India


India is a socialist democratic republic. It has a federal form of government, comprising 29 states and six union territories. The Indian parliament is the supreme legislative body and is essentially based on the British parliamentary system. There are two houses: The Rajya Sabha (Council of States) and the lok Sabha (House of the People). The national executive power is centered on the Council of Members (Union Cabinet), led by the Prime Minister.

India has been one of the best performers in the world economy in recent years with GDP growth exceeding 9 percent in 2008 and 2009. India is the fourth largest world economy ranked by purchasing power parity, and the second fastest economy by GDP growth. India’s economy has recovered from the global financial crisis faster than other regional economies with growth expected to be approximately 8 percent in 2010.
 
Besides its economic credentials, India’s demographic profile makes it an increasingly attractive investment destination for foreign investors. India’s substantial and expanding middle class and youth populations – over 40 percent of its population are over 21 – are hungry for consumer goods. India, therefore, represents an enormous market for foreign investors with potential for increased growth over the next two decades.

Since 1991, there has been significant deregulation and liberalization in India. This has opened up many sectors of the economy to private investment, including foreign direct investment. Competition is actively encouraged and the recent re-election of the National Congress Party, with a mandate to implement investor-friendly economic reforms, has been a positive development for foreign investors.
Business visas
Foreign nationals wishing to conduct business transactions in India must obtain a business visa from an Indian embassy or consulate abroad. Business visas may be issued for up to five years, with a multiple entry provision, but usually with a cumulative stay of not more than 180 days. Business visas can be renewed or extended within India. Business and tourist visas are usually not convertible into employment visas while the holder of the relevant visa is in India.
 
Residential permits
 
Foreign nationals wishing to work in India must obtain a residential permit from a Foreigners’ Regional Registrar Office (FRRO), which are located in all major cities. A foreign national holding a visa (other than a tourist visa) valid for a period exceeding 180 days is required to be registered with the FRRO within 14 days of arrival in India. Certain categories of people are exempt from registration requirements, including United States nationals with a ten-year tourist/business visa, provided their period of stay is less than 180 days.
 
Employment visa
 
Foreign nationals intending to take up employment in India also require an employment visa or work permit issued by Indian missions abroad. The visas are issued for a period of one year, and may be extended in India for the period of the foreign national’s contract of employment.
 
Income tax clearance certificate Foreign employees are required to register for tax purposes by obtaining a permanent account number with the Indian income tax authorities upon their arrival in India. This is a one-time registration number, which must be included in correspondences with the tax authorities. A person not domiciled in India, intending to stay for more than 120 days, must produce an income tax clearance certificate, which certifies that the person’s stay in India was self-financed.
Introduction
Foreign companies wishing to do business or establish a presence in India have a number of options as discussed below.
 
Distributorship arrangement
 
Before establishing a representative office, it is common for foreign companies to test market potential by appointing a sales representative or distributor. This provides a relatively low-risk and low-cost method of testing the marketplace.
 
India’s distribution channels are diverse, and there are few established retailers that operate on a national level. It is important to investigate a potential distributor’s creditworthiness, reputation and capabilities before selecting them.

Foreign direct investment
 
Automatic route
 
Foreign direct investment (FDI) in the equity share capital of an Indian company is permitted in all sectors under the “automatic route” (without prior approval) of the Foreign Investment Promotion Board (FIPB), except with respect to the following:
    • manufacture of cigars and cigarettes of tobacco and manufactured tobacco substitutes
    • commodity exchanges
    • courier services
    • credit information companies
    • print media companies
    • manufacture of items exclusively reserved for the small-scale sector with more than 24 per cent FDI
    • proposals in which the foreign collaborator had an existing financial/technical collaboration in India in the “same” field prior to 12 January 2005
    • manufacture of electronic aerospace and defense equipment’s (all types)
    • further specialized sectoral limitations as noted in the FDI Policy such as 49 percent automatic route allowed in the private banking sector.
Under the automatic route, foreign companies may acquire shares in existing Indian companies without obtaining prior regulatory or government approval. The Indian company, however, must notify the relevant regional office of the Reserve Bank of India (RBI) within 30 days of receiving investment funds from the foreign investor, and must file certain documents with the regional office within 30 days after the issue of shares to the foreign investor.
 
FDI is prohibited in certain sectors. A non-exhaustive list of sectors includes gambling, lottery business, atomic energy and retail trading (except single brand product retailing, which requires specific clearance).
 
Wholly owned subsidiaries
 
Foreign companies are permitted to establish wholly owned subsidiaries in India. Such companies may be established as a private limited or public limited company, subject to the requirements of the Companies Act 1956. Foreign equity ownership may be up to 100 per cent except in certain specified sectors. The Indian subsidiary company must register with the Register of Companies (ROC) and is subject to the same laws as domestic companies. The steps for establishing a private company in India are set out in Annex A.
 
Joint ventures
 
As with wholly owned subsidiaries, foreign companies are permitted to incorporate a company locally in India as a joint venture company with an Indian partner/other shareholder as either a private limited or a public limited company. Equity ownership restrictions apply to certain industry sectors, as mentioned above.

FDI beyond automatic approval
 
In cases where the automatic approval route is not available, clearance from the FIPB is required. Additionally, in certain cases, the approval of the RBI may also be required.
 
Repatriation of investment capital and profits earned in India
 
Investment capital and profits earned may be repatriated without restrictions, except in the case of non-resident Indians (nRIs) who choose to invest specifically under non-repatriable schemes:
    • carrying out research work in which the branch office’s parent company is engaged
    • promoting technical or financial collaborations between Indian companies and the branch office’s parent company or the group of companies to which it belongs
    • representing the parent company in India and acting as its buying/selling agent
    • rendering services in information technology and development of software in India
Repatriation of sale proceeds of investments in India is permitted with prior approval of the RBI and tax clearance from the income tax authorities.

Liaison office
 
Foreign companies wanting to establish an initial presence in India often set up a liaison office. Prior approval of the RBI is required before setting up a liaison office in India.

A foreign company may open a liaison office in India to represent its parent company or the group in order to: promote the export or import of goods and services from or to India, to facilitate technical or financial collaborations between its parent or the group of companies to which it belongs and an Indian entity, to act as a communication channel between itself and an Indian entity. Liaison offices are not permitted to undertake any commercial, trading or industrial activity, or earn any income in India. Liaison offices are prohibited from charging any commissions or receiving other income from Indian customers for providing liaison services. Permission to establish a liaison office is initially granted for three years but may be extended beyond this period.
 
Branch office
 
Foreign companies engaged in manufacturing and trading activities may open a branch office in India for any of the following purposes:
    • undertaking export and import activities
    • rendering professional or consultancy services
    • rendering technical support to the products supplied by the branch office’s parent or the group of companies to which it belongs
    • undertaking activities of foreign airline or shipping company
    • manufacturing in a Special Economic Zone (SEZ).
Prior approval of the RBI is required before setting up a branch office in India. For income tax purposes, a branch office is treated as an extension of the foreign company in India, and is taxed at the rate applicable to foreign companies in India. A branch office is also required to register with the relevant Registrar of Companies (“ROC”).
 
Project office
 
Foreign companies may establish a project office if it is intended that its business presence in India will be for a limited period of time. Essentially, a project office is set up with the purpose of executing a specific project.

According to the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) (Amendment) Regulations 2003, a foreign company may open a project office in India, provided it has secured from an Indian company a contract to execute a project in India, and one of the following conditions is satisfied:
    • the project is funded directly by offshore funds
    • the project is funded by a bilateral or multilateral international financing agency
    • the project has been cleared by an appropriate authority
    • a company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project.
The foreign company is required to furnish a report to the relevant regional office of the RBI under whose jurisdiction the project office is set up, giving certain details.
 
Foreign companies engaged in turnkey construction will normally set up a project office for their operations in India. Such offices cannot undertake activities other than activities relating and incidental to the execution of the relevant project.
 
