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Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
Note on entry strategies in India  by CA.Sudha g. bhushan
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Note on entry strategies in India by CA.Sudha g. bhushan

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Note on entry strategies in India

Note on entry strategies in India

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  • 1. Evaluation on the EntryStrategies in India CA.SUDHA G. This report deals with the provisions relating to Liaison BHUSHAN office, Branch Office and Company incorporation with foreign Capital Page 1
  • 2. LIAISON OFFICEIntroductionA ‘Liaison Office’ is a representative office set up primarily to explore and understandthe business and investment climate. Such office is not permitted to undertake anycommercial / trading / industrial activity, directly or indirectly, and is required to maintainitself out of inward remittances received from parent company through normal bankingchannels.As defined under clause 2(e) of Foreign Exchange Management (Establishment in Indiaof Branch or Office or other Place of Business) Regulations, 2000.Liaison Office means a place of business to act as a channel of communicationbetween the Principal place of business or Head Office by whatever name called andentities in India but which does not undertake any commercial /trading/ industrialactivity, directly or indirectly, and maintains itself out of inward remittances receivedfrom abroad through normal banking channel;The liaison office can do only permitted activities in India these are:- (i) Representing the parent company/group companies in India. (ii) Promoting export import from/to India. (iii) Promoting technical/financial collaborations between parent/group companies and companies in India. (iv) Acting as a communication channel between the parent company and Indian companies.Suitability of Liaison office in IndiaThe Liaison Office generally acts as a communication channel between the parentcompany overseas and its present or prospective customers in India. The Liaison Officecan also be set up to establish business contacts or gather market intelligence topromote the products or services of the overseas parent company. The cost involved inLiaison Office is very low and also the statutory compliances are very less as comparedto company. It is best to start have the understanding of Indian customer and businessBY CA. Sudha Page 2
  • 3. environment to open a Liaison office rather than incorporating a company and blockingthe capital .Legal Framework for Liasion OfficeThe following pictorial presentation depicts the legal frame work for liaison office inIndia.BY CA. Sudha Page 3
  • 4. Foreign Exchange Management ActForeign Exchange Management Act is an act to consolidate and amend the law relatingto foreign exchange with the objective of facilitating external trade and payments and forpromoting the orderly development and maintenance of foreign exchange market inIndia.The Act has given general power to the Reserve Bank of India under section 47 tomake notifications to regulate various provisions of the Act. Also the specific power hasbeen given under Section 6(6) to make the regulations to regulate the liaison office ofthe companies incorporated outside India.As per sub-section (6) of Section 6 of the Foreign Exchange Management Act, 1999the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment inIndia of a branch, office or other place of business by a person resident outside India,for carrying on any activity relating to such branch, office or other place of business.Reserve Bank of India (RBI)In exercise of the powers given under sub section 6 of section 6 of the ForeignExchange Management Act, 1999.RBI has framed the regulation by way of notificationto regulate the provisions relating the Liaison office in India. These regulations areForeign Exchange Management (Establishment in India of branch or office orother place of business) Regulations, 2000 framed by way of Notification No.FEMA 22 /2000-RB dated 3rd May 2000.Liaison office RegistrationFor opening the Liaison office in India, the person resident outside India has to takeprior permission of Reserve bank of India. As per the notification mentioned above noperson resident outside India shall, without prior approval of the Reserve Bank,establish in India a branch or a liaison office or a project office or any other place ofbusiness by whatever name called.The permission for Liaison office is required to be taken in the form of application to theRBI. Such an application is required to be made in the prescribed form i.e. Form FNC 1.The FNC1 is the form which serves as the purpose for RBI for getting the requiredBY CA. Sudha Page 4
