Doing business in india

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Doing business in india

  1. 1. Doing businessin India
  2. 2. This publication should be used as a research tool only, and the informationgiven should not serve to substitute for the tax professional’s own researchwith respect to client matters.This book is one in a series of country profiles prepared for use by clientsand professional staff. Additional copies may be obtained from:Ernst & Young Private LimitedGolf View Corporate Tower B,Sector-42, Sector Road,Gurgaon, Haryana,IndiaTel No.: +91-124-464 4000Facsimile: +91-124-464 4050© 2008 Ernst & Young, IndiaAll Rights Reserved. Doing Business in India
  3. 3. ContentsPrefaceList of frequently used abbreviationsIntroduction Basic statistics.................................................................................1 The land..........................................................................................1 The people.......................................................................................1 Time zone........................................................................................3 Public holidays.................................................................................3A. Government structure and economic climate..................3 A.1 Government structure.............................................................3 A.2 Financial system......................................................................5 Reserve Bank of India...............................................................5 Types of institutions................................................................5 A.3 Type of economy.....................................................................7 General economic trends..........................................................7 The market.............................................................................8 Currency........................................................................9 A.4 Leading industries...........................................................10 Oil and natural gas.................................................................10 Power...........................................................................12 Mining............................................................................14 Information technology..........................................................15 Retail.......................................................................16 Health sciences.....................................................................17 Roads..........................................................................20 Ports...........................................................................21 Real estate...........................................................................22 Telecommunications ............................................................23 Entertainment...............................................................24 Banking.......................................................................25 Capital markets.....................................................................26 Insurance..............................................................27 Automotive........................................................................28 Doing Business in India
  4. 4. B. Investment climate and foreign trade...........................33 B.1 Foreign investment framework...............................................33 Industrial policy.....................................................................33 Industrial licensing................................................................33 Foreign investment policy......................................................33 B.2 Economic policies and incentives for foreign investment............34 Features of foreign investment policies and incentives..............34 Foreign direct investment.......................................................34 Foreign exchange controls.....................................................37 B.3 Economic laws and regulations................................................40 Indian contract Act, 1872.......................................................40 Intellectual property rights protection.....................................41 Labour laws..........................................................................43 Anti trust regulations.............................................................47 Negotiable Instruments Act, 1881...........................................49 Sale of Goods Act, 1930.........................................................49 Arbitration and Conciliation Act, 1996.....................................50 B.4 Special investment considerations..........................................51 Special economic zones..........................................................51 100 % export oriented units....................................................53 State-level incentives.............................................................54 Government-owned industries and privatization.......................55 B.5 Regional and international trade agreements and associations..........................................................................56 B.6 Major trading partners and leading imports and exports.............57 Trading partners...................................................................57 Foreign trade policy...............................................................58 Imports.........................................................................58 Exports..................................................................59 Balance of trade....................................................................60 Tariff liberalisation................................................................60C. Companies.............................................................63 C.1 Forms of enterprise...............................................................63 Major types of corporate forms...............................................63 Structures typically used by foreign investors...........................64 Funding of Indian businesses...................................................66 C.2 Mergers and acquisitions........................................................70 Reorganisations and mergers.................................................70 Demerger.......................................................................70 Slump sale............................................................................71 Doing Business in India
  5. 5. Buy-back of shares................................................................71 Capital reduction...................................................................71 C.3 Taxes on corporate income and gains.......................................71 Administration....................................................................72 Corporate income tax.............................................................72 Minimum alternate tax............................................................75 C.4 Corporate taxes at a glance.....................................................76 Tax incentives.......................................................................77 Profits from new undertakings................................................77 Undertakings established in SEZs............................................82 SEZ developers.....................................................................84 Capital gains & losses.............................................................84 Foreign tax relief...................................................................88 C.5 Determination of taxable income.............................................88 Deductions.......................................................................88 Relief for losses.....................................................................90 Dividend distribution tax.........................................................91 Fringe benefit