Setting Up Liaison Offices, Project Offices, Branch Offices and

The Practical Application of India business March 2010
Daily Business News Available at
Volume IV - Number I
www.india-briefing.com/news
Setting Up Liaison Offices,
Project Offices, Branch
Offices and Private Limited
Companies in India
In This Issue:
Establishment Procedures for Liaison, Project and Branch Offices
Establishment Procedures for Private Limited Companies
India’s Special Economic Zones
India’s Labor Laws
Indian Tax Considerations
China and India Incorporation and Business Costs Compared
Welcome to India Briefing!
I
nvestment into India is booming. Following the reelection of the Congress Party to power in 2009, the country is reaping the benefits
of the market reforms being brought to the table by the now emboldened central government. And as a result of India’s focus on
development, the door has now been thrown wide open to large amounts of foreign investment. In this issue of India Briefing we examine
how to set up several different types of legal entities in India: the liaison office, the project office, the branch office and the private limited
company. We also take a look at the advantages setting up in India’s special economic zones can provide and compare incorporation
requirements and business costs between operating in China and India. Finally, we take a look at regional labor costs and run through
the documentation and reporting requirements for foreign investors under India’s Companies Act.
The articles in this issue of India Briefing were researched and written with the help of the India-based foreign direct investment and tax
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Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
Setting Up Liaison Offices, Project
Offices, Branch Offices and Private
Limited Companies in India
[ By Chris Devonshire-Ellis, Managing Partner, Dezan Shira & Associates ]
INDIA
LIAISON OFFICES
PROJECT OFFICES
PRIVATE LIMITED
COMPANIES
BRANCH OFFICES
Why it makes sense to
be in India right now
Over the past three years, India has seen
something akin to a minor revolution
take place in terms of its attractiveness to
foreign investment. This has culminated
in four current truths about the Indian
market that were not so easily apparent
as little as five years ago.
First, the Indian economy, supported by
an expanding middle consumer class and
as a direct result of sensible and pragmatic
reform put in place over the past decade
is now a huge and sustainable market
economy for foreign investors to sell
to. The banking system is stable; India
possesses relatively little foreign debt and
none of the specific types of debt that have
afflicted much of the global economy over
the past 18 months. Indian exposure to
the sub-prime crisis has been fractional.
India’s middle class is estimated to be 250
million people; little wonder that brands
such as Porsche and Ferrari are now sold
in India and brands such as Jaguar are
now Indian-owned. Opportunities exist
at the lower level as well. Levi’s Jeans
are a status symbol. The size of India’s
middle class is growing as well. While
poverty remains an issue in many rural
areas, India’s current economic models
dictate that hundreds of millions will be
lifted out of poverty within the next 10
to 20 years.
Second, this process of development
and reform has been given a major boost
politically. India has had to deal with
two decades of coalition governments,
with the country unable to decide which
party of the many should have an overall
mandate to govern. The result has been
a modern India often derided for the
shortcomings of its democracy, and of a
government paralyzed in any meaningful
reform by the constant horse trading that
has had to go on to get any legislation
through. Laws that have been passed were
so often watered down by minority views
with vested interests that the impact has
been minimal.
Over the same period, China has stood
up, and with a one party state, has
been able to enact real progress. China
is often now held up as a model of
optimum governance, whereas India is
typically depicted as politically backward,
India Briefing
3
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
moribund and argumentative. While this
may have been true, such pictures are now
outdated. Today, India has a government
that can effectively manage reform and get
much needed legislation passed through
the law-making bodies. The Congress
Party won a decisive victory in Indian
general elections a year ago and the
party has wasted no time in seizing the
opportunity to radically reform Indian
competitiveness and commerce. India
now has strong political leadership with
a business friendly government open to
transparency and reform. This is expected
to continue.
Third, India’s reform involves removing
trade barriers, opening up to competition
(including foreign competition in domestic
markets), and getting government out of
business. While some progress still needs
to be made in key politically hot areas such
as insurance and mass retail, generally
India is open to foreign investment and
progressively more welcoming. Such
reforms will continue and change and
this is to the benefit of early players who
can enter the Indian market and develop
market share over their rivals.
Fourth, tremendous opportunities exist at
this very moment for foreign investors to
get actively involved with public-private
partnerships. However, these will not stay
incumbent for long. One of the points
always made is the legendary state of
disrepair and backwardness of much of
India’s infrastructure. Many compare it to
the vastly superior infrastructure available
in China. Yet this problem is also an
opportunity. Just as China’s infrastructure
was backward 20 years ago and has
since improved, so too will India fix its
infrastructure problems. As we noted
in the previous issue of India Briefing
“Investing In India’s Public-Private
Partnerships,” the government is making
huge amounts of financing available for
foreign investment and participation
to assist with the redevelopment of the
country. For a nation the size of India,
the opportunities are staggering. India’s
infrastructure problems are not just a
problem, they are now the bedrock of
reform and a rare chance for multinational
businesses to enter into a market that is
going to deliver, in the words of Prime
Minister Manmohan Singh, “sustained
10 percent growth for the next 25 years.”