  • 5. information to arrive at the decision whether the permission is to be granted to Liaisonoffice in India or not.The application form duly completed and submitted to the Chief General Manager,Exchange Control Department (Foreign Investment Division), Reserve Bank of India,Central Office, and Mumbai-400001.The information required to be given in form: Full name and address of the applicant company/firm [whether the applicant is a proprietary concern or partnership firm or limited company or public sector undertaking or any other organisation]. Date and Place of incorporation / registration of the applicant company. Details of capital of the applicant company. Brief description of activities of the applicant company. Value of goods imported from and / or exported to India by the applicant during each of the last three years. Particulars of existing arrangements if any, for representing the company in India. Particulars of the proposed Branch/ Liaison Office like activities to be undertaken and place of establishmentDocuments required to be submitted along with Form: Translated English version of the Company’s Certificate of Incorporation/Registration, Memorandum & Articles of Association attested by the Indian Embassy/Notary public in the country of registration (Two original copies) Copies of last three years audited Balance Sheet, Profit & Loss Account of the applicant company/firm. Undertaking that the Liaison office will not carry out any trading and commercial activity in India.BY CA. Sudha Page 5
  • 6. Copy of the Board resolution for opening office in India.The permission granted to Liaison office shall be for the period of three years. Theliaison office is required to approach the office of Reserve bank of India before theexpiry of three years for seeking extension/ renewal of permission otherwise it will beconsidered that the liaison office is functioning without a valid permission in violation ofregulation 3 of Notification No. FEMA 22 /2000-RB dated 3rd May 2000.Permitted ActivitiesThe liaison office can do only those activities in India that are permitted as per ScheduleII of the said notification. As per the Schedule II, activities that can be done by theliaison office are:- Representing in India the parent company/group companies. Promoting export import from/to India. Promoting technical/financial collaborations between parent/group companies and companies in India. Acting as a communication channel between the parent company and Indian companies.Prohibited/Restricted Activities The liaison office in India is not allowed to carry on any business activity in India . it shall not take any activity Trading, commercial or industrial activity. There shall be no generation of revenue by Liaison office in India. It shall not enter into any contracts with Indian residents; No commission /fees shall be charged or any other remuneration received /income earned by the office in India for the liaison office activities/services rendered by it or otherwise in India. All the expenses for the set-up, operation and maintenance of the Liaison office have to be met out of foreign exchange remittances from the Foreign company through normal banking channels. The Liaison office shall not borrow/lend any money from/to any person in India without RBI prior permission. It shall not acquire, hold, and transfer any immovable property in India without RBI prior approval.BY CA. Sudha Page 6
  • 7. Prior approval of RBI required before shifting of Liaison officeAcquisition of Immovable property in IndiaAs per Foreign Exchange Management (Acquisition and transfer of immovable propertyin India) Regulations, 2000 FEMA 21/2000-RB, dated 3-5-2000, [the regulations toprovide for provision for acquisition and transfer of immovable property in India] theLiaison office is not allowed to own/acquire any immovable property in India however,the same can take on lease the immovable for carrying on the permitted activities inIndia.Closure of Business operationsThe Reserve Bank of India is required to be intimated with the documents Copy of the letter of approval of Reserve Bank of India for establishment of Liaison in India. Board resolution from foreign/parent company duly notarised/consularized Power of attorney from foreign/parent company duly notarised/counslarized in favour of person signing documents for closure. Certificate by Liaison office on pending legal proceedings in Indian courts or enquiries from Enforcement Directorate. Certificate by Liaison office that it does not own any immovable property in India. Certificate by Liaison office that it does not own any deposits, loans and advances. An undertaking by Liaison office for remittance of surplus to head office.Remittance of Funds outside IndiaIn case the Liaison office wants to remit funds/assets out of India then it is required tothe regulations as mentioned in the Foreign Exchange Management (Remittance ofAssets) Regulations, 2000.The Regulation Foreign Exchange Management (Remittanceof Assets) Regulations, 2000 provides for remittance of assets outside India. Regulation6 of the said notification deals with the Liaison office. It provides that in case ofremittance of winding up proceeds of a branch/office in India of a person residentoutside India, the application is required to be made to the RBI together with followingdocuments namely:(A) Copy of the Reserve Banks permission for establishing the branch/office in India;(B) Auditors certificateBY CA. Sudha Page 7
