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ENTRY OPTIONS FOR FOREIGN INVESTORS
A foreign company planning to set up business
operations in
India can do so in the following ways:
As a foreign company through a
Liaison Office/Representative
Office
Project Office
Branch Office
As an Indian company through a
Joint Venture
Wholly Owned Subsidiary
As a Foreign Company
Foreign companies, defined as companies which have been
incorporated outside India, can set up their operations in India through opening
of liaison, project and branch offices.
Liaison/Representative Office
One of the normal practices for foreign companies to enter
the Indian markets is the setting up of a liaison/representative office. A
liaison office is not allowed to undertake any business activity in India and
cannot therefore earn any income in India. The role of such offices is,
therefore, limited to collecting information about possible market opportunities
and providing information about the company and its products to the prospective
Indian customers.
The opening and operation of such offices is regulated by the
Foreign Exchange Regulation Act (FERA). Approval from the Reserve Bank of India
(RBI) is required for opening such offices. There are certain standard
conditions imposed for operation of such offices :
Expenses of such offices are to be met entirely
through inward remittances of foreign exchange from the head office abroad.
Such offices should not undertake any trading or
commercial activities and their activities should be limited to collecting and
transmitting information between the overseas head office and potential Indian
customers.
Such offices should not charge any commission or
receive other income from Indian customers for providing liaison services.
Liaison/ representative offices also have to file regular
returns comprising of Annual Audited Accounts, an annual activity report on the
activities of the office and some other documents with RBI.
Permission to set up such offices is usually granted for a
period of 3 years and this may be extended from time to time.
Project Office
Foreign companies planning to execute specific projects in
India can set up temporary project /site offices in India for the purpose.
Specific approval from the RBI is required for setting up a project office. Such
approval is generally accorded in respect of Government approved projects, but
of late the RBI has been giving approval for setting up project offices even for
executing private sector projects which have not been approved by the
Government.
Approvals accorded for setting up project offices are
specific to the particular project to be executed and last only till the
completion of the project.
Branch Office
The Government has allowed foreign companies engaged in
manufacturing and trading activities abroad to set up branch offices in India
for the following purposes:
To represent the parent company/other foreign
companies in various matters in India e.g. acting as buying / selling agents
in India.
To conduct research work in the area in which the
parent company is engaged provided the results of the research work are made
available to the Indian companies.
To undertake export and import trading activities.
To promote possible technical and financial
collaborations between the Indian companies and overseas companies.
A branch office is not allowed to carry out manufacturing
activities on its own but is permitted to subcontract these to an Indian
manufacturer.
Permission for setting up branch offices is granted by the
Reserve Bank of India (RBI) on a case to case basis. RBI normally considers the
operating history of the applicant country worldwide and its proposed activities
in India for granting the approval.
As an Indian company
A foreign company can commence operations in India through
incorporation of a company under the provisions of the Indian Companies Act,
1956. Foreign equity in such Indian companies can be up to 100% depending on the
business plan of the foreign investor, prevailing investment policies of the
Government and receipt of requisite approvals.
Joint venture with an Indian partner
Foreign companies can set up their operations in India by
forging strategic alliances with Indian partners.
Setting up of operations through a joint venture may entail
the following advantages for a foreign investor:
established distribution/marketing set up of the
Indian partners
available financial resources of the Indian
partner
established contacts of the Indian partner which
help smoothen the process of setting up of operations.
Wholly owned subsidiary company
The other investment option open to foreign investors is the
setting up of a wholly owned subsidiary. This implies that the foreign company
can own 100% shares of the Indian company. A 100% subsidiary can provide the
necessary flexibility to the foreign investor to set up its operations in India.
Wholly owned subsidiaries are subject to prior approval from
the "Foreign Investment Promotion Board" (FIPB).
FIPB considers cases on a flexible basis and grants
permission depending on the merits of each case. Criteria normally taken into
account by FIPB for allowing 100% ownership include positive net foreign
exchange earnings, development of export markets & substantial export
earnings, substitution of existing imports, induction of proprietary technology,
generation of substantial employment opportunities and a large amount of initial
capital investment inflow.
For further details, contact
The Deputy secretary
Foreign collaboration/ Foreign direct
investment/ FIPB
Secretariat for Industrial Assistance, Department of
Industrial Policy & Promotion
Ministry of Industry, Government of India
New Delhi
Tel: 91-011-3014218, Fax: 91-011-3015245
E-mail: iisdc@sansad.nic.in.
Website: http://www.nic.in/indmin
INCENTIVES FOR FOREIGN INVESTMENT
Central and State governments offer several incentives to
investors with a view to attracting investments and stimulating industrial
growth and development. These incentives are designed to channel investments to
specific industries, encourage foreign investment and promote the development of
backward regions. The incentives are revised periodically to accommodate and
reflect new areas of emphasis.
Tax Incentives
Some of the tax incentives offered to investors are:
Tax holiday for the first 5 years of operation for all
industrial undertakings engaged in the business of generation and/or
distribution of power commencing activities before March 31, 1998.
Subsequently 25% of income continues to be exempt for the next five years.
Tax holiday for a period of 5 years to Indian companies engaged in
the business of developing, maintaining or operating any infrastructure
facility. After the first five years 25% of income continues to be exempt for
the next five years. This exemption is also available in 10 consecutive years
out of the initial 12 years of operation.
