CONTENTS

A Preface

B General Information

C Our Vibrant Economy – Areas of Investment

D Investment – Supportive Environment

E Business Organizations – Law and Format

F Taxation

G Special Economic Zones & Software Parks

H Appendices

A. Preface

This guide is designed to provide to an investor, particularly a foreign investor, fundamental information on the present business and economic environment in India. The information covers areas like taxation, accounting, finance, employment and labour, besides other commercial and legal implications influencing business decisions in the country’s changing economic scenario.

The information given is not exhaustive and is only meant to be a guide. This guide does not purport to be an offer, invitation or solicitation of any kind.

B. GENERAL INFORMATION

Welcome to an insight of an enigma that is India. The seventh largest country in the world, the second largest population in the world, the country having the largest English speaking population after USA and UK, is a land of immense opportunities.

India can be explained to the person who does not know it as a land, which will never cease to amaze. It is a very old adage in India that “this can happen only in India”.

India is a land of diversity with a congruence of many diverse cultures that continue to coexist in balanced harmony. It is a land that enjoys the advantages of a civilization, which spans a period of more than 5000 years. It is a vibrant country that symbolizes continuity in change and change in continuity.

The country is a land of contrasts where tradition can coexist with development and where hope manages to flourish in despair.

The present economic and tourism scenario is aptly described in the words “INCREDIBLE INDIA”.

Geographic Profile

OVERVIEW

Longitude 68°7’ W to 97°25’ W Latitude 8°4’ to 37°6’ North Land Area 3,287,590 Sq. Kms. Coastline 7516 Kms. Land Frontier 15,200 Kms. Capital New Delhi Boundaries North Countries: China, Nepal, Tibet, Bhutan

Mountain Range: Himalayas South Countries: Sri Lanka

Water Body: Indian Ocean East Countries: Myanmar, Bangladesh

Water Body: Bay of Bengal West Water Body: Arabian Sea

North West

Countries: Pakistan, Afghanistan Water Body: Arabian Sea

Major International Airports Ahmedabad, Amritsar, Bengaluru, Chennai, Goa, Guwhati, Hyderabad, Kochi, Kolkata, Mumbai, New Delhi, Thiruvananthapuram

Major Seaports Ennore, Haldia, Kandla, Kochi, Kolkata, Mumbai, Mormugao, New Managalore, Paradip, Tuticorin, Vishakhapatnam

Major Cities Mumbai, New Delhi, Kolkata, Chennai, Bengaluru, Hyderabad, Pune, Lucknow, Kanpur

Time Zone GMT + 05:30 H Currency Unit Indian Rupee (INR) Environment - international agreements

India is part of Antarctic-Environmental Protocol, Antarctic- Marine Living Resources, Antarctic Treaty, Biodiversity, Climate Change, Desertification, Endangered Species, Environmental Modification, Hazardous Wastes, Law of the Sea, Nuclear Test Ban, Ozone Layer Protection, Ship Pollution, Tropical Timber 83, Tropical Timber 94, Wetlands, Whaling

GEOLOGICAL CHARACTERISTICS

Climate Tropical Monsoon Seasons Summer (March – June)

Monsoon (June – October) Post – Monsoon (October – November) Winter (December – February)

Natural Resources

Coal (4th largest reserve in the world), manganese, bauxite, iron ore, mica, granite, titanium ore, chromites, diamond, limestone, natural gas, petroleum, arable land

Flora & Fauna

Over 47,000 species (flora) More than 89,000 species (fauna)

Major Rivers Ganga, Yamuna, Brahmaputra, Godavari, Krishna, Cauvery, Narmada, Tapti

Islands Lakshadweep, Diu & Daman, Andaman & Nicobar Islands

CONSTITUTION AND GOVERNMENT

The Indian federation is the world’s largest democracy with strong foundations having a single citizenship and a single but extremely active judiciary and a parliamentary form of democracy.

Three main arms of the Indian Governance Structure are:

The Legislative

The Legislature is known as the Parliament, comprised of the Lok Sabha and the Rajya Sabha. The Lok Sabha has term of five years or it can be dissolved by the President. The Lok Sabha members are elected by universal adult suffrage (right to vote) from all parts of India. The Rajya Sabha members are elected by the representatives of State Legislatures and some co-opted by the President of India on the basis of their contribution to the society.

Independent body known as Election Commission overseas the election process to ensure free and fair election at Central and State levels.

The Executive

The President of India is the Constitutional head of the Executive of the Union. Under his directions the Cabinet of Ministers headed by the Prime Minister of the country is responsible for the day-to-day running of the country. Though the President does not interfere with the working of the Prime Minister and his cabinet, he is an important guiding force for the country. The Prime Minister and his cabinet are answerable to the Parliament of India, which is formed of the democratically elected representatives.

The Judiciary

The legal system in India is well established. The Supreme Court of India is the apex court of the Nation headed by the Chief Justice of India. All States have a High Court as an apex court at State level. In addition, there are district courts, metropolitan courts, city civil courts, tribunals and criminal courts functioning in the States. Judgments of lower level courts can be petitioned in the higher level courts. The entire judiciary system is independent of the Indian Governance Structure and operates as per provisions laid down in the Constitution of India. The legal system of India is based on English Law. For efficiency in disposal special Tribunals have been set up especially for economic matters such as direct and indirect tax, company law, competition act, modern arbitration and conciliation law is in place. POLITICAL SETUP

India is the largest democracy in the world and has adopted a Parliamentary system of Government with two Legislative Houses. The country is a Union of the National Capital Territory, Delhi, 29 States and 6 Union Territories. The Central Government has exclusive jurisdiction over all matters of national interest such as defence, communication, banking and currency, international trade and foreign affairs. The State Governments have primary responsibility for matters like law and order, education, health and agriculture.

Major political parties in India include the Indian National Congress, the Bhartiya Janata Party, the Janta Dal, the Communist Party of India and the Samajwadi Party. The Indian National Congress is the most prominent party and has been in power in the country for more than 45 years since Independence.

ECONOMIC ARRANGEMENT

Economic arrangements are very well established in the Government machinery through formation of Planning Commission, Five Year Plans and Annual Budgetary System. An Annual Central Budget for the next year (April - March) is presented before members of the Parliament by the ruling party of the Government in February each year.

Estimates of receipts, expenditure, capital outlay and allocation of funds are directed through budget mechanism. All tax law proposals and rates for central coffers are directed through budgetary provisions. Sectors of paramount priority and national importance are supported through budget allocations. Financial progress is closely monitored and measured by the Ministry of Finance. An Annual economic survey report is presented prior to the presentation of the budget and necessary adjustments are then routed through the budgetary provisions.

The principles and provisions of revenue sharing between Central and State Governments are well defined in the Constitution. Additional financial support to the States is provided by the Central Government on need basis.

DEMOGRAPHIC PROFILE

Population 1.21 Billion (Urban: 29%, Rural: 71%) Population Growth Rate 1.41% per annum Birth Rate 22.22 (births/ 1000 population) Death rate 6.4 (deaths/ 1000 population) Life expectancy 70 Years Sex ratio 1.06 males per female Households 240 Million

India has a population of approximately 1.21 billion people, comprising approximately one sixth of the world’s population. Although India occupies only 2.4% of the world’s land area, it supports over 17.5% of the world’s population. Currently, it is the second most populous nation on earth, though if current trends persist, India will replace demographics of the People’s Republic of China, as the most populous nation in less than 15 years.

It is a cultural mix of various races, religions, dialects, cultures, likes, dislikes and all the possible variations that one can expect.

Religions Hinduism, Islam, Christianity and Sikhism are the four main religions followed in India. Other religions include Buddhism, Jainism, Judaism and Zoroastrianism

Languages Hindi is the principal official language of India. Apart from Hindi there are 21 official languages including Bengali, Telugu, Marathi, Tamil, Urdu, and Gujarati. English has the status of an associate language and is widely used in national, political and commercial communication.

Festivals Deepawali, Holi, Guru Nanak Jayanti, Rakshabandhan, Christmas, Janamashtami, Id-ul-Zoha

AGE STRUCTURE

India can be described as a young country with almost 65% of its population lying between the age group of 15-64 years. About 29% of the Indian population lives in urban areas. The average life expectancy is around 70 years. The median age in the country is around 25.1 years, which is lower than many countries in the world. More than half of the Indian population is educated and this figure is rapidly increasing. Almost 74% (male: 82%, female: 65%) of the population is literate.

EDUCATION AND LABOUR FORCE

Education

India has the largest school-age population in the world. It has a well established education system with more than one million schools enrolling over 130 million students.

For higher education, India has more than 400 universities, over 20,000 colleges and 7,000 technical institutions with approximately 13 million students.

Labour Force

India’s labour force stood at approximately 478.3 million in 2010. It is estimated that over 13 million people enter India’s urban labour force every year.

India can boast of the largest pool of skilled and unskilled manpower, which is very versatile and adaptive. It has also got probably the largest pool of scientific qualified and technologically adept manpower along with globally recognized innovators, managers,

scientists and entrepreneurs in many fields. There also exists skilled and unskilled labour, which is not only cost effective and efficient but also capable of moulding itself to any requirements. Though India does not have much labour trouble, it does have well developed labour unions that look after worker rights.

The official language of the country is Hindi, which is spoken by almost 41% of the population. However, English with various degrees of fluency is spoken and understood throughout the country.

TRAVEL TO INDIA

International air connections are available from New Delhi, Mumbai, Chennai, Thiruvananthapuram, Bangalore, Hyderabad, Ahmedabad, Kochi, Kozhikode and Kolkata. Further, a number of international chartered air connections are also available from Goa. Most international airlines have regular flights into the country, with Air India (the national international carrier) offering flight connections to various international destination s.

For domestic air travel, there are a number of regular airlines – Indian, Jet Airways, Air Sahara, and Kingfisher airlines as well as budget airlines for inexpensive air travel Air Deccan, Spice Jet, Paramount Airways etc.

The country also has an extensive rail and road transport network.

Railways 111,599 Km Roadways 3,316,452 Km Waterways 14,500 Km Number of Airports 454

PORTS

India is presently ranked 17th position in the maritime nations of the world. About 95% by volume and 70% by value of the country’s trade is carried on through maritime transport. There are 13 major ports and 187 miner and intermediate ports. Major seaports are Ennore, Haldia, Kandla, Kochi, Kolkata, Mumbai, Mormugao, New Managalore, Paradip, Tuticorin, Vishakhapatnam.

VISA REGULATIONS

REQUIREMENT OF VISA

Foreigners desirous of visiting India can obtain a visa from the Indian Embassy in the country of their residence. They should possess a valid National Passport - except in the case of nationals of Bhutan and Nepal, who may carry only suitable means of identification.

The Consular Passport and Visa Division of the Ministry of External Affairs is responsible for issuance of Indian visas to foreign nationals for visits for various purposes. This facility is granted through various Indian missions abroad.

The Indian High Commission/ Embassy usually issues the visas in the applicant’s country of residence with supporting documents.

The following types of visas are normally granted for entry to India -

Temporary Visas

Visitors to India need visas to enter the country unless they are Indian citizens. Non-resident Indians holding citizenship of another country are also required to obtain visas before arriving in India unless they hold a Person of Indian Origin (PIO) card issued by the Indian government. Visas must be obtained from the Indian Embassy or Consulate in the applicant’s home country. Special permits are required for visiting the Andaman and Nicobar Islands, Bhutan, Lakshadweep, remote North-eastern states and Sikkim.

Tourist visas are valid for one to six months, generally beginning on the date the visa was issued and not on the date of entry into India. Tourist visas are generally multiple-entry visas, however, this option must be specifically requested at the time of application.

Business Visa

This visa is required by persons visiting India on business. It is necessary to provide a letter from the applicant’s overseas employer stating the exact purpose of the visit, and the expected duration with the application. A letter of invitation from the Indian Company should also be provided.

Business visas are normally Multiple Entry and may be granted for up to two years. Business Visas are issued for visits of more than 180 days with multiple entries. Although a Business visa is usually valid for a period of up to five years, there is no hard and fast rule for the same. Business visas valid for a period up to ten years with multiple entries are available to foreign businessmen who have set up or intend to set up joint ventures having Governmental approval in India.

Employment Visa (Work Permits)

A Multiple Entry employment visa is granted on a case by case basis to foreign nationals wishing to take up an employment in India. Indian companies are allowed to engage the services of foreign nationals without any approval. An employment visa must be obtained

from the Indian Consulate in the country of residence of the applicant, prior to departure for India.

Normally the following main papers are required to be filed with the application for employment visa –

A letter of secondment from the overseas company and an employment letter from the Indian Company

Expected duration of the employment

Entry Visa/ X-Visa

This visa is granted to those persons who wish to visit India for long term or permanent residence but do not belong to any of the above categories.

Foreign nationals coming to India on an employment visa may obtain an X-visa for their spouses before coming to India. If such a spouse decides to take up any employment in India, then the spouse will be required to go back to the port of origination and obtain the requisite employment visa.

According to the rules currently in force, a change of category of visa is not permitted. Any breach in the purpose/ category of the visa granted to a foreign national is illegal and can result in his/ her deportation.

The foreign national can however apply for an extension of visa duration. The application is to be made to the Ministry of Home Affairs through the concerned FRRO/ Office of the Senior Superintendent of Police (SSP) along with required documents for getting visa extension.

SPOUSE WORK RIGHTS

Generally spouses of foreign nationals arrive on an X-visa, which does not allow any employment or business in India. In cases where the spouse wants to work in India, then an appropriate visa (that is, a business or employment visa) is required. Once the spouse reaches India with an X-visa, and decides to take up any employment, then the spouse would need to go back to the port of origination and obtain the requisite employment visa.

REGISTRATION REQUIREMENTS

Foreign national entering India for the first time on a visa (whether tourist, business or any other) which is valid for a period of more than 180 days, would be required to register themselves with the appropriate Foreigner’s Regional Registration Office (FRRO) within fourteen (14) days of his/ her arrival in India. Such a visa holder would be required to register with the relevant FRRO notwithstanding the fact that the visa holder intends to remain in India for a period that is less than the duration of the visa in question. Therefore, the implication of such a visa is that the foreign national holding the visa would be deemed to have the intention of remaining in India for the entire duration of the visa.

