29 June 2018
Establishing a Presence in India
India's economic policies are designed to accelerate economic growth and attract significant capital inflows on a sustained basis and encourage technology collaboration. The Indian government releases a consolidated FDI policy in the month of March every year, outlining the rules and procedures in respect of FDI, which now covers more than two dozen sectors and activities with sectoral equity caps or conditions for receiving foreign investment. In addition, India’s FDI policy is governed by the provisions of the Foreign Exchange Management Act (1999), which entails the provisions on the modes of investments in the country.
India’s FDI policy is reviewed periodically in order to make it more investor-friendly, with significant changes made in recent years. Since taking office in 2014, the Modi government has gradually eased restrictions for foreign investors, opening nearly 90% of the country’s industrial base, including the defense sectors and the railways, in order to back the Make in India initiative, which is aimed to improve India’s status as a global design and manufacturing hub. Nonetheless, sectors that are closed to FDI include atomic energy, lottery business, construction of farm houses, manufacturing of cigarettes, gambling and betting.
In 2018, the Indian government approved major amendments to the FDI policy to further liberalise and simplify the investment regime for foreign companies, part of which are concerned with allowing 100% FDI under the automatic route in a growing number of economic sectors, including single-brand product retail trading. After hitting a record FDI high of US$60 billion for the 2016-17 fiscal year (which ended March 2017), India received FDI of US$36 billion in the nine months to December 2017.
Under India's foreign investment policy, two routes are available for foreign investors, depending upon the industry and the levels of investment contemplated, that is, the automatic or government approval route as discussed below.
1. Automatic Route
The Indian government has formulated sector-specific guidelines for FDI and investments up to specified sectoral caps that are allowed under the automatic route, with a few exceptions. Foreign investment proposals under the automatic route do not need any prior approval by the government, provided that the requisite documents are filed or intimated with the regional branch of the Reserve Bank of India (RBI) within 30 days of receipt of inward remittances. Within 30 days from the date of issue of shares, a report in Form FC-GPR together with the following documents should be filed with a regional office of the RBI:
- Certificate from the Company Secretary of the company accepting investment from persons resident outside
- 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
Together with the latest liberalisation measures in early 2018, 100% FDI in sectors permitted under the automatic route In India includes aviation projects and services, real estate broking services, courier services, single-brand retail trading, e-commerce, agriculture, manufacturing, mining, oil and natural gas exploration, industrial parks, non banking financial services, etc.
2. Government Approval Route
All proposals for foreign investment other than those covered under the automatic approval route are subject to government approval, typically permitted FDI sectors yet above the sectoral caps. Notified sectors/activities requiring government approval are mining, defence/cases relating to FDI in small arms, broadcasting, print media, civil aviation, satellites, telecom, private security agencies, trading (multi-brand retail trade), financial services not regulated or regulated by more than one regulator/banking public and private (as per FDI policy), and pharmaceuticals.
Prior to 2017, India had an inter ministerial panel called Foreign Investment Promotion Board (FIPB), which was tasked with coordination within the government and approving foreign investment proposals. However, FIPB was scrapped in 2017 in favour of direct clearance by individual ministries amid investor complaints that FIPB decisions were often bogged down with delays caused by ministerial infighting. Besides, with FDI caps being raised progressively and more than 90% inward FDI coming through the automatic route, the Indian government considered it high time that the FIPB be scrapped.
Nevertheless, the Indian government has replaced FIPB with the Foreign Investment Facilitation Portal (FIFP) as an online interface with foreign investors. The FIFP portal is administered by the Department of Industrial Policy & Promotion (DIPP) under the Ministry of Commerce and Industry (MCI). Furthermore, it will continue to facilitate single-window clearance of FDI proposal applications through the government approval route, while individual Indian ministries will be entrusted to take up concerned FDI proposal applications. Upon receipt of an FDI proposal application, the concerned administrative ministry or department will process the application as per the Standard Operation Procedure (SOP).