tax...................................................................91 Deemed basis of taxation........................................................92 Tonnage tax scheme..............................................................92 Related companies................................................................92 C.6 Other significant taxes...........................................................93 Banking cash transaction tax...................................................93 Securities transaction tax.......................................................93 Customs duty........................................................................94 Excise duty...........................................................................95 Service tax............................................................................95 Value added tax/Central sales tax............................................96 Octroi/entry tax....................................................................97 Special Economic Zone...........................................................97 C.7 Financial reporting and auditing..............................................98 Sources of generally accepted accounting principles..................98 Significant fundamental concepts............................................99 Disclosure, reporting and filing requirements............................99 Interim financial reporting requirement of listed companies......100 VAT audit............................................................................103D. Individuals................................................................107 D.1 Income tax..........................................................................107 Liability for income tax.........................................................107 Scope of income liable to tax..................................................107 Types of income subject to tax in india....................................108 Deductions.................................................................116 Doing Business in India
  6. 6. Tax rates............................................................................116 Relief for losses...................................................................117 Tax filing and payment procedures.........................................117D.2 Other taxes.........................................................................119 Wealth tax...........................................................................119 Inheritance (or estate) and gift taxes....................................120 Social security.....................................................................120D.3 Double tax relief and tax treaties...........................................120D.4 Visa and registration requirements........................................121 Visa on arrival.....................................................................121 Temporary landing Facility/Permit........................................121 Tourist visas.......................................................................122 Business and employment visas and self-employment..............122 Foreign exchange regulations...............................................123D.5 Residential permit...............................................................124 Formalities to be observed by registered foreigners.................126D.6 Family and personal considerations.......................................126 Work visas for family members..............................................126 Restricted areas..................................................................126 Drivers permit.....................................................................127D.7 Other matters.....................................................................127 Exchange controls...............................................................127 Person of Indian origin card..................................................128 Dual citizenship...................................................................129Appendices...............................................................133Appendix 1: Useful addresses and telephone number..................133Appendix 2: Exchange rates.....................................................144Appendix 3: FDI policy.............................................................145Appendix 3.1: Illustrative list of sectors in which FDI upto 100% is allowed under automatic route...............................145Appendix 3.2: Illustrative list of infrastructure sectors in which FDI upto 100% is allowed under automatic route.............146Appendix 3.3: Illustrative list of services sectors in which FDI upto 100% is allowed under automatic route....................146Appendix 4: Corporate tax calculation.......................................147Appendix 5: Treaty tax rates....................................................148Appendix 6.1: Individual income tax calculation.............................153Apendix 6.2: Taxability of income items......................................154Appendix 6.3: Sample tax calculation...........................................156 Doing Business in India
  7. 7. PrefaceThis book was prepared by Ernst & Young, India with the intention ofgiving busy executives a quick overview of the investment climate,taxation, forms of business organisations, and business and accountingpractices in India. The complex decision-making process involved inundertaking foreign operations requires an intimate knowledge of acountrys commercial climate, along with a realisation that the climate isconstantly evolving. Companies doing business in India, or planning to doso, are well-advised to obtain current and detailed information fromexperienced professionals. The information presented in the book isvalidated w.e.f. 31 December 2007. Doing Business in India
  8. 8. List of frequently used abbreviationsADR American Depository ReceiptBCTT Banking Cash Transaction TaxBPO Business Process OutsourcingBTP Biotechnology ParkCAGR Compounded Annual Growth RateCBDT Central Board of Direct TaxesCCI Competition Commission of IndiaDDT Dividend Distribution TaxEHTP Electronic Hardware Technology ParkEOU Export Oriented UnitEPZ Export Processing ZoneFBT Fringe Benefit TaxFCCB Foreign Currency Convertible BondFDI Foreign Direct InvestmentFEMA Foreign Exchange Management Act, 1999FII Foreign Institutional InvestorFIPB Foreign Investment Promotion BoardFTP Foreign Trade PolicyGATT General Agreement on Tariffs and TradeGDP Gross Domestic ProductGDR Global Depository ReceiptHTP Hardware Technology ParkIRDA Insurance Regulatory and Development AuthorityIT Information TechnologyITA Information Technology AgreementITES IT Enabled Services Doing Business in India
  9. 9. List of frequently used abbreviationsMNC Multinational CorporationMoF Ministry of FinanceMoP Ministry of PowerMoPNG Ministry of Petroleum and Natural GasNBFC Non-Banking Financial CompanyNELP National Exploration License PolicyNHPC National Hydel Power CorporationNPC Nuclear Power CorporationNRIs Non-resident IndiansNTPC National Thermal Power CorporationPIO Person of Indian OriginPSB Public Sector BankPSU Public Sector UnitRBI Reserve Bank of IndiaRs Indian RupeeSDR Special Drawing RightsSEBI Securities and Exchange Board of IndiaSEZA Special Economic Zones Act, 2005SEZ Special Economic ZoneSTP Software Technology ParkSTT Securities Transaction TaxTRAI The Telecom Regulatory Authority of IndiaVAT Value Added TaxWTO World Trade Organisationy-o-y Year on year Doing Business in India
  10. 10. A. Government structure and economic climate