4
India Briefing
India, quite simply, is a both a market
and an opportunity for growth that
foreign investors simply cannot afford
to overlook if they want sustainable
growth projections and dividends into
their balance sheets for the next decade
and beyond.
In this issue of India Briefing we look
at the simplest ways of setting up in
India: the liaison office, and going
additional steps further, project offices
(suitable for the fulfillment of specific
contractual work), branch offices and the
establishment of a foreign-owned, limited
liability company.
Setting up Liaison
Offices in India
LIAISON OFFICES
operating a liaison office in India. Where
a liaison office becomes a permanent
establishment of a foreign company,
the LO becomes subject to taxation
and is treated as a foreign entity. The
taxation rate is 44 percent under such
circumstances. This is triggered when a
direct business connection between the
LO and its foreign parent company can
be established. This means that related
party transactions must be dealt with
most carefully when establishing an LO.
If this is likely to become an issue, either
a branch office, project office or limited
liability company could prove to be,
dependent upon specific circumstances,
a more appropriate choice.
Taxes and applicable overheads
Liaison offices are subject to pay
withholding taxes (tax deduction at
source) at around 10.03 percent for the
salaries paid to its employees and the
office rental fee.
Comparison with China
representative offices
Requirement
The role of a liaison office in India,
similar to the role of a representative
office in China, is limited to collection
of information, marketing of exports
and imports (without entering into
any contracts) and the facilitation of
technical or financial collaboration.
The liaison office cannot undertake any
commercial activity, directly or indirectly.
All expenses for establishing and running
the liaison office must be met through
inward remittances, as no income can be
generated locally. As the liaison office
is not permitted to be engaged in any
commercial activity, it earns no income
and is therefore generally not liable to
pay any income tax. It also needs to
be established with the approval of the
Reserve Bank of India, which is a standard
rubber stamping exercise.
Triggering permanent
establishment
Care must be taken not to trigger
permanent establishment status when
China
India
Capital investment
No
Choice of staff
administration
FESCO Free
Taxes on expense
turnover
15%
0
VAT chargeable
Yes
No
Income Tax
Yes
Average gross hourly pay US$3
Employment welfare
(%) of salary
No
No
US$1.20
45-50% 10.3%
Reserve Bank of India
requirements
All foreign companies that set up
operations in India have to provide
documentation to the Reserve Bank of
India. Your advisors will be able to raise
the relevant official documentation,
however the foreign businesses corporate
secretarial department will also have to
provide:
(i) An English version of the companies
certificate of incorporation, together
with the memorandum and articles
of association, attested by the Indian
Embassy or a notary public in the
country of registration
(ii) Latest audited balance sheet of the
applicant entity
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
This applies to all foreign entities
establishing a presence in India.
Setting up Project
Offices in India
PROJECT OFFICES
Foreign investors planning to execute
specific projects in India that are linked to
a one-off contract (as may well be pertinent
for infrastructure related construction for
example), can set up a temporary project
site office in India to handle the contract.
The RBI will provide approval and can
grant general permission for foreign
entities to establish project offices, subject
to certain conditions. These dictate that
the foreign investor has secured a contract
from an Indian company to execute a
project in India. In addition, the project
must adhere to one of the following
guidelines.
(i) The project is funded directly by
inward remittance from abroad
(ii) The project is funded by a bilateral
or multilateral international financing
agency
(iii)The project has been cleared by an
appropriate authority
(iv)A company or entity in India awarding
the contract has been granted Term
Loan by a Public Financial Institution
or a bank in India for the project
However, if the above criteria are not met,
the foreign entity has to approach RBI to
obtain approval.
Operating PO foreign
currency accounts
Authorized banks in India can open noninterest bearing foreign currency accounts
for project offices in India subject to the
following:
(i) The PO has been established in India,
with the permission of the RBI, and
having the requisite approval from
the concerned project sanctioning
authority
(ii) The contract under which the project
has been sanctioned, specifically
provides for payment in foreign
currency
(iii)Each project has only one foreign
currency account
(iv)The permissible debits to the account
shall be payment of project related
expenditure and credits shall be
foreign currency receipts from the
project sanctioning authority, and
remittances from the parent or group
company abroad or the multilateral
international financing agency
(v) The responsibility of ensuring that
only the approved debits and credits
are allowed in the foreign currency
account shall rest solely with the
concerned branch of the authorized
bank; additionally, the account
shall be subject to scrutiny by the
concurrent auditor of the bank
(vi)The foreign currency account has to
be closed at the completion of the
project
Setting up Branch
Offices in India
Remittances by project offices
in India to overseas parent
Profits earned by the BO are freely
remittable from India, subject to payment
of applicable taxes. In doing so, BOs have
to submit annual audit reports from their
chartered accountants to the RBI.