For investment proposals above INR 50 billion (about US$740 million), however, they will be approved by the Cabinet Committee on Economic Affairs. More information can be found at the official website of FIFP, with attention drawn particularly to the FAQs on online FDI proposal applications. Apart from this, DIPP has set up a joint venture with the Federation of Indian Chambers of Commerce and Industry (FICCI) and various state governments to promote inward FDI. Invest India is responsible for promoting and facilitating investments to India, acting as the first reference point for overseas investors to offer handholding services.
Business Presence in India
There are two main ways for a Hong Kong company to set up a business presence in India:
- Operate as an Indian company by setting up Wholly Owned Subsidiary Company, Equity Joint Venture with an Indian partner, or Limited Liability Partnership under the Companies Act 2013
- Operate as a foreign company by setting up a Liaison or Representative Office, Branch Office or Project Office, which can undertake specified activities under the Foreign Exchange Management Regulations 2000
Setting up an Indian Company
- Wholly Owned Subsidiary Company (WOSC) – A foreign company can set up a WOSC in India to carry out its activities, subject to FDI guidelines in respect of sectoral and equity cap limits. Such a subsidiary is treated as an Indian resident as well as an Indian company for the purpose of all Indian laws and regulations (thereupon, the Income Tax 1961, Foreign Exchange Management Act 1999 (FEMA) and Companies Act 2013, etc.), despite being 100% foreign-owned. As an incorporated entity, a WOSC is legally separate or distinct from its members or shareholders.
- In forming a WOSC in India, at least two shareholders are required for a private limited company. In the case of establishing a public limited company, the mandatory requirement is seven shareholders including two directors, one of whom has to be an Indian resident.
- WOSC need to register with the Registrars of Companies (ROC) in various Indian states and union territories as required under the Companies Act and comply with statutory requirements under the Act. Permitted WOSC activities are specified in the memorandum of association of the company, and subject to the FDI guidelines.
- WOSC are required under FEMA to file period and annual filings related to foreign liabilities and assets, as well as receipt of capital and issuance or transfer of shares to foreign investors. They are also liable to income tax.
- Equity Joint Venture (JV) – While setting up WOSC is often seen as the preferred option, foreign companies may come into conditions where they may consider setting up JV, for example, forging strategic alliances with Indian partners in the same field and/or parties who can bring synergy to the proposed investment plan.
- JV are sometimes necessitated in the event of sectoral and equity cap restrictions on foreign ownership stipulated by the FDI guidelines.
- Under the current FDI policy and FEMA, foreign investment into Indian partnership firms requires permission from the RBI.
- A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Each partner of a partnership has unlimited liability.
- Limited Liability Partnership (LLP) – this is a hybrid form of business structure which combines the advantages of a full-fledged company with the benefit of organisational flexibility found in a partnership, along with less compliance requirements. No less than two partners are required to form an LLP and these partners have limited liability. An LLP is a separate legal entity, liable to the full extent of its assets, with the liability of the partners being limited to their agreed contribution in the LLP.
- Formation of an LLP is limited to sectors where 100% FDI is allowed through the automatic route without any performance-linked conditions. LLP need to be registered with the ROC in various Indian states and union territories as required under the Companies Act.
- LLP are required to report details of receipt of capital contribution and any disinvestment or transfer of capital needs to be reported to the RBI. While LLP are liable to income tax, there will be no levy on distribution of profits as dividends to partners, unlike in the case of company where repatriation will be subject to dividend distribution tax.
Procedures to Follow to Set up a Wholly Owned Subsidiary Company
The World Bank’s Doing Business 2018 report gives an overall ranking of 100th among 190 economies, while according it with a much lower ranking of 156th in starting a business. To enhance the ease of doing business in India, the Mody government has taken a bold initiative to reform government services in what is known as Government Process Re-engineering, with a view to expediting the entire company incorporation process. Reform of government services is seen as pivotal in ensuring the smooth running and success of other initiatives including Make In India and Digital India.