  11. 11. The land Spread over three million square kilometres and located entirely in the northern hemisphere, India is the seventh largest country in the world in terms of geographical size. Indias neighbours are Bangladesh and Myanmar in the east; Bhutan, China and Nepal in the north; Pakistan in the west, and Sri Lanka in the south.Introduction The peopleBasic statistics PopulationLand area: 3.29 millionsquare kilometres As per the last census carried outCapital: New Delhi in 2001, India had a population ofPopulation: 1.122 billion approximately 1.029 billion.(estimated as of 1 October Based on historical growth rates,2006) the population as of 1 OctoberLanguages spoken: 18 2006 was an estimated 1.122principal languages; majority billion, and the country isspeak Hindi; businesslanguage: English expected to overtake China andInternational airports: become the most populous nationAhmedabad, Amritsar, by 2045.Bangalore, Chennai, LanguageDabolim, Guwahati,Hyderabad, Kochi, Kolkata, Given its cultural diversity, scoresMangalore, Mumbai, Nagpur, of languages and dialects areNew Delhi, Srinagar, and spoken in the country. Of these,Thiruvananthapuram 22 languages are recognised inMajor seaports: Chennai, the Indian Constitution, whichEnnore, Haldia, Jawaharlal include Bangla, Gujarati, Hindi,Nehru, Kandla, Kochi, Kannada, Malayalam, Marathi,Kolkata, Mormugao, Oriya, Punjabi, Sanskrit, Tamil,Mumbai, New Mangalore, Telugu, and Urdu. Hindi, writtenParadip, Tuticorin, and in the Devanagari script, is theVisakhapatnam Doing Business in India 1
  12. 12. national language, while English Cost of livingis the business language. India offers the advantage of aReligion low cost of living, relative to American and EuropeanAs India is a secular country, it countries. The cost of livingdoes not advocate any one varies by type of locationreligion, and all religions are (urban/rural) and size ofaccorded equal status before the location (small/large/metro).law. The various religionspracticed in the country are TravelHinduism, Islam, Christianity, Most parts of the country are wellSikhism, Buddhism, Jainism, connected by air, rail, and roadJudaism, and Zoroastrianism. transport. For domestic airEducation travel, there are a number of regular airlines—Indian, JetIndia has over one million schools Airways, and Kingfisherand approximately 9,200 Airlines—as well as budget airlinescolleges in general fields, 4,600 for inexpensive aircolleges in professional fields, travel—Deccan, JetLite, Spicewhile 300 universities/ Jet, IndiGo, GoAir, andinstitutions are considered of Paramount. Nearly every majornational importance. There are a international airline operateslarge number of private and flights to and from the country.Government or municipal The country also has an extensivecorporation-run schools in the rail and road transport network.urban areas. However, in the Railway services are offered byrural areas, education is imparted the Government-owned Indianlargely by Government-run Railways. Bus services (regular,schools. Professional educational deluxe, and luxury) over shorterinstitutes, with a combined intake distances are provided byof over half a million students per Government agencies and privateannum, constantly add to the operators. Numerous car rentalcountrys large pool of skilled agencies offer cars for hire andEnglish-speaking work force, public taxis are available in largewhich is a tremendous cities.competitive advantage vis-à-visother nations.2 Doing Business in India
  13. 13. Tourism establishments also work on Saturdays. Banking hours areTourism is in a high-growth phase usually from 9:00 am to 3:00 pm;in the country. Foreign tourist although some banks havearrivals, comprising business and branches open till 8:00 pm.leisure travellers, increased by Shops are usually open till 9:0013% y-o-y in 2006 to 4.4 million, pm six days a week. Sunday isand by 12.3% y-o-y in the first the weekly holiday, although thisnine months of 2007 to 3.4 can vary from place to place formillion. The countrys earnings various markets.from tourism grew by 14.6% toUSD 6.6 billion in 2006, and by Public holidays25.6% to USD 5.6 billion in thefirst nine months of 2007, on a y- Public holidays are announced byo-y basis. With rising foreign the Central Government and byinvestment interest in India, the individual State Governments.business travel segment is There are three nationalexpected to witness rapid growth. holidays—Republic Day (26 January), Independence DayBesides the Indian Tourism (15 August), and Gandhi JayantiDevelopment Corporation (2 October). In addition, there(ITDC), which is run by the are several holidays for festivals,Central Government, each state the dates of which change fromhas its own tourism development year to year.corporation.Time zone A. Government structure andIndia is five and one-half hoursahead of the Greenwich Mean economic climateTime. It has not adopted daylightsaving time, and uses standard A.1 Government structuretime countrywide throughout the Governmentyear. As enshrined in its Constitution,Business hours India is a sovereign, socialist,Normal business hours are from secular, democratic republic. It9:00 am to 6:00 pm, Monday comprises 29 states and six unionthrough Friday. Some commercial territories. Each state is administered by a state Doing Business in India 3
  14. 14. Government, while the Central legislature (Legislative AssemblyGovernment is in charge of the and Legislative Council). Theoverall administration of the members of the Legislativecountry. The union territories are Assembly of a state are directlyadministered by representatives elected by the people of thenominated by the Central state.Government. The Election Commission is anIndia follows a parliamentary independent body with theform of Government. Even mandate to oversee the electionthough the President is the Head process to ensure free and fairof the Republic, the real powers elections at the central and theare vested in the Prime Minister, state levels.who is the elected representative The Executiveof the people. The Governmenthas three branches—legislature, The leader of the majority partyexecutive, and judiciary. in the Lok Sabha usually becomes the Prime Minister of the country.The Legislature The Prime Minister and theAt the central level, India has a Council of Ministers, collectivelybicameral legislature. The Union called the Union Cabinet, areParliament comprises the Lok vested with the responsibility ofSabha (House of the People or running the day-to-day affairs ofthe Lower House) and the Rajya the Central Government. TheSabha (Council of the states or past few Governments in thethe Upper House). The Members country have been coalitionof the Lok Sabha are directly Governments, with no singleelected by the people of the political party securing absolutecountry, while the members of majority in the Lok Sabha.the Rajya Sabha are indirectly Similarly, at the state level, theelected i.e. they are voted for by leader of the majority party in thethe elected representatives of the Legislative Assembly becomespeople of states & union the Chief Minister of the state.territories. The Chief Minister, along with hisAt the state level, some states Council of Ministers (togetherhave a unicameral legislature called the state Cabinet), are(Legislative Assembly), while responsible for the day-to-daysome have a bicameral affairs of the State Government.4 Doing Business in India
  15. 15. The Judiciary prescribe exchange control norms to facilitate externalIndia has an independent judicial trade and payment; andsystem. The Supreme Court is theapex judicial authority, followed ? Act as banker to the Centralby the High Courts, which head and State Governmentsthe judicial system in each state. RBI, through its policies,Under each High Court, there is a directives, and guidelines, hashierarchy of subordinate courts been placing increasing emphasis(district level and lower). on the monitoring of, andPolitical Parties provisioning for non-performing assets, capital adequacy, and riskIndia has numerous political management.parties, including national,regional, and local parties. The Types of institutionsmajor national parties are the The banking system in IndiaCongress (I), the Bhartiya comprises scheduled commercialJanata Party (BJP), the banks, urban and stateCommunist Party of India (CPI), cooperative banks, and regionalthe Communist Party of rural banks. ScheduledIndia—Marxist (CPM), and the commercial banks, in turn, can beJanata Dal (JD). categorised into public sector banks, private sector banks, andA.2 Financial system foreign banks. Besides banks,Reserve Bank of India another segment of players in the Indian financial system, are non-The Reserve Bank of India (RBI), banking financial companiesestablished in 1935, is the (NBFCs).central bank of the country. Ithas a four-fold role to: Public sector banks? Regulate and supervise the This segment comprises 28 Indian financial system; banks, including the State Bank? Formulate, implement, and of India and its seven subsidiary monitor the monetary policy banks. It is the dominant segment of the country; in the banking industry. The Central Government is the? Manage the countrys foreign majority shareholder, holding exchange reserves and more than 51% equity stake in all Doing Business in India 5