Foreign technology agreements
 
Foreign companies may enter into technology agreements with Indian companies provided that:
    • The technical know-how lump sum payment does not exceed uS$2 million (per technology)
    • Royalties from wholly owned subsidiaries to their parent companies do not exceed 8 percent on exports and 5 percent on domestic sales (net of sales).

In situations where there is no technology transfer, remittance outside India for use of a trade mark or franchise right in India is permitted, without prior approval, so long as such payment does not exceed 2 percent of export sales and 1 percent of domestic sales. Where there is a transfer of technology, royalties that may be received for the granting of the right to use a trade mark, brand name or franchise right cannot exceed the maximum amounts referred to in the second point above.

General
Most sectors are now open to 100 percent foreign ownership. In other sectors, FDI caps are gradually being reduced. Very few sectors now completely disallow foreign ownership. Those sectors that are completely closed are contained in a negative list published by the Indian government; for example, sectors prohibited for FDI are retail trading (except single brand product retailing where specific approval is required), atomic energy, lottery, gambling and betting.

Foreign institutional investors
Companies and other entities and non-residents, may also invest in India under the Portfolio Investment Scheme as foreign institutional investors (Fiis). Fiis may also register as sub-accounts on behalf of third parties who wish to invest in Indian securities. Fiis and their sub-accounts are required to register with the Securities and Exchange Board of India (SEBi), the principal capital markets regulator in India under the SEBi (Foreign institutional investors) Regulations 1995. Registered Fiis can buy and sell securities on the Indian stock exchanges. They can also invest in listed and unlisted securities in off-market transactions subject to pricing restrictions.

A single Fii or an approved sub-account of an Fii cannot hold more than 10 percent of the paid-up capital of an Indian company, or 10 percent of the paid-up value of each series of convertible debentures issued by an Indian company.

Fiis and their sub-accounts together cannot hold more than an aggregate of 24 percent of an Indian company’s issued and paid-up share capital. However, the limit of 24 percent may be increased up to the sectoral cap for the relevant industry, on the passing of a resolution by the board of directors of the Indian company followed by the passing of a special shareholders’ resolution to approve the increase. The ceiling includes shares and convertible debentures acquired through the primary market or the secondary market. However, the ceiling does not include investment made by the Fii through offshore funds, global depository receipts and euro convertible bonds.

Small-scale industry reservation policy Since 1964, the Indian government has reserved many areas of production for the small-scale industry, such as garments, sporting goods, shoes and toys. This policy is aimed at protecting labor intensive industries from competition by larger corporations.

Although the number of reserved industries has reduced, the reservation policy is still a barrier to entry for foreign investors who may not invest more than 24 percent in these sectors.

Other restrictions
 
Foreign investors who had an existing venture, investment, technical collaboration or trade mark agreement with an Indian company prior to January 12, 2005 are required to obtain the prior approval of the FIPB for investments or collaborations in the same field. This restriction does not apply to investment proposals in the information technology or mining sector or to investments by international financial institutions.

Prior approval of FIPB is also not required for investments by venture capital funds registered in India, or for investments in financially weak or defunct companies, or where the prior investment in the existing Indian partner is less than 3 percent.

Government initiatives and incentives
 
Tax incentives
 
The government offers a range of tax incentives to investors to promote industrial growth and foreign investment. These incentives include:
    • deduction of scientific research and development costs
    • deduction of preliminary expenses in five annual instalments
    • full or partial deduction of foreign exchange earnings by hotels and construction companies
    • a ten-year deduction of 90 per cent of the profits and gains derived by any undertaking that is located in a free-trade zone or a export processing zone
    • a ten-year deduction of such profits and gains as are derived by a 100 per cent export-oriented undertaking from the export of articles or things or computer software. This deduction is available only until 31 March 2011
    •  a ten-year tax holiday on profits and gains of a new industrial undertaking, set up anywhere in India, for power-generating projects
    • a ten-year tax holiday to any enterprise that builds, maintains, and operates any infrastructure facility, such as roads, highways or expressways, new bridges, airports, ports, or rapid rail transport systems on a BOT (build, operate, transfer), BOOT (build, own, operate, transfer), or similar basis.
Special economic zones
 
The government has offered incentives for establishing special economic zones with the following benefits:
    • 100 percent foreign ownerships
    • accelerated approval processes
    • exemption from value added tax/central sales tax, excise duty, custom duty and service tax on domestic procurements and imports
    • 100 percent income tax exemption for first five years; 50 per cent income tax exemption for next five years; income tax exemption for next five years to the extent of profits reinvested (maximum 50 per cent)
    • 100 percent deduction for a block of ten years out of 15 years in respect of profit and gain of a special economic zone developer and co-developer for the purpose of income tax
    • exemption from dividend distribution tax
    • no minimum alternate tax
    • single point clearance to the SEZ unit under various state acts and rules
    • external commercial borrowings by units up to uS$500 million a year allowed without any maturity restrictions
    • freedom to bring in export proceeds without any time limit
    • flexibility to keep 100 percent of export proceeds in EEFC account
    • SEZ units allowed to write-off unrealized export bills
    • SEZ units allowed to sub-contract part of process abroad
    • inter-unit sales permitted provided payment in foreign currency.
Other incentives
 
State governments also encourage investment and seek to attract capital by offering various incentives. These commonly take the form of investment incentives, power tariff incentives and other physical benefits.
General
Indian taxes can be broadly classified into direct and indirect taxes. Direct taxes cover income tax and corporate tax.
 
Personal income tax Income tax is levied on:
    • income from salary
    • income from house property
    • profits and gains of business or profession
    • capital gains
    • income from other sources, including dividends, interest income and other income not covered under of any of the first four above.
Corporate taxes
 
The tax year runs from 1 April to 31 March. The current rates of taxation (as a percentage of net income) are as follows:
    • domestic companies – 30 percent (for the assessment year 2009/10)
    • foreign companies – 40 percent (for the assessment year 2009/10).
A surcharge is payable on income tax where the total taxable income exceeds Rs10 million at the rate of 10 percent for domestic companies and 2.5 percent for foreign companies.
 
Additionally, an education levy of 2 percent and a secondary higher education levy of 1 percent on the amount of tax and surcharge are also payable.

Corporate residency
 
An entity incorporated in India or having its entire management and control in India is a resident and is taxed on its worldwide income. A non-resident corporation (foreign company) is taxed only on income received or deemed to be received in India from Indian operations, or income that is accruing or arising in India or deemed to accrue or arise in India (subject to treaty benefits wherever available).

For individuals, women, persons over age 65, if the income exceeds Rs1 million, surcharge on income tax at the rate of 10 percent is applicable. In addition, an education levy of 2 percent and a secondary higher education levy of 1 percent on the amount of tax and surcharge are payable. A deduction of up to a maximum of Rs100,000 is available on taxable income on investment, made in certain specified savings schemes.

Withholding tax
 
Withholding tax is payable on certain payments, including interest, salaries paid to employees, professional fees, payments to contractors, commissions, winnings from games, lotteries, horse races, etc. Responsibility for the deduction of withholding tax is fixed on the person responsible for making the payment. The rate of withholding tax applicable to non-residents varies depending on the nature of the income.

Capital gains tax
 
Capital gains arising from the transfer of capital assets situated in India are taxable. Capital assets include all kinds of property except stock-in-trade, raw materials and consumables used in business or professions, personal effects (except jewelry), agricultural land and notified gold bonds.

Profits gained from the transfer of long-term capital assets are taxed as long-term capital gains. Long-term capital gains are defined as capital gains on assets held for over three years (one year for listed shares and certain specified securities). Profits gained from the transfer of short-term capital assets (that is, assets that do not qualify as long-term capital assets) are referred to as short-term capital gains.
 
