcurrenttopicintheIndianConstitution-itissubjecttolegislationfrombothStateandCentralgovernments.TheIndianContractsAct,1872defines the term contract as an agreement legally enforceable bylaw.Theremustbealawfulofferandalawfulacceptancetoresultinanagreement.

Customary working hours and holidaysThenormalworkinghoursinafactoryperdayareeight.TheusualworkinghoursinIndiaare9amto5:30pmor9:30amto6pm.Incaseofcorporates,itissevenhoursperday,sixdaysaweek.Indiansubsidiariesofmultinationalcorporationsusuallyfollowafiveday–eighthourperdayweek.Normally,10daysofcasualleaveand20-30daysofprivilegeleaveisallowedinayear.MayDay,whichisknownastheInternationalWorkersDay,iscelebratedeveryyearon1MayinIndia.

Minimum wageTherearelawsinIndiaforworkerstoreceiveaminimumwage.It is one of the most important aspects of starting a new line ofworkorrunninganorganisationsuccessfully.Thereisalawaswell,whichenforcestheemployerstopaythesetminimumwagesinIndia.ThislawisknownastheMinimumWagesAct,1948.ThemaingoalofthisActistopreventexploitationofaworker.

Work permits for foreign workersAforeignnationalcomingtoIndiatoworkisrequiredtogetanemploymentvisa.Employmentvisasareusuallygrantedforoneyear,orthetermoftheemployment/projectcontractandthetimeperiodcanbeextendedonceinIndia.Allforeigners(includingforeignersofIndianorigin)visitingIndiaonlongtermvisas(Student,Medical,ResearchandEmploymentVisaofmorethan180days)arerequiredtogetthemselvesregisteredwiththeForeignersRegionalRegistrationOfficer(FRRO)concernedhavingjurisdictionovertheplacewheretheforeignerintendstostay,within14daysofarrivalinthecountry.

PersonsofIndianOrigin(PIOs)thatfallwithinacertaincategory,asspecified,whohavemigratedfromIndiaandacquiredcitizenshipofaforeigncountryotherthanPakistanandBangladesh,areeligibletoavailtheOverseasCitizenofIndia(OCI)statusaslongastheirhomecountriesallowdual citizenship in some form or the other under their local

laws.PersonsregisteredasOCIdonothaverighttovote,oreligibilitytocontestforelectionstopublic/governmentoffices,etc.RegisteredOCIsshallbeentitledtothefollowingbenefits:• Multipleentry,multi-purposelife-longvisatovisitIndia• Exemption from reporting to police authorities for any length

of stay in India• ParitywithNRIsinfinancial,economicandeducational

fields,exceptintheacquisitionofagriculturalorplantationproperties

ApersonregisteredasOCIforfiveyears,iseligibletoapplyforIndiancitizenship,ifhe/shehasbeenresidinginIndiaforoneyearoutofthefiveyears,beforemakingtherequest.

Social securitySocialsecurityisvalidonlyforthoseindividualswhoareemployedintheorganisedsector.TheEmployees’StateInsuranceSchemeprovidesmedicalcareandotherbenefitsforemployeesorlabourersearninglessthanUSD300amonth(INR21,000).

TheEmployees’ProvidentFundOrganisation(EPFO)isastatutorybodyundertheMinistryofLabourandEmployment,Government of India that administers social security regulationsinIndia.Itismandatoryforallemployerswhoemploymorethan20peopletoapplythefundforthebenefitoftheirworkers.Itcoversallthepensionsandthesurvivorbenefitsintheeventofanyemployee’sdeath.Allemployeesarerequiredtocontribute12percentoftheirsalarytoEPFO.Thisisautomaticallydeductedbytheemployer.Employeesearnatax-freeinterestoncontributionsmadetothefund.EvenforeignorinternationalworkerswhoareemployedinIndiaaresubjecttothetermsofthisfund.Recently,theFinanceMinistryallowedEPFOtoinvest5percentofitscorpusinexchangetradedfunds.

Indiaalsohasasocialsecurityagreement,whichisabilateralagreementbetweentwogovernments.ThisagreementservestoprotecttheinterestsofIndiancitizensworkinginthefollowingcountries:• Australia• Austria• Belgium• CzechRepublic• Canada• Denmark• France • Finland• Germany


• Hungary• Japan• RepublicofKorea• Luxembourg• Netherlands• Norway• SwissConfederation• Sweden

Sickness and pension arrangementsIt is compulsory for an employer to provide medical facilities toitsworkforcebycontributingtowardsEmployees’StateInsuranceScheme,orbyprovidingmedicalbenefitstoitsemployeesandtheirfamilymembers.

TheemployercontributestowardsaProvidentFundSchemeand a certain portion of the contribution is appropriated towardsaPensionScheme,whichprovidespensionbenefitstotheemployeesandtheirfamilymembers.Workersarealsoentitled to gratuity on completion of five years of continuous service.However,contributiontowardsaProvidentFundSchemeisnotrequired,ifthenumberofemployeesinthatorganisationdoesnotexceed20.

Trade unionsThe trade unions in India are generally divided on political lines.Tradeunionshavestruggledhardtoachieveanadequatemeasureofprotectionagainstexploitation.Thetradeunionsworktoprotecttheinterestoftheworkersanddiscusskeyworkplace-relatedissueswiththemanagementsuchaswagesandbenefits.

ThesixmajorCentralTradeUnions(CTU)inIndiaaretheUnitedTradeUnionCongress(UTUC),BhartiyaMazdoorSangh(BMS),HindMazdoorSang(HMS),AllIndiaTradeUnionCongress(AITUC),CentreofIndianTradeUnions(CITU)andtheIndianNationalTradeUnionCongress(INTUC).Atradeunionwillbe recognised if it functions for more than a year after its registration.Incaseanorganisationhasmorethanoneunion,forittoberecognised,itmusthaveatleast15percentofworkersasitsmembers.

Source:MinistryofLabourandEmployment,MinistryofOverseasIndianAffairs


Accounting, reporting and audit requirementsSummaryInIndia,accounting,reportingandauditingrequirementsofbusiness entities are primarily governed by the regulations issuedbytheInstituteofCharteredAccountantsofIndia(ICAI),theSecuritiesandExchangeBoardofIndia(SEBI),theMinistryofCorporateAffairs(MCA)andtheCentralBoardofDirectTaxes(CBDT).

The ICAI has issued accounting standards that are applicable toallentitiesengagedincommercial,industrialorbusinessactivities.Thelegalrecognitiontothesestandardshavebeen given by the Central Government by notification of the standardsundertheCompaniesAct,2013(2013Act).The2013ActisanactofParliamentofIndiawhichgovernstheincorporationofacompany,mannerofconductingtheaffairsofacompany,responsibilitiesofitsboardofdirectorsandotherprovisionsincludingwindingup.Italsoprescribesthefinancial reporting and auditing requirements to be followed by all companies including foreign companies as defined in the 2013Act.

ThecompanieslistedonrecognisedstockexchangeinIndiaaregovernedbyrulesandregulationsissuedbytheSEBIfromtimetotime.Inaddition,thereisindustryspecificguidancerelatingto financial reporting issued by the relevant authorities such as RBI.

Followingsub-sectionsdiscusssomeofthecommonrequirements:

Records to be maintainedCompanyshouldfollowaccrualbasisofaccounting.The2013Actrequiresthattherecordscanalsobemaintainedinelectronic mode in the prescribed manner and are required to beretainedforaminimumperiodofeightyears.Further,theCentral government has the power to direct the company to retainthestatutorybooksforlongerperiods,incertaincases.

Preparation of financial statementsEvery company is required to prepare both separate and consolidated financial statements on an annual basis in accordancewithaccountingframeworkapplicabletothecompany.Further,alistedcompanyisalsorequiredtopublishquarterlyorhalfyearly,asthecasemaybe,interimfinancialinformation,subjectedtoreview,intheformatsprescribedbySEBIwithintheprescribedtimelines.