In case foreign nationals are required to move around the country to comply with the demands of their jobs/profession. Under such circumstances, the foreign national would be required to obtain registration with the ‘relevant FRRO’ i.e. either in the first port of entry or where the residential address has been provided.

CONVERSION/ EXTENSION OF VISA

In the event that a foreign national holding a visa valid for a period of less than one year desires to convert it into a visa valid for a period of more than one year, then he/ she would be required to approach the Ministry of Home Affairs for conversion/ extension of the said visa.

DRIVERS PERMIT

Foreign nationals are not allowed to drive in India using their home country Drivers’ Licenses. Foreign nationals must obtain International Drivers’ Licenses in their home countries. International Drivers’ Licenses are generally valid for six months. To obtain an Indian Driver’s License, individuals must apply to the Regional Transport Authority, which issues Learners’ Permits. This enables the individual to drive if accompanied by an adult who has a valid Indian Driver’s License. One month after the Learner’s Permit is issued, a driving test and a verbal examination of the local driving laws must be taken. On successful completion of the examinations, the Regional Transport Authority issues a Driver’s License.

EMPLOYMENT REGULATIONS

There are various Acts, which regulate labour and employment in India. Some of the Acts are:

Apprentices Act, 1961 Beedi Workers Welfare Fund Act, 1976 Bonded Labour System (Abolition) Act, 1976 Building and Other Construction Workers (Regulation of Employment & Conditions of

Service) Act, 1996 Child Labour (Prohibition & Regulation) Act, 1986 Children (Pledging of Labour) Act, 1933 Cine-Workers and Cinema Theatre Workers (Regulation of Employment) Act, 1981 Cine-Workers Welfare Fund Act, 1981 Contract Labour (Regulation & Abolition) Act, 1970 Dangerous Machines (Regulation) Act, 1983 Dock Workers (Regulation of Employment) Act, 1948 Dock Workers (Safety, Health and Welfare) Act, 1986 Employees Provident Fund & Miscellaneous Provisions Act, 1952 Employees' State Insurance Act, 1948 Employers' Liability Act, 1938 Equal Remuneration Act, 1976 Factories Act, 1948 Industrial Disputes Act, 1947 Industrial Employment (Standing Orders) Act, 1946 Inter-State Migrant Workmen (Regulation of Employment and Condition of Service)

Act, 1979 Labour Laws (Exemption from Furnishing Returns & Maintaining Registers by Certain

Establishments) Act, 1988 Maternity Benefit Act, 1961Minimum Wages Act, 1948 National Commission for Safai Karamcharis Act, 1993 Payment of Bonus Act, 1965 Payment of Gratuity Act, 1972 Payment of Wages Act, 1936 Pensions Act, 1871 Sales Promotion Employees (Conditions of Service) Act, 1976 Seamen’s Provident Fund Act, 1966 Trade Union Act, 1926 Weekly Holidays Act, 1948 Workmen's Compensation Act, 1923

BUSINESS LAWS AND LEGISLATIONS

RESERVE BANK OF INDIA

The Reserve Bank of India (Reserve Bank) was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act. The objectives are to regulate the issue of bank notes, regulate the banking industry, keeping reserves with a view to securing monetary stability in India, and to operate the currency and credit system of the country to its advantage.

The Reserve Bank has multifaceted role and acts in the following various capacities:

Monetary Authority

To formulate, implement and monitor the monetary policy in order to maintain price stability and ensure adequate flow of credit to productive sectors.

Regulator and Supervisor of the Financial System

To prescribe the broad parameters of banking operations within which the country’s banking and financial system function in order to maintain public confidence in the system, protect depositors’ interests and provide cost-effective banking services to the public.

Manager of Exchange Control

To manage the Foreign Exchange Management Act, in order to facilitate external trade and payment and promote orderly development and maintenance of the foreign exchange market in India.

Issuer of Currency

To issue and exchange or destroy currency and coins not fit for circulation in order to give the public the adequate quantity of supplies of currency notes and coins and in good quality.

Banker to the Government

To perform merchant banking function for the Central and State Governments and also act as their banker.

Banker to Banks

To maintain banking accounts of all Scheduled banks.

SECURITIES AND EXCHANGE BOARD OF INDIA

The Securities and Exchange Board of India (SEBI) regulates and promotes an orderly development of the capital market in India.

SEBI has three primary functions:

To deal with all matters relating to the development and regulation of the securities market and investor protection, and advise government on these matters

To prepare comprehensive legislation for the regulation and development of the securities market

To carry out such functions as may be delegated by the Central Government for the development and regulation of the securities market

Mutual funds, merchant bankers, FIIs, portfolio managers, stockbrokers, sub-brokers, share transfer agents, bankers and registrars to public issue, underwriters, investment advisors and any other intermediaries who may be associated with the securities market in any manner have been brought under the purview of the regulatory powers of SEBI. Rules, regulations and guidelines have been issued by the SEBI in this regard and are available on the website http://sebi.gov.in.

Among the key SEBI Regulations are the following -

SEBI Insider Trading Regulations

The SEBI (Prohibition of Insider Trading) Regulations incorporate several disclosure and other reporting requirements, the onus of which is cast on the company, its directors, employees and also on intermediaries such as investment bankers, lawyers, auditors, brokers etc. These Regulations seek to curb insider trading, price rigging, unfair practices, etc. by those possessions of certain vital and confidential information.

All listed companies must frame a Code of Internal Procedures and Conduct on the lines of the specified model code to prevent insider trading. Violation of the code of conduct will lead to disciplinary action by the company, which may include a wage freeze, suspension, ineligibility to participate in ESOPs, etc., in addition to any action by SEBI.

Stock brokers, sub-brokers, transfer agents, investment bankers, registrars, bankers to a public issue, investment advisers, portfolio managers, asset management companies, trustees of mutual funds, professional firms such as auditors, accountancy firms, law firms, analysts, consultants, etc., assisting or advising listed companies are covered by this requirement.

SEBI Takeover Regulations

The Takeover Regulations apply when there is an acquisition of equity shares/ voting power/ control of a listed company in excess of the specified limits. Based on the limits, the Acquirer has to comply with reporting requirements or acquire shares from the public. The person acquiring the shares/ voting power/ control is an Acquirer and the company whose shares are being acquired is the Target Company.

Disclosure on Acquisition

Acquirer acquires (in addition to shares already held by him) greater than or equal to 5% or 10% or 14% or 54% or 74% shares/ voting power in a listed company

Acquirer must disclose his holding at each stage to the Target Company and Stock Exchanges within two days of acquisition

Target Company must in turn disclose the same to the Stock Exchanges Subsequent continuing disclosures are required to be made.

Any Acquirer who acquires shares/voting in excess of the limits have to make a Public Announcement an advertisement, through a merchant banker specifying that he desires to acquire a minimum of 20% of the voting capital of the company from the public.

A Public Announcement is required to be made when:

Acquisition (in addition to shares already held) of shares/ voting power upto 15% by an Acquirer/ Persons Acting in Concert (PACs)

Acquisition of shares/ voting power greater than or equal to 5% in any financial year by an Acquirer/ PACs already holding greater than or equal to 15% but less than or equal to 55% (popularly known as ‘Creeping Acquisition’)

Acquisition of any shares/voting power by an Acquirer/PACs already holding greater than or equal to 55% but less than or equal to75%

Acquisition of control over a Target Company (with or without shares/voting power)

Acquisition could be direct or indirect, i.e. by acquiring an unlisted company, via the vehicle of a foreign company, etc. For an indirect acquisition, the Public Announcement is to be made within three months of the restructuring/ acquisition.

The Public Announcement must contain the Minimum Offer Price calculated as under:

For frequently traded shares For infrequently traded shares Highest of: Negotiated price between Acquirer and

shareholders of Target Company Acquisition price paid by Acquirer in 26

weeks prior to Public Announcement

Highest of: Negotiated price between Acquirer

and shareholders of Target Company Acquisition price paid by Acquirer in 26

weeks prior to Public Announcement

Higher of the average of: Weekly high/low of closing prices during

26 weeks prior to the Public Announcement

Average of daily high/ low of closing prices during the 2 weeks prior to Public Announcement

Others Parameters such as: Book Value EPS P/ E Multiple vis-a-vis Industry Average

The offer price may be paid in cash, listed equity shares/ rated secured instruments of the Acquirer.

Other Conditions

Every Acquirer must provide for an Escrow Account of 25% of the consideration for offer sizes < INR 1 billion and 10% for the excess consideration above INR 1 Billion

The Escrow may consist of cash with a bank, bank guarantee, securities with margin

Various obligations are cast upon the Acquirer, Target Company and the merchant banker

An offer once made can only be withdrawn if any statutory approval has been refused, the sole Acquirer has died or special circumstances exist which SEBI deems fit

If the offer results in public shareholding falling below 10%, then the Acquirer shall buyout the remaining shares as per the SEBI Delisting Guidelines or within six months it shall raise the public shareholding by an offer for sale or by a fresh issue

Competitive Bids

Any other person can make a competitive PA within 21 days of the first PA This Bid must be equal to the present + proposed shareholding of the first Acquirer The first Acquirer can revise his offer pursuant to the competitive bid within 14 days Both Acquirers can make upward revisions in the price and number of shares till seven

days before the closure of the offer

Dematerialisation of Securities

Issue and allotment of shares in a Public/ Rights/ Offer for sale must be only in dematerialised (demat) form. However, an option must be given to the subscriber to receive the shares in physical format, i.e. certificate. Unlisted securities can also be issued in demat form.

Currently, there are two Depositories and several depository participants associated with one or both of these Depositories. A company whose securities are to be dematerialised must execute an agreement with the Depository.

A shareholder is required to open a separate demat account with the depository participant for every combination of shareholding. Almost all listed securities are now compulsorily traded in the demat form.

Transfer of securities in a demat form is exempt from stamp duty applicable to transfer of shares under the Indian Stamp Act. However, the transfer would attract demat charges.

LIMITED LIABILITY PARTNERSHIPS

Limited Liability Partnership (LLP) is a form of business structure which combines best elements of the partnership and corporate structures of carrying out business and provides considerable flexibility in management and for conducting businesses, especially to small and medium firms. The LLP were recently introduced in India vide the Limited Liability Partnership Act, 2008 (LLP Act). The salient features of the LLP Act are as under:

The LLP is an alternative corporate business vehicle that would give the benefits of limited liability but allows its members the flexibility of organizing their internal structure as a partnership based on an agreement

The LLP Act does not restrict the benefit of the LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfils the prescribed requirements

While the LLP is a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP

Further, no partner would be liable on account of the independent or unauthorised actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct

A LLP shall be a body corporate and a legal entity separate from its partners. It will have perpetual succession. The Indian Partnership Act, 1932 does not apply to LLPs. There shall be no upper limit on the number of partners in an LLP unlike in an ordinary partnership firm where the maximum number of partners cannot exceed 20. Under the LLP Act one of the partners of the LLP must be an Indian

The taxation of LLPs is addressed in the Income tax Act, 1961 (see Section IV) The LLP Act provides for corporate actions like mergers, amalgamations, etc. While the enabling provisions in respect of winding up and dissolutions of LLPs have

been made, detailed provisions in this regard would be provided by way of rules under the Act

The Act also provides for conversion of existing partnership firm, private limited company and unlisted public company into a LLP by registering the same with the Registrar of Companies (ROC)The ROC is the authority responsible to register and control LLPs

The governance of LLPs shall be in electronic mode

MONOPOLIES AND RESTRICITIVE TRADE PRATICES ACT AND THE COMPETITION ACT

The Monopolies and Restrictive Trade Practices Act (MRTP) is an important piece of economic legislation, which in certain respects is similar to the anti-trust legislation in other countries and is meant to control unfair and/or restrictive business practice. The Competition Act is now operational in India. India is now in line with the US, Europe and most recently China in relation to a competition law regime. The Act when entirely implemented is expected to regulate the way companies do business in India.

As an independent body responsible for investigating mergers, market shares and conditions, besides regulating firms, the Competition Commission of India (CCI) would ultimately replace the Monopolies and Restrictive Trade Practices Commission (MRTPC). Though MRTPC will continue to deal with pending cases for two years before being dissolved, it would no longer admit any new cases.

Companies face fines of up to three times their annual profits if they fall foul of new competition laws. The regime has been modelled on the European system and it proposes to make contravention of CCI orders a criminal offence.

The Competition Act seeks to regulate the following:

Prohibiting enterprises or persons or their associations from entering into certain agreements which cause or are likely to cause an adverse effect on competition in India

Abuse of the dominant position by an enterprise Forming of ‘combination’ of enterprises and/ or persons by way of acquisitions,

mergers or amalgamations which cause or are likely to cause an adverse effect on competition in India

COMPANIES ACT AND CORPORATE GOVERNANCE

The Companies Act regulates the formation, financing, functioning and winding up of companies. The Companies Act prescribes regulatory mechanism regarding all relevant aspects including organisational, financial and managerial aspects of companies. In the functioning of the corporate sector, although freedom of companies is important, protection of investors and shareholders is equally important.

The main objects of the Companies Act are:

To protect the interests of the large number of shareholders as there exists separation of ownership from management in a company

To safeguard interests of creditors To help development of companies on healthy lines To help attainment of the social and economic objectives of the Government of India To equip the government with adequate powers of intervention, in the affairs of a

company in public interest as prescribed by law to protect the interest of all stakeholders

Synergies exist between the Companies Act and the regulations issued by the SEBI in common matters relating to governance, management, issue of securities, investor protection, etc.