  16. 16. the public sector banks, although RBI has come out with a roadits shareholding has decreased map for deregulation of foreignover the years on account of banks, whereby, from 2009, apublic offerings of shares and foreign bank would be on par withreturn of equity capital to the an Indian bank, and can freelyGovernment by these banks. compete with other Indian banks as well as carry out mergers andPrivate sector banks acquisitions.This segment comprises 28 Cooperative banks and regionalbanks, including seven new rural banksprivate sector banks and 21 oldprivate sector banks. The new Cooperative banks cater to theprivate sector banks are growing credit needs of specificrapidly in size. The last couple of communities or groups of peopleyears have witnessed some in a region, and operate in bothmergers and acquisitions in this urban and rural areas. They havesegment, and this trend is been established under theexpected to gain in strength in respective State Co-operativethe years to come. The RBI has Societies Act, and areplaced restrictions on administered by the stateshareholding in private sector authorities, although theirbanks and no shareholder can banking activities come within thehold more than 5% shareholding purview of RBI. Regional ruralin a private sector bank. banks were established under an act of the Parliament with a viewForeign banks to improving credit delivery inThis segment comprises 29 rural areas.banks, including most of the Non-Banking Financialleading international banks, Institutions (NBFIs)although their presence isrestricted to the metropolitan NBFIs offer enhanced equity andand large cities. Currently, there risk-based products. They play aare several restrictions on crucial role in broadening accessforeign banks with respect to the to financial services, diversifyingexpansion of branch network, the existing product portfolios,location of new branches, and and enhancing competition in theacquisition of shareholding in financial sector. The NBFIIndian banks. However, recently, segment comprises all-India6 Doing Business in India
  17. 17. financial institutions, state-level There are various factors thatfinancial institutions, NBFCs, and have led numerous multi-nationalprimary dealers. The first two are corporations (MNCs) to not onlyGovernment-owned and focus on establish operations in India butlong-term development financing; also to consider it among theirNBFCs are mostly private sector key markets. The countrys keyentities that provide niche strengths in this respect include:financial services; while primary ? a dynamic and competitivedealers play an important role in private sector that accountsthe primary and secondary for over 75% of the countrysGovernment securities market. GDP and offers considerableA.3 Type of economy scope for collaborations ? a sound and independentThe year 1991 witnessed a spate legal systemof economic reforms, includingdelicensing of most industries, ? a large and growingderegulation of industries earlier consumer market; andmonopolised by the public sector, ? a vast pool of English-and liberalisation of foreign trade speaking and skilledthrough a steady reduction in managerial and technicaltariffs. The relaxation of foreign manpower that matches, ifinvestment limits in nearly all not surpasses, the best in theIndian industries has been an world.impetus to the inflow of ForeignDirect Investment (FDI) into the General economic trendscountry. These measures have Key economic indicatorshad far-reaching consequencesand today, India has a strong, The economy continued to growvibrant, and fast-growing at a rapid pace in 2006–07, witheconomy, which is rapidly real GDP growing by 9.4% y-o-yintegrating with the global during the fiscal year, an increaseeconomy. According to the from 9.0% y-o-y in 2005–06. WithGoldman Sachs BRIC report, India this, the economy has clocked anis forecast to become the third average growth of 8.6% in reallargest economy in the world, GDP over the past four fiscalafter China and the US, by the years. With the agriculture sectoryear 2050, overtaking all other growing by only 2.7% y-o-y indeveloped economies. 2006–07, accelerated growth of Doing Business in India 7
  18. 18. the industry and services sectors rules at 39.3 (10 January 1(10.9% and 11.0%, respectively) 2008) .were the principal drivers of Inflation, measured on a weeklyeconomic growth. basis by the Wholesale PriceThe economy is expected to Index, ruled higher at 5.4% on anmaintain the growth momentum average during 2006–07, asin the current year (real GDP against 4.4% in 2005–06,growth in the first quarter was primarily owing to a surge in9.3%). As per the latest forecast international crude prices andof the Centre for Monitoring strong growth in domesticIndian Economy, real GDP growth demand for credit. It has comefor the full year is expected to be down a tad, to an average of9.1% y-o-y, with the agriculture, 4.75%, in the first half of theindustry, and services sectors current year, on account of theexpected to grow by 3.9%, 9.5%, tight monetary policy initiativesand 10.7%, respectively. of the RBI. As a result, interest rates ruled higher in 2006–07 asThe countrys foreign currency compared with the previous year.reserves, excluding gold and The maximum prime lending rateSpecial Drawing Rights (SDRs), (PLR) of banks was 12.5% inhave demonstrated sustained 2006–07 as compared withgrowth, from USD 135 billion at 10.8% in the previous year, andthe end of 2005 to over USD 273 has moved up further to 13.3% inbillion as of 11 January 2008. the first half of the current year.The principal factors responsiblefor this reserve accretion are the The marketcountrys burgeoning services Consumer marketexports and strong capital inflowscomprising FDI and foreign Indias growing consumer marketportfolio investments by foreign is one of the chief attractions forinstitutional investors (FIIs). multinational consumer product companies. Steadily increasingThe Indian rupee (INR or Rs.) urbanisation and explosivehas appreciated significantly growth of the electronic mediaagainst the US dollar over the have brought about sweepingpast few years. The INR–USD changes in the lifestyles andexchange rate, which stood at consumption attitudes of people.48.8 on 31 March 2002 currently The easy availability of consumer1For detailed information on the Indian currency, please refer to the note on Currency in the following section8 Doing Business in India