Contents of financial statements2013Actlaysdowntheformatforpresentationoffinancialstatementsofcompaniesexceptinsurance,bankingandelectricity companies and other class of companies for which formoffinancialstatementsisspecifiedbythegoverningAct.Financialstatementscompriseofbalancesheet,statementofprofitandloss,cashflowstatement,astatementofchangesinequity(ifapplicable)andrelatednotes.

ConsolidationThe 2013 Act mandates preparation of consolidated financial statements, if a company has one or more subsidiaries unless the following conditions are compiled:• Itisawholly-ownedsubsidiaryorpartiallyownedsubsidiary

ofanothercompanyandallitsothermembers,includingthosenototherwiseentitledtovote,havingbeenintimatedin writing and they do not object to the fact that company is notpresentingconsolidatedfinancialstatements.

• Its securities are neither listed nor in the process of listing on anystockexchange,inIndiaoroutsideIndia;and

• Its ultimate or any intermediary holding company files consolidated financial statements with the registrar which is incompliancewiththeapplicableaccountingstandards.

Audit of financial statementsEverycompanyinIndia,irrespectiveofitssize,musthaveitsfinancial statements audited by a Chartered Accountant in practice(memberoftheICAI).Theauditsarerequiredtobeconducted in accordance with the auditing standards issued by ICAI and notified by the Central Government under the 2013Act.Inaddition,IncomeTaxAct,1961mandatesaudit,tobeconductedbyaCharteredAccountantinpractice(memberoftheICAI),oftaxpayersmeetingcertainspecifiedthresholds.

Auditing standardsTheStandardsofAuditingissuedbytheICAIaresubstantiallysimilar to the auditing standards issued by the International AuditingandAssuranceStandardsBoard(IAASB)oftheInternationalFederationofAccountants(IFAC).

Reporting on internal financial controlsIncaseofalistedcompany,directorsarerequiredtolaydowninternal financial controls to be followed by the Company and report annually whether such internal financial controls wereadequateandoperatingeffectively.Incaseofothercompanies,directorsarerequiredtoreportwhethersuchinternalfinancialcontrolswereadequate.


Incaseofallcompanies,auditorsarerequiredtoreportwhether internal financial controls over financial reporting in relation to separate and consolidated financial statements wereadequateinoperatingeffectively.

2013Actdoesnotprescribeinternalcontrolframeworkforthepurposeofreportingbyauditorsanddirectors.

Mandatory Firm RotationToreducetherisksofexcessivelongtermfamiliarity,2013Actprohibits auditor appointment for a period of more than five consecutiveyears(inthecaseofindividualasanauditor)ortenconsecutiveyears(inthecaseofanauditfirmasanauditor)bylistedandcertainotherclassofcompanies.Individual/Auditfirmasanauditorthathascompletedthe above prescribed period of appointment is eligible for appointment as auditors after a period of five years from the completionoftheabovementionedperiod.

Inspection of recordsThebooksofaccountsandotherrecordsareopentoinspectionbyanydirector,RegistrarofCompaniesandothergovernment authorities such as those involved with excise and salestax.

Accounting yearUnderthe2013Act,companiesarerequiredtoadoptuniformfinancialyearendingon31Marchunlessspecificallypermittedbytheauthorities.Similarly,theaccountingyearmustendon31Marcheveryyearforincome-taxpurposes.

Filing of financial statements/resultsAcompanyisrequiredtoholdanAnnualGeneralMeeting(AGM)withinsixmonthsoftheendofthefinancialyear,andfilingofthefinancialstatementswiththeRegistrarofCompaniesisrequiredwithin30daysoftheAGM.Further,listedcompaniesalsoneedtofiletheaudited(orreviewed,asapplicable)financialresultswiththestockexchangewithin60days,incaseofannualperiods,and45days,incaseofquarterlyperiodsexceptlastquarter.

Language in which business records are required to be maintainedThereisnoprescribedlanguageformaintenanceofbooksandbusinessrecords.ItcanbemaintainedinanyIndianlanguage.CompaniesgenerallymaintaintheiraccountsinEnglish.

Maintenanceofaccountingrecordsinaforeigncurrencyandpresentationoffinancialstatements.

Theaccountingrecords,whetherelectronicormanual,havetobekeptinIndiancurrency.However,theforeigncurrencyamountsmayalsobedisclosed.

Accounting framework2013Actprescribestwoaccountingframework,IndianAccountingStandards(IndAS),whicharebasedonInternationalFinancialReportingStandardsasissuedbyInternationalAccountingStandardsBoardwithcertaincarve-outs,mandatoryforcertainclassofcompanies,andstandardsthataresubstantiallydifferentfromIndAS.Companiesarerequiredtodeterminetherelevantaccountingframeworkaspertheapplicablelaw.Further,companymayirrevocablyopttoprepareIndAScompliantfinancialstatementsfortheaccountingperiodsbeginningonorafter1April2015.

MinistryofCorporateAffairs(MCA)hasnotified39IndianAccountingStandards(Ind-AS),whicharebasedonInternationalFinancialReportingStandards(IFRS)withcertaincarve-outs.IndASareapplicabletocompaniesinthemannerspecifiedintheroadmapissuedbyMCA.FollowingistheroadmapformandatoryadoptionofInd-ASbyallcompaniesotherthaninsurancecompanies,bankingcompaniesandnon-bankingfinancecompanies(NBFCs):• TheapplicabilityofIndASismademandatoryunderphase

IforcompanieswhosenetworthisofINR5bnormoreforaccountingperiodsbeginningonorafter1April2016,withcomparativesfortheperiodending31March2016orthereafter.

• UnderPhaseII,IndASismademandatoryforaccountingperiodsbeginningonorafter1April2017,withcomparativesbeginningforperiodending31March2017or thereafter for the companies having net worth more than INR2.5bnbutlessthanINR5bn.

• BothunderphaseIandphaseII,IndASwouldbemandatorily applicable to companies whose equity and debt securities are listed or are in the process of listing onanystockexchangeinIndiaoroutsideIndia,alsotoholding,subsidiary,jointventureorassociatecompaniesofcompaniescoveredabove.

Separateroadmapshavebeenissuedforbanks,insurancecompaniesandNBFCstotransitiontoIndAS,earliestperiodisaccountingperiodbeginningonorafter1April2018.


ROC filingTheMCArequiresfilingoffinancialstatementswiththeRegistrarofCompanies,usingtheeXtensibleBusinessReportingLanguage(XBRL)taxonomy,forthefollowingcompanies:• all companies listed in India and their Indian subsidiaries;• allcompanieshavingpaidupcapitalofINR50mnand

above; and• allcompanieshavingturnoverofINR1bnandabove.

Fortheremainingcompanies,itisrequiredtofilltheprescribedforms.

TheXBRLdocumentsoffinancialstatementsarerequiredtobecertifiedbyaCharteredAccountantorCompanySecretaryorCostAccountantinwholetimepractice.

Income Computation and Disclosure Standards (ICDS)In view of the significant developments in convergence withIFRS,ICDSwerenotifiedundertheITAct,whichare,inprinciple,closertotheexistingIndianGAAPthantheIFRSbasedIndAS.Thesestandardsareeffectivefromthecurrentfinancialyear(2016-17)itselfandarerequiredtobefollowedby all taxpayers following mercantile system of accounting for the purpose of computation of income from business and ‘other income’chargeabletotax.


Direct tax

Income tax is chargeable on taxable income computed in accordancewiththeprovisionsoftheIncome-TaxAct,1961(hereinafterreferredtoas‘ITAct’).Incomecanbebroughtwithinthe tax net under the following heads of income:

1.Income from salary

2.Income from house property

3.Profitsandgainsfrombusinessandprofession(PGBP-Businessincome)

4.Capital gains

5.Incomefromothersources(Incomenotspecificallycoveredunderaboveheadsofincomelikeinterest,dividend,etc.)

All taxpayers are required to follow a uniform tax year from 01Aprilto31Marchfortaxpurposes,referredtoas‘previousyear’,irrespectiveofthefinancialyear(‘FY’)followedforaccountingpurposes.