Income from other sources
Income from other sources includes interest income, dividends and other income. This is a residual category in the heads of income. Income under this head is taxed at normal rates as applicable for individuals, companies and firms. However, the following incomes in the case of non-residents are taxed at special rates on a gross basis:
    • Dividends other than dividends on which dividend distribution tax has been paid – 20%
    • Interest received on loans given in foreign currency to Indian concern or government of India – 20%
    • Income in respect of units purchased in foreign currency of specified mutual fund/UTI – 10%
Income from royalties and technical fees in case of non-residents
 
Any income derived in the form of royalties or technical fees by non-residents in India is taxed at a concessional rate of 10 percent. However, where a non-resident has a permanent establishment in India and the royalty or fees for technical services is effectively connected with the permanent establishment, the non-resident may be taxed at 40 percent plus surcharge and education cess.

Repatriation of profits
 
Before foreign companies can repatriate profits, the Income Tax Department must be satisfied that they have paid tax owing and issued a no-objection certificate. Applications require a certificate from a chartered accountant stating that all tax obligations have been fulfilled.
 
Repatriation of earnings
 
Dividends declared and paid by domestic companies are exempt from tax in the hands of their shareholders. However, the company is liable to pay dividend distribution tax of 15 percent (plus applicable surcharge and levies) on such dividends.

Advance rulings
 
A system of advance rulings is currently available to non-residents and specified residents. This scheme enables the applicant to obtain in advance a ruling on issues which could arise in determining their tax liability. Advance rulings are pronounced by an authority known as the Authority for Advance Rulings. The ruling is binding on the relevant income tax authorities and the applicant in respect of the specific transaction.

Double tax treaties
 
India has double tax avoidance agreements with over 60 counties, including Australia. Non-residents can be taxed under the double tax treaty or the domestic law, whichever they choose.

If no double tax agreement exists, a resident company can claim a foreign tax credit for the foreign tax paid by it. The amount of credit granted is the lower of the Indian tax payable on the income that is subject to double taxation and the foreign tax discharged.

Transfer pricing
 
India has introduced comprehensive transfer-pricing regulations, effective from 1 April 2001, with the objective of preventing multinational companies from manipulating prices in intra-group transactions such that profits are not shifted outside India. Under the transfer pricing regulations, income and expenses (including interest payments) with respect to international transactions between two or more associated enterprises (including permanent establishments) must be at arm’s length prices.

Indirect taxes
 
Excise duty
 
Excise duty is a tax applicable on the manufacture of goods within the country. The term “manufacture” has been interpreted to mean bringing into existence new articles having a distinct name, character, use and marketability. Basic excise duty is levied at a uniform rate of 8 percent. Excise duty is mostly levied on an ad-valorem basis, but certain commodities may attract excise duty at specific rates, based on quantity or weight. Excise law in India provides for a CENVAT Credit Scheme, which limits the cascading effect of duty incidence on a number of excisable goods, which are used as inputs in the manufacture of other excisable goods.

Customs duty
 
Customs duty is levied on the import of goods into India. It comprises basic customs duty, additional customs duty and special additional customs duty. The peak rate of basic customs duty is now 10 percent. The primary basis for valuation of goods is the transaction value.

Service tax
 
Service tax is levied on certain identifiable taxable services provided in India by specified service providers, currently applicable to over 111 services. The service tax rate is currently 10.36 percent (which is inclusive of education levies and secondary and higher education levies charged, on the service tax). Generally the liability to deposit tax is on the service provider. Where the service provider is a non-resident or person outside India, the liability to pay service tax is on the service recipient.

Central sales tax
 
Levied on sale of movable goods, this tax is imposed by the central government if the goods are sold interstate. The collection and administration of central sales tax is the responsibility of state governments. Interstate sales tax is currently at the rate of 2 percent. However, movement of goods between the states as stock transfers from factory to depots are not liable for levy of central sales tax.
 
Value-added tax
Value-added tax (VAT) on sales was introduced at the state level in April 2003 and replaces the existing sales tax. Most Indian states have now adopted the VAT system. While internationally VAT is implemented such that it replaces all indirect taxes except customs duty, in India, VAT replaces local sales tax only. Since VAT was implemented at the state level, central sales tax and all other indirect taxes such as customs, excise, service tax, etc, continue as before.
General
India has extensive labor law legislation covering labor employment and dismissal terms, health and safety and pension obligations.

 
Labor laws
 
The government has enacted comprehensive labor law legislation. The following are the key labor laws:
    • The Industrial Disputes Act 1947, which regulates industrial relations including closures and retrenchment
    • The Factories Act 1948, which governs working conditions in factories. The Act establishes minimum standards for working conditions and facilities related to manufacturing processes, handling and storage of materials, working hours etc
    • The Minimum Wages Act 1948, which empowers the appropriate government (central or state) to fix and revise minimum wages and allowances payable to workers and also to regulate the conditions of work such as hours of work and overtime
    • The Payment of Bonus Act 1965 requires payment of a bonus to certain categories of employees
    • The Payment of Gratuity Act 1972 requires the payment of gratuity, as recognition of continuous service to an employer, to certain categories of employees when they leave their employment
    • The Employees’ Provident Fund and Miscellaneous Provisions Act 1952, which applies to workers whose wages do not exceed rs6,500 per month in applicable industries and establishments. The employer and the employee are required to make matching contributions to the fund. Effective from November 1995, workers who have put in a minimum of ten years’ eligible service and have attained the age of 58 years are entitled to a superannuation/retirement pension
    • The Workmen’s Compensation Act 1923, which provides for the payment to workmen for injuries arising out of or in the course of their employment
    • The Contract Labor (Regulation) Act 1970, which regulates the employment of contract labor in certain establishments and provides for its abolition in certain circumstances
    • The Employees State Insurance Act 1948, which provides for certain benefits to employees in the case of sickness, maternity and employment injury
    • The Industrial Employment (Standing Orders) Act 1946, which requires employers in industrial establishments formally to define conditions of employment under them.
Dispute resolution

Courts
 
India has a written constitution and codified central and state laws. It has a three-tiered court system comprising the Supreme Court of India, the High Court located in each state, and lower civil, criminal and revenue courts and various tribunals. There are also specialized legal forums such as industrial courts, cooperative courts, family courts, consumer courts and other judicial tribunals.

 
For the settlement of company disputes, there is a Company Law Board constituted under the Indian Companies Act 1956 (to be replaced by the National Company Law Tribunal), direct and indirect tax tribunals, Competition Commission etc. Listed companies are regulated by the SEBI and its appellate tribunal. Intellectual property disputes such as infringement actions and trade mark objections may be settled before boards constituted under the relevant statutes.

 
The time taken for a suit to be heard by an Indian court can be lengthy. As a result, interim relief has assumed great importance. Specifying remedies available in a contract assists with the grant of interim relief. Negotiable instruments, guarantees and written contracts providing for a liquidated sum can be enforced through a summary procedure.

 
Recognition of foreign judgments
 
Indian courts will consider foreign judgments conclusive after their validity is determined according to the following principles:
    • the foreign judgment is determined by a court of competent jurisdiction
    • the foreign judgment is not contrary to natural justice
    • the foreign judgment is not obtained by fraud
    • the foreign judgment is not founded on an incorrect view of international law
    • the foreign judgment is given on the merits of the case
    • the foreign judgment is not founded on breach of any law enforced in India.
Arbitration
 
The Arbitration and Conciliation Act 1996 provides for dispute resolution through arbitration and conciliation as an alternative to litigation. Most companies choose arbitration as the most suitable method for resolving disputes. India’s Arbitration and Conciliation Act 1996 is based on the United Nations Commission on International Trade Law.

 
Arbitration in India can be an efficacious remedy, and the law allows interim relief in the course of arbitration proceedings. However, arbitration can only be initiated in the case of a dispute between parties. Arbitral awards are enforceable as decrees of Indian courts.

 
Indian courts can, however, refuse enforcement of a foreign award on certain grounds, including if enforcement of the relevant award would be contrary to public policy. To limit the possibility of challenges to foreign awards, parties can agree to exclude the application of the relevant provisions of the Arbitration and Conciliation Act.

 
India is a signatory to both the Geneva Convention on the Execution of Foreign Arbitral Awards (1923) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1960).