Authorized Indian banks can permit
intermittent remittances by the PO pending
the completion of the project provided
they are satisfied with the legitimacy
of the transaction. This is subject to the
following requirements:
(i) The PO submits an auditors/ chartered
accountants certificate to the effect
that sufficient provisions have been
made to meet other liabilities in India
including income tax
(ii) An undertaking from the PO that
the remittance will not, in any way,
affect the completion of the project in
India and that any shortfall of funds
for meeting any liability in India will
be met by inward remittance from
abroad
Foreign companies incorporated outside
India and engaged in manufacturing
or trading activities are allowed to set
up branch offices in India with specific
approval of the RBI. Branch offices are
permitted to represent their parent/group
companies and undertake the following
activities in India:
(i) Export/import of goods
(ii) Rendering professional or consultancy
services
(iii)Carrying out research work, in which
the parent company is also engaged
(iv)Promoting technical or financial
collaborations between Indian
companies and parent or overseas
group company
(v) Representing the parent company in
India and acting as buying/selling
agent in India
(vi)Rendering services in Information
Technology and the development of
software in India
(vii)R e n d e r i n g t e c h n i c a l s u p p o r t
(maintenance, etc.) to the products
supplied by parent companies
Activity restrictions
It should be noted that retail trading
activities are not currently allowed for a
BO in India. Branch offices are also not
allowed to carry out manufacturing or
processing activities in India, directly or
indirectly. They are permitted to acquire
property for their own use and to carry out
BRANCH OFFICES
Any inter project transfer of funds requires
prior permission of the pertinent regional
office of the RBI under whose jurisdiction
the PO is situated.
India Briefing
5
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
the permitted or incidental activities, but
not for leasing or renting out the property.
Entities from Pakistan, Bangladesh,
Sri Lanka, Afghanistan, Iran and China
are not allowed to acquire immovable
property in India, even for a BO. These
entities are allowed to take such property
on a lease basis only for a period not
exceeding five years. Entities from Nepal
are only allowed to establish liaison
offices in India.
Setting up Private
Limited Companies
in India
PRIVATE LIMITED
COMPANIES
Branch offices in special
economic zones
The RBI has given permission to foreign
investors for establishing branches
in India’s special economic zones to
undertake manufacturing and service
activities. This is subject to the following
conditions:
(i) The BOs are functioning in sectors
where 100 percent FDI is permitted
(ii) The BOs comply with Part XI of the
Companies Act (Section 592 to 602)*
(iii)The BO functions on a stand-alone
basis
* This section of the Companies Act is
mainly administrative and deals with
the documentary and mandatory filing
requirements for foreign companies
operating BOs in India. This is covered
in more detail later in this issue.
BO vs private company
A branch office can perform almost all of
the activities that a parent company can
perform in India without the hassle of
incorporation. A branch office typically
carries out the following activities:
entering into contracts for the import or
export of goods; rendering professional
or consultancy services; research and
development; promoting technical or
financial collaboration; acting as buying
or selling agents; and rendering services
or technical support. One major advantage
of a branch office is the ease of setting up
and exiting the entity.
It should also be noted that BOs carry a
higher tax penalty than private companies
in India. The tax burden for a BO is 41.86
percent (compared to 33 percent for a
PO), however, they may remit the profits
of the BO outside of India, subject to RBI
guidelines.
6
India Briefing
A private limited company in India
requires a minimum of two directors,
and has from two to fifty shareholders
with limited liability. Both directors and
shareholders can be other legal entities.
The minimum paid-up capital for a private
company is about US$2,500. Formation
takes approximately six to eight weeks.
The need for such a company to have
either 100 percent foreign ownership or
whether it requires an Indian investor
is dependent upon the scope of the
businesses intended activities. These
specific categories were identified in some
detail in a previous 2007 issue of India
Briefing “Establishing Business in India.”
The data remains valid and the issue may
be purchased at www.inda-briefing.com.
The intended scope of business activities
in India needs to be studied first to assess
the suitability of the business as being a
100 percent foreign owned entity.
100 percent foreign ownership
On the assumption that the scope
of activities does not require Indian
investment, then a private limited
company may be established with 100
percent foreign ownership in India. This is
known as the “automatic route” and does
not require prior approval.
Restricted and prohibited
investment sectors
The Reserve Bank of India has published
two lists hat affect foreign investment
in India: List A concerning approval
required; and List B concerning limited
eligibility. All items and activities that
are not mentioned in list A and list B
are eligible for foreign investment under
the automatic route up to 100 percent.
Items in list A require approval from the
Foreign Investment Promotion Board.
List B prescribes the limits on the foreign
investments for which automatic approval
will be granted by RBI, subject to certain
restrictions.