  19. 19. finance has served to fuel this products are imported. Aboom in consumerism. These significant quantum of productionfactors have generated a growing in certain industries is alsodemand for a variety of quality exported. Recognising Indiasproducts and services, including cost advantages and technicalconvenience foods, branded expertise in manufacturing,apparel, automobiles, toys, home several MNCs have begun to useappliances, electronic goods, the country as a manufacturingrestaurants, travel, base to outsource their regionalcommunication, and or global product requirements.entertainment. During the last four fiscal years, industrial production (measuredIn rural areas, the electronic by Index of Industrialmedia has played a strategic role Production) grew at an averagein enabling consumer product of nearly 8.8% per annum. In thecompanies to create awareness current fiscal, it is expected toabout their branded products, grow by 9.5%.which has caused a shift inconsumption from unbranded and Currencytraditional products to branded Indias monetary unit is the Indianalternatives. Besides, the rupee (INR or Rs). Only thecomposition of the consumption Central Government isbasket has also changed, with the empowered to legislate onshare of food items decreasing in matters related to currency andfavour of non-food products. coinage, and RBI is the soleWhile urban areas have multiple authority empowered to issueretail outlets ranging from small currency. RBI notes are fullymom-and-pop stores to large backed by approved security,supermarkets, the villages are including bullion, foreigncatered to by small shops. securities, rupee coins, and rupeeIndustrial market securities of the Government.The industrial market is an A rupee is divided into 100 paise.equally large and diverse market The denominations of currencycomprising a wide range of notes and coins presently usedproducts for industrial are Rs 1,000, Rs 500, Rs 100, Rsconsumption. While the majority 50, Rs 20, Rs 10, Rs 5, Rs 2, Reof requirements are met 1 and 50 paise.domestically, some of these Doing Business in India 9
  20. 20. As the rupee is not freely Forward-looking export-importconvertible into foreign currency, policies have enhanced theforeign exchange transactions competitiveness of the countrysare carried out through entities exports, and created anauthorised by the RBI to deal in environment conducive to theirforeign exchange or foreign rapid growth. In order to enablesecurities, i.e. an authorised the industry to imbibe state-of-moneychanger or an offshore the-art technology and globalbanking unit. A person may best practices, the Governmentpurchase foreign exchange from has been welcoming FDI andan authorised dealer by providing foreign collaborations. The FDIa declaration of the intended use limits in almost all industries haveof the foreign exchange. Usage of been progressively liberalisedforeign exchange for purposes and approval proceduresother than that declared would simplified. With liberalisation, FDIlead to contravention of the in a large number of industries isForeign Exchange Management permitted upto 100%Act, 1999 (FEMA). automatically, without any approvals. FDI in sectors,A.4 Leading industries including telecom, real estate,Since the commencement of and retail, among others iseconomic reforms in 1991, permitted, but subject to certainsuccessive Governments have restrictions.implemented strong measures to Oil and natural gasliberalise the businessenvironment and boost industrial India is the worlds fifth largestgrowth. The elimination of consumer of primary energy.licensing requirements for all but Primary energy consumptionsix industries has ushered in an grew at a CAGR of 4.6% betweenera of competition and imparted 1996 and 2006, as compareddynamism to the industry. with a global average of 2.1%. Indias primary energySubstantial reduction in import requirement is expected to moretariffs on raw materials and than double over the next twointermediate products, coupled decades. Oil and gas currentlywith the rationalisation of excise accounts for 36% of the primaryduties, have eased access to commercial energy consumption,inputs and reduced costs. and its share is projected to10 Doing Business in India
  21. 21. increase marginally over the next owned by National Oiltwo decades. Companies.During the last decade, the The Petroleum and Natural Gasdemand for oil and gas has risen Regulatory Board (PNGRB) hassharply (grew at a CAGR of 4% been constituted recently as anand 6.8%, respectively during independent regulator for the1996–2006). This has resulted in midstream and the downstreamincreasing reliance on crude segments of the industry. In theimports for meeting domestic upstream segment, thedemand requirements with Directorate General ofapproximately 76% of the crude Hydrocarbons continues todemand during 2006 being met function as a quasi-regulatorthrough imports. under the aegis of MoPNG.The Indian oil and gas industry Recent developments andhas traditionally been dominated industry outlookby the National Oil Companies. In the upstream segment, theRecently, private companies, New Exploration and Licensingincluding Reliance Industries Ltd., Policy (NELP) has given a boostEssar Oil Limited, Gujarat Adani to private investment and anEnergy Limited and Gujarat Gas added impetus to exploration andCorporation Ltd. have also production (E&P) activity (162emerged as prominent players blocks have been awarded in theacross the industry segments. first six rounds of NELP in whichForeign players with a significant exploration investments of USDpresence in the Indian oil and gas 10 billion is expected to takesector, include BG, Cairn Energy, place). The increased E&Pand Royal Dutch Shell. activity under NELP has alsoRegulatory scenario facilitated some world class discoveries, of which, the KrishnaThe industry is under the Godavari basin gas discoveries ofadministrative charge of the Gujarat State PetroleumMinistry of Petroleum & Natural Corporation and RelianceGas (MoPNG). FDI upto 100% Industries Limited are the mostunder the automatic route noteworthy. In the downstream(subject to sectoral policy refining segment, Indias capacityregulations) is permitted in all has more than doubled betweenactivities except in refineries Doing Business in India 11
  22. 22. 1998 and 2006, making the opportunity to emerge as acountry a net exporter of regional refining hub.petroleum products (net exports Powerof 10 MT during 2005–06). Theincreased gas availability has The Indian power sector has beenboosted consumption particularly one of the most vibrant sectorsin the industrial and City Gas during the past one year withDistribution (CGD) segments. substantial progress in the generation, transmission, andIn the future, the demand supply distribution segment as well asgap for oil and gas is projected to the renewable energy segment.increase even further, due to Ironically though, the sector hashigh demand growth (projected not been able to keep pace withto grow at 6.4% and 7.4%, the blistering economic growthrespectively, from 2006–07 to leading to demand supply gaps in2024–25). Significant most of the progressive states.investments are expected to beundertaken in order to capitalize As of September 2007, the totalon the opportunities created by installed capacity stood atthe growing demand. 135,781.6 MW. For 2006–07, the all India energy deficit stoodIn the upstream segment, the at 9.6% and the peak demandlaunch of NELP VII and increased deficit stood at 13.8%. AsE&P activity in the other NELP against the target of 41,100 MWblocks are expected to result in installed capacity addition forlarge investments and new Tenth Plan, only 21,180 MW hasopportunities for upstream been achieved. Further, for thecompanies and service providers. Eleventh Plan, the Ministry ofIn the natural gas segment, Power has targeted capacitysignificant investment is addition of 78,577 MW.expected to take place in the The complex transmissionestablishment of new gas system, primarily run by thetransmission and distribution State Transmission Utilitiespipelines and CGD networks. (STU) and the CentralIndias growing petroleum Transmission Utility (CTU), isproducts surplus (expected to estimated to be approximatelyreach 60 MT by 2011–12) will 355,000 ckt. Km (Circuitalso provide it with an Kilometres) lines with 430,00012 Doing Business in India