  • 8. (i) indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; (ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees etc. of the Liaison office have been either fully met or adequately provided for; (iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India;(C) No-objection or Tax clearance certificate from Income-Tax authority for theremittance; and(D) Confirmation from the applicant that no legal proceedings in any Court in India arepending and there is no legal impediment to the remittance.The Companies Act, 1956 Companies Act is an act to regulate the Companies incorporated in India and also thecompanies functioning in India.Section 591 to 602 of the said act, both inclusive shall apply to all foreign companies,companies incorporated outside India which, have established a place of businesswithin India.Registration when requiredAs per section 592 of the Companies Act, 1956 the registration is required within 30days of the establishment of place in Business in India. The intimation is filed with theRegistrar of Companies within 30 days in Form 44 with the Ministry of Corporate affairs.The documents which are required to be filed with Form 44 are as follows: 1. Certified copy of Memorandum and Articles of Association / Charter of the foreign company with certified English translation thereof, where necessary. 2. Full address of registered/principal office of foreign company. 3. Name and address of the person resident in India authorized u/s 592(1)(d) to accept on behalf of the foreign company, any notice or other documents required to be served on the foreign company. 4. Full Address of the principal place of business in India. 5. List of Director and Secretary of the foreign companyBY CA. Sudha Page 8
  • 9. 6. POA in favour of Authorized person/Country ManagerAlteration to be intimated to the office of Registrar of CompaniesAs per section 593 of the said Act, If any alteration is made or occurs in:- (a) the charter, statutes, or memorandum and articles of a foreign company orother instrument constituting or defining the constitution of a foreign company; or (b) the registered or principal office of a foreign company ; or (c) the directors or secretary of a foreign company ; or (d) the name or address of any of the persons authorised to accept service onbehalf of a foreign company; or (e) the principal place of business of the company in India;the company shall, within the prescribed time, deliver to the Registrar for registration areturn containing the prescribed particulars of the alterationAccounts and AuditThe Liaison office is required to submit its accounts to the office of Registrar ofCompanies in Form 52.The provisions of sections 209, 209A, 233A and 233B andsections 234 to 246 (both inclusive) shall, so far as may be, apply only to the Indianbusiness of a foreign company having an established place of business in India, as theyapply to a company incorporated in India. All documents relating to Liaison office shallbe submitted to Registrar of Companies, New Delhi.The Income Tax Act, 1961Registrations under the Act The Liaison office is required to take the permanent account number (PAN) and tax Deduction number (TAN) from the Income tax department. Application for PAN is made in Form 49A and application for TAN is made in 49B to the NSDL. Copy of any one of the following documents is required to se sent with an application Copy of registration certificate of the respective country duly attested by Indian Embassy/ Consulate/ High Commission/ Apostille in the country where applicant is located. Copy of certificate of registration with the competent authority in IndiaBY CA. Sudha Page 9
  • 10. Copy of approval issued by the competent authority in India Copy of the accompanying documents alongwith the approval issued by competent authority in India Copy of the application (duly acknowledged) made by the applicant before the competent authority in India Registration certificate issued by ROC (Form No. 44)Applicability of the Indian Income Tax Act, 1961On the basis of Permitted business activities as per the RBI regulation the Liaison officeis not allowed to carry on any BUSINESS ACTIVITY [trading, commercial or industrial]in India. Therefore one might say since there is no business activity allowed to becarried on Liaison office there is generation of income hence there is no income to bechargeable in the hands of Liaison office. But this is required to be further analyzed fromthe Income Tax perspective.Section 2(13) Income Tax Act defines business as “business includes any trade,commerce or manufacture or any adventure or concern in the nature of trade,commerce or manufacture”.Although the Liaison office is not doing any business activity in India but the activity ofthe parent company is purely commercial in