 
An arbitral award obtained in a signatory nation to either the Geneva or New York Conventions is enforceable in India pursuant to the Arbitration and Conciliation Act 1996.

 
Choice of law
 
Indian private international law follows the English private international law rules. It therefore allows the parties to choose a proper law of contract provided the choice is not contrary to public policy. The laws of India, which are considered “mandatory” laws, cannot be excluded. For example, in the case of foreign collaboration agreements, which require government approval, the government imposes a condition that the contract must be governed by Indian law.
Business environment
General
 
India has a mixed economy with an active state and private sector. India’s five-year plan from 2007 to 2012 contemplates rapid industrial development, focusing on technological advancement and international competitiveness in sectors such as steel, electronics, machinery, information technology and infrastructure.

India’s political and legal systems are similar to many countries as they are based on the British systems. Its geographical and cultural diversity, however, make it a challenging and complex place to do business.

Banking sector
 
The banking sector was earlier dominated by state-owned institutions. Banks in India are segregated as public or private sector banks, cooperative banks and regional rural banks.

The entry of new private banks following reforms in the early 1990s means that the state banks account for a smaller share of the system’s assets than in the past. These institutions now offer more sophisticated financial services. It is advisable that foreign businesses establish banking relationships with one of the newer privately owned banks.

Foreign banks are permitted to set up wholly owned subsidiaries in India. The limit for foreign shareholding in private banks (including foreign institutional investors and nRIs) other than in the case of wholly owned subsidiaries of foreign banks, is 49 percent under the automatic route. Additionally, at least 26 percent of the paid-up capital of private banks is required to be held by Indian residents. Foreign institutional investors’ shareholding in a private banking company cannot exceed 24 percent of the paid up capital, except through a resolution of the board of directors followed by a special shareholders’ resolution, to increase the holding up to 49 percent, provided that the investment does not exceed the 74 percent overall foreign investment ceiling.
 
Foreign and portfolio investment in public sector (nationalized) banks are subject to overall statutory limits of 20 percent as provided by the Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80.

Competition policy
 
The Competition Act 2002 is designed to prevent businesses engaging in practices that have an adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers, and to ensure freedom of trade carried on by other participants in markets in India. The Competition Act 2002 prohibits anti¬competitive agreements, abuse of dominant position, and regulates mergers and amalgamations of enterprises. It replaces the Monopolies and Restrictive Trade Practices Act 1969.

Environmental laws
 
Following the Bhopal gas tragedy in 1984, the Indian government increased its focus on environmental protection.
 
Companies are required to obtain statutory pollution and environmental approvals before establishing industrial projects in India. However, if investment in a project is less than Rs1 billion (approximately Us$22.2 million), an environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries.
 
The establishment of industries in certain locations considered ecologically fragile (for example Aravalli Range, coastal areas, doon Valley, dahanu) are regulated by separate guidelines issued by the Ministry of Environment and Forests.

The Environment Protection Act 1986 lists a number of industries, including oil refineries and cement, petrochemicals, dye and paper products, which require Ministry of Environment approval. The government also prescribes guidelines on the quality standards of air, water and soil for different areas, and the maximum levels of emissions to which industries must adhere.

Franchising
 
Whilst there are no franchise-specific laws in India, there are a number of other laws that impact on franchise arrangements in India. These include the law of contract, intellectual property law, competition law and consumer protection law.
 
The RBI regulates the terms of payment under franchise agreements (such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees) where one party is a non-Indian entity. The RBI prescribes certain requirements that must be complied with, including that a franchisee must provide a tax clearance and a chartered accountant’s certificate at the time of remitting royalty payments to a franchisor outside India.
 
The Indian government permits foreign franchisors to charge royalties up to 1 percent for domestic sales and up to 2 percent for exports for use of the franchisor’s brand name or trade mark, where there is no transfer of technology. Where there is a transfer of technology (know-how) franchisors may charge royalties up to 5 percent for domestic sales and up to 8 percent for export sales for use of the franchisor’s technology and brand name or trade mark.
 
Franchise arrangements are governed by the Indian Contract Act 1872. India’s intellectual property laws are also relevant to the licensing of the franchisor’s intellectual property to the franchisee. A franchise arrangement may involve restrictions on the production, supply and distribution of goods and services, thereby attracting provisions of the Competition Act 2002. Additionally, consumer protection laws, which provide for remedies to consumers in case of defective products and services, may also impact on franchise arrangements.
 
Foreign companies who wish to leverage their brands in India can enter into franchising arrangements such as:
    • direct franchising
    • franchising through a subsidiary or branch office
    • franchising through an area development agreement – under this arrangement, the developer is given the right to open a multiple number of units in accordance with a predetermined schedule and within a given area
    • master franchising
    • joint ventures
    • licensing arrangements.
Intellectual property
Thai law recognizes the common categories of intellectual property rights, including copyrights, trademarks and patents and trade secrets. The Central Intellectual Property and International Trade Court was established in 1997 with jurisdiction over both civil and criminal cases relating to intellectual property rights and international trade issues. The Department of Intellectual Property of the Ministry of Commerce (DIP) is responsible for the administration of the various laws enacted for the protection of intellectual property rights.

Copyright
 
Under the Copyright Act B.E. 2537 (1994) (Copyright Act), an author gains automatic protection over his or her copyright work. The Copyright Act has a wide definition of “works” that are protected, including literary works, dramatic works, visual and graphic arts, musical works, audio-visual works, cinematic works, sound recordings and broadcasts. Thailand, as member of the Berne Convention, is obliged to protect copyright works of other member states. Although not required to receive protection under the Copyright Act, copyright works can be registered with the DIP for evidentiary purposes.

The Copyright Act protects copyright works against infringement by unauthorized reproduction, adaptation, publication and use. Generally, protection under the Copyright Act lasts during the lifetime of the author and for 50 years after the death of the author.

Trademarks
 
The owner of a registered trademark receives protection under the Trademark Act B.E. 2534 (1991) (Trademark Act). The Trademark Act defines a “trademark” as a symbol used (or proposed to be used) in respect of a good, to distinguish that good from goods under another trademark. In order to receive protection under the Trademark Act, a trademark must be registered with the Trademark Registrar within the DIP. Any licensing and/or assignment of a registered trademark must also be registered with the DIP in order to receive protection under the Trademark Act.
 
The Trademark Act protects registered trademarks against infringement by counterfeits and imitations. Generally, protection under the Trademark Act lasts for ten years after the date of the application and can be renewed for additional ten-year periods by submission of an application within the prescribed period.

Patents
 
The owner of a registered patent receives protection under the Patent Act B.E. 2522 (1979) (Patent Act). The Patent Act protects three categories of patents: invention patents, design patents and petty patents. In order to receive protection under the Patent Act, a patent must be registered with the Patent Registrar within the DIP. Any licensing and/or assignment of a registered patent must also be registered with the DIP in order to receive protection under the Patent Act.

The Patent Act protects registered patents against infringement by making, using, selling, keeping for sale or importing the patented products or the products produced using the patented process. Generally, protection of inventions and designs lasts for 20 years and ten years, respectively, from the date of filing and neither can be renewed. Protection of petty patents lasts for six years, but can be renewed twice for periods of two years for each renewal.

Trade secrets
 
The owner of a “trade secret” receives protection under the Trade Secret Act B.E. 2545 (2002) (Trade Secret Act). The Trade Secret Act defines “trade secret” to include the method or process of manufacturing, price lists and customer database. A trade secret need not be registered to receive protection.

The Trade Secret Act protects the trade secret owner from infringement by disclosure, deprivation or usage of trade secret without the consent of the owner. Generally, protection of trade secret lasts so long as it remains a trade secret under the Trade Secret Act.

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India is a socialist democratic republic. It has a federal form of government, comprising 29 states and six union territories. The Indian parliament is the supreme legislative body and is essentially based on the British parliamentary system. There are two houses: The Rajya Sabha (Council of States) and the lok Sabha (House of the People). The national executive power is centered on the Council of Members (Union Cabinet), led by the Prime Minister.