In addition, the Ministry of Corporate Affairs (MCA) took the further step in October 2016 to introduce the Companies (Incorporation) Fourth Amendment Rules 2016 to facilitate the integration of electronic formats through the Simplified Proforma for Incorporating Company Electronically (SPICe eForm INC-32), eForm Memorandum of Article (INC-33) and eForm Articles of Association (INC-34), alongside some other changes.
Setting up a wholly owned subsidiary company (WOSC) by a foreign company in India in the permitted sectors is a process similar to the incorporation of a private limited company in the country. The procedures for registering a new WOSC in India are outlined below:
- Check the availability of the proposed name for the WOSC on the MCA website, using the revamped eForm INC-1. MCA is responsible for administering the Companies Act 2013, Companies Act 1956, Limited Liability Partnership Act (2008) and other related Acts, rules and regulations.
- Register Digital Signature Certificates (DSC) with the ROC that is under MCA.
- Obtain Director Identification Numbers (DIN) for all proposed first directors of the new company by submitting to the ROC the SPICe eForm INC-32. The particulars of maximum three directors shall be mentioned in this eForm and DIN may then be allotted to maximum three proposed directors through INC-32.
- Draft the eMOA (INC-33) and eAOA (INC-34), complete with DCS, and file them with the ROC together with the registration fee and stamp duties.
- Once the applications are processed by the ROC, the company is incorporated and a Corporate Identity Number (CIN) will be provided along with the issuance of DIN to the proposed directors.
- File an online PAN application to the Income Tax Department for the Permanent Account Number (PAN), which is a unique, 10-character number consisting of both letters and digits, and is issued to all judicial entities identifiable under the Indian Income Tax Act 1961. Processing fee for PAN is Rs.110 (about US$1.6).
- Apply for other taxable numbers including the Tax Deduction Account Number (TAN). Online application for TAN can be done via the Tax Information Network website of the Income Tax Department at a cost of Rs.65 (about US$1).
- File an application for GST Identification Number. More information on GST in India can be found here.
Grants and Tax Incentives for Companies and Limited Liability Partnerships
Indian governments provide various tax incentives and exemptions, many of which are geared towards encouraging innovation, exports, and the development of certain specific industrial sectors (e.g. power, ports, highways, electronics and software) or remote regions of the country. However, some benefits are being phased out.
- A company or LLP formed after 1 April 2016 but before 1 April 2019 may be granted a three-year tax holiday if and where:
- It is engaged in a business that involves innovation, development, the deployment or commercialisation of new products, or processes or services driven by technology or intellectual property (IP)
- Its turnover does not exceed about US$4 million
- It holds a certificate of eligibility from the prescribed authority
- Companies set up in SEZ are granted tax holidays for exporting goods and services. Previously, export and other foreign exchange earning entities were favoured by the government with income tax incentives, but these are being phased out with the exception of predominantly export-oriented units set up in SEZ.
- Presently, units in SEZs enjoy 100% income tax exemptions on export income for the first five years, 50% for the next five years thereafter, and 50% of the plowed back export profit for another five years.
- Other benefits include a refund of integrated goods and services tax (IGST) on goods imported by units and developers of SEZs, easy refund procedure of input GST paid on procurement of goods and services if any, and minimal compliance requirement and return filing procedure.
- State governments may offer additional benefits from in the form of stamp duty exemption, VAT exemption or refund, and electricity duty exemption.
- Weighed deductions at 150% for in-house research and development (R&D) expenses, including capital outlays - companies may claim a deduction for expenses incurred in the three years immediately preceding the year in which the company commenced operations.
- Many Indian states exempt stamp duties for companies operating in the IT sector.
- Rental or leasing incomes generated by real estate investment trusts registered with the Securities and Exchange Board of India (SEBI) are not taxable. More information can be found from in the 2018 amended SEBI regulations.