India follows a mix of source based and residence based taxation.GlobalincomeofaresidentistaxableinIndia.However,non-residentsaretaxableoncertainIndiasourcedincome.

Taxation of individualsDependinguponthedurationofphysicalpresenceinIndia,anindividual can be:• Residentandordinarilyresident(ROR)• Residentandnon-ordinarilyresident(RNOR)• Non-resident(NR)

Scopeoftaxationofanindividualisasfollows:• RORaretaxableontheirworldwideincome• RNORandNRaretaxablefortheirIndia-sourcedincome

Thepersonaltaxratesforthefinancialyear2017-18areasfollows:

Income slabs (USD ) Income slabs (INR) Rate of tax (%)

Upto$3,750* UptoINR250,000 Nil

$3,750to$7,500 250,000to500,000 5%#oftheamountoftotal income exceeding INR2,50,000

$7,500to$15,000 500,000to1,000,000 INR12,500+20%ofthe amount of total incomeexceedingINR500,000

Above$15,000 Above1,000,000 INR112,500+30%ofthe amount of total incomeexceedingINR1,000,000

*Minimumexemptionlimitfor:

Seniorcitizen(age60yearsandabovebutlessthan80years):INR300,000(USD4,500)

Veryseniorcitizen(age80yearsandabove):INR500,000(USD7,500)

*USDratetakenat66.66


Therates,mentionedabove,areexclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.Pleaserefertothesectionon‘Rateofsurcharge,educationcessandsecondaryandhighereducationcess’forfurtherdetails.

Taxation of Partnership firm (including LLP)Scopeoftaxableincomeofafirmisasfollows:• Resident:Taxedonworldwideincome• Non-resident:Taxedon(a)receipt,(b)deemedreceipt,(c)

accrualand(d)deemedaccrual-ofincomeinIndiaA firm is said to be resident in India in every case except where during that year the control and management of its affairs is situatedwhollyoutsideIndia.

Thetaxratesforthefinancialyear2017-18is30percent,exclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.

Corporate income tax ratesScopeoftaxableincomeofacompanyisasfollows:• Resident*:Taxedonworldwideincome• Non-resident:Taxedon(a)receipt,(b)deemedreceipt,(c)

accrualand(d)deemedaccrual-ofincomeinIndia*FromFY2016-17onwards,acompanyshallbearesidentinIndia,ifitisanIndiancompanyoritsplaceofeffectivemanagementisinIndia.Placeofeffectivemanagement(PoEM)hasbeendefinedtomeanaplacewherekeymanagementandcommercialdecisionsthatarenecessaryfortheconductofbusinessofanentityasawholeare,insubstancemade.TheIndianrevenueauthoritieshavealsoreleasedguidelinesfordeterminationofPoEMofaforeigncompanyinIndia.

Tax rate for domestic company

Thecorporatetaxratesforthefinancialyear2017-18is30percent,exclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.

Areducedtaxrateof29percentisapplicabletodomesticcompaniesforFY2016-17withatotalturnover/grossreceiptsofuptoUSD0.75mn(INR50mn)inFY2014-15.Further,theFinanceAct2017haslegislatedalowercorporatetaxrateof25percentforFY2017-18fordomesticcompanies,whosetotalturnoverinFY2015-16wasnotmorethanINR500mn(USD7.5mn).

Theabovetaxratesasapplicableforboththefinancialyears,isexclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.

Domesticcompaniessetuponorafter01March2016,engaged solely in manufacture or production have an option to betaxedat25percentsubjecttofulfilmentofcertainspecifiedconditions(seesection‘manufacturingcompanies’forfurtherdetails).

Theabovetaxrateisexclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.

Tax rate for foreign company

Thecorporatetaxratesforaforeigncompanyis40percent,exclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.

Rate of surcharge and cess

Rate of surcharge

Individuals/AoParesubjecttosurchargeof15percentiftheirtotalincomeexceedsUSD0.15mn(INR10mn)whilefirmsaresubjecttosurchargeof12percentifitstotalincomeexceedsUSD0.15mn(INR10mn).

TheFinanceAct2017hasintroducedasurchargeof10%forindividuals/AoPiftheirtotalincomeexceedsUSD75,000(INR5mn)butdoesnotexceedUSD0.15mn(INR10mn).

Rate of education cess and secondary and higher education cess.

Cess is applicable on all taxpayers and all levels of income, and is computed on the amount of tax computed, inclusive of surcharge (wherever applicable).

Companies

Net Income (USD)

<0.15mn (INR10mn)

0.15mn ~1.50mn(INR10-100mn)

>1.50mn(INR100mn)

Domestic Nil 7% 12%

Foreign Nil 2% 5%

Particular Rate of Tax %

Education cess 2%

Secondaryandhighereducationcess 1%


Minimum alternate tax (MAT)/ Alternate minimum tax (AMT)Indiahasminimumtaxregime,wherebyMATispayablebycorporatesonprofitsasperbooks(subjecttospecifiedadjustments),wheretaxpayableontotalincomeunderthenormalprovisionsofIncome-TaxActislessthanMAT.Similarly,AMTispayablebyotherpersonsontheir‘adjustedtotalincome’.Thetaxratesforthefinancialyear2017-18is18.5percent,exclusiveofapplicablesurcharge,educationcessandsecondaryandhighereducationcess.

Type of taxpayer

Rate of tax (%)

Applicability Credit availability

Company 18.5percentofbookprofits

MATisleviablewhere tax payable on the total income is less than18.5percentofbookprofits.

The excess of MATovernormaltax is treated as credit,whichcanbeset-offinany10subsequentyears against normal tax liability subject to prescribed limitation.*

LLP claiming certain specifieddeductions

Persons (otherthancompany andLLP)claiming certain specifieddeductions$

18.5percenton adjusted total income

AMTisleviablewhere tax payable on the total income is lessthan18.5per cent of adjusted total income.

The excess of AMTovernormaltax is treated as credit,whichcanbeset-offinany10subsequentyears against normal tax liability subject to prescribed limitation.*

$ItisapplicablewhentheadjustedtotalincomeexceedsUSD0.03mn(INR2mn)

TimelimitforclaimingcreditofMAT/AMThasbeenincreasedto15yearsasagainstexisting10yearsbytheFinanceAct2017.

Asregardsforeigncompanies,ithasbeenclarifiedthatMATprovisions do not apply to a foreign company if it does not haveapermanentestablishmentinIndia(inaccordancewiththeprovisionsofrelevanttaxtreaty)orincasewherethereisnotaxtreatyavailable,itisnotrequiredtoseekregistrationunderanylawforthetimebeinginforcerelatingtocompanies.

Taxation of dividendsThe rate of DDT mentioned above is exclusive of applicable

surcharge@12percent,educationcessandsecondaryandhighereducationcess@2percentand1percent,respectively.Further,DDTisrequiredtobecalculatedonthegrossed-upamount.

Particular Rate of tax (%) Basis for levy

Indian company paying dividend

15%asDividendDistribution Tax (DDT

Dividendsdeclared,distributed or paid after specifiedadjustments**

DDTWherearesidentindividual,HUForfirmreceivesaggregatedividendinexcessofINR1mn(USD15,000)fromdomesticcompanies,taxattherateof10percentontheamountofdividendinexcessofINR1mnshallbelevied.TheFinanceAct,2017hasproposedtoextendthistaxtoallresidents(exceptdomesticcompaniesandspecifiedcharitableinstitutions)

**Deductionofdividendsreceivedfromasubsidiaryisallowed,subjecttocertainconditions,forcomputingDDT.However,nocreditofDDTpaidonthedividendreceivedisallowedundertheIndianlaws.Further,DDTisnotataxdeductibleexpense.

Dividend received from a foreign company is taxable in the hands of Indian shareholders at their effective tax rates.However,inthecaseofdividendsreceivedbyanIndian company from a foreign company in which the Indiancompanyholds26percentormoreequity,taxataconcessionalrateof15percentislevied.