India has been one of the best performers in the world economy in recent years with GDP growth exceeding 9 percent in 2008 and 2009. India is the fourth largest world economy ranked by purchasing power parity, and the second fastest economy by GDP growth. India’s economy has recovered from the global financial crisis faster than other regional economies with growth expected to be approximately 8 percent in 2010.
 
Besides its economic credentials, India’s demographic profile makes it an increasingly attractive investment destination for foreign investors. India’s substantial and expanding middle class and youth populations – over 40 percent of its population are over 21 – are hungry for consumer goods. India, therefore, represents an enormous market for foreign investors with potential for increased growth over the next two decades.

Since 1991, there has been significant deregulation and liberalization in India. This has opened up many sectors of the economy to private investment, including foreign direct investment. Competition is actively encouraged and the recent re-election of the National Congress Party, with a mandate to implement investor-friendly economic reforms, has been a positive development for foreign investors.
Business visas
Foreign nationals wishing to conduct business transactions in India must obtain a business visa from an Indian embassy or consulate abroad. Business visas may be issued for up to five years, with a multiple entry provision, but usually with a cumulative stay of not more than 180 days. Business visas can be renewed or extended within India. Business and tourist visas are usually not convertible into employment visas while the holder of the relevant visa is in India.
 
Residential permits
 
Foreign nationals wishing to work in India must obtain a residential permit from a Foreigners’ Regional Registrar Office (FRRO), which are located in all major cities. A foreign national holding a visa (other than a tourist visa) valid for a period exceeding 180 days is required to be registered with the FRRO within 14 days of arrival in India. Certain categories of people are exempt from registration requirements, including United States nationals with a ten-year tourist/business visa, provided their period of stay is less than 180 days.
 
Employment visa
 
Foreign nationals intending to take up employment in India also require an employment visa or work permit issued by Indian missions abroad. The visas are issued for a period of one year, and may be extended in India for the period of the foreign national’s contract of employment.
 
Income tax clearance certificate Foreign employees are required to register for tax purposes by obtaining a permanent account number with the Indian income tax authorities upon their arrival in India. This is a one-time registration number, which must be included in correspondences with the tax authorities. A person not domiciled in India, intending to stay for more than 120 days, must produce an income tax clearance certificate, which certifies that the person’s stay in India was self-financed.
Introduction
Foreign companies wishing to do business or establish a presence in India have a number of options as discussed below.
 
Distributorship arrangement
 
Before establishing a representative office, it is common for foreign companies to test market potential by appointing a sales representative or distributor. This provides a relatively low-risk and low-cost method of testing the marketplace.
 
India’s distribution channels are diverse, and there are few established retailers that operate on a national level. It is important to investigate a potential distributor’s creditworthiness, reputation and capabilities before selecting them.

Foreign direct investment
 
Automatic route
 
Foreign direct investment (FDI) in the equity share capital of an Indian company is permitted in all sectors under the “automatic route” (without prior approval) of the Foreign Investment Promotion Board (FIPB), except with respect to the following:
    • manufacture of cigars and cigarettes of tobacco and manufactured tobacco substitutes
    • commodity exchanges
    • courier services
    • credit information companies
    • print media companies
    • manufacture of items exclusively reserved for the small-scale sector with more than 24 per cent FDI
    • proposals in which the foreign collaborator had an existing financial/technical collaboration in India in the “same” field prior to 12 January 2005
    • manufacture of electronic aerospace and defense equipment’s (all types)
    • further specialized sectoral limitations as noted in the FDI Policy such as 49 percent automatic route allowed in the private banking sector.
Under the automatic route, foreign companies may acquire shares in existing Indian companies without obtaining prior regulatory or government approval. The Indian company, however, must notify the relevant regional office of the Reserve Bank of India (RBI) within 30 days of receiving investment funds from the foreign investor, and must file certain documents with the regional office within 30 days after the issue of shares to the foreign investor.
 
FDI is prohibited in certain sectors. A non-exhaustive list of sectors includes gambling, lottery business, atomic energy and retail trading (except single brand product retailing, which requires specific clearance).
 
Wholly owned subsidiaries
 
Foreign companies are permitted to establish wholly owned subsidiaries in India. Such companies may be established as a private limited or public limited company, subject to the requirements of the Companies Act 1956. Foreign equity ownership may be up to 100 per cent except in certain specified sectors. The Indian subsidiary company must register with the Register of Companies (ROC) and is subject to the same laws as domestic companies. The steps for establishing a private company in India are set out in Annex A.
 
Joint ventures
 
As with wholly owned subsidiaries, foreign companies are permitted to incorporate a company locally in India as a joint venture company with an Indian partner/other shareholder as either a private limited or a public limited company. Equity ownership restrictions apply to certain industry sectors, as mentioned above.

FDI beyond automatic approval
 
In cases where the automatic approval route is not available, clearance from the FIPB is required. Additionally, in certain cases, the approval of the RBI may also be required.
 
Repatriation of investment capital and profits earned in India
 
Investment capital and profits earned may be repatriated without restrictions, except in the case of non-resident Indians (nRIs) who choose to invest specifically under non-repatriable schemes:
    • carrying out research work in which the branch office’s parent company is engaged
    • promoting technical or financial collaborations between Indian companies and the branch office’s parent company or the group of companies to which it belongs
    • representing the parent company in India and acting as its buying/selling agent
    • rendering services in information technology and development of software in India
Repatriation of sale proceeds of investments in India is permitted with prior approval of the RBI and tax clearance from the income tax authorities.

Liaison office
 
Foreign companies wanting to establish an initial presence in India often set up a liaison office. Prior approval of the RBI is required before setting up a liaison office in India.

A foreign company may open a liaison office in India to represent its parent company or the group in order to: promote the export or import of goods and services from or to India, to facilitate technical or financial collaborations between its parent or the group of companies to which it belongs and an Indian entity, to act as a communication channel between itself and an Indian entity. Liaison offices are not permitted to undertake any commercial, trading or industrial activity, or earn any income in India. Liaison offices are prohibited from charging any commissions or receiving other income from Indian customers for providing liaison services. Permission to establish a liaison office is initially granted for three years but may be extended beyond this period.
 
Branch office
 
Foreign companies engaged in manufacturing and trading activities may open a branch office in India for any of the following purposes:
    • undertaking export and import activities
    • rendering professional or consultancy services
    • rendering technical support to the products supplied by the branch office’s parent or the group of companies to which it belongs
    • undertaking activities of foreign airline or shipping company
    • manufacturing in a Special Economic Zone (SEZ).
Prior approval of the RBI is required before setting up a branch office in India. For income tax purposes, a branch office is treated as an extension of the foreign company in India, and is taxed at the rate applicable to foreign companies in India. A branch office is also required to register with the relevant Registrar of Companies (“ROC”).
 
Project office
 
Foreign companies may establish a project office if it is intended that its business presence in India will be for a limited period of time. Essentially, a project office is set up with the purpose of executing a specific project.

According to the Foreign Exchange Management (Establishment in India of Branch or Office or other Place of Business) (Amendment) Regulations 2003, a foreign company may open a project office in India, provided it has secured from an Indian company a contract to execute a project in India, and one of the following conditions is satisfied:
    • the project is funded directly by offshore funds
    • the project is funded by a bilateral or multilateral international financing agency
    • the project has been cleared by an appropriate authority
    • a company or entity in India awarding the contract has been granted a term loan by a public financial institution or a bank in India for the project.
The foreign company is required to furnish a report to the relevant regional office of the RBI under whose jurisdiction the project office is set up, giving certain details.
 
Foreign companies engaged in turnkey construction will normally set up a project office for their operations in India. Such offices cannot undertake activities other than activities relating and incidental to the execution of the relevant project.
 
Foreign technology agreements
 
Foreign companies may enter into technology agreements with Indian companies provided that:
    • The technical know-how lump sum payment does not exceed uS$2 million (per technology)
    • Royalties from wholly owned subsidiaries to their parent companies do not exceed 8 percent on exports and 5 percent on domestic sales (net of sales).