nature. One may argue that Liaison office isnot earning profit but it is assisting in earning profit for commercial activity but at thesame time it is not necessary that every activity should result in earning revenue.The Income of the foreign company may be taxable in India.As per section 5 of the Income Tax Act, 1961Subject to the provisions of this Act, thetotal income of any previous year of a person who is a non-resident includes all incomefrom whatever source derived which— (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Keeping in mind the provisions of section 5 of the Income Tax Act, 1961 it can be said that if the income is said to be received or is deemed to be received in India or it accrues or arises or is deemed to accrue or arise to the foreign company the same shall be taxable in India.BY CA. Sudha Page 10
  • 11. To determine whether the sum is deemed to accrue or arise in India Section 9 of the Income Tax Act, 1961 is to be read. The section 9, in various clauses of sub- section (1), enumerates certain incomes which shall be deemed to accrue or arise in India, if the conditions mentioned in the respective clauses are fulfilled. As per Section 9(1)(i) of the Act, a Liaison office would be deemed to be liable to tax on its income in India in case it constitutes a ‘business connection’ of its foreign parent in India. “Business connection” shall include any business activity carried out through a person who, acting on behalf of the non-resident,— has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident, unless his activities are limited to the purchase of goods or merchandise for the non-resident; or has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident; or habitually secures orders in India, mainly or wholly for the non-resident or for that non-resident and other non-residents controlling, controlled by, or subject to the same common control, as that non-resident.Therefore it can be inferred that if the Liaison office is taken to be Business connectionof the parent company in India in that case the Liaison office shall be taxable under theIncome tax Act,1961. In the present context, it is also relevant to mention section 90(2) of the Income TaxAct, 1961, which provides that where the Central Government has entered into anagreement with the Government of any country outside India for granting relief of tax, oras the case may be, avoidance of double taxation, then, in relation to the assessee towhom such agreement applies, the provisions of this Act shall apply to the extent theyare more beneficial to that assessee.Therefore, for determining the taxability, if any, of LOs in India the Income Tax Act,1961 is to be read with the double taxation avoidance agreement.It could be said that the taxability of Liaison office in India is broadly governed bySection 9(1)(i) of the Income Tax Act, 1961 (Act), and, Article 5 (on permanentestablishment [PE]) read with Article 7 (on business profits) of the relevant Double TaxAvoidance Agreement (DTAA) (if any).As said earlier, as per Section 9(1)(i) of the Act, an LO would be deemed to be liable totax on its income in India in case it constitutes a ‘business connection’ of its foreignparent in India. As per Article 5 read with Article 7 of the relevant DTAA, an LO wouldBY CA. Sudha Page 11
  • 12. be taxable in India, in case it constitutes a Permanent Establishment of its foreignparent in India.It may be clarified that where the liaison office creates a PE or establishes a businessconnection, the foreign company would become liable to pay tax on the profits, whichcan be attributed to the liaison office. And if liaison office doesn’t create any of theaforesaid relationship, liaison office will not attract any income tax in India.But even if the Liaison office is held to be a ‘business connection’/ PE of its foreignparent in India, only so much of the profits as are attributable to the operations carriedout by the Liaison office in India, would be liable to tax in India. Also, as per the IncomeAct, no income shall be deemed to accrue or arise in India to the foreign parent throughor from ‘operations which are confined to the purchase of goods’ in India for the purposeof export.To avoid the tax liability of Liaison office in India it is important the Liaison office shouldbe engaged only in preparatory and auxiliary work and should not be construed ascarrying out any part of business operations of the foreign company in India. But there isno set of guidelines that can be laid down to decide existence of a PE; this woulddepend on the facts of each case and the gamut of activities carried out by the Liaisonoffice vis-a-vis global business operations of the foreign company.BY CA. Sudha Page 12