  23. 23. MVA of substation capacity at New and Renewable Energyvoltage 66 kV to 765 kV. The overlooks operations of theHVDC capacity is approximately renewable energy based8,200 MW. generation sector.The distribution segment is The Government has beencrucial as it directly affects the striving to provide a conduciveconsumers who pay for the policy environment to encourageelectric supply. It is estimated free and fair competition in eachthat the total number of element of the energy valuecustomers are more than 145 chain and attract capital from allmillion with an average annual sources—public and private,growth rate of approximately 4%, domestic, and foreign.while the average per capita The Electricity Act (EA) 2003consumption is more than 650 was formulated to create a liberalunits. Aggregate Technical & development framework by theCommercial (AT&C) loss functional segregation of thereduction that has been hovering generation, transmission, andaround 35% is one of the key distribution segments. This ischallenges in this segment. aimed at de-licensing generation,The total investment required in open access in transmission andcapacity creation, transmission, distribution, competitive tariffs,and distribution is estimated at thereby encouraging privateUSD 200 billion, of which USD sector participation.100 billion is required for The National Electricity Policygeneration projects alone. 2005 provides guidelines forRegulatory scenario accelerated development of the electricity sector aimed atThe Power industry operates providing reliable electricityunder the regulatory control of supplies to all by 2012. Thethe Ministry of Power. The National Tariff Policy 2006Central Electricity Regulatory assures electricity to consumersCommission (CERC) at the at reasonable and competitivenational level and State prices; thereby improving theElectricity Regulatory financial viability of the sector.Commissions (SERCs) at thestate level were established tofacilitate reforms. The Ministry of Doing Business in India 13
  24. 24. Recent developments and In distribution, 14 states haveindustry outlook unbundled, and additional directives are expected in theRecent guidelines issued ensure Accelerated Power Developmentthat all future generation and & Reforms Program (APDRP)transmission projects are to be scheme. CERC has approved theawarded through competitive setting up of the power exchangebidding, further lowering the to trade power across theproject cost and ensuring cheap country, and the first one viz.power to consumers. India Electricity Exchange isIn generation, ten Ultra Mega expected to be operational soon.Power Projects (UMPP) have Miningbeen announced, out of whichtwo projects viz; Sasan and India is endowed with hugeMundra have been awarded to reserves of several metallic andReliance Energy Ltd. and Tata non-metallic minerals. MineralPower Co. Ltd., respectively. New production constitutes 6% of thedirectives on hydro power are countrys GDP.expected to be released soon. An Adequate survey and explorationamendment to the Electricity Act activities are yet to be carried out2003 has allowed captive power to adjudge the full potential ofgenerators to sell surplus power the countrys vast resources.to end consumers. The Indo-US Despite a favourable FDI regime,Nuclear Treaty that strongly foreign investment is much belowpromoted the opening of the the desired level due to policyNuclear Power Generation and procedural issues.segment has been put on theback burner due to domestic Regulatory scenariopolitical issues. The Ministry of Mines regulatesThe transmission sector is the mining sector, with theopening up, with increased exception of coal and atomicparticipation by the private minerals. State Governments ownsector in Build Own Operate the minerals in their respectiveTransfer (BOOT) and Public states. The Mines and MineralsPrivate Partnership (PPP) (Development and Regulation)projects, including the Western Act 1957 (MMDR Act) is theGrid Strengthening Scheme. governing legislation in this sector.14 Doing Business in India
  25. 25. FDI up to 100% is allowed under ? set up new mechanism inthe automatic route for stock exchanges for raisingexploration and mining of fundsminerals, including diamond and The Indian mining sector can takeprecious stones. However, no a giant leap forward andFDI/ private investment is significant investments can bepermitted for coal mining except expected if the abovefor captive consumption by recommendations are accepted.power, cement, iron, and steel However, the recommendationcompanies. for captive mining can be aRecent developments and dampener.industry outlook The Government has revisedThe Government has constituted royalty rates of royalty for coal ina committee to review the August 2007 and further, aNational Mineral Policy 1993, comprehensive review of the coalwhich has submitted its draft policy is also underway, whichreport and the key will further provide an impetus torecommendations2, inter alia. the investment in coal mining inSome of the key highlights are as India.follows: Information technology? removal of delays for The IT industry has been at the granting mineral concessions forefront of Indias success story and forest clearances and continues to charter? preferential allocation of remarkable growth. The industry mines to steel plants that do comprises software services, not have captive mines ITES (including BPO), and? charging royalty on ad- hardware. Indias unparalleled valorem basis prowess as an IT-ITES hub is well- established across the globe and? preference to those willing to the country is a key sourcing set up an industry in a mining base and strategic market for the state global IT-ITES sector.? prioritise infrastructural needs and facilitate Since 1999–2000, the sector has investments to meet these grown at a CAGR of over 28%; the needs industrys contribution to GDP has risen from 1.9% to a2 As available in the public domain Doing Business in India 15
  26. 26. projected 4.8% in the current estimated to belong to India.fiscal. The industry is anticipated Hardware is poised for robustto exceed USD 36 billion in growth with several MNCs setting2005–06 and should achieve the up their manufacturing facilitiestargeted USD 60 billion by in India. A policy for making India2009–10. Exports are estimated a preferred destination for theto exceed USD 23.9 billion in manufacture of semi-conductors2006–07 while IT software and and other high-technologyservices employment is expected products is proposed to beto reach 1.2 million in 2006–07. formulated shortly.Regulatory scenario A national e-governance plan,The Government has been which lays out the blueprint for aproactive in encouraging foreign more e-enabled India, is to beinvestment in the IT-ITES sector. implemented shortly. Further,Not only has the FDI regime been amendments to the Informationliberalised, there are also various Technology Act 2000 arefiscal incentives (including proposed, with a core focus onexport-related incentives) that strengthening the informationhave been made available to IT security environment.operations in India. RetailRecent developments and With an estimated market size ofindustry outlook USD 350 billion, Indias retailThe IT-ITES services is poised for sector is at the peak of its appealrapid growth over the next few for international and Indianyears by offering a wider services players. Being the second-largestportfolio, catering to a larger set employer after agriculture andof industry verticals, and one of the largest growingincreasingly evolving to become a sectors, it is expected to grow toglobal Knowledge Process USD 427 billion by 2010, therebyOutsourcing (KPO) hub. ensuring that the retail sector will remain one of the mainstays ofA new opportunity on the the Indian economy. Modernengineering services front is also retail accounts for approximatelyemerging. While currently India 4% of the total retail market inbrings in approximately USD 1.8 India. This share is expected tobillion of this market, by 2020 as increase to approximatelymuch as USD 50 billion is16 Doing Business in India