Taxation on income distributed by way of buy-back of unlisted sharesTaxislevied@20percent(plusapplicablesurchargeandcess)onthe‘distributedincome’paidbyunlistedcompaniestotheirshareholdersonbuy-backbyacompanyofitsownshares.

‘Distributed income’ is computed as the difference between theamountpaidasconsiderationforbuyingbacktheunlistedshares and the consideration received by the company at the time of such shares computed in accordance with prescribed rules.Suchtaxwouldbepaidbythecompanywhilebuyingbackitsownshares.

Buy-backreceipttaxedinthehandsofthecompanywouldbeexemptfromtaxinthehandsoftheshareholders.

Capital gains taxCapital gains tax is leviable on transfer of a capital asset for avaluegreaterthanitscostofacquisition.Incaseofnon-residentinvestors,gainfromtransferofshares/debenturesof an Indian company is computed in foreign exchange used fortheinvestmentandthenconvertedinIndianRupeeonthe


dateoftransfer,thusprovidingforadjustmentoffluctuationinforeignexchange.Thecapitalgainsarefurthercategorisedintoshort-termcapitalgain(STCG)andlong-termcapitalgain(LTCG)dependingontheperiodofholdingoftheassettransferred.

A short term capital asset is an asset held for not more than 36months.However,shorterholdingperiodof12monthand24monthsisprescribedforlistedsecurity/unitofanequity-orientedfundandunlistedsharesrespectively.TheFinanceAct2017hasreducedtheholdingperiodto24months(from36months)incaseofimmovableproperty(beinglandorbuildingorboth)inordertoqualifyasalongtermcapitalasset.Capitalasset which do not qualify as short term are treated as long termcapitalasset.

STCGischargeableatthenormalrateoftaxdependingonthetaxabilityoftransferor.However,STCGontransferoflistedsecurity/unitofanequity-orientedfundetc.(subjecttoSecurityTransactionTax)istaxableat15percenttaxrate.

LTCG is computed on adjusted gains computed after consideringinflation(basedoncostinflationIndex),exceptinthecaseofLTCGaccruingtonon-residentinvestorsfromtransferofshares/debenturesofanIndiancompany.Taxrateon LTCG can be categorised as follows:

Nature of long term capital asset transferred Tax rate

Listedsecurity/unitofanequity-orientedfundetc(subjecttoSTT)

Exempt*

Unlistedsecuritiesorsharesofaprivatecompanytransferredbyanon-resident(withoutconsideringforeignexchangefluctuation)

10%

Other assets 20%

*AspertheFinanceAct2017,theexemptiononlistedsecurityshallbe available only in cases where acquisition of such security was subjecttoSTT.Certainexceptionstothisrequirementarealreadynotifiedvidenotificationno43of2017dated05June2017.

There is a separate computation mechanism for depreciable businessassets,whichformpartofblockofassetsheldbyataxpayer.

Taxation of non-residentsNon-residentsaretaxableontheincomereceivedoraccruingin India and income deemed to have been received or accrued inIndia.Deemedaccrualprovidesfortaxationonfollowingterms:

Businessincome:Businessincomeofanon-residentistaxableinIndia,ifitiseffectivelyconnectedwitha‘businessconnection’ofsuchnon-residentinIndia.Theterm‘businessconnection’isnotdefinedintheITAct.Thoughithasawiderscope,itisconceptuallysimilartopermanentestablishment(PE)asdefinedintaxtreaties.Profitsfromabusinessincomeofanon-resident,attributabletooperationscarriedoutinIndia,aretaxableinIndia.

FeesforTechnicalServices(FTS):Feesformanagerial,technicalorconsultancyservicesrenderedbyanon-residentistaxableinIndia(whereanon-residentdoesnothaveaPEinIndia)@10percentofgrossreceipt.

Royaltyincome:Royaltypayabletoanon-residentistaxable@10percent,plussurchargeandcess.Thefinaltaxratewouldbeaninter-playbetweentheratesprovidedinthetreatyandtheAct.SpecificexplanationsseektotaxpaymentsforuseofcomputersoftwareandtelecommunicationchargesasRoyalty.

Interestincome:Tax@20percentisapplicableoninterestpayablebyanIndiancompanytoanon-residentformoniesborrowedinforeigncurrency.Alowerwithholdingrateof5percent is provided for external commercial borrowings and long termbondsbefore01July2017.Thisbenefitisproposedtobeextendedtoborrowingsbefore01July2020andpaymentforinterestonrupeedenominatedbonds).Similarly,lowerrateofwithholdingof5percentisavailableforinterestpayabletoaFIIoraQualifiedForeignInvestor(QFI)onarupeedenominated bond of an Indian company or a government securityissuedbefore01July2017,subjecttocertainotherconditions.TheFinanceAct2017hasextendedthesun-setclauseto01July2020.

The rates mentioned above are exclusive of applicable surcharge,educationcessandsecondaryandhighereducationcess.Pleaserefertothesectionon‘Rateofsurcharge,educationcessandsecondaryandhighereducationcess’forfurtherdetails.


Capitalgains:Gainsaccruedonanon-residentonaccountoftransferofacapitalassetsituatedinIndia,aretaxableinIndia.

SharesoraninterestinaforeigncompanyshallbedeemedtobesituatedinIndia,ifsuchsharesorinterestderives,directlyorindirectly,itsvaluesubstantiallyfromassetslocatedinIndia.

Taxtreatybenefit:Anon-residenteligibleforataxtreatycanbetaxedundertheprovisionsoftaxtreaty,atalocationdeemedmorebeneficial.Indiahasavastnetworkoffavourabletaxtreaties.Tilldate,Indiahasenteredintocomprehensivetaxtreatieswith96countries.

TaxtreatieswithvariouscountriessuchasMauritius,Singapore,Cyprus,Netherlandsetc.providebenefitsinformof capital gains exemption on transfer of shares of Indian companies.However,taxtreatieswithMauritius,Singaporeand Cyprus have been revised to withdraw capital gains exemptionontransferofsharesacquiredonorafter01April2017,whilesimultaneouslygrandfatheringtaxbenefittothesharesacquiredbefore01April2017.Further,taxtreatieswithAustralia,US,UK,Singapore,etc.providebeneficialtaxtreatmentforincomefromFTS.

Anon-residentisrequiredtofurnishaTaxResidencyCertificate,whichisissuedbytheRevenueauthoritiesofhis/herStateofresidence.Inaddition,thenon-residentneedstofurnish a declaration in the prescribed format to be eligible for claimingtaxtreatybenefit.

Equalisation levy:Anequalisationlevyof6percentoftheamountofconsiderationforspecifiedservicesi.e.onlineadvertisement,provisionfordigitaladvertisingspaceetc.payabletoanon-resident(nothavingaPEinIndia),istobedeductedbytheremitterwitheffectfrom01June2016.Thelevyhasbeenintroduced to tax digital services rendered by foreign service providerswithouthavingapresenceinIndia.

Security transaction tax (STT)SecurityTransactionTax(STT)isleviedonvarioussecuritytransactionscarriedoutthrougharecognisedstockexchangeinIndia.Areduced/nilrateofcapitalgainsisprescribedforthetransactionswhichhavebeensubjectedtoSTT.

Commodities transaction tax (CTT)TheCommoditiesTransactionTax(CTT)isleviedalongthelinesofSTT.CTTisleviedontaxablecommoditiestradedatrecognisedassociations.

Wealth tax WealthtaxhasbeenabolishedvideFinanceAct,2015.

Gift taxIndiadoesnotlevygifttaxunderaseparatestatute.However,certainreceiptsofsumofmoneyorpropertybyanindividual,withoutadequateconsideration,aretaxedasotherincome.Similarly,receiptofcertainsharesbyacompanyorafirmwithout adequate consideration are taxed as other income in thehandsoftherecipient.Further,considerationreceivedfroma resident in excess of the fair value of shares issued is taxable inthehandsofthecompanyissuingsuchshares.

TheFinanceAct2017hasproposedtoextendthisprovisiontoreceiptofproperty(immovableormoveable)byanytaxpayerwithoutadequateconsideration.

Estate dutyNoestateordeathdutyischarged.