  • 13. BRANCH OFFICEIntroductionOne of the other entry strategies for the companies incorporated outside India toestablish their business in India is by way of opening the Branch office in India. As perIndian laws companies incorporated outside India engaged in manufacturing or tradingactivities are allowed to set up Branch Offices in India with specific approval of theReserve Bank.The branch office is defined as per Regulation of Notification No. FEMA 22 /2000-RBdated 3rd May 2000 clause 2(c) as “Branch shall have the meaning assigned to it insub-section (9) of Section 2 of the Companies Act, 1956 (1 of 1956),and as per the companies Act, 1956 “branch office” in relation to a company means— any establishment described as a branch by the company; or any establishment carrying on either the same or substantially the same activity as that carried on by the head office of the company; or any establishment engaged in any production, processing or manufactureSuch Branch Offices are permitted to represent the parent/group companies andundertake the activities in India like export/Import of goods from or to India, renderingprofessional or consultancy services, carrying on the research, in areas in which theparent company is engaged ,promoting technical or financial collaborations betweenIndian companies and parent or overseas group company. representing the parentcompany in India and acting as buying/selling agent in India, rendering services inInformation Technology and development of software in India, rendering technicalsupport to the products supplied by parent/group companies.Foreign Exchange Management Act, 1999As per Sub-section (6) of Section 6 of the Foreign Exchange Management Act, 1999the Reserve Bank may, by regulation, prohibit, restrict, or regulate establishment inIndia of a branch, office or other place of business by a person resident outside India,for carrying on any activity relating to such branch, office or other place of business.BY CA. Sudha Page 13
  • 14. Reserve Bank of IndiaThe Branch office is governed by following regulation framed by Reserve Bank of India“Foreign Exchange Management (Establishment in India of branch or office orother place of business) Regulations, 2000 framed by way of Notification No.FEMA 22 /2000-RB dated 3rd May 2000”.Branch office Registration – Reserve Bank of IndiaThe Branch office is required to take prior permission of Reserve bank of India. As perthe notification mentioned above no person resident outside India shall, without priorapproval of the Reserve Bank of India, establish in India a branch or a liaison office or aproject office or any other place of business by whatever name called.An application is required to be made to the Reserve Bank of India in Form FNC 1. Theapplication form should be duly completed and submitted to the Chief General Manager,Exchange Control Department (Foreign Investment Division), Reserve Bank of India,Central Office, and Mumbai-400001.The information required to be given in form 1. Full name and address of the applicant company/firm [State whether the applicant is a proprietary concern or partnership firm or limited company or public sector undertaking or any other organisation 2. Date and Place of incorporation / registration of the applicant company. 3. Details of capital of the applicant company 4. Brief description of the activities of the applicant company 5. Value of goods imported from and / or exported to India by the applicant during each of the last three years: 6. Particulars of existing arrangements if any, for representing the company in India. 7. Particulars of the proposed Branch/ Liaison Office like activities to be undertaken and place of establishmentFollowing Documents are required to be submitted along with the Form: Translated English version of the Company’s Certificate of Incorporation/Registration, Memorandum & Articles of Association attested by the Indian Embassy/Notary public in the country of registration (Two original copies) Copies of last Five years audited Balance Sheet, Profit & Loss Account of the applicant company/firm Copy of the Board resolution for opening office in India.BY CA. Sudha Page 14
  • 15. Permitted activities for a branch in India of a person resident outside IndiaAs per Schedule I of the Foreign Exchange Management (Establishment in India ofbranch or office or other place of business) Regulations, 2000 framed by way ofNotification No. FEMA 22 /2000-RB dated 3rd May 2000 the following are the activitieswhich can be performed by the Branch office in India: Export/Import of goods Rendering professional or consultancy services. Carrying out research work, in which the parent company is engaged. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. Representing the parent company in India and acting as buying/selling agent in India. Rendering services in Information Technology and development of software in India. Rendering technical support to the products supplied by parent/group companies.Restricted Activities The Branch office is prohibited from expanding its activities or undertake any new trading, commercial or industrial activity other than that expressly approved by RBI. It is restricted from accepting deposits in India Retail trading activities of any nature is not allowed for a Branch Office in India.Acquisition of Immovable property in India As per Foreign Exchange Management (Acquisition and transfer of immovable property in India) Regulations, 2000 FEMA 21/2000-RB, dated 3-5-2000, the regulations to provide for provision for acquisition and transfer of immovable property in India a branch, office in India of a foreign company established with requisite approvals wherever necessary, is eligible to acquire immovable property in India which is necessary for or incidental to carrying on such activity provided that all applicable laws ,rules, regulations or directions in force are duly complied with. The entity/concerned person is required to file a declaration in Form IPI with the Reserve Bank, within ninety days from the date of such acquisition.BY CA. Sudha Page 15
  • 16. Remittance of ProfitsA person resident outside India permitted by the Reserve Bank, to establish a branch inIndia may remit outside India the profit of the branch or surplus of the Project on itscompletion, net of applicable Indian taxes, on production of the following documents,and establishing the net profit or surplus, as the case may be, to the satisfaction of theauthorised dealer through whom the remittance is affected.The Regulation Foreign Exchange Management (Remittance of Assets)Regulations, 2000 provides for remittance of assets outside India. Regulation 6 of thesaid notification deals with the branch office.It provides that in case of remittance of winding up proceeds of a branch/office in Indiaof a person resident outside India, the application is required to be made to the RBItogether with following documents namely:(A) Copy of the Reserve Banks permission for establishing the branch/office in India;(B) Auditors certificate (i) indicating the manner in which the remittable amount has been arrived and supported by a statement of assets and liabilities of the applicant, and indicating the manner of disposal of assets; (ii) confirming that all liabilities in India including arrears of gratuity and other benefits to employees etc. of the Liaison office have been either fully met or adequately provided for; (iii) confirming that no income accruing from sources outside India (including proceeds of exports) has remained unrepatriated to India;(C) No-objection or Tax clearance certificate from Income-Tax authority for theremittance; and(D) Confirmation from the applicant that no legal proceedings in any Court in India arepending and there is no legal impediment to the remittance.The Income Tax Act,1961Registrations under the Act The Branch office is required to take the permanent account number (PAN) and tax Deduction number (TAN) from the Income tax department. Application for PAN is made in Form 49A and application for TAN is made in 49B to the NSDL.BY CA. Sudha Page 16
  • 17. Copy of any one of the following documents is required to se sent with an application Copy of registration certificate of the respective country duly attested by Indian Embassy/ Consulate/ High Commission/ Apostille in the country where applicant is located. Copy of certificate of registration with the competent authority in India Copy of approval issued by the competent authority in India Copy of the accompanying documents alongwith the approval issued by competent authority in India Copy of the application (duly acknowledged) made by the applicant before the competent authority in India Registration certificate issued by ROC (Form No. 44)Applicability of the Act Will be taxable as the foreign company at the rate of 42.23% including surcharge and Cess. Quarterly payment of Advance tax and Fringe Benefit TaxBY CA. Sudha Page 17
  • 18. COMPANYIntroductionOne of the other options of method of establishing the presence in India is to open thefull fledged company in India with Foreign capital and foreign subscribers. The companyis incorporated with foreign capital will not be allowed to repatriate the capital yet it canrepatriate the dividends to the Foreign shareholders after payment of necessary taxes.A Company once incorporated in India shall be an Indian company. Foreign DirectInvestment coming from abroad shall be regulated by the Foreign Exchangemanagement Act, Reserve Bank of India and the policy of Foreign Direct Investment inIndia as formulated by Reserve Bank of India from time to time.As per the current Foreign Direct investment policy the investment can be made in Indiathrough two routes being Automatic route or approval route.Under the automatic route the investment can be made without prior approval of centralgovernment but in the case of approval route the prior approval of Central governmentis required. India has among the most liberal and transparent policies on FDI among theemerging economies. FDI up to 100% is allowed under the automatic route in allactivities/sectors except the following, which require prior approval of the Government:- 1. Sectors prohibited for FDI 2. Activities/items that require an industrial license 3. Proposals in which the foreign collaborator has an existing