New units set up in notified backward districts and states that
commence activities before March 31, 1998/1999 are offered a complete tax
holiday for the first 5 years of operation.
Subsequently 25% of income is exempt for the next five years.
Telecommunication Services - Telecommunication services,
whether basic or cellular, commencing activities between April 1,1995 and March
31, 2000 are eligible for a complete tax holiday for the initial 5 years of
provision of services. Subsequently 30% of income is exempt from tax for the
next five years. Telecom license fee can be amortized and is allowed as
deduction over the period of license.
To encourage investment in industrial infrastructure, industrial
parks which start operating between April 1, 1997 and March 31, 2002 will be
eligible for a 100% deduction for the initial 5 years of commencement of
operations followed by a 30% deduction for the next 5 years.
Tax holiday for a period of 5 years for a company carrying on
scientific and industrial research and development commencing business before
April 1, 1998.
Scientific Research Expenditure - Both revenue expenditure
as well as capital expenditure on scientific research can be fully written off
in the year in which it is incurred. In fact, capital expenditure incurred prior
to the commencement of business can also be written off in the first operational
year. The Union Budget 1997-98 has introduced a provision that a
deduction of a sum equal to 1.25 the expenditure incurred by a company on
scientific research, including capital expenditure, related to the business of
the assessee would be available to companies that have approved in house
Research & Development facilities.
Oil Exploration Ventures - Income of non-residents engaged
in providing services or facilities in connection with or supplying plant and
machinery on hire for prospecting extraction or production of mineral oil is
deemed to be 10% of the gross amount received. Blocks in North East India will
be given a tax holiday for 7 years after commencement of commercial production.
Export Incentives
The Government of India has accorded top priority to export promotion.
Consequently, a number of special incentives and concessions have been granted
to industrial units which are engaged in export activities.
Earnings from the export of Goods/Merchandise
Profits arising out of export of goods of an Indian company engaged in the
export of goods / merchandise are totally exempt from tax. This benefit can also
be passed on to ancillary units supplying goods/merchandise to such exporters.
Tax Exemption on Export of Computer Software
Any income derived from export of computer software or provision of any
technical service in relation to production of computer software is totally
exempt from tax.
Tax Holiday for newly established industrial undertakings in Free Trade Zones
India has established Free Trade Zones (FTZ) for export industries. Profits
or gains derived from industrial undertakings set up in the specified free trade
zones are totally exempt from tax for a period of five consecutive years falling
within the initial eight years of operation of the undertaking. This benefit is
also available to industrial undertakings which manufacture articles/things, in
any electronics hardware technology park or software technology park.
Incentives for 100% Export Oriented Undertakings
Foreign companies are permitted to establish industrial undertakings in free
trade zones or export oriented undertakings/technology parks either in
collaboration with the Indian partner or on the basis of their 100% owned Indian
subsidiary.
Industrial undertakings set up in free trade zones/export oriented
undertakings which export 50% or more of their production and units in software
technology parks and electronic hardware technology parks, are totally exempt
from the payment of Income Tax for a period of five consecutive years at the
option of the assessee, out of eight initial years of operations.
The major EOU/EPZ/FTZ incentives are as follows:
Duty-free importation of capital goods (including second-hand items for
certain industries),
Raw materials, components, office equipment and material-handling
equipment, provided the
Imports are not on the negative list;
Up to 100% foreign equity investment automatically allowed.
Income tax holiday available for any consecutive five years during the
first eight years of production.
Exemption from taxes on export earnings even after period of tax holiday
Exemption from excise duties on goods manufactured for exports;
Units allowed to install machinery on lease.
Units allowed to export their production through export/trading/star
trading/super star trading houses.
A Summary of Major Incentives in India
Category % Exemption Period of Exemption
For setting up new power projects 100 Deduction from taxable income 5 years
30 Deduction from taxable income Next 5 years
New industrial undertakings in underdeveloped districts, areas 100 Deduction from taxable income 5 years
30 Deduction from taxable income Next 5 years
Enterprises carrying on business of developing, maintaining and
operating infrastructure facilities 100 Deduction from taxable income 5 years
30 Deduction from taxable income Next 5 years
Telecommunication services (basic and cellular) and notified
industrial parks 100 Deduction from taxable income 5 years
30 Deduction from taxable income Next 5 years
Companies carrying on scientific and industrial research and development 100 Deduction from taxable income 5
years
Newly established industrial undertakings in Free Trade Zones/100% Export Oriented
Undertakings/ Software Technology Parks 100 Profit exempt from tax
Consecutive 5 years of first 8 years
Profit from export business 100 Deduction from taxable income Without any
limit on number of years
Profits on projects outside India 50 Deduction from taxable income Without
any limit on number of years
Profits on export of computer software 100 Deduction from taxable income
Without any limit on number of years
Foreign exchange earnings of hotel/tour operators 50Of profits plus profits transferred Without any limit
on number to reserve account for specified of years purposes allowed as deduction
from taxable income
Income arising from patents, inventions, designs or registered trademarks received
from foreign enterprises 50 Deduction from taxable income Without any limit
on number of years
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