- Capital gains earned by investment funds registered with the SEBI are not taxable.
- Royalty income earned from patents licensing in India is taxed at 10%.
- Income tax exemptions are available to industries set up in India’s north eastern region.
- Selected industries, such as mineral oils, natural gas, developing and building affordable housing projects, are eligible for tax incentives.
- Industries hiring additional employees are eligible for tax deductions.
- Accelerated depreciation for certain categories of property, such as energy-saving, environmental protection and pollution control equipment.
- Additional depreciation on new plant and machinery installed by entities in the power transmission business is available.
- Agricultural income is not taxable.
While tax holidays, weighed and accelerated depreciation are being phased out, the central government’s development banks and state industrial development banks also extend loans in new projects in the country.
Operating as a Foreign Entity in India
Aside from setting up resident companies in India, a foreign company can choose to set up an operation in India in the form of a Liaison Office (LO), a Branch Office (BO) or a Project Office (PO). Establishment of BO, LO or PO in India by foreign entities is regulated under Section 6(6) of FEMA read with Notification No. FEMA 22(R)/2016-RB issued on 31 March 2016. The RBI may amend the regulations and directions in respect of the Authorised Persons under Section 11 of the FEMA, issuing Circulars governing transactions by the Authorised Persons with their customers and constituents.
Applications for establishing BO, LO or PO in India by foreign entities will be considered by the RBI as per its guidelines and Master Directions. The Application Form FNC should be properly filled out, along with the applicant’s declaration and required documentation, and submitted to the AD Category-I bank designated by the applicant. The FAQs for setting up BO/LO/PO in India can be found here.
- Liaison office – Setting up an LO is common for foreign companies embarking on an entry to the Indian market. An LO is limited to collecting information about the Indian market, overseeing networking efforts and promoting the company and its products to prospective Indian customers. Besides, LO are not allowed to undertake any business activities to generate any income in India under the terms of approval granted by the RBI.
- For an LO, the head office must have a profit-making track record in its home country during the preceding five years, and its net worth cannot be less than US$50,000.
- After an LO is formed after receiving approval from the RBI, it needs to be registered with the ROC.
- Annual activity certificate certified by an Indian auditor is required under FEMA and filed with the RBI.
- LO are generally not allowed to engage in any business activity and thus not subject to tax in India.
- Branch Office – Unlike an LO, a branch office (BO) set up by a foreign company is allowed to engage in a range of income-earning activities. These include export/import of goods, representing the parent company to be the trading agent in India, rendering professional services, undertaking research work and promoting technical/financial collaboration between its parent company and an Indian company.
- For a BO, the head office must have a profit-making track record in its home country during the preceding five years, and its net worth cannot be less than US$100,000.
- BO need to obtain specific approval from the RBI to carry out designated activities.
- Foreign companies engaged in manufacturing and trading abroad are allowed to set up BO in India to undertake manufacturing activity only within the country’s special economic zones (SEZ), but not outside these zones.
- They have to file annual activity certificates with the RBI as required under FEMA and are liable to pay tax on their business income.
- Project Office – compared to a BO, a temporary Project Office (PO) can be set up by a foreign company planning to execute specific projects in India.
- Generally, the RBI grants permission to a foreign company to set up a PO to carry out specific projects and activities, subject to certain conditions, and the foreign company needs to provide information to a regional office of the RBI on the specific projects or contracts involved. Approval for PO is generally accorded for executing government-supported construction projects or where the projects are financed by Indian and international financial institutions and multilateral organisations.
- PO need to file annual activity certificates with the RBI as required under FEMA and are liable to pay tax on their business income. Upon completion of the project, project offices may remit outside India the surplus of the project, after meeting tax liabilities.
- PO are not permitted to acquire real estate without prior RBI approval, but they are allowed to lease property in India for a maximum period of five years.