Specifically, the Companies Act inter alia provides for the following:

Incorporation of companies and related matters; Issue of prospectus and other matters relating to issue of shares and debentures and

miscellaneous provisions relating thereto; Registration of charges; Management and administration, which deal with the following matters: Registered office Commencement of new businesses Register of members and debenture holders, including foreign registers Meetings and proceedings Managerial remuneration Dividend payments Accounts and audit Investigation of the affairs of a company Appointment of the Board of Directors, conduct of Board meetings, powers of the

Board, disclosures of interest, remuneration and compensation, etc. Provisions relating to company secretaries and managers; Powers of the Central Government to remove managerial personnel on

recommendation of the Tribunal; Arbitration, compromises, arrangements (including amalgamations) and

reconstructions; Prevention of oppression and management; Revival and rehabilitation of sick industrial companies; Winding up proceedings;

Incorporation of Producer companies and related matters - a Producer company is a company engaged in agriculture or any other primary activity or service which promotes the interests of farmers or consumers;

Companies incorporated outside and carrying on business in India.

Corporate Governance

With a view to encourage companies to adopt good corporate governance practices leading to more transparent, ethical and fair business conduct, following provisions have been made:

Director’s Resonsibility Statement to be included in the Director’s Report; Constitution of an Audit Committee; Debarring a person to act as a Director of a Company if default in filing Annual

Returns, Accounts, or repayment of deposits/debentures/interest/dividend has taken place;

Appointment of a Director in maximum 15 companies; Clause 49 of the Listing Agreement with Stock Exchanges providing for promoting and

raising the standards of corporate governance in companies

FOREIGN EXCHANGE MANAGEMENT ACT

The Foreign Exchange Management Act (FEMA) replaced the Foreign Exchange Regulation Act (FERA) in 2000 and was enacted with the objective of facilitating external trade and payments and promoting the orderly development and maintenance of foreign exchange markets in India. The FEMA extends to the whole of India and also applies to branches, offices and agencies located outside India that are owned and controlled by a person resident in India. The Reserve Bank supervises compliance with the FEMA by specifying Regulations and issuing directions. The Central Government is empowered to make requisite Rules.

As the FEMA regulates transactions between residents and non-residents, residential status is of utmost importance. Residential status under the FEMA is determined by the intent of the person to stay in India for an indefinite period of time as against physical stay.

A “capital account transaction” is a transaction that alters the assets and liabilities, including contingent liabilities outside India, of persons resident in India, or assets and liabilities in India, of persons resident outside India, and includes transactions specifically referred to in the FEMA.

The Reserve Bank has issued Regulations to specify:

Any class or classes of capital account transactions that are permissible; The limit upto which foreign exchange will be admissible in the case of such

transactions.

However, the Reserve Bank is not permitted to impose any restriction on the drawing of foreign exchange for payments due on account of the amortisation of loans or for the depreciation of direct investments in the ordinary course of business.

The Reserve Bank has issued Regulations which prohibit, restrict and regulate the following:

Transfer or issue of any foreign security by a person resident outside India; Transfer or issue of any security by a person resident outside India; Transfer or issue of any security or foreign security by any branch, office or agency in

India on behalf of a person resident outside India; Any borrowing or lending in foreign exchange in whatever form or by whatever name

called; Any borrowing or lending in rupees in whatever form or by whatever name called

between a person resident in India and a person resident outside India; Deposits between persons resident in India and persons resident outside India; The export, import or holding of currency or currency notes; The transfer of immovable property outside India, other than by way of a lease

exceeding five years, by a person resident in India; The acquisition or transfer of immovable property in India, other than by way of a

lease exceeding five years, by a person resident outside India; The giving of a guarantee or surety with respect to any debt, obligation or other

liability incurred; The establishment of a branch, office or other place of business, by a person resident

outside India for carrying out any activity

A “current account transaction” is a transaction other than a capital account transaction. The Central Government has framed Rules under which current account transactions have been broadly classified as:

Transactions that are prohibited; Transactions that require the prior approval of the Central Government; Transactions exceeding specified monetary limits, which require prior Reserve Bank

approval

INTELLECTUAL PROPERTY RIGHTS

Intellectual property refers to the creation of mind, i.e. invention, industrial designs for articles, literary and artistic work, names and symbols used in commerce. The law governing intellectual property rights is an umbrella term which encompasses within its fold, various statute laws such as:

The Patents Act; The Copyright Act; The Trademarks Act; The Design’s Act; The Geographical Indications of Goods (Registration and Protection) Act (passed by

the Parliament but as yet to be implemented); The Semiconductors of Integrated Circuits Layout Design Act; Protection of Plant varieties and Farmer’s Right Act; Information Technology Act; Biological Diversity Act

Summarised provisions of the laws relating to trademarks, copyright, patents, the geographical indication of goods and industrial design, which form the core segments of the law of intellectual property, are highlighted below -

Trademarks

The Trademarks Act enables the registration and protection of trademarks, brands and trade names and prevents the fraudulent use of trademarks on merchandise.

A trademark is a visual symbol. It can be in the form of a work, a device or a label applied to commercial articles with a view to indicating to the purchasing public that they are the goods manufactured or dealt with by a particular person as distinguished from goods of a similar nature.

Trademarks are essentially a product of an economy where competition is involved between the manufacturers of similar products. Though not compulsory, registration of trademarks is advisable for better protection under law.

Services have also been included for protection as Servicemarks. Such registration is relevant to protection of non tangible products.

The Act also provides for protection to marks under the categories of Certification Marks and Collective Marks.

Registration of a trademark, which resembles existing well-known trademarks, is not permissible. A registered trademark can be protected in perpetuity subject only to the condition that it is used or renewed periodically and that action is taken against the infringer.

Additionally,

Foreign-owned trademarks may be used for the sale of goods in India; Trademarks are registered for maximum of 10 years from the date of application; Subsequent registration may be renewed for a 10 year period or for a lifetime on

payment of the prescribed fee; Passing-off actions may protect unregistered trademarks; Registered trademarks may be protected under statute or by passing- off actions by

an injunctory suit or opposition against trademarks in the process of registration

Patents

Patent is a legal right granted by the government that permits the owner to prevent others from making, using or selling an invention and is granted for a period of 20 years from the date of filing the application.

The Act provides that the following cannot be patented:

Any invention which is frivolous, or which claims anything obviously contrary to well established natural laws;

An invention the primary or intended use of which could be contrary to law or morality or injurious to public health;

Mere discovery of a scientific principle or the formulation of an abstract theory; The mere discovery of any new property or new use for a known substance or of the

mere use of a known process, machine or apparatus, unless such known process results in a new product or employs atleast one new reactant;

A substance obtained by mere admixture resulting only in the aggregation of the properties of the components thereof or a process for producing such substance;

Mere arrangement or rearrangement or duplication of known devices, each functioning independently of one another in a known way;

A method or process of testing applicable during the process of manufacture for rendering the machine, apparatus or other equipment more efficient or for the improvement or restoration of the existing machine, apparatus or other equipment or for the improvement or control of manufacture;

Method for agriculture/horticulture; Any process for the medicinal, surgical, curative, prophylactic or other treatment of

human beings or any process for a similar treatment of animals or plants to render them free of disease or to increase their economic value or that of the products

The Patents Act provides for the granting of exclusive rights to sell or distribute an article or substance in respect of the following:

Any new invention, which is not obvious; Any new and useful art, process, or method of manufacture; machine apparatus or

other article; or substance produced by manufacture

India is a member of the World Intellectual Property Organisation and a signatory to the Patent Co-operation Treaty.

The Patents Act provides for international applications under the Patent Cooperation Treaty. The term of patent shall be 20 years from the international filing date accorded under the Patent Co-operation Treaty.

Copyright

Copyright in India is governed and protected by the Copyright Act. India is a member of the Universal Copyright Convention and the Berne Convention. Indian copyright owners can protect their copyright in any country since India is a member of both these conventions.

The Act provides for the registration of works. However, non-registration does not generally affect the rights of the owners of copyright. It is a self–sustaining right independent of registration.

Copyright means the exclusive right to do or authorise others to do certain acts in relation to the following:

Original work involving skill, labour and judgement in respect of literary works such as books and publications, including computer software;

Artistic works whether usable as trademarks or not;

Engineering drawings, industrial drawings; Sound recordings; Musical works; Cinematographic films; Broadcasting reproduction rights.

The object of copyright law is to encourage authors, composers, artists and designers to create original works by rewarding them with the exclusive right, for a limited period, to exploit the work for monetary gain.

There is no copyright in ideas. Copyright subsists only in the form of expression in which the idea is reduced to work as specified above. Since there is no copyright in an idea there shall be no infringement if an idea is adopted and put in one’s own work and which is substantially a variant of the original.

The owner of the copyright in an existing work, or the prospective owner of the copyright in a future work, may assign the copyright to any person either wholly or partially and either generally or subject to limitations, and either for the whole term of the copyright or any part thereof. The assignment of copyright in any future work shall take effect only when the work comes into existence. To be valid, the assignment of copyright must be reduced to writing and signed by the assignor or by his duly authorised agent.

The term of copyright in the case of published literary, dramatic, musical and artistic works (other than photographs) published within the lifetime of the author, subsists until 60 years beginning from the next calendar year following the year in which the author dies.

The term of copyright subsists until 60 years beginning from the calendar year following the year in which the work is first published for the following works:

Any anonymous and pseudonymous work; Any posthumous work; Any photographs; Any cinematograph films; Any sound recordings; Any government work; Any works of public undertakings; Any works of international organisations.

Industrial Designs

Designs which, when applied to articles, lend aesthetic appeal to goods are protected by the Design Act 2000. The designs, which are new and original designs having aesthetic value and not having been previously known or published in India or elsewhere, are entitled to registration under the Act. Designs that improvise any function of an article are not registrable under the Act.

The Design Act 1911, for the purpose of registration, classified goods into 14 classes. However, the Design Act 2000 follows the Locarno Classification. The object of design registration is to ensure that persons other than the originator are not using the design

without the permission of the originator. The right conferred by registration of a design is called copyright. The Design Act governs copyright in an industrial design or product design. If a design is registered under the Act it is not eligible for protection under the Copyright Act even though it may be an original artistic work. The term of registration is 10 years, renewable thereafter.

Geographical Indications of Goods

The GI Act has been introduced to conform to the Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement. The GI Act seeks to provide registration and better protection of geographical indication relating to goods in India, and is designed to protect the use of such geographical indication from infringement by others, and protect the consumers from confusion and deception. Procedure for registration is similar to the Trademarks Act. The term of registration is 10 years, renewable thereafter.

The term ‘geographical indication’ in relation to goods, means an indication which identifies such goods as agricultural goods, natural goods or manufactured goods as originating, or having been manufactured in the territory of country, or a region or locality in that territory, where a given quality, reputation or other characteristic of such goods is essentially attributable to its geographical origin and in the case where such goods are manufactured, one of the activities of either the production or processing or preparation of the goods concerned takes place in such territory, region or locality as he case may be.

The GI Act prohibits the registration of geographical indications:

The use of which is likely to deceive or cause confusion; The use of which would be contrary to any law in force at the time; Which comprises or contains scandalous or obscene matter; Which comprises or contains any matter likely to hurt the religious feelings of any

class or section of citizens of India; Which would otherwise be disentitled to protection in a Court; Which are determined to be generic names or indications of goods and are therefore

not protected in the country of origin or which have fallen into disuse in that country; Which, although literally true as to the territory, region or locality in which goods

originate, falsely represent the fact that the goods originated in another territory, region or locality

ARBITRATION & CONCILIATION ACT

Arbitration is a mechanism for expeditious redressal of disputes. With there being increasing pressure on civil courts due to pending cases and a complex civil procedure code, arbitration is becoming increasingly popular as an alternative dispute resolution mechanism.

An arbitration may take place between parties in terms of an agreement in writing, which could be in the form of a separate agreement in writing or a clause in an existing agreement. Exchange of communication, which can form part of a record like letters, telegrams, etc., can also be treated as a written agreement.

Certain statues exclude the jurisdiction of private arbitration. The following matters cannot be referred to arbitration:

Insolvency matters; Matrimonial cases; Testamentary matters; Industrial disputes; Criminal proceedings; Matters relating to Charitable trusts.

The parties to an arbitration may decide on the number of arbitrators, except that this shall not be an even number. If parties fail, a sole Arbitrator is appointed by the Chief Justice. However, if the provisions of a statute provide differently, such provisions shall prevail.

The parties are free to agree to any location and procedure for conducting the arbitral proceedings as long as such procedure does not violate the principals of natural justice.

An Arbitral Tribunal must make an award in accordance with the substantive laws in force. Such award must be made by a majority of the Arbitrators. During the proceedings, the Tribunal may use mediation or conciliation to encourage the settlement between the parties.

An arbitral award must be in writing and state the reasons for the award, unless it is an award of consent of the parties. The award may include interest until the date of the award.

An award may be set aside by making an application within three months, for specified reasons.

An award, not set aside, may be enforced in the same manner as a decree under the code of civil procedure.

THE RIGHT TO INFORMATION ACT

An Act to provide for setting out the practical regime of right to information for citizens to secure access to information under the control of public authorities, in order to promote transparency and accountability in the working of every public authority, the constitution of a Central Information Commission (CIC) and State Information Commissions (SICs) and for matters connected therewith or incidental thereto.

A long awaited step in achieving transparency in administration had been taken legislatively and one of the precursors of such a Central Act has been the Freedom of Information Act and the Maharashtra Right to Information Act.

The salient features of the Act are:

This Act replaces the Freedom of Information Act, 2002 and to the extent of occupied field is also replacing the Acts like the Maharashtra Right to Information Act;

The Act seeks to streamline the administration in order that the various functionaries of the Government adapt themselves to the obligation of furnishing information as called for;

It provides for an independent apparatus or instrumentality for enabling the citizens to obtain information about the functioning of various Government functionaries;

By definition and otherwise, it has spelt out the contents of the obligation to furnish information as also has made distinction as to the matters to which the obligation is not attached while matters are enlisted which are exempted for being furnished as and by way of information to the requesting member of the public;

The Act provides for: hierarchy of instrumentalities with inbuilt provisions for Appeal provides remedy to third party as defined in the Act bars jurisdiction of Civil Courts exempting organisations to which this Act may not apply empowering the Central Government to prepare educational programmes etc made distinction in terms of period available and excluded for getting information.

CONSUMER PROTECTION ACT

An Act which provides for better protection of the interests of consumers and for that purpose to make provision for the establishment of consumer councils and other authorities for the settlement of consumers’ disputes and for matters connected therewith.