List A and List B are provided as under:
Activities for which automatic route of
RBI for foreign direct investment is not
available and for which approval must
be obtained:
(a) Petroleum sector (except for private
sector oil refining), natural gas/LNG
pipelines
(b) Investing companies in infrastructure
and services sector (c) Defense and strategic industries
(d) Atomic minerals
(e) Print media
(f) Broadcasting
(g) Postal services
(h) Courier services
(i) Establishment and operation of
satellites
(j) Development of integrated township
s
(k) Tea sector
(l) Asset reconstruction companies
Activities for which foreign direct
investment is prohibited
(a) Retail trading (except single brand
product retailing)
(b) Atomic energy
(c) Lottery business
(d) Gambling and betting
(e) Housing and real estate business
(exception: development of
townships, construction of residential/
commercial premises, roads or
bridges to the extent specified in
RBI Notification)
(f) Agriculture (excluding floriculture,
horticulture, development of seeds,
animal husbandry, pisiculture and
cultivation of vegetables, mushrooms
under controlled conditions and
services related to agro and allied
sectors) and plantations (other than
tea plantations)
(g) Chit funds
(h) Nidhi companies (mutual benefit
financial companies)
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
Businesses requiring prior approval
should request assistance from their
advisors for help with applications and
procedures with the Foreign Investment
Promotion Board.
Other general regulations
In a private limited company, the
shareholders’ right to transfer shares is
restricted and the invitation to the public
to subscribe to any shares or debentures
is prohibited. One important advantage
of a private limited company is that the
liability of shareholders is limited to the
paid and unpaid capital that is issued as
part of the company. No invitation or
acceptance of deposits from persons other
than members, directors or their relatives
is allowed.
Companies must also comply with various
requirements relating to the filing of
various documents and forms with the
Registrar of Companies, including annual
returns, a list of directors, a notice of
the creation of charge in its assets or of
an increase in its nominal share capital
and copies of notices for shareholder
meetings. There are fewer compliance
requirements. A private limited company
must keep a record of accounts, audit its
records, and file an annual report on return
with the registrar of companies.
Establishment procedures
– automatic route
After these have all been filed, and
appropriate registration fees paid, the
Registrar of Companies will issue a
certificate of incorporation. Private
companies can commence operations from
the date of their certificate of incorporation.
The government has recently introduced
an e-filing system through which company
incorporation (including subsequent
statutory documents) can be filed in
electronic form.
Establishment procedures
– non-automatic route
Obtain the certificate of approval and
company incorporation certificate
from the local approval authority
Completion of draft application
documentation
Application for Pre–registration of
the name of the Private Company
with the approval authority
D r a f t i n g o f m e m o r a n d u m o f
association and articles of association
for the private limited company
Application for the incorporation
certificate of the company
Obtain the Director Identification
Number (DIN) for each director from
the Ministry of Corporate Affairs
Obtain digital signature certificate
form Ministry of Corporate Affairs
for the directors
Obtain approval for the registered
address of the Company
Obtain company seal from state
treasury or authorized private bank
Obtain Permanent Account Number
(PAN) for the company and its
directors (if directors are resident in
India)
Obtain tax account number for the
company
Enroll with the office of Inspector,
Shops, and Establishment Act (state/
municipal)
Enroll for value-added tax with the
State Commercial Tax Office
These vary on a case by case basis
depending upon the industry and proposed
equity make up of the business. In all
cases, prior approval will need to be
obtained from the Foreign Investment
Promotion Board. This often goes hand
in hand with other industry related
approvals procedures depending on the
circumstances. Your advisors will be able
to assist.
Additional governmental
approvals
Investors need to seek approval for
foreign direct investment by the Foreign
Investment Promotion Board. A grant of
approval by the FIPB generally takes about
30 days. Investors then need regulatory
approvals from state governments and
local authorities for the construction of
any buildings, and other matters like
water and environmental clearances. With
the automatic route, no prior approval is
required either by the government or the
Reserve Bank of India. Investors only
are required to notify the regional office
concerned with the RBI within 30 days
of receipt of inward remittances and file
the required documents with that office
within 30 days of issue of shares to foreign
investors. In cases where FDI in activities
is not covered under the automatic
route, prior government approval is
required. Such approval is granted on the
recommendation of the FIPB.
Industrial licenses are granted by the
secretariat for industrial assistance in
the Department of Industrial Policy
and Promotion. An industrial license is
required for industries such as electronic
aerospace and defense equipment.
Industrial projects are to be located within
25 kilometers of the standard urban area
limit of the 23 cities having a population
over 1 million (per 1991 census). But
even in these cases, an industrial license
is not required if a unit is located in an
area designated as an industrial area
before 1991.
Entrepreneurs are also required to obtain
statutory clearances relating to pollution
control and the environment as may be
necessary for setting up an industrial
project for 31 categories of industries.
These include petrochemical complexes,
petroleum refineries, cement and thermal
power plants. If investment in the project
is less than Rs.1 billion (approximately
US$23.5 million), such environmental
clearances are not necessary (except
in certain cases such as mining, tarred
roads in Himalayan areas, foundries,
and electroplating industries). Setting up
industries in certain locations considered
ecologically fragile are guided by separate
guidelines issued by the Ministry of
Environment and Forests.