financial/technical collaboration in India in the same field 4. Proposals for acquisitions of shares in an existing Indian company in financial service sector and where Securities and Exchange Board of India (substantial acquisition of shares and takeovers) regulations, 1997 is attracted) 5. All proposals falling outside notified sectoral policy/CAPS under sectors in which FDI is not permittedMost of the sectors fall under the automatic route for FDI. In these sectors, investmentcould be made without approval of the central government. The sectors that are not inthe automatic route, investment requires prior approval of the Central Government. Theapproval in granted by Foreign Investment Promotion Board (FIPB). In few sectors, FDIis not allowed.After the grant of approval for FDI by FIPB or for the sectors falling under automaticroute, FDI could take place after taking necessary regulatory approvals form the stategovernments and local authorities for construction of building, water, environmentalclearance, etc.BY CA. Sudha Page 18
  • 19. Foreign Exchange Management Act, 1999The Act has given general power to the Reserve Bank of India under section 47 tomake notifications to regulate various provisions of the Act. Also the specific power hasbeen given under Section 6(3)(b) to make the regulations to regulate the transfer orissue of any security by a person resident outside India;Reserve Bank of IndiaThe Issue/ transfer of shares of any security by a person resident outside India isregulated by Foreign Exchange Management (Transfer or issue of security by a personresident outside India) Regulations, 2000, Notification No. FEMA 20 /2000-rb dated 3rdMay 2000, RBI.As per the regulation 5 of the said regulation “A person resident outside India (otherthan a citizen of Bangladesh or Pakistan or Sri Lanka) or an entity outside India,whether incorporated or not, (other than an entity in Bangladesh or Pakistan) , maypurchase shares or convertible debentures of an Indian company under Foreign DirectInvestment Scheme, subject to the terms and conditions specified in Schedule 1of thesaid notification”Procedure under automatic route FDI in sectors/activities to the extent permitted under automatic route does not require any prior approval either by the Government or RBI. There is only two way intimation to the Reserve Bank of India through the Authorised dealer category I. An Indian company receiving investment from outside India for issuing shares/convertible debentures/preference shares under the FDI Scheme, should report the details of the amount of consideration to the Reserve Bank not later than 30 days from the date of receipt in the prescribed form along with the KYC report. Once the Annexure II along with the KYC report is submitted the regional office of Reserve Bank of India shall acknowledged the receipt by way of allowing the Unique Identification Number (UIN) for the amount reported.Time frame within which shares have to be issued The equity instruments should be issued within 180 days from the date of receipt of the inward remittance or by debit to the NRE/FCNR (B) account of the non-resident investor. After issue of shares/ convertible debentures/ preference shares, the Indian company has to file Form FC-GPR, not later than 30 days from the date ofBY CA. Sudha Page 19
  • 20. issue. Price of shares issued to persons resident outside India under the FDI Scheme, shall be on the basis of SEBI guidelines in case of listed companies. In case of unlisted companies, valuation of shares has to be done by a Chartered Accountant in accordance with the guidelines issued by the erstwhile Controller of Capital Issues. Part A of Form FC-GPR has to be duly filled up and signed by Managing Director/Director/Secretary of the Company and submitted to the Authorised Dealer of the company, who will forward it to the Reserve Bank. The following documents have to be submitted along with Part A : (i) A certificate from the Company Secretary of the company certifying that (a) all the requirements of the Companies Act, 1956 have been complied with; (b) terms and conditions of the Government’s approval, if any, have been complied with; (c) the company is eligible to issue shares under these regulations; and (d) the company has all original certificates issued by authorised dealers in India evidencing receipt of amount of consideration. (ii) A certificate from Statutory Auditors or Chartered Accountant indicating the manner of arriving at the price of the shares issued to the persons resident outside India. The report of receipt of consideration as well as FC-GPR have to be submitted to the concerned Regional Office of the Reserve Bank under whose jurisdiction the registered office of the company is situated. Part B of FC-GPR should be filed on an annual basis by the Indian company, directly with the Reserve Bank. This is an annual return to be submitted by 31st of July every year, pertaining to all investments by way of direct/portfolio investments/re-invested earnings/others in the Indian company made during the previous years (i.e. the information in Part B submitted by 31st July, 2008 will pertain to all the investments made in the previous year’s up to March 31, 2008). The details of the investments to be reported would include all foreign investments made into the company which is outstanding as on the balance sheet date. The details of overseas investments in the company both under Direct/portfolio investment may be separately indicated.Procedure under Government ApprovalBY CA. Sudha Page 20