LABOUR LAWS

Factories Act

The Factories Act provides for the health, safety, welfare, service conditions and other aspects of workers in factories. The Act is enforced by the State Government who frame rules that ensure that local conditions are reflected in enforcement. The Act also regulates the safeguards to be adopted for the use and handling of hazardous substances.

The Factories Act extends to whole of India and is applicable to all ‘factories’ including government factories. The Act applies to all factories employing more than 10 people and working with the aid of power or employing 20 people and working without the aid of power. Factory however does not include a mine covered under the Mines Act, a mobile unit of the armed forces, a railway shed or a hotel, restaurant or eating place. The Act covers all workers employed in the factory premises or precincts directly or through an agency including a contractor, involved in any manufacture.

Industrial Disputes Act

The Industrial Disputes Act provides for the investigation and settlement of industrial disputes in an industrial establishment relating to lockouts, layoffs, retrenchment etc. It provides the machinery for the reconciliation and adjudication of disputes or differences between the employees and the employers. Industrial undertaking includes an undertaking carrying any business, trade, manufacture, etc.

The Act lays down the conditions that shall be complied before the termination/ retrenchment or layoff of a workman who has been in continuous service for not less than one year under an employer. The workman shall be given one month’s notice in writing, indicating the reasons for retrenchment and the period of the notice that has expired or the workman has been paid, in lieu of such notice, wages for the period of the notice. The workman shall also be paid compensation equivalent to 15 days’ average pay for each completed year of continuous service. A notice shall also be served on the appropriate Government.

Payment of Bonus Act

The Payment of Bonus Act provides for the payment of bonus to persons employed in certain establishments on the basis of profits or on the basis of production or productivity. The Act is applicable to establishments employing 20 or more persons or other notified establishments. The minimum bonus, which an employer is required to pay even if he suffers losses during the accounting year is 8.33% of the salary.

Payment of Gratuity Act

The Payment of Gratuity Act provides for a scheme for the payment of gratuity to all employees in factories, establishments employing 10 or more employees or other notified establishments. Gratuity is payable to an employee on his retirement/resignation at the rate of 15 days salary of the employee for each completed year of service or a part thereof exceeding six months, subject to a maximum of INR 350,000.

Payment of Wages Act

The Payment of Wages Act regulates issues relating to time limits within which wages shall be distributed to employees and that no deductions other than those authorised by the law are made by the employers.

Minimum Wages Act

The Minimum Wages Act prescribes minimum wages for all employees in all establishments or working at home in certain employments specified in the schedule of the Act. Central and state governments revise minimum wages specified in the schedule.

The minimum wages paid are as under:

Particulars Amount per month (INR) Unskilled Worker 3,350 Semiskilled Worker 3,450 Skilled Worker 3,550

Employees Provident Fund Act (PF Act)

The PF Act seeks to ensure the financial security of the employees in an establishment by providing for a system of compulsory savings towards an employee’s retirement. The Act is applicable to factories, establishments employing more than 10 persons and other notified establishments. Provident Fund is deducted at 12% of the salary (basic + dearness

allowance) paid to an employee in a month. Employers are required to contribute an equal amount towards provident fund and deposit the same with the authorities.

Employees earning monthly, more than INR 6,500 (basic + dearness allowance) are not entitled for a matching contribution from the employer.

Employees Pension Scheme

The EPF Pension Scheme under the Employees Provident Fund Act, provides for monthly pension to employees on their superannuation, and for pensions to widows and children of employees.

The EPF Pension Scheme applies to all factories and establishments to which the Employees Provident Fund Act applies.

Employee State Insurance Act (ESI Act)

The ESI Act provides for certain benefits to employees (and dependants, in some cases) in case of sickness, maternity, medical reasons, disablement and employment injury through government hospitals. The ESI Act is applicable to all organisations which have more than 10 employees.

The employees entitled to the ESIC benefits are those earning a salary (basic + dearness allowance + overtime) not exceeding INR 10,000 per month.

Monthly contributions towards ESIC are 1.75% of employee’s salary and a matching contribution from the employer of 4.75% of the employee’s salary.

Workmen’s Compensation Act

The Workmen’s Compensation Act provides that compensation shall be provided to a workman for any injury suffered during the course of his employment or to his dependents in the case of his death. The Act provides for the rate at which compensation shall be paid to an employee.

Maharashtra State Tax on Professions (Profession Tax Act)

The Profession tax Act is a state subject and every state is empowered to enact legislation in this regard. The Act extends to every person engaged actively or otherwise in any profession, trade, calling or employment and falling within the specified classes specified in the Act. Tax is payable to the state government as prescribed. As regards persons earning salary or wages, the employer will deduct profession tax from the salaries or wages. An employer, too, is required to pay the tax as prescribed.

PREVENTION OF MONEY LAUNDERING ACT

The Prevention of Money Laundering Act was brought into force with effect from July 1, 2005. Under the Act, every banking company, financial institution and intermediary (including a stock broker, sub-broker, share transfer agent, banker to an issue, trustee to a trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager,

investment adviser and any other intermediary associated with the stock market and registered with the SEBI shall have to maintain a record of all the transactions of the nature and value of which have prescribed in the Rules notified under the Act. Such transactions include:

All cash transactions of the value of more than INR 1 million, or its equivalent in foreign currency;

All series of cash transaction integrally connected to each other which have been valued at below INR 1 million or its equivalent in foreign currency, where such series of transactions take place within one calendar month;

All cash transactions where forged or counterfeit currency notes or bank notes have been used as genuine and where any forgery of a valuable security has taken place;

All suspicious transactions, whether or not in cash

SEBI has issued guidelines to the intermediaries, specified above, in context of the recommendations of the Financial Action Task Force (FATF) on anti-money laundering standards. Compliance with these standards by all intermediaries and the country is imperative for international financial relationships. The guidelines lay down the minimum requirements/disclosures to be made in respect of the clients.

The intermediaries may specify additional disclosures to be made by their clients to address concerns of money laundering and suspicious transactions undertaken by clients.

BANKING & FINANCE

The banking system in India is well developed to meet the requirements of trade, commerce and industry. The country has a vast representation of banks with a huge coverage of branches all over India of Indian and foreign banks also. The banking sector is controlled by the Central Bank i.e. Reserve Bank of India, which though maintaining a watchful eye on the banking sector does not interfere with the day-to-day working of the banks.

General Lending Policies

Broadly, Banks and Financial Institutions in India grant loans for capital expenditure for setting up a new project or for expansion and diversification programmes of existing businesses. The finance is available for a fixed term ranging from one to seven years depending upon the project requirements. The rate of interest varies from seven to twelve percent depending upon the merits of each case.

The Banks also grant working capital facilities against current assets of business entities. Non-fund based facilities in terms of letter of credit for procurement of raw materials and issuing payment and performance guarantees of business entities are also issued by the Banks.

There are industry specific lending institutions also for power generation, irrigation, railways, roads, shipping, hotels and tourism, films production, housing construction, etc. In addition, special financial institutions for the promotion of small industries, agriculture, etc provide soft finance to eligible business entities

CURRENCY

The official currency of India is the ‘Indian Rupee’ commonly known as the INR. The Rupee is divided in to 100 units, which are known as the Paisa. The Rupee is fully convertible on the trade front under the Liberalized Exchange Rate Management System (LERMS). All transactions under the LERMS will take place at market-determined rates. The Rupee is fully convertible on current account. On the capital account also the Rupee is substantially free with residents permitted to invest abroad subject to completion of certain formalities and non-residents are permitted to invest in most sectors. In the international market the Rupee is pegged to the US Dollar.

NATURAL RESOURCES

India has abundant reserves of coal, iron ore, manganese, mica, bauxite, granite, titanium, chromites, limestone, forests and natural products

C. Our Vibrant Economy – Areas for Investment

India has seen a systematic transition from being a closed to an open economy since the beginning of economic reforms in the country in 1991. These reforms have had a far-reaching impact and have unleashed its enormous growth potential. Today, the Indian economy is characterized by a liberalized foreign investment and trade policy, the larger role played by the private sector and deregulation. India has grown to become a trillion dollar economy with a largely self-sufficient agricultural sector, a diversified industrial base and a stable financial and services sector.

Presently, the economy of India is on the fast track of progress at all levels. Prime sectors like agriculture, automobile, power, petrochemical, steel and Information Technology are progressing at a rapid rate. All the engines of the economy are currently running at nearly full speed.

GROSS DOMESTIC PRODUCT

Among the growing economies of the world, India is second only to China. The country’s GDP has been growing at an average rate of 8.5% for the last five years. Despite the global economic slowdown, its GDP is expected to increase by 7.5% in FY11.

Some major highlights:

Growth momentum continues overcoming the financial crisis – 8.60% in 2010-11 Revival in agriculture contributed to overall growth less than 1 % last year Marginal increase in growth rate of Industry from 8% in 2009-10 to 8.1% in 2010-11 Services keep momentum at around 10% year to year

The average inflation in the 52 weeks ending on 26 March, 2011 was 13% (Source: http://www.ciionline.org/ accessed on 22/06/2011)

Domestic Market

India can boast of being the largest growing market in the world due to its fast growing middle class with increasing standards of living and growing aspirations. The middle class has a high saving and spending potential making India a large market for a variety of goods.

Some major highlights:

Indian middle class population projected to reach a figure of 583 million (41 percent of population)

Indian middle class to control largest block of income at INR19 trillion by year 2015 and INR 51.5 trillion by year 2020

Savings-Investment gap in private sector was 7.1% in 2008-09 and fell to 6.7% 2009-10 Households plays a critical role in savings and capital formation High percentage of savings indicate capacity to build demand of products

Spending pattern of Indian consumers shifting from basic necessities to discretionary

items Personal products and services, Education and recreation, Transportation, Healthcare

and communication to be fastest expanding categories

Domestic Consumption Fuelling Economic Growth:

As compared to other countries, India is relatively insulated to external shocks due to strong domestic consumption. Consequently, although the global recession affected the whole world in FY09, India recorded a GDP growth rate of 6.7% during this period.

Increasing urbanization and modern technology have brought about a remarkable change in the lifestyles and consumption pattern of Indians. Private domestic consumption accounts for more than 50% of the country’s GDP and is one of the key factors driving overseas investments in the country.

INDUSTRY

India is one of the leading developing nations with a strong presence in all areas of business and commerce. The major growth drivers in the future where immense growth is possible are:

IT Enabled Services Software Development Infrastructure and Allied Industries Transport Hospitality Tourism Development Insurance Telecom Back office operations Bio-technology, Fast Moving Health Goods (FMHG) and Pharmaceuticals Media & Entertainment Fast Moving Consumer Goods (FMCG) and Luxury Goods Manufacturing Hubs Retail Marketing and Sales Agriculture Engineering and capital goods Textiles The areas stated above are considered as the basis on which India can convert itself into economic superpower. The potential of these industries is unlimited due to the large Indian market and also due to India’s immense influence in the South Asian economy.

INFRASTRUCTURE

The economy's growth rate has seen a surge in demand for increased capacities in roads, ports, airports, railways, power generation & transmission and in industrial infrastructure for the manufacturing and service sector. It is giving good returns to the investor.

MANUFACTURING

Manufacturing recorded an impressive growth rate of 7.8% during the year 2010-11. It is because of impressive growth in the industrial sector, propelled by the robust growth in the manufacturing sector which continues the growth rate unabated. Overseas companies are investing more in India to take advantage of growing demand. Several MNCs like Sony, Samsung, Coca Cola, Nokia, Motorola, etc. which have got varied profiles are manufacturing in India.

SERVICE SECTOR

It is another emerging area having a huge potential for expansion in a number of services. Some of the specific services having good scope for growth are:

Information Technology (IT)

The industry comprises software services, hardware and IT enabled services (ITES). IT and ITES services had shown an immense growth with a multi dynamic portfolio including Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO).

Business Process Outsourcing (BPO)

The sector in the past few years has witnessed considerable activity, including revamping up of operations by both the Indian and MNC players. BPO involves business process management and outsourcing. Business process management uses technology aimed at redesigning the process, reducing unnecessary steps, and bring efficiencies. On the other hand, outsourcing uses the expertise and resources of dedicated outside service providers to perform many of these vital yet non-core activities.

India is firmly established as the largest recipient of outsourcing contracts as well as FDI inflows into BPO activities from industry majors and MNCs as more and more countries are striving to become outsourcers and are succeeding. The BPO industry is mostly dominated by companies providing BPO services (45%), followed by software development (20%) and call centres (18%).

India is undoubtedly the most favoured BPO destination of the world for a variety of reasons, a few of which are listed below:

Human Resource: India is home to large and skilled human resources. India has an inherent strength, which has made it a major success as an outsourcing destination

Language: Besides being technically sound, the work force is proficient in English

Cost Effectiveness: Employee costs are lower in comparison to other developed countries of the world

Time Zone Differences: India also has a distinct advantage of being in a different time zone that gives it flexibility in working hours.

Knowledge Process Outsourcing (KPO)

KPO is one-step extension of Business Processing Outsourcing (BPO) as BPO Industry is grooming into Knowledge Process Outsourcing because of its favourable advantages and future scope. Knowledge process can be defined as a high added value process chain where the achievement of objectives is highly dependent on the skills, domain knowledge and experience of the people carrying out the activity.

Some of the general services provided by the KPOs are:

Intellectual Property Research; Equity Financial and Insurance Research; Data Search; Integration and Management; Analytics (Data Analytics/ Risk Analytics) and Data Mining Services; Research and Information Services in Human Resources; Business and Market Research; Engineering and Design Services; Design, Animation, and Simulation Services; Research and Development; Network Management; Decision Support Systems

India is amongst the most favoured destinations for KPO's as the benefits described in the BPO sector above hold good for the KPO sector too.

Telecommunication

India's rapidly growing telecom sector has seen much activity in last couple of years. FDI upto 49% under the automatic route and 74% subject to conditions is allowed for telecom services. In case of Internet services without gateway, and for telecom equipment manufacturing industry, 100% is permitted.

The Department of Telecommunications (DOT) under the Ministry of Communications, is the administrative department for monitoring the telecom sector.