Other approvals and clearances at the
state level include land, water, electricity,
registrations, and so on.
Documentation and reporting
requirements for foreign investors
under the Companies Act
Part XI of India’s Companies Act
is specifically pertinent to foreign
investors in India, and dictate the
provision of documentation and
reporting aspects of such businesses.
Documentation
Various corporate documents giving
particulars of the investor,
Returns regarding any alterations in
the company,
India Briefing
7
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
Balance-sheet and profit and loss
accounts of the company,
Charges on any of the company’s
properties in India.
Reporting
It also provides that the following
provisions shall apply to Indian
business of a foreign company:
Registration of charges
Right to obtain copies of and inspect
the trust deed
Books of account to be kept by the
company
Annual returns to be made by the
company
Inspection of books of accounts
Power of central government to
direct special audit
Audit of cost accountants
Power of Registrar to call for
inspection and investigation
As can be seen these are fairly standard.
Your professional advisors will be able
to take you through these processes
and the specific government raised
forms that need to be completed and
submitted as part of the pre and post
incorporation and administrative
procedures.
India was one of the first countries in
Asia to recognize the effectiveness of
the export processing zone model in
promoting exports, with Asia’s first EPZ
set up in Kandla in 1965. With the aim of
attracting larger foreign investments in
Kargil
Leh
Jammu
Pathankot
Amritsar
HIMACHAL
PRADESH
PUNJAB
CHANDIGARH
HARYANA
Delhi
Jaisalmer
DELHI
UTTARANCHAL
Yamuna
New Delhi
Bikaner
Bareilly
ARUNACHAL
PRADESH
SIKKIM
Kanpur
Jodhpur
Gorakhpur
Ga
nge
s
Gwalior
Kota
ASSAM
NAGALAND
Ghag
hara
Allahabad Benares
Udaipur
MEGHALAYA
BIHAR Ganges
INDIA
MANIPUR
Silchar
JHARKHAND
Kandla
Okha
Dibrugarh Tinsukia
UTTAR
Agra PRADESH
RAJASTHAN
Ahmadabad
Jamnagar
Vadodara
Narmada
GUJARAT
Diu
WEST
BENGAL
Jabalpur
Indore
MADHYA PRADESH
Jamshedpur
CHHATTISGARH
Surat
Nagpur
Mah
Cuttack
anad
i
MAHARASHTRA
DAMAN AND DIU
Balasore
Haldia
Paradip
Special economic zones are deemed to
be “foreign territory” for the purposes
of trade operations, duties and tariffs. As
of 2007, more than 500 SEZs have been
proposed, well over 250 of which have
been created. An SEZ may be set-up in
the public, private, or joint sector or by a
state government. The minimum size of an
SEZ is 1000 hectares. The zones in India
closely follow the successful Chinese
SEZ model.
Wi t h t h e g o a l s o f e c o n o m i c
competitiveness and easier exporting,
SEZs function as fast growth engines
which can boost manufacturing and
create new job opportunities at an
unprecedented scale. Business entities
may be established in SEZs for the
manufacturing of goods, the provisioning
of services, and other activities including
processing, assembling, trading, repairing,
reconditioning, making of gold, silver, and
platinum jewelry. These entities must be
net foreign exchange earners, and they are
not subjected to any pre-determined value
addition or minimum export performance
requirements.
Exports from India’s SEZs
Year
Special Economic
Zones in India
JAMMU AND
KASHMIR
India, the government announced their
special economic zones policy in April
2000.
TRIPURA
MIZORAM
2003-2004
2004-2005
2005-2006
2006-2007
2007-2008
2008-2009
Value
(US$bn)
3.05
4.04
5.03
7.63
14.68
21.96
Growth rate
year-on-year
39%
32%
25%
52%
93%
50%
The functioning of the SEZs is governed
by a three-tier administrative set up. The
Board of Approval sits at the highest level
and is headed by the commerce secretary.
The approval committee at the zone-level
deals with approval of units in the SEZs
and other related issues. Each zone is
headed by a development commissioner,
who is former chairperson of the zone’s
approval committee.
CRISSA
DADRA AND
NAGAR HAVELI
Pune
da
Go
ri
va
Hyderabad
Krish
Vishakhapatnam
Kakinada
PONDICHERRY
ANDHRA
PRADESH
Guntakal
na
Marmagao
GOA
KARNATAKA
Mangalore
Coler
oon
PONDICHERRY
PONDICHERRY
Calicut
KERALA
LAKSHADWEEP
Cochin
Coimbatore
Madurai
Tuticorin
8
India Briefing
Cuddalore
PONDICHERRY
TAMIL NADU
Special economic zones offer a great
many advantages. They may import,
or procure from domestic sources, all
of their requirements of capital goods,
raw materials, consumables and office
equipment for the setting up of operations
without any license or specific approval.