  • 21. FDI in activities not covered under the automatic route require prior governmentapproval. Approvals of all such proposals including composite proposals involvingforeign investment/foreign technical collaboration are granted on the recommendationsof Foreign Investment Promotion Board (FIPB). Application for all FDI cases, exceptNon-Resident Indian (NRI) investments and 100% Export Oriented Units (EOUs),should be submitted to the FIPB Unit, Department of Economic Affairs (DEA), Ministryof Finance. Application for NRI and 100% EOU cases should be presented to SIA inDepartment of Industrial Policy and Promotion .Application can be made in Form FC-IL.Plain paper applications carrying all relevant details are also accepted. No fee ispayable.Prohibited SectorsThe extant policy does not permit FDI in the following cases: 1. Gambling and betting 2. Lottery Business 3. Atomic Energy 4. Retail Trading 5. Agricultural or plantation activities of AgricultureGeneral permission of RBI under FEMAIndian companies having foreign investment approval through FIPB route do not requireany further clearance from RBI for receiving inward remittance and issue of shares tothe foreign investors. The companies are required to notify the concerned RegionalOffice of the RBI of receipt of inward remittances within 30 days of such receipt andwithin 30 days of issue of shares to the foreign investors or NRIs.The Companies Act,1956Once the company is incorporated in India, it shall be governed by the IndianCompanies Act, 1956 which means all the provisions enumerated in Indian companiesAct shall be applicable. Also all the acts/provisions/rules/notifications which areapplicable to companies in India shall be applicable in the same manner as areapplicable to the company with Indian capital. The Companies Act of 1956 sets downrules for the establishment of both public and private companies. The most commonlyused corporate form is the limited company, unlimited companies being relativelyuncommon. A company is formed by registering the Memorandum and Articles ofAssociation with the State Registrar of Companies of the state in which the main officeis to be located.The Income Tax ActBY CA. Sudha Page 21
  • 22. Since the company is incorporated all the provisions of Indian Income Tax, 1961 as are applicable to company incorporated in India shall be applicable. As per the Income Tax Act the income of company is taxable at the rate of 33.99%. Advance Tax payment of Income Tax As per section 211 of the income tax the total tax payable by the company is required to be made in four installments. Following are the specified proportions and scheduled dates for payment of Advance Tax to Govt.:- Due date of Installments Amount PayableOn or before the 15th June Not less than 15% of Advance Tax Liability Not less than 45% of Advance Tax Liability, asOn or before the 15th September reduced by the amount paid in earlier installment. Not less than 75% of Advance Tax Liability, asOn or before the 15th December reduced by the amount paid in earlier installment(s). The whole amount of Advance Tax Liability, asOn or before the 15th March reduced by the amount paid in earlier installment(s). Consequences of non deposit of Advance Tax: There shall be charged an interest under Section 234B and Section 234 C of the Income Tax Act for the nonpayment , short payment of taxes and deferment in payment of Advance Tax. BY CA. Sudha Page 22
  • 23. Advance Tax payment of Fringe Benefit Tax Due date of Installments Amount Payable On or before the 15th June Not less than 15% of Advance Tax Liability Not less than 45% of Advance Tax Liability,as reducedOn or before the 15th September by the amount paid in earlier installment. Not less than 75% of Advance Tax Liability, as reducedOn or before the 15th December by the amount paid in earlier installment(s) The whole amount of Advance Tax Liability, as reduced by On or before the 15th March the amount paid in earlier installment(s) Consequences of Fringe Benefit Tax: There shall be charged an interest under Section 115WJ of the Income Tax Act. Tax audit if gross receipts exceed INR 40,00,000 Annual corporate tax return, wealth tax return and fringe benefit tax return Annual and quarterly withholding tax returns Compliance with transfer pricing regulations *FBT is abolished from Budget 2009-2010. In case of further discussion on the above matter mail me at sudhag999@gmail.com. BY CA. Sudha Page 23

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