The total number of telecom subscribers is expected to reach 250 million approximately by the end of year 2012.

Tourism

The Indian Tourism industry is one of the most important export industries of the country. Tourism yields substantial foreign exchanges for India. A large number of participants are contributing to the revenue of the industry. Segments such as hotels, tour operators, airlines, shipping etc., are significant contributors to this revenue.

Retail and Distribution

These are two fast emerging areas for organized large-scale activity from farms to the food table, with opportunities in the entire value chain.

D. Investment – Supportive Environment

With globalization and the widening of the world economy, there is an immense potential for investment in India due to the following reasons:

India is one of the largest economies in the world Substantially a free market economy with government recognition of the need for

further reforms Availability of one of the largest pool of cost effective, skilled and qualified scientific

and technical manpower Large availability of manpower of around 360 million, which is more than the

population of many countries Vibrant capital markets and strong financial sectors along with a large and

penetrative network of banks and financial institutions Latest state of the art infrastructure facilities with governmental recognition of the

need for greater improvement Growing middle class with increasing aspirations A vast untapped market waiting to be tapped. Approximately 1% of the Indian

population would mean more than 10 million consumers, which is more than the combined population of Singapore and Hong Kong

Recognized educational institutions, which are the providers of many top industry professionals in the world and also a source of manpower for potential investors

India has a high savings rate leading to greater capital flow and therefore higher investments

Indian Government’s recognition about fiscal discipline and awareness of the need for prudent financial policies and curbing of subsidies over the long run

Foreign Direct Investment

Foreign Direct Investment (FDI) is permitted under the following forms of investments:

Through financial collaborations Through joint ventures and technical collaborations Through capital markets via Euro issues Through private placements or preferential allotments

Sectors Prohibited for FDI

Retail Trading (except Single Brand Product retailing) Atomic Energy Lottery Business Gambling and Betting Housing and Real Estate Business (only NRIs are allowed to invest) Coal & Lignite Mining (allowed only for captive purposes, but there is no prohibition for

large size projects)

Automatic Route

In order to further improve the investment climate, a major rationalization of the FDI policy and associated procedures was recently undertaken by Ministry of Commerce and Industry.

As per the extant policy, FDI up to 100% is allowed, under the automatic route, in most sectors/ activities. FDI under the automatic route does not require prior approval either by the Government of India or the Reserve Bank of India (RBI). Investors are only required to notify the relevant Regional office of RBI within 30 days of receipt of inward remittances and file required documents with that office within 30 days of issue of shares to foreign investors.

Automatic route is allowed in almost all sectors except:

Where more than 24% foreign equity is proposed to be inducted for the manufacture of items reserved for the Small Scale Sector

Proposals in which a foreign collaborator has a previous venture/ tie-up with India, where the consent of a partner is required

Where shares are being issued for acquiring existing shares of another Indian company

Proposals falling outside notified sectoral policy/caps.

Approval Route – FIPB

FDI in activities not covered under the automatic route requires prior Government approval and is considered by the Foreign Investment Promotion Board (FIPB), Ministry of Finance.

Indian companies having foreign investment approval through FIPB route do not require any further clearance from RBI for receiving inward remittance and issue of shares to the foreign investors. Again, the companies are required to notify the concerned Regional office of the RBI of receipt of inward remittances within 30 days of such receipt and within 30 days of issue of shares to the foreign investors or NRIs.

Processing of Non - Automatic Approval Cases

The Foreign Investment Promotion Board (FIPB) approves all other cases where the parameters of automatic approval are not met. Normal processing time is 4 to 6 weeks. Its approach is liberal for all sectors and all types of proposals, and rejections are few. It is not necessary for foreign investors to have a local partner, even when the foreign investor wishes to hold less than the entire equity of the company. The portion of the equity not proposed to be held by the foreign investor can be offered to the public.

The Foreign Investment Promotion Board (FIPB) has been constituted by the Government with a view to promote and attract foreign investment in India. The FIPB is a high powered committee comprising the Principal Secretary to the Prime Minister (Chairman), Finance Secretary and Commerce Secretary, and is located at the Ministry of Industry.

Foreign Investment through GDRs

Indian companies are allowed to raise equity capital in the international market through the issue of Global Depository Receipts (GDRs). GDRs are designated in dollars and are not subject to any ceilings on investment. An applicant company seeking Government's approval in this regard should have a consistent track record of good performance (financial or otherwise) for a minimum period of 3 years. This condition would be relaxed for infrastructure projects such as power generation, telecommunications, petroleum exploration and refining, ports, airports and roads.

CAPITAL MARKETS

India has by the virtue of its size probably one of the largest investor bases in the world. The Bombay Stock exchange is one of the oldest stock exchanges in Asia. There are 23 recognized stock exchanges in India. However predominant business is done at the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). All the stock exchanges have screened based computerized trading with satellite up-linking facilities from any part in India. The exchanges now have trading of all securities in electronic units known as dematerialized shares. The BSE and the NSE have also introduced derivative products like Futures and Options with a view of bringing the Indian stock markets in tune with international markets and practices.

MUTUAL FUNDS

In India, Mutual Funds are governed by the Securities and Exchange Board of India (SEBI) regulations. Foreign participation in Mutual Funds and Asset Management Companies are governed by SEBI. All companies who wish to provide services of a mutual fund are also required to be members of Association of Mutual Funds of India (AMFI).

VENTURE CAPITAL FUNDS AND COMPANIES

Venture capital funding is also considered as an option for funding business. It has gained momentum after the Information Technology boom where it gained popularity as a means of funding. In India, these funds are governed by SEBI guidelines. There are a number of funds, which are currently operational in India and involved in funding start-up ventures. Many of the venture funds are involved in providing mezzanine or bridge financing and are better known as private equity players. The venture capital companies also provide entrepreneurs with incubator facilities with innovative ideas. The Indian Venture Capital Agency (IVCA) is the nodal centre for all venture capital activities in the country. The association was set up in 1992 and over the last few years it has developed an impressive database.

FOREIGN EXCHANGE MARKET

The money market in India is structured and well developed. The major players in the money market are the Authorized dealers, Nationalized banks (mainly State Bank Of India) and foreign banks that work under the active and regulatory control of the Reserve Bank of India. With the economic liberalization, the Govt. of India has opened the doors for attracting foreign exchange to the Country. The provisions of Foreign Exchange Management Act, govern foreign exchange in India. Foreign Exchange reserves continue to show an impressive growth.

FOREIGN EXCHANGE

The Reserve Bank of India (RBI) is the governing authority for all matters relating to foreign exchange management and control. RBI manages through stipulations in the Foreign Exchange Management Act (FEMA) to supervise, control and flourish foreign funds.

E. Business organisations

LEGAL ENTITY FOR INDIAN OPERATIONS

A foreign company has to make a choice as to its legal entity for carrying out business activities in India. The choice of legal entity will largely depend on the type of business operations in India. It is quite possible that a foreign company may do business in India without physically carrying out any activities in India. The example of such activity could be export of goods and services to India. However, in most of the cases, when a foreign company decides to do business in India, it is generally not possible to totally abstain from activities in India.

As a general guideline, a foreign company may do business in India in any one of the following manners while retaining its legal status as a foreign company:

As a foreign company without carrying out any business activity within Indian boundaries;

Through a liaison office in India; Through a project office in India; and Through a branch office in India

A foreign company, depending upon its nature of business activities in India, may also operate through an Indian company in any of the following manners:

As an Indian company with 100% share holding held by the foreign company. Such a company is called 100% subsidiary of the foreign company

As an Indian company in joint venture with one or more Indian and foreign partners

FOREIGN COMPANY

A Foreign Company is a company, which is incorporated outside India. Such companies, for conducting business in India, have to comply with the following formalities:

Compliance of the Indian Companies Act, 1956 Compliance of Reserve Bank of India's Rules and Regulations

Compliance of Companies Act

Sections 591 to 602 of the Companies Act contain provisions relating to foreign companies. As per section 592, foreign companies are required to file certain documents with the Registrar of Companies. The list of the documents to be filed is given in section 591. Foreign companies which establish a place of business in India shall, within 30 days of the establishment of the place of business, file with the Registrar of Companies the following documents:

Certified copy of the Charter or Memorandum and Articles of Association of the Company and if the instrument is not in English language, a certified translation thereof in English

Full address of the registered office or principal office of the company abroad List of Directors and Secretary of the company The name and address of one or more persons resident in India who is or are

authorized to accept, on behalf of the company, service of any notice served on the company

The full address of the office of the company in India which is its place of business

The above documents are required to be delivered to the Registrar of Companies, New Delhi and also to the Registrar of the State in which the principal place of business of the foreign company is situated along with prescribed Form.

Further, such foreign company is required to submit its Indian business accounts and world accounts to the prescribed authorities. The Balance Sheet and Profit & Loss Account for Indian operations are to be compiled separately and independently as per the requirements of Schedule VI of the Companies Act. For the purposes of maintaining Indian accounts, foreign company is required to keep at its principal place of business in India such books of accounts which relate to:

Money received or expended; Sales and purchases made; and Assets and liabilities.

However, where the foreign company has only liaison office(s) in India and is not engaged in any trading, manufacturing or other commercial activity in India, such a company should submit a certificate that the company did not carry out any trading activities.

Compliance of Reserve Bank of India's Formalities

The Foreign Exchange Regulation Act, 1973 (FERA) governed the business carried on in India by the foreign companies and foreign nationals. However, w.e.f. June 1, 2000 FERA has been replaced by Foreign Exchange Management Act, 1999 (FEMA). A foreign company has to comply with various rules and regulations as prescribed in FEMA.

Liaison Office in India or Representative in India

Foreign companies intending to set up a liaison office in India or to post a representative in India for undertaking liaison activities are required to take approval from Reserve Bank of India. The RBI normally grants approval for liaison activities initially for a period of three years. The application is to be submitted to the Central Office of Reserve Bank (Foreign Investment Division).

It may be noted that when a foreign company undertakes liaison activities in India, whether through a liaison office or through a representative, the permission from the Reserve Bank is granted on the condition that the expenses of the liaison/ representative office are to be met exclusively out of foreign exchange to be remitted from a foreign country to India. The Reserve Bank also requires submission of annual accounts.

List of the activities which may be undertaken by the Liaison office in India

Representing in India the parent company/group companies

Promoting export import from/to India Promoting technical/financial collaborations between parent/group companies and

companies in India Acting as a communication channel between the parent company and Indian

companies

Appointment as Agent in India

Foreign companies and foreign nationals are required to obtain RBI's permission for their appointment as agents in India. For the purposes of RBI regulations, the term ‘agent’ includes any person or company (including its branch) buying goods with a view of selling them before any processing thereof. It may also be mentioned that there are altogether different regulations for foreign nationals of Indian origin permanently resident in India.

Project Office in India

A foreign company may open a project office/s in India provided it has secured from an Indian company a contract to execute a project in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.

Branch Office in India

Foreign companies can establish a branch office or other place of business for their activities of a trading, commercial or industrial nature. They are required to take permission of Reserve Bank to carry on such activities, for which an application to Reserve Bank should be made.

There are separate regulations for foreign nationals of Indian origin permanently resident in India.

List of the Activities which may be undertaken by the Branch Office in India

Export/ Import of goods Rendering professional or consultancy services Carrying out research work, in which the parent company is engaged Promoting technical or financial collaborations between Indian companies and parent

or overseas group company Representing the parent company in India and acting as buying/selling agent in India Rendering services in Information Technology and development of software in India Rendering technical support to the products supplied by parent/group companies Foreign airline/ shipping company.

A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).

INDIAN COMPANY

A foreign company, depending upon its nature of business activities in India may also operate through an Indian company in any of the following manners:

as a joint venture with Indian partner as a wholly owned subsidiary

A foreign company can operate in India through an Indian company the shares of which may be partly held by the foreign company and partly by Indian partners. The incorporation of the Indian company shall be governed by the Indian Companies Act, 1956. Incorporation of a company in India requires filing of certain documents with the Registrar of Companies including the Articles and the Memorandum of Association of the company along with the prescribed fees. The formalities relating to incorporation are rather simple requiring in all six to ten weeks time when a company can start its commercial operations.

The Indian companies can be primarily divided into two categories:

Private Limited Company Public Limited Company

A private company means a company having a minimum paid up capital of Rs. 0.1 million or such higher paid up capital as may be prescribed. The private limited company is a company which by its articles of association –

Restricts the right of its members to transfer shares; Limits the number of its members to fifty; Prohibits any invitation to the public to subscribe to its shares and debentures; Prohibits any invitation or acceptance of deposits from persons other than its

members, directors or their relatives.

However, a public limited company does not have any such restrictions. Such a company can be quoted on stock exchanges in India and abroad. There is no restriction on the number of its shareholders as also on the right of the shareholders to transfer their shares. The company can also invite public to subscribe to its shares and can also raise loan by issue of debentures. The financial institutions also generally prefer to deal with a public limited company. Therefore, from foreigners' point of view, formation of a public limited company is a more appropriate form to carry out business activities in India.

These companies can be limited by share capital or guarantee

Capital of a Limited Liability Company

The minimum paid-up capital of a Public Company must be at least Rs. 0.5 million and that of a Private Company must be at least Rs. 0.1 million. The memorandum of association must state the amount of the company’s initial authorized share capital (the amount of capital available for issue), which can be any amount that the promoters require. Of the authorized share capital not all needs be paid in immediately. Shares may be partly paid. The authorized share capital may be increased by a simple resolution

passed at the company’s general meeting, if the articles of association so provide.

A limited company can issue only two kinds of shares, equity shares and preference shares, provided they form part of the authorized share capital of the company. Every member holding equity shares has a right to vote in respect of the capital held on every resolution placed before the company. Every member holding a preference share has a preferential right to be paid a fixed amount or rate of dividend; a preferential right, on winding up or repayment of capital, to be repaid the amount of capital paid up on his shares; right to vote only on resolutions which directly affect the rights attached to preference shares. Under the Companies Act, 1956, consideration for subscriptions to shares may be in forms other than cash such as goodwill, know-how and supply of plant and machinery. While this option is freely available to Indian investors, foreign investors must normally contribute cash unless a specific approval from the Government is obtained.