  27. 27. 15–20% with the entry of a Changing lifestyle, strong incomenumber of corporates into the growth, and favourablesegment. demographic patterns have led to huge expansion in Indian retail.Regulatory scenario India is slated to have over 410FDI up to 100% is allowed under new malls by 2010, offering 205the automatic route in cash-and- million square feet of retailcarry wholesale trading and space. By 2015, it is estimatedexport trading. FDI up to 51%, that there would be more thanwith prior Government approval, 715 operational malls offeringhas also been recently permitted 350 million square feet of retailin the retailing of single-brand space. A large section of thisproducts. The Government is development is estimated tolikely to adopt a calibrated come up in tier II and tier III cities.approach, spread over a period of The rural revolution in India istwo to three years, to further also growing rapidly, driven byopen up the industry to foreign rising purchasing power,investment. changing consumption patterns,Recent developments and easy access to information andindustry outlook communication technology, better infrastructure, andMany large Indian conglomerates improved Government initiativesand business houses are to boost the rural economy. Theexpressing their strong interest size of the rural retail market isor making a significant headway estimated to exceed USD 45.2in the retail sector. The organised billion by 2010.retail segment is estimated togrow at more than 30% annually Health sciencesand exceed USD 20 billion by The Indian Pharmaceutical2010. The demand for luxury industry has evolved substantiallybrands in India is soaring, with and transformed itself from amany international retailers, for reverse-engineering led industry;example, Gucci, Chanel, Louis focused on the domestic market,Vuitton, Versace, Fendi, and to a research-driven, exportValentino among others who oriented industry with a globalhave already established their presence. As per Department ofpresence in India. Chemicals and Petrochemicals Doing Business in India 17
  28. 28. estimates, the Indian Regulatory scenarioPharmaceutical Industry is a USD In India, there is a clear12 billion enterprise, which demarcation of responsibilitiesincludes approximately 45% between the Central Governmentcontributions from exports. The and the State Governments. Thedomestic Indian pharmaceutical Central Drugs Standard Controlindustry grew by nearly 17% in Organization (CDSCO) headed2006–07 to USD 7.3 billion. by the Drugs Controller GeneralThe Indian biotechnology of India (DCGI) discharges theindustry grew by 31% in 2006–07 functions allocated to the Centralto approximately USD 2.1 billion Government. The CDSCO isin revenues over USD 1.5 billion attached to the office of thein 2005–06. The biotech industry Directorate General of Healthin India mainly consists of five Services in the Ministry of Healthdistinct segments—biopharma, and Family Welfare. The DCGI is abioagriculture, bioinformatics, statutory authority under the Actbioindustrial, and bioservices. and overlooks the functioning ofThe biopharma segment accounts port offices, zonal offices, andfor over two-thirds of the drug testing laboratories.industry. During 2006–07, it The DCGI is the regulator for therecorded sales in excess of USD pharmaceutical industry, and is1.5 billion and accounted for 71% primarily responsible for theof the total industry revenues. approval of new drugs and clinicalThe biopharma sector registered trials and for setting drug quality26.9% growth. standards. Under the Drugs andThe Indian healthcare industry Cosmetics Act, the DCGI alsowas worth approximately USD coordinates with and regulates34.2 billion (2006) with a CAGR the state drug controlof 16%. Healthcare delivery and authorities. Certain drugs arepharmaceuticals account for also subject to price controlsnearly 75% of the total healthcare imposed by the Ministry ofmarket. The private healthcare Fertilisers and Chemicals (Drugsegment is by far dominant, with Price Control Order).public health spending The Department of Biotechnologyaccounting for less than 1% of the is the nodal agency for policy-countrys GDP. making, promotion of research18 Doing Business in India
  29. 29. and development (R&D), In a fiercely competitive marketinternational cooperation, and like India, the ability ofmanufacturing activities pharmaceutical companies topertaining to biotechnology in the continually add new productscountry. (internal pipeline/licensing) in line with the emerging demandHealthcare services come under patterns is the route adopted bythe purview of the Union Ministry MNCs to sustain growthof Health and Family Welfare. The momentum. PharmaceuticalNational Accreditation Board for MNCs with relatively smallerHospitals & Healthcare Providers presence or with limited salesis in the process of evolving a force in specific therapeuticprocess of accreditation for segments would either have tohealthcare facilities. build up a wide network or in-Recent developments and license to a partner with a strongindustry outlook muscle in that particular therapeutic area.The Indian Patent Act of 1970amended on 22 March 2005 Inorganic avenues of growth aremarks the end of a protected era being seriously looked at byand signals a new phase in the domestic pharmaceuticalintegration of India into the companies to leverage the globalglobal pharmaceutical market. advantage. Indian companies lookThe new amendment for pipeline, relationship-building,incorporating product patents and technological competence asseek to make copying of post- the major influencers in any1995 patented drugs illegal. The acquisition.challenges in the product patent The biotechnology industry tooregime and the generics business has high growth potential;are significant: margin pressure, revenues are expected to grow tolegal issues, parallel launch of USD 5 billion by 2010 on theauthorized generics, and back of higher domesticaccessing distribution channels, consumption and rapid growth inamong others. All this has exports.necessitated a re-look at theexisting business models and With rise in income levels anddeveloping alternative models in increasing adoption of healthpreparation for the future. insurance, the demand for Doing Business in India 19
  30. 30. tertiary care is expected to grow The National Highways Authorityfrom the current share of 15–20% of India (NHAI) and the state-of the total healthcare market. level departments of highways orThe market for tertiary care is public works departments areexpected to grow at a faster rate responsible for national and statedue to the rise in complex in- highways, respectively.patient ailments, for instance, The Government is activelyheart diseases and cancer. The encouraging the participation ofaverage annual growth in health the private sector in roadexpenditure by the BRIC infrastructure projects bycountries is estimated at 11% for providing incentives, includingthe 2006–11 period, reaching tax exemptions and duty-freeapproximately USD 413 billion by import of road-buildingthe year 2011. Public spending equipment. FDI upto 100% underon healthcare is currently at 0.9% the automatic route is permittedof GDP, expected to double to 2% in roads and highways, toll roads,of GDP. vehicular bridges, and roadRoads transport services.India has one of the largest road Recent developments andnetworks in the world, spanning industry outlookapproximately 3.8 million The Central Governmentkilometres. Roadways account launched the National Highwaysfor approximately 80% of the Development Project (NHDP) inpassenger traffic and 65% of the 1999 as it recognised the criticalfreight traffic in the country. importance of expanding andOver the past few years, road strengthening the nationaltraffic has been growing at 7–10% highway network. The NHDP isand vehicle population at being implemented in multipleapproximately 10% annually. phases. In Phases I and II, nearlyRegulatory scenario 14,300 kilometres of national highways are being convertedThe Department of Road into four-lane or six-laneTransport and Highways, under highways; in Phases III and IV,the Ministry of Shipping, Road approximately 12,000 kilometresTransport and Highways, is of national highways are to beresponsible for all policy matters upgraded to four-lane dualrelating to national highways.20 Doing Business in India