Computation of business incomeBusinessincomeisgenerallytaxableonthenetbasisi.e.grossincomelessallowabletaxdeductions.Generally,allexpenseslaidoutandexpendedforbusinesspurposes(otherthancapitalexpenses)aredeductible(subjecttocompliancewithwithholdingtaxprovisions)fromtheincomeofthetaxpayerforincome-taxpurposes.ThedeductibilityisfurthersubjecttoexceptionsandfulfilmentofconditionsasstatedintheITAct.

The following principles are generally applied for examining the admissibility of an expense:• Expense should be incurred for the business• Expense should be incurred in the previous year• Expense should not be of a personal nature• Expenseshouldbeofarevenuenature-expensesofa

capital nature are not allowed• Expense should not be for a purpose prohibited by law• No deduction of expenses incurred in respect of exempt

income

Certain expenses are specifically disallowed or the quantum of deductionisrestricted.Theseinclude:• Income-tax• ExpenditureincurredonCSRactivities• Expenditure for the purpose of earning exempt income • Expensesincurredincashbeyondspecifiedlimit.• Provisionfortaxes,duties,interestonloansfrompublic

financialinstitutionsorontermloansfromascheduledbank


and certain contributions to statutory funds on behalf of employees,notactuallypaid.However,suchexpenditureisdeductibleintheyearinwhichitisactuallypaid.

Depreciation of capital assets is allowed on the basis of the reducingbalancemethodusingvaryingrates,dependingonthenatureofassets.Allsimilartypeofassetseligibleforthesamerateofdepreciationareclubbedtogetherina‘block’anddepreciationischargedonthevalueofthatblock.Depreciationisavailableforafullyear,irrespectiveoftheactualperiodofuseoftheasset.However,intheyearofacquisitionoftheasset,depreciationisallowedathalfthenormalrates,iftheassetisusedforlessthan180daysinthatyear.

Depreciationonintangibleassetssuchasknow-how,patents,copyrights,trademarks,licenses,franchisesorothersimilarbusinessorcommercialrights,isalsoavailable.

Theratesofdepreciationfordifferentblocksofassetsareasfollows:

ForFY2016-17,therateof40percentiscappedforthecompaniesclaiming25percenttaxrate.

Blocks of assets Rates

Residentialbuildingsexcepthotelsandboardinghouses 5%

Buildingsmeantfornon-residentialpurposessuchashotels and boarding houses

10%

Furnitureandfittings 10%

General plant and machinery 15%

Intangible assets 25%

Computers 60%

Income computation and disclosure standards (ICDS)TheCentralgovernmenthasnotifiedICDS,whichprescribesthe detailed provisions to be applied while computing tax under the heads – Profits and Gains from Business and Profession andotherincome.ThesestandardsareapplicableforFY2016-17onwards.

Set-off of business loss and unabsorbed depreciationBusinesslosses,otherthanfromspeculationbusiness,arepermitted to be set off against income from any other source (exceptincomefromemploymenti.e.salaryincome)inthesameyear.Businesslosses,whichcouldnotbesosetoff,are

permitted to be carried forward for setting off against business profitsarisingintheeightsubsequentyears.Unabsorbeddepreciation is permitted to be carried forward for an unlimited period.

Key direct tax incentives/ tax holidaysIndia provides various tax incentives in form of higher deduction/taxexemptions.FinanceMinisterinhisspeechin2015unionbudgetproposedtophaseouttaxincentivesandreducecorporatetaxratefrom30percentto25percentovernextfouryears.Thereafter,aplanforphasingoutoftaxincentiveswasissuedforpubliccomments.

Research and development (R&D) activitiesTheIncome-TaxActprovidesfordeductionforexpenditureincurredonscientificresearchrangingfrom125percentto200percentoftheamountofexpenditure.Italsoallowsforweighteddeductionfordonationsmadetocertaininstitutions,associations,companyforscientificresearch.

Manufacturing companies• Domesticcompaniessetuponorafter01March2016,

engaged in the business of manufacture or production of article or thing have an option to pay taxes on a lower corporateincometaxrateof25percent.Thetotalincomeofsuch companies should be computed in prescribed manner andthecompanyshallnotbeeligibleforanytaxincentives.

• 100percentdeductionavailablefor10consecutivetaxyearstoanyundertakinginvolvedinthemanufactureandproductionofanyarticle/thing,locatedinNorth-Easternstates(providedtheundertakingcommencesmanufacturingby31March2017)andcarriesonanyeligiblebusiness.

• Adeductionof15percentofthecostofnewplantandmachinery[investmentmorethanUSD3.74mn(INR250mn)]acquiredandinstalledbyamanufacturingunitinanyonefinancialyear.Thisone-timeallowanceisoverandabove the normal depreciation and additional depreciation allowableundertheAct.Theallowanceisavailableonlyifsuchassetsareacquiredandinstalledonorbefore31March2018.

Special economic zonesAspecificallydelineatedduty-freeenclavedeemedtobeaforeignterritoryforpurposesoftradeoperations,dutiesandtariffs.

The deductions are:• ToSEZdeveloper:For100percentofprofitsandgains

derivedfromdevelopingandmaintainingaSEZfor


ten consecutive assessment years out of fifteen years commencingfromtheyearinwhichaSEZhasbeennotifiedbythecentralgovernment.ThedeductionshallnotbeavailablewheredevelopmentofSEZbeginsonorafter 1April2017.

• ToSEZunit:ForprofitsandgainsderivedbyitsunitsetupinanySEZthatcommencesmanufactureorproductionorarticle or thing or start providing services on or before 31March2020asfollows:i. 100percentexportprofitsforthefirstfivetaxyearsii. 50percentofexportprofitsforthenextfivetaxyearsiii.Upto50percentofexportprofitsforthenextfivetax

years(subjecttotransferofprofitstoaspecialreserve)

Start-ups• TheFinanceAct,2016hasintroduced100percent

deductionoftheprofitsearnedbyastart-upduringanyofthethreeyearsoutoftheinitialfive*yearsofitsoperations.

• The deduction is however available only to a new entity which is not set up by way of the splitting up or restructuring ofanexistingundertaking.

• Thestart-upshouldbeengagedinabusinesswhichinvolvesinnovation,development,deploymentorcommercialisationofnewproducts,processesorservicesdrivenbytechnologyorintellectualproperty.

• Further,thestartupshouldnothaveaturnoverexceeding USD3.74mn(INR250mn)perannumduringFY2016-17toFY2020-21

*TheFinanceAct2017hasincreasedthewindowofclaiming100percentdeductionfromfiveyearstosevenyears.

Business specific incentives for capital expenditure100percentdeductiononcapitalexpenditureavailableforthefollowing categories of specified businesses which commences its operation on or after specified dates:• Laying down or operating cross country natural gas or

crude pipeline: − Laying down and operating slurry pipeline for

transportation of iron ore − Settingupandoperatingsemi-conductorandwafer

fabrication manufacturing facility − Building and operating a hotel of two star or above − Bee-keepingandproductionofhoneyandbeeswax − Settingupandoperatinganinlandcontainerdepotora

container freight station − Developing or operating and maintaining a new

infrastructurefacilityonorafter1April2017

• 150percentdeduction(restrictedto100percentwitheffectfrom01April2017)oncapitalexpenditureshallbeavailable for the following categories of specified business which commences its operations on or after specified dates:

− Settingupandoperatingacoldchainfacility − Settingupandoperatingawarehousingfacilityfor

storage of agricultural produce − Buildingandoperatingahospitalwithatleast100beds

for patients − Developing and building a housing project under specific

schemes − Production of fertilizer

Patent box regime• In order to encourage indigenous research and development

activities,royaltyincomeoftheeligibleassesseesinrespectofapatentdevelopedandregisteredinIndia,shallbetaxableat10percentonthegrossamountofroyalty.

• An ‘eligible assessee’ means an Indian resident who is the true and first inventor of the invention and whose name appears on the patent register as the patentee in accordancewithPatentsAct,1970.