Various Options as to Capital

A company can opt for various options pertaining to its Share Capital:

Issue of further Capital Alteration of Share Capital Reduction of Share Capital Diminution of Share Capital Issue of Shares at par, at discount or at premium Issue of Sweat Equity Shares Buy back of Own Shares

A company, only in accordance with guidelines issued by SEBI, can make an offer of shares or other securities to the public. All offer documents for public issue of shares or other securities by companies intending to be listed on recognized stock exchanges or which are already listed, are required to be filed with SEBI and comply with directions issued by SEBI in this regard. All Rights offer documents are also to be filed with SEBI. Public offer and Rights offer documents must comply with disclosure norms lay down by SEBI. Shares are now permitted to be held in an electronic form through the depository mode.

Procedure for Formation of a Company

The procedure for setting up a limited liability company whether public or private, which is normally entrusted to professional advisors, can be summarized as follows:

At least two promoter subscribers in case of a private company and at least seven in the case of a public company must apply for availability of a suitable name

The proposed name must be approved by the Registrar of Companies Two principal constitution documents of the company must be drawn up:

Memorandum of Association, which states the company’s name, the situation of its legal address or registered office (which must be in India), the objects of the company, its limited liability status and the amount of its authorized capital

Articles of Association, which regulates the company’s internal management and the rights of its members among themselves

The promoter subscribers must sign two printed copies of the memorandum and

the articles of association, in presence of a witness In the case of a public company, a declaration by persons agreeing to act as

directors must be obtained The two signed copies of the memorandum and articles of association, one of

which is duly stamped, the declaration (if required) and other specified documents, along with the registration fees prescribed, are presented to the Registrar of Companies for registration. On issue of its certificate of incorporation by the Registrar of Companies, the company comes legally into existence from that date

A private company may commence business as soon as a certificate of incorporation is issued. A public company, however, may not start operations until the Registrar of Companies, on completion of further formalities, has issued a certificate of entitlement to commence business

At any point of time, a private company must have at least two shareholders and a public company at least seven

Cost of Forming a Company

For the formation of a company other than the usual costs involved in research and development, documentation, stamp duty etc., costs have to be incurred for registration fees with the ROC. The amount of duty and the registration fees depends on the authorized capital of the company.

Management of a Limited Liability Company

The management of a company is vested in the board of directors, appointed by the shareholders, all of whom must be individuals. Directors need not be resident and can also be foreign nationals.

The minimum number of directors in a public company is 3 and in a private company 2. As to the maximum number of directors, if a public company proposes to increase the number of its directors by more than 12, approval of the Central Government is required.

The subscribers to the Memorandum are deemed to be the first directors of the company. The shareholders in a General Body Meeting normally appoint subsequent directors.

The Board may appoint additional directors when the need arises, if the articles so permit. Such directors however, hold office up to the date of the next Annual General Meeting (AGM) of the company. The appointment of such directors can be regularized in the AGM.

In the case of a public company up to one third of the board may be comprised of permanent directors. Of the non-permanent directors one third must retire by rotation at every AGM although a retiring director is eligible for reappointment.

Financial stakeholders like Development Banks, Financial Institutions and working capital granting commercial banks can also appoint their representatives as nominee directors. The Act provides for protection of such directors against many provisions applicable to the ordinary directors. Provisions like retirement by rotation, holding of certain minimum shares etc are not applicable to such directors.

A company may appoint one or more managing or full time directors. The appointment and remuneration of a managing or full time director of a public company is required to be approved by the shareholders in their General Body Meeting. Approval of the Government is not necessary if the appointee meets specified conditions and the remuneration is within the limits prescribed under the Companies Act.

Directors’ remuneration is normally determined by the articles of association or by the shareholders at a General Body Meeting. A provision is made for minimum remuneration based upon the effective capital of the company, in case there is no profit or profit is inadequate. Unless the Central Government approves otherwise, the remuneration paid to the managing and full time directors of a public company may not exceed 5% of net profits if there is one such director, and 10% if there are more than one such director.

The articles of a private limited company can give power to its board of directors to fix the remuneration of a managing or full time director.

Meetings and Votes in a Limited Liability Company

An Annual General Meeting must be held in each calendar year, not more than fifteen months after the preceding meeting and within six months from close of each accounting period. The Annual General Meeting is required to be held during business hours on a working day at a place within the city in which the registered office of the company is situated. Shareholders are entitled to appoint proxies to attend meetings and vote on their behalf.

Ordinary resolutions require a simple majority of the votes that are cast by those attending the meeting (in person or by proxy). A company’s articles of association can be amended only by a ‘Special Resolution’ which is passed by a 75% or greater majority of the votes cast at a general meeting of which due notice has been given. Usually, each shareholder has one vote by a show of hands. On a poll, voting rights are in proportion to each shareholder’s share of the paid up capital.

A formal meeting of the Board of Directors is required to be held once in every three months. These meetings need not be necessarily held in a place within the city of the registered office of the company, and can be held anywhere even outside India.

Publication of Information by a Limited Liability Company

In addition to its constitution documents, every limited company must file its annual financial statements with the Registrar of Companies and an ‘Annual Return’ containing updated particulars of its shareholders, directors and share capital. Information filed with the Registrar of Companies is available to the public for inspection on payment of a nominal fee.

Public companies listed on the stock exchanges are required to publish their quarterly results in a local and National newspaper.

A limited company must state its name and registered office address in legible characters in its business letters, bill heads, notices and other official publications; and its name on all communications including invoices, receipts, cheques and endorsements.

Corporate Governance

The Government of India has introduced good Corporate Governance (CG) leading to more transparent, ethical and fair business practices to be adopted by corporate entities at large. Certain important features of CG are as under:

The Report of the Board of Directors shall now include a Directors’ Responsibility Statement confirming – maintenance of adequate accounting records for safeguarding the assets of the

company and for preventing and detecting frauds and other irregularities; judgments and estimates made in a reasonable and prudent manner to ensure

true and fair view of the accounts; preparation of accounts by following the applicable accounting standards; consistent application of the accounting policies selected; and preparation of financial statements on a going concern basis

It is further provided that every public company having paid up capital of Rs. Fifty million or more shall constitute a committee of the Board known as the Audit Committee. Such a committee shall have full access to the information contained in the records of the company and shall also have powers to seek external professional advice. All the recommendations of the Committee relating to financial management and audit reporting shall be binding on the Board. Recommendations not acceptable to the Board are to be communicated to the Shareholders with reasons thereof

The Companies Act now debars a person from acting as a Director of a company if there is a default in filing Annual Return/ Accounts or repayment of deposits/ interest or dividends

Apart from the above requirements, all listed companies are now required to publish

their quarterly and half yearly results with a limited review by the Auditors. Such accounts shall be prepared in compliance with the applicable accounting standards and shall also disclose segmental results. With the annual report, all listed companies have to publish audited consolidated accounts also

Listed companies are also required to include a report on CG in their annual report

covering certain vital information. Some of the important information are listed below: A brief statement on company’s philosophy on code of governance Composition and category of directors, their attendance at the Board Meeting,

etc. Audit committee, Remuneration committee and Shareholders committee details

Certain important disclosure by the Board

Means of communication with the company General shareholders information

Accounting Systems and Standards

India has a well established system of accounting. All corporate entities follow the mercantile (accrual) system for recording their accounting transactions. The Institute of

Chartered Accountants of India, the Accounting regulatory authority, has prescribed Accounting Standards and Auditing and Assurance Standards till date providing comprehensive guidelines. These are mandatorily applicable mainly to listed companies and some of the accounting standards are applicable to private limited companies also. Certain Accounting Standards are applicable to non-corporate entities.

India is also a member of International Accounting Standards Board and whenever the international body prescribes new accounting standards, these are adopted in India also with modifications to suit the Indian environment and laws.

Joint Venture Company

A joint venture company in India is like any other Indian company for the purposes of Indian Companies Act, Indian Income Tax Act and other applicable laws, rules and regulations. The formalities relating to incorporation of an Indian company have already been discussed in preceding paragraphs. Regarding approvals for the participation of a foreign company in India, permissions and approvals will be required from the Reserve Bank of India or Foreign Investment Promotion Board (FIPB), as the case may be.

Wholly Owned Subsidiary

A foreign company may also operate in India by incorporating a company in India whose 100% shares are held by a foreign company. Such a company is known as a wholly owned subsidiary.

Incorporation of the Company

The formalities relating to incorporation of a wholly owned subsidiary are more or less the same as incorporation of a normal Indian company, the procedure for which has already been discussed in preceding paragraphs. However, such a company requires a prior approval from Foreign Investment Promotion Board ["FIPB"].

OTHER LEGAL ENTITIES

Partnership

Partnership is created by an agreement between the partners, which is called the Partnership Deed. The Indian Partnership Act governs the partnerships.

Co-operatives

Government encourages cooperatives in certain sectors like retailing of goods for mass consumption and certain agro industries.

Trusts

Trusts are usually created in India for charitable or religious purposes.

F. TAXATION

INCOME TAX

India’s income tax regime is governed by the Income Tax Act 1961 (IT Act) and the rules framed there under. The Indian Constitution prohibits states from imposing tax on income other than income derived from agriculture.

ADMINISTRATIVE SYSTEM

At the apex of the income tax department is the Central Board of Direct Taxes (CBDT). The CBDT is part of the Finance Ministry and administers direct tax laws. The CBDT is a large organisation with director-generals, chief commissioners and commissioners in charge of specified areas assisted by deputy commissioners and officers, who issue assessment orders and collect taxes.

ASSESSMENTS

All taxpayers are required to file a Return of Income form on or before specified dates for each tax year. Tax on income is assessed for a tax year commencing April 1, at the rates in force for the relevant assessment year. Assessment year is the year commencing on April 1, immediately succeeding the tax year. Assessments of more than 90% non-corporate taxpayers are completed in a summary manner by accepting the returns furnished by them. Assessments in the remaining cases are made after detailed scrutiny and investigation. Assessment of a non-resident can be made either directly or through his agent. In some cases, an income tax officer can treat a person in India as an agent of a non resident and collect taxes from the non-resident through that agent.

ADVANCE RULING

A person can seek an advance ruling on determination (including a question of law or fact):

In relation to a transaction undertaken or proposed, with a non-resident applicant; or Of the tax liability of a non-resident in respect of a transaction undertaken or

proposed to be undertaken, by the resident applicant with a non-resident; or Determination or decision of an issue (including a question of law or fact) relating to

computing total income, pending before any income tax authority or the Appellate Tribunal. An advance ruling would be binding for the specific transaction on the tax authorities and the applicant who has sought it. The advance ruling would be binding unless there is a change in the law or in the facts. Advance rulings are communicated within six months from the date of application.

RESIDENCE

The liability to tax under the IT Act depends upon the residential status of the taxpayer, irrespective of his/her nationality or domicile.

An individual is said to be resident in India in a tax year if he/she is:

In India for a period or periods amounting to 182 days or more in a tax year; or In India for an aggregate period of 60 days or more (182 days in certain cases) in the

tax year and has been in India for an aggregate period of 365 days or more in the four tax years preceding that tax year

A person is said to be ‘Resident but Not Ordinary Resident’ (NOR) in India in any tax year if such person is:

An individual who has been non-resident in India in nine out of ten tax years preceding that tax year; or who has during the seven tax years preceding that tax year, been in India for a period or periods aggregating to 729 days or less;

A manager of Hindu Undivided Family (HUF) who has been non-resident in nine out of ten tax years preceding that tax year; or who has during the seven tax years preceding that tax year, been in India for a period or periods aggregating to 729 days or less. A non-resident is a person who is not resident in India. A company, whether Indian or foreign, is said to be resident in India if the control and management of its affairs is situated wholly in India. A foreign company will have part of its management and control outside India and, hence, will be a non-resident

SCOPE OF TOTAL INCOME

A resident pays tax in India on his/her global income. A non-resident is taxable on his/her income received in India and also on income sourced in India. There are certain provisions in the IT Act that deem income to accrue or arise in India, i.e. sourced in India. A resident but not ordinary resident’ is not liable to tax in respect of income which accrues outside India unless that income is derived from a business controlled in or a profession set up in India.

TAXABLE INCOME

The income of the taxpayer is determined under five heads - salaries, income from house property, profits and gains of business or profession, capital gains and income from other sources. Specific deductions are available under each source and there are specific rules as to what constitutes income from each source. The tax charged is at the rates in force for the relevant tax year. The IT Act provides for setting off of losses and carry forward of unabsorbed losses under various heads of income, which are referred to below. The consequent adjusted income is the gross total income. Gross total income less certain specified deductions and tax incentives provided under the IT Act is the total taxable income of a taxpayer. Certain types of income and receipts are fully exempt from tax and do not form part of gross total income.

AGRICULTURAL INCOME

Agriculture is a state subject and there is no central income tax on agricultural income. However, agricultural income is aggregated with other income for the purpose of determining the rate of tax applicable to other income.

TAX CONCESSIONS

The IT Act offers several tax incentives to industrial units in the country in computing taxable income from business and profession. These incentives reduce the tax incidence substantially.

Depreciation Allowance

Depreciation is available at specified rates on tangible and intangible capital assets (except land) owned by a tax payer and used for the purposes of business or profession. Tangible assets are classified into four blocks – buildings, furniture and fixtures, plant and machinery and ships. Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature. Depreciation is restricted to 50% of the rates in the year of acquisition if the asset is used for less than 180 days. Depreciation can also be claimed on fractional ownership of assets. An additional 20% depreciation is allowed in case of any new machinery or plant (other than ships and aircrafts), which has been acquired and installed after March 31, 2005 by a tax payer engaged in the business of manufacture or production of any article or thing, subject to satisfying specified conditions. It is mandatory to claim depreciation allowance. Depreciation that is not absorbed can be carried forward and set off against income in subsequent years without any time limit. The IT Act permits depreciation allowance on a written down value method. However, in respect of assets acquired on or after April 1, 1997 by undertakings engaged in the business of generation or generation and distribution of power, the tax payer may opt to claim depreciation under the straight line method on individual asset instead of a block of assets. Such option once exercised cannot be reversed. Rates of depreciation prescribed for assets falling within each block, are given in Appendix I.