  31. 31. carriageways. Phases V and VI on through maritime transport.involve the six-laning of 6,500 The countrys coastlinekilometres of existing four-lane comprises 13 major portshighways and construction of (Chennai, Ennore, Haldia,1,000 kilometres of expressways. Jawaharlal Nehru, Paradip, Kandla, Kochi, Kolkata,NHDP is being funded through Mormugao, Mumbai, Newvarious mechanisms—budgetary Mangalore, Tuticorin, andallocation from the Government, Visakhapatnam), and 187 minorloan assistance from multilateral and intermediate ports.agencies (the World Bank, AsianDevelopment Bank, and Japanese The total traffic handled by theBank for International major ports increased by 9.5% toCooperation, among others) and 463.8 million tonnes in 2006–07,private sector participation. and by 13.7% y-o-y to 244.1 million tonnes in the first half ofThe Government is further the current year.considering to upgrade 23,000kilometres of single-lane Regulatory scenariohighways to two-lane highways, The Department of Shipping,and has also accelerated the under the Ministry of Shipping,development of roads in the Road Transport and Highways,north-eastern region. In addition, has the primary responsibility tothe Government has launched the develop and manage thePradhan Mantri Gram Sadak countrys maritimeYojna, which involves providing infrastructure. The principalgood quality road connectivity to legislations governing Indianrural areas. The project will ports are The Indian Ports Act,involve new road construction of 1908 and The Major Ports Trusts368,000 kilometres and Act, 1963.upgradation of 370,000kilometres of roads. Major ports are governed by port trusts while State GovernmentsPorts are responsible for theIndia is presently ranked 17 in administration of minor ports.the maritime nations of the With the entry of private sectorworld. Approximately 95% by players into port operations, thevolume and 70% by value of the power to fix and revise tariffs hascountrys external trade is carried been entrusted to an independent Doing Business in India 21
  32. 32. authority—the Tariff Authority for million tones. The GovernmentMajor Ports. has launched the National Maritime DevelopmentFDI up to 100% under the Programme for sprucing upautomatic route is permitted in maritime infrastructure andthe construction and expanding capacity at majormaintenance of ports and ports, involving an investment ofharbours, maritime transport approximately USD 14 billion.services, and internal waterwaystransport services. Real estateThe Department of Shipping is Residential sales account foralso planning to enact a Shipping more than 75% of the total realTrade Practices Act, which is estate market in value terms.presently in the draft stage. There is scope for over 400Additionally, it has announced a township projects of a populationnew dredging policy to be of 0.5 million each over the nextfollowed by the major ports. five years spread over 30–35 cities.Recent developments andindustry outlook There has been a sharp increase in demand for office space;Since the announcement of Indias total stock of Grade Aguidelines for private sector office space was estimated to beparticipation, a number of approximately 120 million squareprojects involving private sector feet (msf) at the end of 2006.and foreign investment, including The IT-ITES sector account forthe construction of new container 70–75% of the total office spaceterminals, and new ports have requirement. Estimates indicatematerialized. that there will be demand for 172The total traffic at Indian ports is msf of office space duringprojected to grow at 7.7% CAGR 2008–10.to reach 876.7 million tonnes by Growth in organized retail has led2011–12, of which the major to increased demand for mallports are expected to account for space in the country. At the end70% (615.7 million tonnes). To of 2006, there weremeet this projected demand, the approximately 90 malls totallingtotal capacity requirement at the 19 msf across seven cities in themajor ports is estimated at 800.4 country. The retail stock is22 Doing Business in India
  33. 33. expected to reach approximately agenda and has assumed growing60 msf by 2008. importance with the opening of the sector to foreign investment.There has also been a sharp rise SEBI has also approvedin business and tourism related introduction of real estate mutualtravel. In 2006, international funds (REMFs), which is atourist arrivals in India increased positive move forward and in lineby over 13% to reach 4.4 million. with global best practicesThere are close to 110,000 hotel followed by mature realrooms across categories in India; estate/security markets.and an immediate requirement ofapproximately 100,000 new Growing residential demand hashotel rooms. created an estimated shortage of 24 million dwelling units, and theRegulatory scenario shortage is expected to increaseFDI up to 100% is permitted to approximately 26 millionunder the automatic route in the housing units by 2012.following areas: The current boom in the? Township, housing, built-up hospitality segment has resulted infrastructure and the in existing hotels increasing their construction-development capacity and international hotels projects and service apartment chains? Hotel and tourism establishing their operations in India. By 2020, India is expected? Setting up/development of to be a leading tourist destination industrial park/SEZ in South Asia and demand for? Construction and related hospitality-focused real estate engineering services during 2005–09 is estimated to require a capital investment ofCorporate tax exemptions of up USD 8–9 billion.to 100% are available forprojects, including industrial Telecommunicationsparks, SEZs, and hotel projects In 2007, the Indian telecommeeting certain conditions. industry achieved unexpectedRecent developments and growth rates with eight millionindustry outlook subscribers being added every month. The Indian telecomThe sector is currently at the market has grown to become theforefront of the Governments Doing Business in India 23
  34. 34. third largest communications Directors shall still have to bemarket in the world with Indian resident citizens, however,revenues of over USD 22 billion, the Chairman, Managing Director,an average annual subscriber Chief Executive Officer, and/orgrowth of approximately 45% and Chief Financial Officer can now berevenue growth of approximately foreign nationals. Also, the Chief25%. The total subscriber base Officer In charge of technicaltouched 250 million network operations and Chief(approximate), driven by the Security Officer shall have to begrowth in the wireless segment, resident Indian citizens. Inwhich reached beyond 200 addition, the remote access ofmillion (approximate) the equipment of telecom servicesubscribers. companies can be provided to the foreign equipment vendors with aThe year has seen a lot of market prior approval from theactivity with many companies Department ofapplying for the Unified Access Telecommunications.Service License and globaltelecom player Vodafone picking Entertainmentup a 67% stake in Hutchison- The entertainment industry isEssar for an enterprise value of one of the fastest growingapproximately USD 19 billion. sectors in India. The current sizeRegulatory scenario of the industry is estimated at USD 12.5 billion, and it isFurther to the enhancement of expected to grow to USD 25FDI ceiling from 49% to 74% for billion by 2011.telecom service companies inNovember 2005, the Government The estimated revenues of theof India reviewed its FDI policy. film industry and the televisionThe key features of the revised industry are USD 2.4 billion andFDI policy were: USD 5.5 billion respectively; and are expected to grow to USD 4.4A cap of 74% remains unchanged billion and USD 13 billion,for the telecom service respectively. The estimatedcompanies; however, the revenues of the music and radiorequirement of a serious resident industry are USD 185 million andIndian promoter holding at least USD 162.5 million, respectively,10% of the equity was done away and are expected to grow to USDwith. The majority of the Board of24 Doing Business in India

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