In situations where there is no technology transfer, remittance outside India for use of a trade mark or franchise right in India is permitted, without prior approval, so long as such payment does not exceed 2 percent of export sales and 1 percent of domestic sales. Where there is a transfer of technology, royalties that may be received for the granting of the right to use a trade mark, brand name or franchise right cannot exceed the maximum amounts referred to in the second point above.

General
Most sectors are now open to 100 percent foreign ownership. In other sectors, FDI caps are gradually being reduced. Very few sectors now completely disallow foreign ownership. Those sectors that are completely closed are contained in a negative list published by the Indian government; for example, sectors prohibited for FDI are retail trading (except single brand product retailing where specific approval is required), atomic energy, lottery, gambling and betting.

Foreign institutional investors
Companies and other entities and non-residents, may also invest in India under the Portfolio Investment Scheme as foreign institutional investors (Fiis). Fiis may also register as sub-accounts on behalf of third parties who wish to invest in Indian securities. Fiis and their sub-accounts are required to register with the Securities and Exchange Board of India (SEBi), the principal capital markets regulator in India under the SEBi (Foreign institutional investors) Regulations 1995. Registered Fiis can buy and sell securities on the Indian stock exchanges. They can also invest in listed and unlisted securities in off-market transactions subject to pricing restrictions.

A single Fii or an approved sub-account of an Fii cannot hold more than 10 percent of the paid-up capital of an Indian company, or 10 percent of the paid-up value of each series of convertible debentures issued by an Indian company.

Fiis and their sub-accounts together cannot hold more than an aggregate of 24 percent of an Indian company’s issued and paid-up share capital. However, the limit of 24 percent may be increased up to the sectoral cap for the relevant industry, on the passing of a resolution by the board of directors of the Indian company followed by the passing of a special shareholders’ resolution to approve the increase. The ceiling includes shares and convertible debentures acquired through the primary market or the secondary market. However, the ceiling does not include investment made by the Fii through offshore funds, global depository receipts and euro convertible bonds.

Small-scale industry reservation policy Since 1964, the Indian government has reserved many areas of production for the small-scale industry, such as garments, sporting goods, shoes and toys. This policy is aimed at protecting labor intensive industries from competition by larger corporations.

Although the number of reserved industries has reduced, the reservation policy is still a barrier to entry for foreign investors who may not invest more than 24 percent in these sectors.

Other restrictions
 
Foreign investors who had an existing venture, investment, technical collaboration or trade mark agreement with an Indian company prior to January 12, 2005 are required to obtain the prior approval of the FIPB for investments or collaborations in the same field. This restriction does not apply to investment proposals in the information technology or mining sector or to investments by international financial institutions.

Prior approval of FIPB is also not required for investments by venture capital funds registered in India, or for investments in financially weak or defunct companies, or where the prior investment in the existing Indian partner is less than 3 percent.

Government initiatives and incentives
 
Tax incentives
 
The government offers a range of tax incentives to investors to promote industrial growth and foreign investment. These incentives include:
    • deduction of scientific research and development costs
    • deduction of preliminary expenses in five annual instalments
    • full or partial deduction of foreign exchange earnings by hotels and construction companies
    • a ten-year deduction of 90 per cent of the profits and gains derived by any undertaking that is located in a free-trade zone or a export processing zone
    • a ten-year deduction of such profits and gains as are derived by a 100 per cent export-oriented undertaking from the export of articles or things or computer software. This deduction is available only until 31 March 2011
    •  a ten-year tax holiday on profits and gains of a new industrial undertaking, set up anywhere in India, for power-generating projects
    • a ten-year tax holiday to any enterprise that builds, maintains, and operates any infrastructure facility, such as roads, highways or expressways, new bridges, airports, ports, or rapid rail transport systems on a BOT (build, operate, transfer), BOOT (build, own, operate, transfer), or similar basis.
Special economic zones
 
The government has offered incentives for establishing special economic zones with the following benefits:
    • 100 percent foreign ownerships
    • accelerated approval processes
    • exemption from value added tax/central sales tax, excise duty, custom duty and service tax on domestic procurements and imports
    • 100 percent income tax exemption for first five years; 50 per cent income tax exemption for next five years; income tax exemption for next five years to the extent of profits reinvested (maximum 50 per cent)
    • 100 percent deduction for a block of ten years out of 15 years in respect of profit and gain of a special economic zone developer and co-developer for the purpose of income tax
    • exemption from dividend distribution tax
    • no minimum alternate tax
    • single point clearance to the SEZ unit under various state acts and rules
    • external commercial borrowings by units up to uS$500 million a year allowed without any maturity restrictions
    • freedom to bring in export proceeds without any time limit
    • flexibility to keep 100 percent of export proceeds in EEFC account
    • SEZ units allowed to write-off unrealized export bills
    • SEZ units allowed to sub-contract part of process abroad
    • inter-unit sales permitted provided payment in foreign currency.
Other incentives
 
State governments also encourage investment and seek to attract capital by offering various incentives. These commonly take the form of investment incentives, power tariff incentives and other physical benefits.
General
Indian taxes can be broadly classified into direct and indirect taxes. Direct taxes cover income tax and corporate tax.
 
Personal income tax Income tax is levied on:
    • income from salary
    • income from house property
    • profits and gains of business or profession
    • capital gains
    • income from other sources, including dividends, interest income and other income not covered under of any of the first four above.
Corporate taxes
 
The tax year runs from 1 April to 31 March. The current rates of taxation (as a percentage of net income) are as follows:
    • domestic companies – 30 percent (for the assessment year 2009/10)
    • foreign companies – 40 percent (for the assessment year 2009/10).
A surcharge is payable on income tax where the total taxable income exceeds Rs10 million at the rate of 10 percent for domestic companies and 2.5 percent for foreign companies.
 
Additionally, an education levy of 2 percent and a secondary higher education levy of 1 percent on the amount of tax and surcharge are also payable.

Corporate residency
 
An entity incorporated in India or having its entire management and control in India is a resident and is taxed on its worldwide income. A non-resident corporation (foreign company) is taxed only on income received or deemed to be received in India from Indian operations, or income that is accruing or arising in India or deemed to accrue or arise in India (subject to treaty benefits wherever available).

For individuals, women, persons over age 65, if the income exceeds Rs1 million, surcharge on income tax at the rate of 10 percent is applicable. In addition, an education levy of 2 percent and a secondary higher education levy of 1 percent on the amount of tax and surcharge are payable. A deduction of up to a maximum of Rs100,000 is available on taxable income on investment, made in certain specified savings schemes.

Withholding tax
 
Withholding tax is payable on certain payments, including interest, salaries paid to employees, professional fees, payments to contractors, commissions, winnings from games, lotteries, horse races, etc. Responsibility for the deduction of withholding tax is fixed on the person responsible for making the payment. The rate of withholding tax applicable to non-residents varies depending on the nature of the income.

Capital gains tax
 
Capital gains arising from the transfer of capital assets situated in India are taxable. Capital assets include all kinds of property except stock-in-trade, raw materials and consumables used in business or professions, personal effects (except jewelry), agricultural land and notified gold bonds.

Profits gained from the transfer of long-term capital assets are taxed as long-term capital gains. Long-term capital gains are defined as capital gains on assets held for over three years (one year for listed shares and certain specified securities). Profits gained from the transfer of short-term capital assets (that is, assets that do not qualify as long-term capital assets) are referred to as short-term capital gains.
 
Income from other sources
Income from other sources includes interest income, dividends and other income. This is a residual category in the heads of income. Income under this head is taxed at normal rates as applicable for individuals, companies and firms. However, the following incomes in the case of non-residents are taxed at special rates on a gross basis:
    • Dividends other than dividends on which dividend distribution tax has been paid – 20%
    • Interest received on loans given in foreign currency to Indian concern or government of India – 20%
    • Income in respect of units purchased in foreign currency of specified mutual fund/UTI – 10%
Income from royalties and technical fees in case of non-residents
 
Any income derived in the form of royalties or technical fees by non-residents in India is taxed at a concessional rate of 10 percent. However, where a non-resident has a permanent establishment in India and the royalty or fees for technical services is effectively connected with the permanent establishment, the non-resident may be taxed at 40 percent plus surcharge and education cess.