Corporate tax complianceWithholding taxThe IT Act casts an obligation on each taxpayer to withhold tax onspecifiedpayments,amongothers,onthefollowing:• Salaries• Interest• Rent• Commissionorbrokerage• Payments to contractors• Professional/technicalfees/royalty• Consideration payable on transfer of immovable property

Allpaymentstonon-residents,whicharetaxableinIndia,attracttaxwithholding.

Indian tax withholding provisions also extend to payments madebynon-residents.Thus,incertainsituations,anon-residentmakingpaymenttoanothernon-resident/residentisrequiredtoundertaketaxwithholdingaspertheIndianregulations.

Further,thedeductee,i.e.thepersonwhosereceiptsaresubjecttotaxwithholding,needstodisclosehis/herPermanentAccountNumber(PAN).Incasethepersonfailstodoso,withholding tax rate would be the higher of the following rates:


• The rate prescribed in the IT Act• Attherateinforcei.e.theratementionedintheFinanceAct,

2017• Attherateof20percent

However,theincreasedrateofwithholdingtaxwouldnottriggerforpaymentstonon-residents,nothavingPAN,ifthenon-residentfurnishesprescribedinformation.

Quarterlyreturns(inprescribedformdependingonthenatureofpayment)needtobefiledwithrespecttotaxeswithheldduringtherelevantquarter.

Extensive provisions are built in for enforcing compliance with taxwithholdingobligations.

Advance taxEverytaxpayerisrequiredtopayhis/hertaxliabilityfortheyearduringthepreviousyearitself,ininstalmentsprescribed.Thetaxliabilityistobeworkedoutonthebasisofanestimateofcurrentincome,andtheincometaxthereonshallbecalculated at the rates in force during the relevant previous year.Interestisleviedfornon-compliancewithadvancetaxprovisions.

Self-assessment taxEvery taxpayer is liable to compensate the required tax payable(ifany)onthebasisofactualincome,afterconsidering the credit for the advance tax paid and taxes deductedatsource.Self-assessmenttaxispayableafterthecompletionofthepreviousyear,butbeforefilingthereturnofincome.

Permanent account number (PAN)Alltaxpayersarerequiredtomakeanapplicationfortheallotmentoftaxregistrationnumber,termedasPAN.TheapplicationistobemadeinForm49A,Form49AA(dependingupontheresidentialand/orregistrationstatusofanassessee).

Thisnumberistobequotedonalltaxreturns,correspondencewith the tax authorities and documents relating to the prescribedcategoriesoftransactions.FailuretoquotePANby the income recipient may result in a higher rate of tax withholding.

Tax deduction account number (TAN)Every person responsible for withholding tax in accordance

withtheprovisionsoftheITActisrequiredtomakeanapplication for the allotment of withholding tax registration number which is called the tax deduction account number (TAN).TheapplicationistobemadeinForm49B,withinonemonthfromtheendofthemonthinwhichthetaxisdeducted.

Other compliances All the companies or firms are required to file a return of income forapreviousyearwithintheprescribedduedates.

Different due dates have been prescribed for this purpose undertheITAct,whichareasbelow:

In case of:

• A company; • Aperson(otherthanacompany)whoseaccounts

are required to be audited under the IT Act or under any other law in force during the period;

• Aworkingpartnerofafirmwhoseaccountsarerequired to be audited under the IT Act or under anyotherlawinforceduringtheperiod.

30thdayofSeptemberof the assessment year

• In the case of a taxpayer who is required to file an accountant’s report under the transfer pricing regulations.

30thdayofNovember of the assessment year

• In the case of any other assesse 31stdayofJuly of the assessment year


TheFinanceAct2017hasprescribedamaximumfeesofINR10,000(USD150)wherereturnofincomeisfiledafterprescribedduedates.

General anti-avoidance rules (GAAR)Tocontrol‘impermissibleavoidancearrangement’(IAA)enteredintobyapersontoavoidtaxes,theprovisionsofGeneralAnti-AvoidanceRules(GAAR)havebeenintroducedinIndia.Itisnoted that an arrangement would be considered an IAA where itsmainpurposeistoobtainataxbenefit.AnagreementwillalsobetreatedasanIAAifitlacks‘commercialsubstance’and does not meet the criteria of being a bonafide business transactionintheordinarycourse.

Notwithstandingtheabove,GAARprovisionswillnotattractto an arrangement where the tax benefit arising in aggregate doesnotexceedINR30Mn

GAARdealswithaggressivetaxplanninginvolvingtheuseofsophisticatedstructures.TheprovisionsofGAARiseffective 01April2017.

Direct tax enforcement in India

Filling the return of income

Appeal to filed with the

appellate authorities

Scrutiny audit of return

of income initiated by Assessign

Officer (AO)*

Demand (if any) to be paid within

30 days from date of receipt of assessment order

Audit of return of income

completed by AO and order

passed

*AOcanmakeareferencetothetransferpricingofficer(TPO)fortransferpricing(TP)audit.The TPO completes TP audit on receipt of reference from AO and forwards the TPO order to the AOformergingitwiththeassessmentorderoncompletionoftheauditofreturnofincome.

Ittakesabout21to33months(dependinguponwhetherareferenceismadetoTPO)tocompleteanauditfromtheendoftheassessmentyear.Thisperiodisproposedtobegraduallyreducedto12monthsovernextthreeyears.

Direct tax dispute resolution processDisputeresolutionisamulti-layeredprocessinIndia.

Assessment order passed

by AO

High Court

Commissioner (Appeals)**

Supreme Court

Appellate Tribunal

Appeal within 120 days

**Alternatively,applicationmaybefiledwiththedisputeresolutionpanelobjectingtovariationsproposedbytheAOtotheincomeofthetaxpayer.

Theentirelitigation,tilltheSupremeCourtlevel,generallygetssettledoveraperiodof10years.

Other alternatives to resolve tax litigation• Settlementcommission• Advancerulingfortransactions(includingproposedones)

involvingnon-residents• MAP-Analternatemechanismundertaxtreatiesfor

resolving international tax disputes by the competent authoritiesofeachstate.

FinanceAct,2016introducedthedirecttaxdisputeresolutionscheme to provide for a window to withdraw pending appeal andsettlethedisputewiththetaxdepartment.Thetaxpayercanmakeadeclarationoftheamountoftax,interestandpenaltywhichispendingason29February2016beforeanyCIT(Appeal)intheprescribedformandmanner.


Nature of Tax Domestic Company Foreign Company

7% surcharge

12% surcharge

2% surcharge

5% surcharge

Corporate Tax 33.06%/27.55%*

34.61%/28.84%*

42.02% 43.26%

Dividend Distribution Tax**

17.30% 17.30% NA NA

Minimum AlternateTax

20.39% 21.34% NA NA

Tax on LTCG 22.04% 23.07% 21.01% 21.63%

Tax on LTCG (without forex adjustment)

NA NA 10.51% 10.82%

Tax on LTCG (where transfer is subject to STT)

NIL NIL NIL NIL

Tax on STCG 33.06% 34.61% 42.02% 43.26%

Tax on STCG (where transfer is subject to STT)

16.53% 17.30% 15.76% 16.22%

Buy Back Tax$ 23.07% 23.07% NA NA

#Pleaserefertothesectionon‘Rateofsurcharge,educationcessandsecondaryandhighereducationcess’fordetailsonsurchargeandcess.

*Forcompanieshavingapplicablecorporatetaxrateof25percent.

**beforegrossingup

$Surchargeof12percentisapplicableinallcases.


Goods and Services TaxThe Government of India have made possible the introduction ofnation’sbiggesttaxreform–GST.Itaimstomitigatethecascading or double taxation by way of single point taxation systemwithfreeflowofinputcredits.

Scope of GSTGSTistobeleviedonsupplyofallgoodsandservicesexceptthesupplyofalcoholforhumanconsumption.LevyofGSTonpetroleumcrude,highspeeddiesel,motorspirit(commonlyknownaspetrol),naturalgasandaviationturbinefuelhavebeen postponed and to be notified by the government at a laterdate.