Such duty free goods procured locally
can be used over a period of five years.
Investors enjoy 100 percent income
tax exemption for the first five years,
and 50 percent for the following two
years, exemption from central sales
tax, exemption from service tax, and
exemption from state sales tax and other
levies as extended by the respective state
governments. As well as other incentives
such as the external commercial borrowing
by SEZ units of up to US$500 million a
year without any maturity restrictions
through recognized banking channels.
The government of India allows 100
percent FDI in the manufacturing sector in
SEZ entities, except sectors requiring an
industrial license (aerospace and defense
for example). The setting up of offshore
banking accounts for SEZ entities is
allowed.
Special economic zone entities also enjoy
flexible exchange control regulations, and
may borrow up to US$500 million in a
year for external commercial borrowing.
Beyond the exemption from central sales
tax and service tax for SEZ entities, yet
another advantage is single window
clearance for central and state-level
approvals. All post approval clearances
such as the granting of importer-exporter
code numbers, changes in the name of the
company or implementing agency and
broad banding diversification are given
at the zone-level by the development
commissioner.
Indian Labor Laws
Indian labor laws are essentially laborfriendly and provide a minimum floor of
guarantees and benefits to all employees.
It is important to note that a foreign
company is unable to contract out of
these minimum protections. Investors
should pay special attention to the
Industrial Disputes Act of 1947, which
provides a large number of protections for
employees; the Shops and Establishments
Act, which governs the hours of work,
payment of wages, leave, holidays,
terms of service and other conditions;
the several wage and remuneration acts,
which regulate the payment of wages,
bonuses, and equalize pay for men and
women; and the Employees Provident
Fund Act of 1972, which provides for the
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
institution of provident funds, pension
funds, and deposit linked insurance funds
for employees in establishments.
Restrictive labor laws can make the
large scale usage of Indian employees
challenging. A harsh “hire and fire”
policy would quickly be struck down
by the Indian judiciary. For example,
companies that employ more than 100
workers need government permission to
fire them. Any termination policy should
be checked against the current law prior
to its implementation.
Regional labor cost comparison
These figures shown in various categories
of labor have taken New York as a
weighted benchmark and compared with
13 regional cities in Asia. This gives
some indication of Indian labor costs. The
results demonstrate that India exhibits
exceptional value for labor – on almost
all charts, the Indian cities of Mumbai
and Delhi rank near the bottom in terms of
wage levels. That, combined with India’s
labor-friendly labor laws, means that
unlike China, significant savings can still
be had on hiring costs in India.
Gross annual income of
car mechanics (US$)
Income
Weekly hours
worked
New York
40,700
40
Hong Kong
19,200
48
Taipei
14,900
45
Singapore
12,800
44
Seoul
11,500
48
Kuala Lumpur
9,800
48
Shanghai
7,500
40
Bangkok
5,000
48
Beijing
3,300
43
Manila
2,900
46
Jakarta
2,700
49
Delhi
2,100
48
Hanoi
2,050
44
Mumbai
1,600
48
Car mechanics were defined as having
completed an apprenticeship, with five
years of experience and to be about 25
years old. While it’s no real surprise to see
that Asia’s economic powerhouses have
the highest salaries, it is interesting that
Indian mechanics work the longest hours
and earn some of the lowest salaries.
Compared to New York mechanics,
Indians earn nearly 23 times less and work
an additional 20 percent longer a week.
The latter figure may have to do with the
general quality of vehicles on Indian
roads.
Gross annual income of
building laborers (US$)
New York
51,400
Taipei
16,000
Hong Kong
15,400
Seoul
11,100
Singapore
Shanghai
11,000
5,400
Kuala Lumpur
3,900
Beijing
2,500
Manila
2,100
Bangkok
Hanoi
Jakarta
Mumbai
Delhi
2,000
1,400
1,400
1,300
1,300
Building laborers were defined as
unskilled or semi-skilled laborers, aged
25 and single. Again we find that the
cost of labor in India is well below other
countries in Asia. Laborers in India are not
only the lowest paid in the region, they
earn a quarter of laborers in Shanghai.
What this shows is that labor costs in India
now demonstrate a significant discount to
those in China.
Gross annual income of
skilled workers (US$)
New York
Seoul
Hong Kong
Taipei
Singapore
Kuala Lumpur
Jakarta
Shanghai
Bangkok
Beijing
Delhi
Mumbai
Manila
Hanoi
74,400
33,300
19,400
17,800
15,300
9,500
8,600
7,600
7,500
5,600
5,500
5,400
3,500
2,800
Skilled workers were defined as those
possessing vocational training with 10
years of experience with a large company
in the metal-working industry. They were
an average of 35 years old, married with
two children. The previous disparity of
skilled workers between China and India
starts to disappear at this level, although
Shanghai still remains 20 percent more
expensive than Mumbai. Interestingly,
Mumbai ranks below Delhi, albeit by a
very small amount. This may be due to
Delhi’s role as the political center of the
country and the number of public sector
jobs.