Repatriation of profits
 
Before foreign companies can repatriate profits, the Income Tax Department must be satisfied that they have paid tax owing and issued a no-objection certificate. Applications require a certificate from a chartered accountant stating that all tax obligations have been fulfilled.
 
Repatriation of earnings
 
Dividends declared and paid by domestic companies are exempt from tax in the hands of their shareholders. However, the company is liable to pay dividend distribution tax of 15 percent (plus applicable surcharge and levies) on such dividends.

Advance rulings
 
A system of advance rulings is currently available to non-residents and specified residents. This scheme enables the applicant to obtain in advance a ruling on issues which could arise in determining their tax liability. Advance rulings are pronounced by an authority known as the Authority for Advance Rulings. The ruling is binding on the relevant income tax authorities and the applicant in respect of the specific transaction.

Double tax treaties
 
India has double tax avoidance agreements with over 60 counties, including Australia. Non-residents can be taxed under the double tax treaty or the domestic law, whichever they choose.

If no double tax agreement exists, a resident company can claim a foreign tax credit for the foreign tax paid by it. The amount of credit granted is the lower of the Indian tax payable on the income that is subject to double taxation and the foreign tax discharged.

Transfer pricing
 
India has introduced comprehensive transfer-pricing regulations, effective from 1 April 2001, with the objective of preventing multinational companies from manipulating prices in intra-group transactions such that profits are not shifted outside India. Under the transfer pricing regulations, income and expenses (including interest payments) with respect to international transactions between two or more associated enterprises (including permanent establishments) must be at arm’s length prices.

Indirect taxes
 
Excise duty
 
Excise duty is a tax applicable on the manufacture of goods within the country. The term “manufacture” has been interpreted to mean bringing into existence new articles having a distinct name, character, use and marketability. Basic excise duty is levied at a uniform rate of 8 percent. Excise duty is mostly levied on an ad-valorem basis, but certain commodities may attract excise duty at specific rates, based on quantity or weight. Excise law in India provides for a CENVAT Credit Scheme, which limits the cascading effect of duty incidence on a number of excisable goods, which are used as inputs in the manufacture of other excisable goods.

Customs duty
 
Customs duty is levied on the import of goods into India. It comprises basic customs duty, additional customs duty and special additional customs duty. The peak rate of basic customs duty is now 10 percent. The primary basis for valuation of goods is the transaction value.

Service tax
 
Service tax is levied on certain identifiable taxable services provided in India by specified service providers, currently applicable to over 111 services. The service tax rate is currently 10.36 percent (which is inclusive of education levies and secondary and higher education levies charged, on the service tax). Generally the liability to deposit tax is on the service provider. Where the service provider is a non-resident or person outside India, the liability to pay service tax is on the service recipient.

Central sales tax
 
Levied on sale of movable goods, this tax is imposed by the central government if the goods are sold interstate. The collection and administration of central sales tax is the responsibility of state governments. Interstate sales tax is currently at the rate of 2 percent. However, movement of goods between the states as stock transfers from factory to depots are not liable for levy of central sales tax.
 
Value-added tax
Value-added tax (VAT) on sales was introduced at the state level in April 2003 and replaces the existing sales tax. Most Indian states have now adopted the VAT system. While internationally VAT is implemented such that it replaces all indirect taxes except customs duty, in India, VAT replaces local sales tax only. Since VAT was implemented at the state level, central sales tax and all other indirect taxes such as customs, excise, service tax, etc, continue as before.
General
India has extensive labor law legislation covering labor employment and dismissal terms, health and safety and pension obligations.

 
Labor laws
 
The government has enacted comprehensive labor law legislation. The following are the key labor laws:
    • The Industrial Disputes Act 1947, which regulates industrial relations including closures and retrenchment
    • The Factories Act 1948, which governs working conditions in factories. The Act establishes minimum standards for working conditions and facilities related to manufacturing processes, handling and storage of materials, working hours etc
    • The Minimum Wages Act 1948, which empowers the appropriate government (central or state) to fix and revise minimum wages and allowances payable to workers and also to regulate the conditions of work such as hours of work and overtime
    • The Payment of Bonus Act 1965 requires payment of a bonus to certain categories of employees
    • The Payment of Gratuity Act 1972 requires the payment of gratuity, as recognition of continuous service to an employer, to certain categories of employees when they leave their employment
    • The Employees’ Provident Fund and Miscellaneous Provisions Act 1952, which applies to workers whose wages do not exceed rs6,500 per month in applicable industries and establishments. The employer and the employee are required to make matching contributions to the fund. Effective from November 1995, workers who have put in a minimum of ten years’ eligible service and have attained the age of 58 years are entitled to a superannuation/retirement pension
    • The Workmen’s Compensation Act 1923, which provides for the payment to workmen for injuries arising out of or in the course of their employment
    • The Contract Labor (Regulation) Act 1970, which regulates the employment of contract labor in certain establishments and provides for its abolition in certain circumstances
    • The Employees State Insurance Act 1948, which provides for certain benefits to employees in the case of sickness, maternity and employment injury
    • The Industrial Employment (Standing Orders) Act 1946, which requires employers in industrial establishments formally to define conditions of employment under them.
Dispute resolution

Courts
 
India has a written constitution and codified central and state laws. It has a three-tiered court system comprising the Supreme Court of India, the High Court located in each state, and lower civil, criminal and revenue courts and various tribunals. There are also specialized legal forums such as industrial courts, cooperative courts, family courts, consumer courts and other judicial tribunals.

 
For the settlement of company disputes, there is a Company Law Board constituted under the Indian Companies Act 1956 (to be replaced by the National Company Law Tribunal), direct and indirect tax tribunals, Competition Commission etc. Listed companies are regulated by the SEBI and its appellate tribunal. Intellectual property disputes such as infringement actions and trade mark objections may be settled before boards constituted under the relevant statutes.

 
The time taken for a suit to be heard by an Indian court can be lengthy. As a result, interim relief has assumed great importance. Specifying remedies available in a contract assists with the grant of interim relief. Negotiable instruments, guarantees and written contracts providing for a liquidated sum can be enforced through a summary procedure.

 
Recognition of foreign judgments
 
Indian courts will consider foreign judgments conclusive after their validity is determined according to the following principles:
    • the foreign judgment is determined by a court of competent jurisdiction
    • the foreign judgment is not contrary to natural justice
    • the foreign judgment is not obtained by fraud
    • the foreign judgment is not founded on an incorrect view of international law
    • the foreign judgment is given on the merits of the case
    • the foreign judgment is not founded on breach of any law enforced in India.
Arbitration
 
The Arbitration and Conciliation Act 1996 provides for dispute resolution through arbitration and conciliation as an alternative to litigation. Most companies choose arbitration as the most suitable method for resolving disputes. India’s Arbitration and Conciliation Act 1996 is based on the United Nations Commission on International Trade Law.

 
Arbitration in India can be an efficacious remedy, and the law allows interim relief in the course of arbitration proceedings. However, arbitration can only be initiated in the case of a dispute between parties. Arbitral awards are enforceable as decrees of Indian courts.

 
Indian courts can, however, refuse enforcement of a foreign award on certain grounds, including if enforcement of the relevant award would be contrary to public policy. To limit the possibility of challenges to foreign awards, parties can agree to exclude the application of the relevant provisions of the Arbitration and Conciliation Act.

 
India is a signatory to both the Geneva Convention on the Execution of Foreign Arbitral Awards (1923) and the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1960).

 
An arbitral award obtained in a signatory nation to either the Geneva or New York Conventions is enforceable in India pursuant to the Arbitration and Conciliation Act 1996.