Deduction for Tax Payers Engaged in Tea, etc. Business

Deduction will be allowed to a tax payer engaged in the business of growing and manufacturing tea or coffee or rubber to the extent of 40% of the profits computed under the head ‘profits and gains of business and profession’ or the amount deposited with the National Bank for Agriculture and Rural Development (NABARD), or in a deposit account opened in accordance with a specified scheme, whichever is less. The amount is required to be deposited within six months from the end of the financial year or before the due date filing of the return of income.

Deduction for Tax Payers Engaged in the Business of Petroleum and Natural Gas

Deduction will be allowed to a tax payer engaged in the business of prospecting for, extracting or producing petroleum or natural gas in India, to the extent of 20% of the profits computed under the head ‘profits and gains of business or profession’ or the amount deposited with the State Bank of India or in a ‘Site restoration account’ opened in accordance with a specified scheme, whichever is less.

Deduction of Expenditure on Scientific Research

Any expenditure incurred on scientific research, which is related to business, shall be allowed as a deduction from the taxable income. Contributions made to national

laboratories or to approved scientific research associations, companies, universities, colleges or institutions engaged in scientific, social or statistical research is allowed at a weighted rate of 175%. Weighted deduction of 200% is allowed to companies engaged in the business of manufacture or production of any specified article or thing.

Deduction of Expenditure on Eligible Projects/ Schemes

Any capital expenditure incurred wholly and exclusively for the purposes of any specified business is allowed as an expenditure in the year in which such expenditure is incurred, subject to conditions. The ‘specified business’ must relate to cold chain and warehousing facilities and laying and operating oil and gas pipelines for distribution.

Deduction of Expenditure On Eligible Projects/ Schemes

Any expenditure incurred by a taxpayer by way of payment to a public sector company or a local authority or to an approved association or institution for carrying out eligible projects or schemes such as social and economic welfare of, or the upliftment of the general public is allowed as a deduction.

Deduction of Expenditure Incurred in Case of Amalgamation or Demerger

Any Indian company which has incurred expenditure on or after April 1, 1999, wholly for the purpose of amalgamation or demerger of an undertaking, will be allowed a deduction over a period of five years in equal instalments from the year in which the amalgamation or demerger takes place.

Expenditure for Obtaining Licence to Operate Telecommunication Services

Payments made to acquire a licence for operating telecommunication services can be amortised over the duration for which the licence is in force.

Voluntary Retirement Expenses

Deduction in respect of payments made to employees on voluntary retirement, in accordance with prescribed guidelines, shall be allowed as a deduction in five equal instalments starting from the tax year in which expenditure is incurred.

Expenditure by Way of Payment to Association or Institution for Carrying Out Rural Development

Deduction is allowed in respect of amount paid to any association or institution which has the object of rural development, or training for implementing programmes of rural development, or any contribution made to a rural development fund or the National Urban Poverty Eradication Fund set up and notified by the Central Government.

Expenditure on Prospecting for Certain Minerals

Deduction can be claimed by a tax payer in respect of expenditure incurred on prospecting for the development of certain minerals listed in Schedule VII of the IT Act. The deduction can be claimed in respect of expenditure incurred during a period of five

years until the year in which commercial production is commenced, and can be claimed over a period of 10 years in equal instalments from the year in which commercial production starts.

DIVIDEND AND INCOME DISTRIBUTION TAX (DT)

Domestic companies are required to pay tax on dividends declared, distributed or paid at 16.2225% (including 10% surcharge and 3% education cess). The amount of dividend on which such tax is payable shall be reduced by the dividend, if any received from a subsidiary company, subject to conditions.

Mutual Funds (other than Equity Oriented Funds) are required to pay tax on distributed income as follows:

By a money market mutual fund or liquid funds: 28.33% (including 10% surcharge and 3% education cess); on income distribution to an individual or HUF; 33.99% (including 10% surcharge and 3% education cess) on income distribution to others;

By a fund other than a money market mutual fund or liquid fund: 14.16% (including 10% surcharge and 3% education cess) on income distribution to an individual or HUF; 33.99% (including 10% surcharge and 3% education cess) on income distribution to others

Equity Oriented Funds are exempt from tax on income distributed. Dividend or income on which tax has been paid as above is not taxed again in the hands of the recipient. A developer of an SEZ is exempt from payment of Dividend Distribution Tax.

SPECIAL PROVISIONS RELATING TO INCOME OF SHIPPING COMPANIES

Under the Tonnage Tax Scheme (TTS – a scheme of presumptive taxation), Indian shipping companies have to exercise the option to be assessed either under the TTS or under the normal provisions of the IT Act, subject to fulfilling various criteria.

TAX HOLIDAYS

The IT Act provides for tax holidays to certain industrial undertakings/enterprises engaged in specified sector/activities. These are summarized below.

Tax Holiday of 100% of Profits for Any 10 Consecutive Years (at the Option of the Tax Payer) Out Of The First 15 Years Of Operation

Nature of Activity Business Commencing Development, operation and maintaining a notified Industrial Park

Before April 1, 2009

Laying/ operating cross country natural gas distribution network by an enterprise owned by a company or a consortium of companies

Before April 1, 2010

Reconstruction or revival of a power generating plant

Before April 1, 2011

Production of fertilizer Before April 1, 2011 Power generation and/or distribution, Before April 1, 2012

Nature of Activity Business Commencing transmission and distribution by laying networks or substantial renovation/modernization of networks Refining of mineral oil (Tax concession only for the initial 7 years)

Before April 1, 2012

Development, operation and maintaining a specified infrastructure facility, by an enterprise owned by an Indian company or a consortium of Indian companies (The block period stated above is 20 years)

After March 31, 1995

Commercial production of mineral oil (Tax concession only for the initial 7 years but no deduction after 31.03.2011)

After March 31, 1997

Developer of SEZ After March 31, 2005 Commercial production of natural gas in blocks licensed under the prevailing policy (Tax concession only for the initial 7 years)

After March 31, 2009

Developing and building housing projects, subject to conditions

Project to be completed within 4 years of approval from local authority

Staggered Tax Concessions Available to Undertakings/ Units/ Companies

Nature of Activity Tax Concession (% of Profits)

Period Business Commencing

Handling, storage and transportation of food grains, processing, preservation and packaging of fruits and vegetables

100%

30% (25% if tax payer other than company)

First 5 years Next 5Years

After March 31, 2001

Operating and maintaining hospitals located anywhere in India, other than specified excluded areas

100% First 5Years Construction complete before March 31, 2013

Manufacture of any article or thing - not specified in the 13th Schedule of

the IT Act; specified in the 14th Schedule of the IT

Act; and/ or substantial expansion undertaken by such undertaking in any Export Processing Zone, Integrated Infrastructure Development Centre, Industrial Growth Centre or Industrial Estate or Industrial Park, Software Technology Park or Industrial Area or Theme Park located in the state of Himachal Pradesh or Uttaranchal

100%

30% (25% if

tax payer is other than company)

First 5 Years Next 5 Years

Before March 31, 2012

Nature of Activity Tax Concession (% of Profits)

Period Business Commencing

Building, owning and operating hotels and convention centres in specified areas

100% First 5 Years

Before March 31, 2010

Hotels located in a specified area having a World Heritage Site

100% First 5 years Before March 31, 2013

Manufacture or produce and eligible article or thing or carry on eligible business in North-Eastern states

100% First 10 Years Before March 31, 2017

Collecting and processing or treating of bio-degradable waste

100% First 5 Years Anytime

CAPITAL GAINS

Profits and gains from the transfer of capital assets other than those held for business purposes, are charged to tax as ‘capital gains’ in the year in which the transfer takes place.

Capital gains are classified as long term capital gains if they arise from the transfer of capital assets:

In the case of shares held in a company, or other securities listed on a recognised stock exchange in India or units of specified mutual funds or zero coupon bonds, for a period of 12 months or more;

In the case of other assets, held for a period of 36 months or more

Capital gain arising on transfer of a capital asset, being a unit of the Unit Scheme 1964 is exempt from income tax.

The IT Act provides for certain transactions which are not considered as transfers of capital assets.

Long term capital gains are calculated after deducting from sale proceeds the indexed cost of acquisition, the indexed cost of improvement and expenditure incurred in connection with the transfer. The indexed cost of acquisition and indexed cost of improvement refer to costs duly indexed and adjusted for inflation as prescribed in the Act. Bonds and debentures (other than capital indexed bonds issued by the government) are not eligible for cost indexation. The benefits of indexation are not available to non-resident tax payers.

For the purpose of computation of capital gains, the tax payer has the option to take either the actual cost or the fair market value of the asset (other than depreciable asset), as at April 1,1981, as the cost of acquisition where the capital asset became the property of the tax payer by any mode specified in the IT Act.

In the case of a tax payer who is a non-resident, capital gains arising from transfer of capital assets, being the shares or debentures of an Indian company, shall be calculated by converting the cost of acquisition, expenses incurred for the transfer and sale consideration into the same foreign currency as was utilised for the purchase of shares or

debentures. The capital gains so computed will be converted into Indian currency on the date of transfer.

Profits arising on the transfer of intangible assets such as goodwill of a business, the right to manufacture, produce or process any article or thing, the right to carry on any business, tenancy rights, stage carriage permits or loom hours, trade mark or brand name associated with a business, are chargeable to tax as capital gains.

In the case of land and buildings, where consideration declared as a result of the transfer of land or buildings or both is less than the value adopted or the value that would have been adopted by any State Government authority, for the purpose of payment of stamp duty, such value is deemed to be the consideration for the transfer. Capital gains are required to be computed accordingly. The IT Act provides for reference of disputed value to a valuation officer.

Gains arising in the following transactions, among others, are chargeable to tax as capital gains:

Gains arising on buy-back of shares; Gains arising on the transfer of securities acquired under stock option scheme or as

‘Sweat Equity’; Insurance compensation on account of the destruction or damage of a capital asset; Profits or gains arising on the sale of one or more undertakings as a ‘slump sale’; Gains arising to shareholders on the distribution of assets by companies in

liquidation; Gains arising on the conversion of capital asset into stock in trade; Gains arising on the transfer of a capital asset by a partner of the firm by way of

capital contribution or otherwise; Gains arising on the transfer of a capital asset by way of distribution on dissolution or

otherwise of a firm or association of persons; Gains arising out of the transfer of a capital asset by way of compulsory acquisition

under any law

The IT Act provides for reduction of long term capital gains income to the extent the net consideration/capital gains are invested in specified assets and held for at least three years. Income from long term capital gains arising from the transfer of equity shares in a company through a recognized stock exchange in India or a unit of an equity oriented fund (such transaction being charged to Securities Transaction Tax, as referred to in Section V, G hereafter), is exempt from income tax. Long term capital gains in other cases are taxed at the rate of 20% in the case of all resident taxpayers. However, in case of long term capital gains on transfer of listed securities or units of any mutual fund or zero coupon bonds, the tax rate would be restricted to 10% of such capital gain computed without the benefit of indexation or at the rate of 20% of such capital gain computed with the benefit of indexation, whichever is more beneficial to the tax payer. Short term capital gains are clubbed together with the other income of the tax payer from other heads and charged to tax at normal rates of tax. However, short term capital gains arising on sale of equity shares in a company or units of an equity oriented fund (such

transaction being charged to Securities Transaction Tax, as referred to in Section V, G hereafter) are taxed at 15%.

BUSINESS REORGANISATION

Under the IT Act, demergers and amalgamations are recognised as a means of business reorganisation under the IT Act. Tax benefits and concessions available to an undertaking continue upon its transfer to a resulting company under a scheme of demerger.

Transfer of capital asset, by the demerged company to the resulting Indian company in a demerger, is not chargeable to capital gains tax.

Transfer of a capital asset in a scheme of amalgamation, by the amalgamating company to the resulting amalgamated Indian company, is not chargeable to tax. Consideration received by way of the issue of shares by the resulting company, in a scheme of demerger, to the shareholders of the demerged company, on demerger of an undertaking, is not chargeable to capital gains tax. Transfer by a shareholder in a scheme of amalgamation of shares in an amalgamating company in consideration for the shares in the amalgamated Indian Company, is not chargeable to tax.

Benefits of unabsorbed business loss and/or unabsorbed depreciation of the amalgamating company/undertaking can be taken by the amalgamated company/resulting company, subject to certain conditions.

Undertakings established in the free trade zone, 100% export-oriented undertaking and units set up in SEZs would continue to be eligible for deduction under the respective sections in the event of transfer of the undertaking in the scheme of amalgamation or demerger. The deduction will be given to the amalgamated or the resulting company.

NON – CORPORATE/ INDIVIDUAL TAX RATES AND ADVANCE TAX

Income tax rates for individuals, irrespective of residential status:

Taxable Income (INR) Rates of Income – Tax for Tax Year 2011 - 12 Upto 250,000 (for Senior Citizens) Upto 190,000 (for Women Tax Payers) Upto 180,000 (for Other Tax Payers)

NIL

250,001 – 500,000 (for Senior Citizens) 190,001 – 500,000 (for Women Tax Payers) 180,001 – 500,000 (for Other Tax Payers)

10% of excess over 250,000 10% of excess over 190,000 10% of excess over 180,000

500,001 – 800,000 For Senior Citizens For Women Tax Payers For Other Tax Payers

25,000 + 20% of excess over 500,000 31,000 + 20% of excess over 500,000 32,000 + 20% of excess over 500,000

Above 800,000 For Senior Citizens For Women Tax Payers For Other Tax Payers

85,000 + 30% of excess over 800,000 91,000 + 30% of excess over 800,000 92,000 + 30% of excess over 800,000

Note: Education cess of 3% is levied on tax Individuals/ HUFs are allowed a deduction from total income upto INR 100,000 in respect of specified investments.