Gross annual income and working
hours of engineers (US$)
Income
Weekly hours
worked
New York
87,700
42
Hong Kong
34,500
48
Singapore
33,900
44
Seoul
29,900
48
Taipei
25,000
42
Bangkok
23,100
48
Kuala Lumpur
17,100
45
Beijing
15,300
40
Shanghai
14,000
40
Jakarta
8,200
40
Delhi
7,700
46
Hanoi
5,200
44
Mumbai
4,700
48
Engineers were defined as being
university or technical graduate,
employed by industrial firms in electrical
engineering with at least five years
experience. They would be about 35
years old and married with two children.
The more than doubling of costs to
employ such an individual in China over
India is again apparent. Mumbai’s figure
is even lower due to the larger amount
of migrant laborers the city attracts over
Delhi.
Gross annual income of
product managers (US$)
New York
105,800
Singapore
59,100
Seoul
42,400
Hong Kong
42,200
Taipei
33,700
Bangkok
31,200
Beijing
28,500
Kuala Lumpur
24,200
Shanghai
22,100
Delhi
17,000
Jakarta
10,900
Hanoi
10,400
Manila
9,400
Mumbai
8,500
Product managers were defined
as employees in the pharmaceutical,
chemical or food industry currently at
middle management with a university or
India Briefing
9
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
technical college degree and at least five
years experience. Typically, a product
manager is 35 years old and married with
no children. Indian product managers
earn about two and a half times less than
their Chinese counterparts, A sizeable
difference exists again between Delhi
and Mumbai, mainly as there is a current
preference to work in Mumbai because
there are more opportunities there. The
high salary differences between Asia’s
economic centers such as Singapore and
Hong Kong and the emerging markets of
China and Southeast Asia would indicate
that product managers tend to be based
in regional headquarters rather than out
in the field. This may change as these
markets develop and require more hands
-on attention from an executive level.
Gross annual income of
department heads (US$)
New York
Seoul
Singapore
Taipei
Hong Kong
Shanghai
Beijing
Bangkok
Kuala Lumpur
Delhi
Mumbai
Hanoi
Manila
Jakarta
110,300
55,200
53,900
51,900
44,600
35,000
32,000
29,800
26,700
13,700
13,200
13,000
11,900
10,500
Department heads were identified
as employees heading a production
department with a staff of over 100 in a
sizable company in the metal-working
industry with vocational training and
many years of experience in the field. A
department head is typically 40 years old
and married with two children. The gap
between department heads in China and
India has now increased to a multiple of
three. The distance in earnings between
American and Indian managers remains
fairly consistent across the board with
American managers earning 10 times
an Indian manager’s salary. On average,
Chinese managers earn twice as much as
Indians do. This is somewhat surprising
given the more prominent use of English
as a language in India, perhaps signifying
that language barriers to executive’s
earning capabilities at this level tend to
fade.
10
India Briefing
Tax Considerations
in India
TAX
India boasts a well-developed tax structure
with clearly demarcated authority between
central and state governments and local
bodies. The central government levies
taxes on income, customs duties, central
excise and service tax, while the state
governments levy value-added tax (which
most states have), sales tax in states where
VAT is not yet in force, stamp duty, state
excise tax, land revenue tax, and tax on
professions. Local bodies are empowered
to levy tax on properties, octroi (local tax
collected on various articles brought into a
district for consumption), and for utilities
like water supply and drainage.
There are some important tax factors when
considering an investment decision in
India, including: the tax implications on
the return of the investment, realized when
the foreign investor exits the investment;
the tax liabilities of the Indian company
being invested in; the tax liabilities on
transactions, such as outsourcing of
support services or other trade-related
transactions between the foreign investor
and the Indian investment company;
and the position adopted by Indian tax
authorities on past practices and activities
relating to foreign investment and the
corresponding related points of tax law.
Taxes levied by the
central government
Indirect taxes
The tax rates for domestic companies
and foreign companies differ quite a bit.
Domestic companies are taxed at the rate
of 33.99 percent, including a 10 percent
surcharge as well as a 2 percent education
cess and 1 percent higher education cess,
if the taxable income exceeds Rs.10
million (US$ 235,000), or else 30.90
percent if the taxable income is Rs.10
million or below.
General tax rates applicable to foreign
companies are 42.23 percent plus a 2.5
percent surcharge, a 2 percent education
cess and 1 percent higher education
cess. Such rates become applicable
mainly where the foreign company has a
permanent establishment in India. If the
company has no permanent establishment
in India, the tax rate depends on the nature
of income (capital gains, royalties, etc.)
and the provision of the relevant double
taxation avoidance agreement.
In case a company’s taxable profit as
computed under the provisions of the
Income Tax Act is less than 10 percent
of its book profit, then it is subject to
a minimum alternate tax at the rate of
11.33 percent (inclusive of surcharge and
education cess).