Dual structure levyGSTisadualstructurewhereinCentreandStates/Unionterritories,bothhavethepowertolevythetaxonsuppliesongoodsandservices.Theduallevystructurewillbeasunder:

• CentralGoodsandServicesTax(‘CGST’)tobeleviedby

CentreandStateGoodsandServicesTax(‘SGST’)/UnionTerritoryGoodsandServicesTax(‘UTGST’)tobeleviedbyrespectivestates/unionterritoriesonallsupplieswithinastate/unionterritory;

• IntegratedGoodsandServicesTax(‘IGST’)tobeleviedbyCentreonallsuppliesbetweenthetwodifferentstates/unionterritories.Further,IGSTisalsotoleviedonexport/importofgoodsorservicesfrom/toIndia.

• CompensationCess(‘Cess’)tobeleviedonspecifiedsupplies for the purpose to compensate the states for the lossofrevenueonaccountofimplementationofGST.

Nature of supplyLevyofCGST&SGST/UTGSTorIGSTwilldependuponthenatureofsupply.SeparateprovisionsforgoodsandserviceshavebeenincorporatedunderGSTlawtoidentifythenatureofsupply.Locationofsupplierandtheplaceofsupplyofgoods or services are the two factors to determine the nature of supply.

Indirect tax

IntroductionofGoodsandServicesTax(‘GST’)on1July2017had been a significant reform in the Indirect taxation of the nation.AbsorbingthelargenumberofCentralandStatetaxesmainlyCentralExcise,ServiceTax,ValueAddedTax,CentralSalesTax,EntryTax,Octroi,EntertainmentTax,LuxuryTax,CountervailingDutyandSpecialAdditionalDutyonCustomsinitself,GSThadledthewayforacommonnationalmarket.Keyindirect taxes applicable in the country are:

• Goods and Services Tax – Tax on supplies of goods and services

• Customs Duty – Duty imposed on import of goods to India

• Professional Tax–Taxonprofessions,trades,callingsandemployments


• Intra-statesupply:Locationofsupplierandplaceofsupplyofgoodsorservicesarewithinthesamestate/unionterritory

• Inter-statesupply:Locationofsupplierandplaceofsupplyofgoodsorservicesarewithdifferentstates/unionterritory

Point of levy under GSTThe earlier indirect taxes prevailing in India entails multiple pointsoflevy.Forinstance,excisedutyisleviedonthemanufactureofgoods.Servicetaxisleviedontheprovisionoftaxableservices.VATisleviedonthesaleofgoods.

ThetriggeringpointforlevyofGSTisthesupply.Provisionsfordeterminingthetimeofsupplyhavebeenprovided,bothinrespectofgoodsandservices.Hence,thetaxincidencewouldbe at the ‘time of supply’ as against the multiple points of levy underearlierregime.

Tax rates under GSTAll goods and services are fitted into a four tier rate structure of 5,12,18and28percent.Whileessentialitemslikefoodgrainswillattractazerorate,demeritandluxurygoodswillattractthehighestrateandmayattractcessalso.

Anti-profiteeringOneofthemajorobjectiveforimplementationofGSTweretoprovide a free flaw of the input tax credits which should result intoreductioninpricesofgoodsandservices.Tosafeguardtheconsumers,anti-profiteeringprovisionshavebeenincorporatedunderGSTcastingresponsibilitiesonthesupplierstoreducetheir prices of goods and services on account of benefit of reducedtaxrateoravailabilityofinputtaxcredits.Suppliersnotcomplyingwiththeanti-profiteeringprovisionsareliableforpenal consequences and it could also lead to cancellation of registrationunderGST.

Customs DutyCustomsduty,afederalgovernmentlevyisleviableonimport/exportofgoodsto/fromIndia.Thetaxableeventforlevyis‘import/export’andimport/exportdutyispayableatthetimeofimport/exportofgoodsto/fromIndia.IndiafollowstheHarmonisedSystemofNomenclature(HSN)classificationrulesandthegoodsareclassifiedunderdifferentchapter/tariffheadings,primarilyaccordingtotheirdescription,componentsanduse.Thedutiesortaxesapplicableonimportshallcomprise:

• Basiccustomsduty–‘BCD’(standardrateof10percent)• Customscess(leviableoncomponentofBCD@3percent)• IGST@18percent(leviableontotalvalueofBCDplus

customscess)

Presently,theeffectivestandardrateofcustomsdutythatisapplicable on the import of goods is approximately around 30.15percentwithinputtaxcreditofIGST,subjecttoexemption/concessionasmaybeavailable/notifiedfromtimeto time and Free Trade Agreements entered into by India with othercountries.However,presentlythereisnoexportdutyleviableongoodsexportedfromIndia,exceptforafewgoodssuchasminerals,etc.(whicharescarcelyavailable).

Professional taxProfessionaltaxisaleviedbytheStateonprofessions,trades,acallingoremploymentinaState.Thus,everypersonwhois engaged in any of the activities mentioned above is liable topayprofessionaltax.NotalltheStategovernmentslevyprofessionaltax,currently.InStateswheresuchalevyexists,every enterprise and employee earning a salary is required to registerandpayprofessionaltax.


BackgroundGlobalisation and increased integration between economies worldwide has paved way for global business operations and subsequentlycomplexinter-companytransactions.Thesetransactions could lead to base erosion and shifting of profits toopaquetaxjurisdictions.Therefore,transferpricingisunderconstantscrutinyoftaxauthoritiesglobally.

IndianTransferPricingRegulations(TPRegulations)wereintroducedinIndiain2001toavoidshiftingofprofitsfromIndia to another jurisdiction arising due to the international transactionwiththerelatedpartiesi.e.associatedenterprise(s)(AEs).Further,thescopeofTPRegulationswasextendedtoincludespecifieddomestictransactions(SDT)witheffectfrom2012.

LegislationAspertheTPregulations,theinternationaltransactionandSDTbetweentheAEsshouldcomplywiththearm’slengthprincipali.e.apricewhichisappliedorproposedtobeappliedin a transaction between persons other than associated enterprises,inuncontrolledconditions.

International transactionThe Act defines the term ‘international transaction’ to mean a transactionbetweentwoormoreAEs,eitherorbothofwhomarenon-residents,inthenatureofpurchase,saleorleaseoftangibleorintangibleproperty,orprovisionofservices,financing or any other transaction having a bearing on the profits,income,lossesorassetsofsuchenterprisesoranycostcontributionagreement.

Further the definition of international transaction also includes ‘deemed international transaction’ which means that a transaction entered into by an enterprise with a person other thananAE(whetherresidentornon-resident)shallbedeemedasaninternationaltransaction,if:• there exists a prior agreement between such other person

and the associated enterprise; or• thetermsofsuchatransactionare,insubstance,

determined between such other person and the associated enterprise.

Specified Domestic Transactions (SDT)TransferpricingprovisionswerealsointroducedforSDTsoastocurbtheshiftofprofitsbetweenresidententities.Thenatureoftransactionincludestransactionenteredintowithentities/withinbusinessunitsclaimingtaxexemptions.SDTprovisionsare applicable where the aggregate of such transactions exceedsasumofUSD3mn6(INR.200mn)inayear.

Associated enterprises International transactionsIntheIndianTPRegulations,thedefinitionofAEsisbroadlysimilar to the definition in the Organisation for Economic Co-operationandDevelopment(OECD)TPGuidelines.AE(s) in relation to another enterprise means an enterprise:• whichparticipates,directlyorindirectly,orthroughone

ormoreintermediaries,inthemanagementorcontrolorcapital of the other enterprise; and

• inrespectofwhich,oneormorepersonswhoparticipate,directlyorindirectly,orthroughoneormoreintermediaries,initsmanagementorcontrolorcapital,arethesamepersonswhoparticipate,directlyorindirectly,orthroughoneormoreintermediaries,inthemanagementorcontrolorcapitaloftheotherenterprise.

Further,theActprescribes13situationswheretwoormoreenterprisesareconsideredasAEs.