 
Choice of law
 
Indian private international law follows the English private international law rules. It therefore allows the parties to choose a proper law of contract provided the choice is not contrary to public policy. The laws of India, which are considered “mandatory” laws, cannot be excluded. For example, in the case of foreign collaboration agreements, which require government approval, the government imposes a condition that the contract must be governed by Indian law.
Business environment
General
 
India has a mixed economy with an active state and private sector. India’s five-year plan from 2007 to 2012 contemplates rapid industrial development, focusing on technological advancement and international competitiveness in sectors such as steel, electronics, machinery, information technology and infrastructure.

India’s political and legal systems are similar to many countries as they are based on the British systems. Its geographical and cultural diversity, however, make it a challenging and complex place to do business.

Banking sector
 
The banking sector was earlier dominated by state-owned institutions. Banks in India are segregated as public or private sector banks, cooperative banks and regional rural banks.

The entry of new private banks following reforms in the early 1990s means that the state banks account for a smaller share of the system’s assets than in the past. These institutions now offer more sophisticated financial services. It is advisable that foreign businesses establish banking relationships with one of the newer privately owned banks.

Foreign banks are permitted to set up wholly owned subsidiaries in India. The limit for foreign shareholding in private banks (including foreign institutional investors and nRIs) other than in the case of wholly owned subsidiaries of foreign banks, is 49 percent under the automatic route. Additionally, at least 26 percent of the paid-up capital of private banks is required to be held by Indian residents. Foreign institutional investors’ shareholding in a private banking company cannot exceed 24 percent of the paid up capital, except through a resolution of the board of directors followed by a special shareholders’ resolution, to increase the holding up to 49 percent, provided that the investment does not exceed the 74 percent overall foreign investment ceiling.
 
Foreign and portfolio investment in public sector (nationalized) banks are subject to overall statutory limits of 20 percent as provided by the Banking Companies (Acquisition & Transfer of Undertakings) Acts 1970/80.

Competition policy
 
The Competition Act 2002 is designed to prevent businesses engaging in practices that have an adverse effect on competition, to promote and sustain competition in markets, to protect the interests of consumers, and to ensure freedom of trade carried on by other participants in markets in India. The Competition Act 2002 prohibits anti¬competitive agreements, abuse of dominant position, and regulates mergers and amalgamations of enterprises. It replaces the Monopolies and Restrictive Trade Practices Act 1969.

Environmental laws
 
Following the Bhopal gas tragedy in 1984, the Indian government increased its focus on environmental protection.
 
Companies are required to obtain statutory pollution and environmental approvals before establishing industrial projects in India. However, if investment in a project is less than Rs1 billion (approximately Us$22.2 million), an environmental clearance is not necessary, except in cases of pesticides, bulk drugs and pharmaceuticals, asbestos and asbestos products, integrated paint complexes, mining projects, tourism projects of certain parameters, tarred roads in Himalayan areas, distilleries, dyes, foundries and electroplating industries.
 
The establishment of industries in certain locations considered ecologically fragile (for example Aravalli Range, coastal areas, doon Valley, dahanu) are regulated by separate guidelines issued by the Ministry of Environment and Forests.

The Environment Protection Act 1986 lists a number of industries, including oil refineries and cement, petrochemicals, dye and paper products, which require Ministry of Environment approval. The government also prescribes guidelines on the quality standards of air, water and soil for different areas, and the maximum levels of emissions to which industries must adhere.

Franchising
 
Whilst there are no franchise-specific laws in India, there are a number of other laws that impact on franchise arrangements in India. These include the law of contract, intellectual property law, competition law and consumer protection law.
 
The RBI regulates the terms of payment under franchise agreements (such as franchise fees, management fees, development fees, administrative fees, royalty fees and technical fees) where one party is a non-Indian entity. The RBI prescribes certain requirements that must be complied with, including that a franchisee must provide a tax clearance and a chartered accountant’s certificate at the time of remitting royalty payments to a franchisor outside India.
 
The Indian government permits foreign franchisors to charge royalties up to 1 percent for domestic sales and up to 2 percent for exports for use of the franchisor’s brand name or trade mark, where there is no transfer of technology. Where there is a transfer of technology (know-how) franchisors may charge royalties up to 5 percent for domestic sales and up to 8 percent for export sales for use of the franchisor’s technology and brand name or trade mark.
 
Franchise arrangements are governed by the Indian Contract Act 1872. India’s intellectual property laws are also relevant to the licensing of the franchisor’s intellectual property to the franchisee. A franchise arrangement may involve restrictions on the production, supply and distribution of goods and services, thereby attracting provisions of the Competition Act 2002. Additionally, consumer protection laws, which provide for remedies to consumers in case of defective products and services, may also impact on franchise arrangements.
 
Foreign companies who wish to leverage their brands in India can enter into franchising arrangements such as:
    • direct franchising
    • franchising through a subsidiary or branch office
    • franchising through an area development agreement – under this arrangement, the developer is given the right to open a multiple number of units in accordance with a predetermined schedule and within a given area
    • master franchising
    • joint ventures
    • licensing arrangements.
Intellectual property
Thai law recognizes the common categories of intellectual property rights, including copyrights, trademarks and patents and trade secrets. The Central Intellectual Property and International Trade Court was established in 1997 with jurisdiction over both civil and criminal cases relating to intellectual property rights and international trade issues. The Department of Intellectual Property of the Ministry of Commerce (DIP) is responsible for the administration of the various laws enacted for the protection of intellectual property rights.

Copyright
 
Under the Copyright Act B.E. 2537 (1994) (Copyright Act), an author gains automatic protection over his or her copyright work. The Copyright Act has a wide definition of “works” that are protected, including literary works, dramatic works, visual and graphic arts, musical works, audio-visual works, cinematic works, sound recordings and broadcasts. Thailand, as member of the Berne Convention, is obliged to protect copyright works of other member states. Although not required to receive protection under the Copyright Act, copyright works can be registered with the DIP for evidentiary purposes.

The Copyright Act protects copyright works against infringement by unauthorized reproduction, adaptation, publication and use. Generally, protection under the Copyright Act lasts during the lifetime of the author and for 50 years after the death of the author.

Trademarks
 
The owner of a registered trademark receives protection under the Trademark Act B.E. 2534 (1991) (Trademark Act). The Trademark Act defines a “trademark” as a symbol used (or proposed to be used) in respect of a good, to distinguish that good from goods under another trademark. In order to receive protection under the Trademark Act, a trademark must be registered with the Trademark Registrar within the DIP. Any licensing and/or assignment of a registered trademark must also be registered with the DIP in order to receive protection under the Trademark Act.
 
The Trademark Act protects registered trademarks against infringement by counterfeits and imitations. Generally, protection under the Trademark Act lasts for ten years after the date of the application and can be renewed for additional ten-year periods by submission of an application within the prescribed period.

Patents
 
The owner of a registered patent receives protection under the Patent Act B.E. 2522 (1979) (Patent Act). The Patent Act protects three categories of patents: invention patents, design patents and petty patents. In order to receive protection under the Patent Act, a patent must be registered with the Patent Registrar within the DIP. Any licensing and/or assignment of a registered patent must also be registered with the DIP in order to receive protection under the Patent Act.

The Patent Act protects registered patents against infringement by making, using, selling, keeping for sale or importing the patented products or the products produced using the patented process. Generally, protection of inventions and designs lasts for 20 years and ten years, respectively, from the date of filing and neither can be renewed. Protection of petty patents lasts for six years, but can be renewed twice for periods of two years for each renewal.

Trade secrets
 
The owner of a “trade secret” receives protection under the Trade Secret Act B.E. 2545 (2002) (Trade Secret Act). The Trade Secret Act defines “trade secret” to include the method or process of manufacturing, price lists and customer database. A trade secret need not be registered to receive protection.

The Trade Secret Act protects the trade secret owner from infringement by disclosure, deprivation or usage of trade secret without the consent of the owner. Generally, protection of trade secret lasts so long as it remains a trade secret under the Trade Secret Act.

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