A company is also taxed when it receives
a return on investment. Returns on
investment in India are realized when the
investor exits the investment, selling its
shares in whole or in part. In such case,
the investor will realize either a capital
gain or business income. Shares situated
in India are considered assets, therefore
gains from the sale of those assets will be
considered taxable in India. The rate on
capital gains will vary based on the type of
asset (shares, property, debt instruments),
the length of time the investor has held
the asset and whether the transactions
have taken place on a recognized stock
exchange in India.
Taxes levied by state
governments and local bodies
Tax on corporate income
Excise duty
Sales tax / VAT
Capital gains tax
Customs duty
Property tax
Personal income tax
Service tax
Octroi
Tax incentives
Securities transaction tax Utilities (water supply, drainage, etc.)
Double taxation avoidance
treaty
Setting Up Liaison Offices, Project Offices, Branch Offices & Private Limited Companies in India
Capital gain arises in the previous year in
which the transfer of assets takes place,
even if the consideration for the transfer
is received or realized in the later year.
When the income from a sale is classified
as business income under Indian law it
will be taxable in India, but only if such
income accrues or arises in India or is
attributable to a “business connection” in
India. The rate of corporate tax applicable
to business income of non-residents is
higher than the rate applicable to domestic
entities; approximately 42.23 percent. It is
worth noting that the dividend distribution
in India is imposed on the investee, and the
investor is not taxed in India. That said,
the next 12 months may see significant
changes in these taxation schemes.
only has 17 years of experience in open
markets. The regulatory environment is
still evolving rapidly, and so investors
should expect change. Investors will want
to choose the state in which they invest
carefully, as each has different levels of
tax sophistication and varying approaches
to market needs.
The central and state governments have
provided various tax related incentives
that can be availed by a foreign investor
establishing a company in India. These
incentives include: indirect and direct tax
incentives, including a reduction in indirect
taxes (sales tax and tax depreciation
allowance) and a tax deduction for the first
ten years of the operation of new industrial
units in specific areas; tax holidays;
and special tax provisions for those
undertakings in which the operations are
100 percent export oriented.
Summary
The Indian government amends tax rules
regularly, much of which directly impacts
foreign investors. Keep in mind that India
Relief from certain types of capital gains
is often sought through double taxation
avoidance treaties between India and
Mauritius, Singapore, Netherlands,
Cypress and the United Arab Emirates,
and may allow structuring alternatives for
foreign investment that entirely relieves
investors of the capital tax liability or
significantly mitigates the same.
India now represents an astonishingly
diverse and rapidly growing market, with
a massive requirement for investment
and infrastructure in much the same way
as China has developed over the past 20
years. Foreign investors who have been
successful in China should be considering
India as a complimentary market.
For companies involved in construction
and other related infrastructure
development, India now represents a
major new opportunity. It is to be expected
that cities such as Mumbai, Hyderabad
and Chennai will start to overtake their
Chinese counterparts of Shanghai, Wuhan
and Guangzhou as boasting the world’s
largest numbers of construction cranes.
Of India’s two faces, the western coast
looking towards the Middle East, Africa
and Europe with the major port of
Mumbai should be considered as a base
for manufacturing and sales to these
markets, while the east coast and the port
city of Chennai looks to Southeast Asia
and routes through to China, Japan and
Australia.
The variations in corporate establishment
in India are well documented in this
issue. We trust our readers will take note
and begin to invest in India, the second
country in Asia after China that can now
be relied upon to deliver double digit
growth to corporate results worldwide.
Chris Devonshire-Ellis is the managing
partner for Dezan Shira & Associates in
India. He spent 21 years in China prior
to setting up the firm’s India operations
three years ago. The practice now
maintains five offices in India and advises
multinational corporations on investment,
legal structures, and tax implications of
establishing a presence in the country.
Mr. Devonshire-Ellis may be contacted at
[email protected]. The firm’s web site
is www.dezshira.com.
India Briefing’s Guide to
Doing Business in India
India Briefing's Guide to Doing Business in India is available for purchase in hard copy
and downloadable PDF. Priced at US$25 plus p&p.
Doing Business in India
• Introduction to India
• Why India matters and where India is going
• A brief history of India
• Key demographics of India
• Setting up a business in India
• India's taxes
• Import/export trends
• Geographical overview
• Living in India
• Business etiquette and culture
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India Briefing
11
Adding the Essential Ingredients
to Foreign Investment in India
Dezan Shira & Associates
Foreign Direct Investment, Company Formation, Tax and Due Diligence Advice throughout India
Please contact our offices below for India due diligence, incorporation and tax advice for matters
relating to foreign direct investment throughout the country, or email [email protected].
New Delhi
Mumbai
Chennai
Chris Devonshire-Ellis, Managing Partner
Vikas Srivastava, Legal Associate
[email protected]
[email protected]
[email protected]
Kolkota
Bangalore
[email protected]
[email protected]
www.dezshira.com