Specified Domestic TransactionsAEsforthepurposeofSDT,areasfollows:• Expensewithdirectors/partner/member,subsidiariesor

entities in which the taxpayer directly or through its directors ofacompany/partner/memberincaseofacorporateortheir relatives have substantial interest in an entity;

• Forentitiesclaimingcertainspecifiedtaxholidays/exemptionsbenefit,anycloselyconnectedentity.

MethodologiesThearm’slengthprice(ALP)inrelationtoaninternationaltransactionandSDTisrequiredtobedeterminedbyanyofthefollowing methods: • Comparableuncontrolledpricemethod(CUP)• Resalepricemethod(RPM)

Transfer pricing in India

6ThelimitisapplicablefromFY2015-16.Earlier,thelimitwasUSD0.75mn(INR.50mn)


• Costplusmethod(CPM)• Profitsplitmethod(PSM)• Transactionalnetmarginmethod(TNMM)• Any other method as prescribed The TP regulations do not prescribe any priority criteria in termsofselection/applicationofmethods.

Arm’s length price (ALP)The ALP means price charged or would have been charged for a transaction between independent parties under similar situation.TheTPregulationprescribestheuseofeitherrangeconcept(35thto65thpercentile)orarithmeticmeandepending on the method applied and number of comparables selected.

Compliance requirement

Compliance requirement Due date of submission

Obtain accountant’s report in Form 3CEB

Accountant’s report is a brief summary of international transaction(s)andSDTalong with the method used to justify the arm’s lengthnature.This document is to be certified by a Chartered Accountant or a firm of Chartered Accountants

30 November of each Assessment Year for international transactions or SDTundertakenduringtherelevantfinancialyear (April–March)

TP documentation (TP Study)

TP study is a detailed documentation(requirementsare in line with the OECD guidelines)relatingtointernationaltransaction(s)orSDTwhichisused to justify their arm’s length nature.Thisdocumentationistobemaintained,andupdatedonanannualbasis,iftheaggregatevalue of the international transaction(s) entered by the enterprise exceeds USD 0.1 mn (INR 10 mn)

Enterprise is required to maintain contemporaneous documentation and needs to submit documentation on request by the Income-tax department

Country-by-Country reportingIn order to meet the commitment to Base Erosion and Profit Shifting(‘BEPS’)initiativeofG-20andthe‘OECD’,anewsection has been inserted in the Act which mandates the requirementofcountry-by-country(‘CbC’)reportinginlinewithAction13oftheBEPSactionplans.However,detailedrulesonthesameareawaited.

These regulations require an Indian entity which is part of aMultinationalEnterprise(‘MNE’)group,tomaintainthefollowinggroupinformationbywayofthreefiles(inadditionto the information already required in relation to international transactions):• MasterFile• Local file • CbC reporting is required to be filed by the parent entity of

anMNEgroupwithannualconsolidatedgrouprevenueinthe immediately preceding accounting year of more than € 750mn(INR53.95bn,USD807.78approx.)

TheCbCreportforFY2016-17wouldneedtobefiledby 31March2018.

7OECDTransferPricingguidelinesforMultinationalEnterprises&TaxAdministrations,July2010


Compliance timelines

Beginning of tax year

Due date for maintaining TP documentation & e-filingAccountantsReport

Limitation for completing TP assessment*

Time period for maintenance of documentation for FY2016-17

Limitation for initiating assessment by AO

Draft order of AO

Close of tax year

1 April 2016

30 Sep 2018

30 Oct 2020

31 Dec 2020

31 March 2017

31 March 2026

30 Nov 2017


Safe Harbour Rules‘Safeharbour’isdefinedasthecircumstancesinwhichtheincome-taxauthoritiesshallacceptthetransferpricethatisdeclaredbytheassessee.SafeharbourrulesareeffectiveinIndiafromthefinancialyear2012-13,andareavailableforaperiodofthreeyears.Atpresent,safeharbourruleshavebeenprescribed for the following transactions:• ProvisionofSoftwaredevelopmentservices• Provision of IT enabled services• Providing corporate guarantee• ContractR&Dservicesrelatingtosoftwaredevelopment• Manufactureandexportofcoreautocomponents• Manufactureandexportofnon-coreautocomponents• Low value adding intra group services

Penalty provisionsPenaltyprovisionsforfollowingnon-complianceshavebeenprescribed by the Act:• Underreportingandmisreportingofincome• Failure to maintain statutory TP documents• Failure to report a transaction in accountant’s report• Failure to furnish master file• Failure to furnish accountant’s report

Transfer Pricing Audit Transfer pricing audit is conducted by the Transfer Pricing Officer(TPO),aspecialisedofficerfromtherevenuedepartment.IftheregularAssessingOfficer(AO)ofataxpayerconsidersitnecessaryorexpedientsotodo,hemaywiththepreviousapprovaloftheCommissioner,referto the computation of the ALP in relation to the international transactionsorSDTofthetaxpayertotheTPO.

The taxpayer has the option of approaching the dispute resolution panel or filing appeal before the commissioner of incometax(appeals).

SafeharbourrulesandAPAaredisputeavoidancemechanismsandMAPisdisputeresolutionmechanism.Changealignmentaccordingly.

Advance pricing agreement Theadvancepricingarrangement(APA)programmewasintroducedintheIndianTPRegulationsin2012.UndertheAPAschemeavailablefromFY2013-14,anypersoncanenterintoanagreementwiththeboard,aftertheapprovalofthecentralgovernment,fordeterminingtheALPorforspecifyingthemanner in which the ALP is to be determined in relation to an internationaltransactiontobeenteredintobythatperson.

APA can be entered in relation to an international transaction only.TheAPAcanbeunilateral,bilateralormultilateral.

In2014,roll-backprovisionswereintroducedintheIndianAPAscheme,whichenablepersonsenteringintoanAPAtoroll-backthe results of the APA to a period not exceeding four preceding years from the year from which the APA is proposed to be applicable.

Mutual agreement procedure Inordertoavoiddoubletaxation,mutualagreementprocedure(MAP)hasprovedtobeaneffectivemethodwheretherevenueauthorities of two different nations try to resolve a dispute together.

UnderMAP,anagreement,whichseekstoavoideconomicdoubletaxationorconflictingtaxation,wouldbereachedbetweenthetaxauthorities.Also,underMAP,disputesareresolvedthroughcompetentauthorities(CAs)ofthecontractingstates.


Glossary of Abbreviations

CSO: CentralStatisticsOffice

GST: GoodsandServicesTax

DIPP: Department of Industrial Policy & Promotion

USFDA: USFoodandDrugAdministration

FIPB: Foreign Investment Promotion Board

APA: Advance Pricing Arrangement

REIT: RealEstateInvestmentTrust

FEMA: ForeignExchangeManagementAct

NBFC: Non-BankingFinancialCompany

SEBI: SecuritiesandExchangeBoardofIndia

CBDT: Central Board of Direct Taxes

ROR: ResidentandOrdinarilyResident

RNOR: ResidentandNon-OrdinarilyResident

MAT: MinimumAlternateTax

AMT: AlternateMinimumTax

ICDS: IncomeComputationandDisclosureStandards

GAAR: GeneralAnti-AvoidanceRules

BCD: Basic Customs Duty

CD: Countervailing Duty

TP: Transfer Pricing

TPO: Transfer Pricing Officer

AO: Assessing Officer

SDT: SpecifiedDomesticTransaction

RBI: ReserveBankofIndia

FEMA: ForeignExchangeManagementAct1999

Fintech: Financial Technology

CAGR: Compoundannualgrowthrate

USFDA: UnitedStatesFoodandDrugAdministration

IT&ITeS:Informationtechnology&InformationTechnologyEnabledServices

REIT: RealEstateInvestmentTrust

AoP: Association of Persons


Acknowledgements

Editorial review Design

Rohit Nautiyal Samridhi Jamwal

Gurpreet SinghGourav Kalra

For further information, please contact:

Spriha Jayati [email protected]+919323744249


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A guide to establishing presence in India · improving the ease of doing business in India and Startup India, Standup India will further pave the way for growth. Additionally, government’s