Advance tax

Non-corporate taxpayers are required to estimate their net tax and to make advance payments in three instalments as given below:

Due Date of Instalment: On or Before

Amount Payable as a Percentage of Net Tax Liability

September 15 At least 30% December 15 At least 60% March 15 Balance Amount

CORPORATE TAX RATES AND ADVANCE TAX

The corporate tax year is the year ending March 31 and is taxed at the rates applicable in the assessment year commencing on the succeeding April 1. The current corporate tax rates are:

Base rates for Corporate Tax remain unchanged at 30 % Surcharge (applicable to domestic companies having taxable income above Rs. 1

Crore) has been reduced to 5% from 7.5% (on tax) thereby reducing total corporate tax rate by 0.7725% from 33.2175% to 2.445%

Surcharge (applicable to companies, other than domestic companies i.e. Foreign Companies having taxable income above Rs. 1 Crore) has been reduced to 2% from 2.5% (on tax) thereby reducing the total corporate tax rate by 0.206% from 42.23% to 42.024%

Note: Surcharge is levied only when total income exceeds INR 10 million.

A foreign company, under the Income Tax Act, is a company which is not a domestic company.

Income of a foreign company and non-residents from royalty, fees for technical services, is taxed at 10%.

Advance tax by corporate assessees

Companies are required to pay income tax in advance for each tax year in four instalments on or before specified dates as given below:

Due Date of Instalment: On or Before

Amount Payable as a Percentage of Net Tax Liability

June 15 At least 15% September 15 At least 45% December 15 At least 75% March 15 Balance Amount

MINIMUM ALTERNATE TAX (MAT)

If the tax liability of a company is less than 18.5% of its book profits, such book profits are deemed to be the total income chargeable to tax at the rate of 18.5%, plus surcharge of 10% (Refer Note in ‘Q’, above) and further education cess of 3% on the tax and surcharge.

‘Book profits’ means the net profit for the relevant tax year as shown in the profit and loss account prepared in accordance with the provisions of the Companies Act as increased or reduced by the specified adjustments.

MAT paid can be carried forward for set off against tax payable under the other provisions of the IT Act, in 10 subsequent years.

The provisions relating to MAT do not apply to a developer of a SEZ or a unit therein.

S. SPECIAL PROVISIONS FOR NON-RESIDENTS Computation of taxable income of Non-Residents engaged in specified business

Taxable income of non-resident individuals and foreign companies is calculated at a flat rate varying from 5% to 10% of the amount paid or payable (whether in or outside India), or an amount received or deemed to be received in India by or on behalf of the taxpayer on account of the following:

• Business of operation of aircraft;

• Business of providing services or facilities in connection with or supplying plant and machinery on hire used in the prospecting for or extraction or production of mineral oils;

• Shipping business;

• Business of civil construction for turnkey power projects.

Nature of Business Taxable Income

Nature of Business Taxable Income Shipping Business - 7.5% of the amount paid/payable in or out of India to the tax payer on

account of carriage of passengers, livestock, mail or goods shipped at any port in India; and

- Amount received/deemed to be received for the carriage of passengers, livestock, mail or goods

- Amount paid/payable or received/receivable includes demurrage charges, handling charges

Exploration etc. Of mineral oils

- 10% of the aggregate amount paid/payable whether in India or out of India to a tax payer or to any person on his behalf on account of provision of services and facilities, supply of plant and machinery on hire for extraction of mineral oils in India or Outside India.

- Amount received and deemed to be received in India on behalf of the

Nature of Business Taxable Income tax payer on account of provision of services and facilities, supply of plant and machinery on hire for extraction of mineral oil outside India.

- There are certain exceptions to the above provisions.

Operation of aircraft - 5% of the aggregate of the amount payable (whether in India or outside India) to a tax payer or to any person on his behalf on account of carriage of passengers livestock, mails or goods from any place in India; and

- Amount received or deemed to be received in India by or on behalf of the tax payer for the carriage of goods, passengers livestock, mails or goods from any place in India

Foreign companies engaged in the business of civil construction, etc., in certain turkey power projects.

A tax payer, being a foreign company engaged in the business of civil construction, or the business of erection of plant and machinery on testing and commissioning thereof, in connection with turnkey power project approved by Central Government an amount equal to 10% of the amount paid/payable in or out of India to the said tax payer or to any person on his behalf on account of such work shall be deemed to be Income computed under the heads profit and gain of business or profession.

Taxation of Income of Non-Residents,etc

Income Taxpayer Rate of tax

i) Taxable dividend, i.e. other than those on which dividend distribution tax is paid;

ii) Interest on Foreign Currency debt;

iii) Income received from mutual fund units or UTI units purchased in foreign Currency.

Non-resident or Foreign Company

20%

i) Income received from units purchased in foreign currency;

ii) Long term capital gain arising from the transfer of units purchased in foreign currency.

Overseas Financial Organisation (Off-shore Fund)

10%

i) Interest on notified Bonds of any Indian Company or Public Sector Company bonds purchased in foreign currency;

ii)Taxable dividend on Global Depository Receipts (GDRs) purchased in foreign currency;

iii)Long term capital gain arising from the transfer of bonds o r GDRs.

Non-resident 10%

Income Taxpayer Rate of tax

i) Taxable dividend on GDRs issued by Indian Company in accordance with notified Employee Stock Option Scheme purchased in foreign currency;

ii) Long term capital gain arising from the transfer of GDRs.

Resident employee of an Indian Company or its subsidiary engaged in specified knowledge based industry (IT or IT related) or service.

10%

i) Taxable dividend on securities;

ii) Long term capital gain arising from the transfer of such securities;

iii) Short term capital gain arising from the transfer of such securities, if securities transaction tax is paid;

iv) Short term capital gain a r i s i n g from the transfer of such securities other than (iii).

Foreign Institutional Investors (FIIs)

20%

10%

15%

30%

Winnings from lotteries, crossword puzzles, races including horse races, card game and other game of any sort or gambling or betting of any form or nature whatsoever.

Any non-resident 30%

i) Participation in any specified game or sports;

ii) Advertisement; iii) Contribution of articles

relating to any game or sports in India in newspaper, magazines or journals.

Foreign national who is non-resident

10%

Income by way of amount guarantee to be paid or payable in relation to any specified game or sports played in India.

Non-resident Sports Association or Institution

10%

Royalty/Fees for technical services (Refer Note).

Non-resident or Foreign Company

10%

Income from units of an open- ended equity oriented fund of the Unit Trust of India or of mutual funds.

Non-resident or Foreign Company

Tax Free

Income Taxpayer Rate of tax

Anonymous donations received on behalf of any university or other educational institution or any hospital or any fund or any specified trust or institution.

Any non-resident 30%

Note: Royalty received by a foreign company through a Permanent Establishment (PE) in India is subject to tax as business profits, subject to conditions and compliances.

T. WITHHOLDING TAXES

Every person, other than an individual not subject to audit under the IT Act, who makes certain payments including salary, interest, contract payments, rent, commission, brokerage and fees for professional and technical services is required to deduct tax at source at prescribed rates. Refer Appendix II. In the case of a non-resident and foreign company, tax is deducted at source at the rates prescribed for the particular source of income. No deduction is allowable in respect of payments made for interest, royalty, and fees for technical services to non-residents or foreign companies, whether within India or outside India, without deduction and payment of tax.

An application can be made to the tax authorities for permission to withhold taxes at a rate lower than those prescribed under the IT Act in the case where the income of a non-resident or resident is not chargeable to tax in India or is taxable at rates lower than that prescribed for withholding taxes. The IT Act provides for disallowance of an expense, if the tax required to be deducted thereon has not been deducted, or has not been paid into the government treasury, if deducted. Such expense will be allowed as a deduction in the year in which the tax has been with held/paid to the government treasury. Taxes withheld must be deposited and returns for the same must be filed within the specified time limits. Full tax credit is granted to the payee of tax deducted at source upon production of a tax deduction certificate against the final tax liability of the payee.

U. DOUBLE TAXATION RELIEF

The government has entered into comprehensive agreements with various countries to avoid the double taxation of income. Agreements have also been entered with certain countries to avoid double taxation in respect of income from shipping and air transport. Unilateral relief is available in India from double taxation where there is no Double Taxation Avoidance Agreement. This relief is by way of deduction, from the Indian income tax, of a sum which is calculated on the doubly taxed income at the lower of the rate of tax or the rate of tax of the other country where tax has been paid. Tax rates under some treaties are given in Appendix III.

V. BUSINESS CONNECTION

The term ‘business connection’ under the IT Act is significant for a non-resident because any profit earned by a non-resident is taxable in India if it is earned through or from any business connection in India.

Business connection normally encompasses:

• A business in India;

• A connection with the non-resident and that business;

• A direct or indirect earning of income by virtue of or through that connection.

A ‘business connection’ requires an element of continuity. An isolated transaction is not regarded as a business connection. The existence of a business connection is a question of fact and would be based upon the circumstances of each case.

W. TRANSFER PRICING

The IT Act contains provisions relating to transfer pricing in an international transaction with an associated enterprise where either party to the transaction is a non-resident.

Income arising from an ‘international transaction’ between ‘associated enterprises’ is to be computed at arm’s length price (ALP). In accordance with internationally accepted principles, it has been provided that any income arising from an international transaction or an outgoing like expenses or interest from the international transaction between associated enterprises, shall be computed having regard to the ALP, which is the price that would have been charged in the transaction if it had been entered into by unrelated parties in similar conditions.

The ALP shall be determined by one of the methods described below:

• Comparable uncontrolled price method;

• Resale price method;

• Cost plus method;

• Profit split method;

• Transactional net margin method;

• Any other prescribed method,

The taxpayer can select the most appropriate method to be applied to any given transaction, but such selection has to be made taking into account the factors prescribed in the Income Tax Rules. With a view to allowing a degree of flexibility in adopting the ALP, the IT Act provides that where the most appropriate method results in more than one price, the actual price at which the transaction is undertaken will be considered, if the difference between such price and the arithmetic mean of the prices arrived at, is not more than % as may be notified by Central Government.

The primary onus is on the taxpayer to determine an ALP in accordance with the rules, and to substantiate it with the prescribed documentation, where such onus is discharged by the tax payer and the data used for determining the ALP is reliable and correct, there

can be no intervention by the Assessing Officer or reference of the transaction to a Transfer Pricing Officer.

Detailed documentation in respect of international transactions must be maintained. Accountants’ reports are to be completed and filed in the prescribed format before the due dates for filing tax returns.

Safe Harbour Rules

The determination of the ALP will be subject to ‘Safe Harbour’ Rules (to be notified) which will set out the circumstances in which the tax authorities shall accept the transfer price declared by the tax payer.

Alternate Dispute Resolution Mechanism

With a view to contain protracted litigation in relation to transfer pricing transactions and their valuation, an Alternative Dispute Resolution Mechanism has been put into place. On being presented with a draft assessment order, an eligible tax payer is given an opportunity to place before a duly constituted Alternative Dispute Panel comprising of three Commissioners of Income-tax, any representations/submissions to substantiate their claim in the income returned.

An eligible tax payer is:

- One who has entered into transfer pricing transaction which has been referred to a Transfer Pricing Officer;

- A foreign company.

X. ANNUAL INFORMATION REPORT

The IT Act requires certain specified persons to furnish an Annual Information Report (AIR) in respect of certain specified financial transactions recorded by them during the financial year. The AIR is required to be furnished within the prescribed time, i.e.by August 31 immediately following the financial year in which the transaction is registered or recorded, in the prescribed form and manner.

The AIR is to be filed electronically and accompanied with a certificate regarding clean and virus free data. Penalties are prescribed for defaults in filing the AIR.

Y. WEALTH TAX

Wealth tax in India under the Wealth Tax Act is payable each year on the taxable wealth and depends upon residential status, citizenship and the location of assets. Taxable wealth includes residential and farm houses, (one property is exempt for individuals) motor cars, jewellery, bullion, utensils of gold or silver, yachts, boats, aircraft, urban land and cash exceeding specified limits as reduced by debts owed and incurred in relation to such assets.

A resident Indian citizen pays tax on his global net wealth. A non-resident pays tax on his net wealth in India.

A foreign citizen, whether resident in India or abroad, pays wealth tax only on his net wealth in India. Wealth of a partnership firm/Limited Liability Partnership (LLP) is assessed to wealth tax in the hands of the individual partners in proportion to their share in the profits of the partnership firm/LLP. Wealth tax, in the case of individuals and companies, is chargeable at 1% of the net taxable wealth exceeding INR 3 million.

Z. SALARIES AND PERQUISITES

Salary includes salary due from the current employer, previous employer, advance salary and arrears of salary. It also includes wages, annuity, pension, gratuity fees, commission, perquisites and profits in lieu of salary and leave salary.

Perquisites include value of accumulation and any benefit granted or provided free of cost or at concessional rate. Separate rules govern the valuation of Perquisites:

Nature of Perquisite/Benefit Perquisite value

Accommodation. - 15% of salary in cities if the population exceeds 2.5 million;

- 10% of salary in cities if the population exceeds 1 million;

- 7.5% of salary in other cases. Provision of sweeper/ gardener / helper / watchman.

Actual cost incurred by the employer.

Provision for value of gas, electricity and water.

Actual cost incurred by the employer.

Provision of educational facilities.

Cost of providing such facility by the employer. No perquisite if the value of such benefit does not exceed INR 1,000 per month per child but limited to 2 children.

Provision of interest free/ concessional loan.

Difference in the rate of interest between SBI Prime Lending Rate and the actual interest charged by the employer.

Provision of assets like computers, laptop and other moveable assets.

10% of the actual cost per annum.

Transfer of movable assets Cost less 10% of the wear and tear for each year of use amount paid by the employee at the time of transfer.

Nature of Perquisite/Benefit Perquisite value

Medical expenses/ reimbursements

Specified payments made by an employer t o w a r d s: - reimbursements of medical expenses (upto INR

15,000 per annum); - medical insurance premium of an employee; - overseas medical treatment in respect of specified

employees; are not considered perquisites.

Value of specified security or sweat equity shares allotted to transferred, directly or indirectly by the employer or former employer to the tax payer free of cost or at a concessional rate.

Fair market value of the specified security or sweat equity share, as reduced by the amount paid/recovered from the tax payer.

Contribution to a superannuation fund by the employer.

In excess of INR 100,000

Any other fringe benefit or amenity.

As per Rules to be prescribed.

AA. TAXATION OF EMPLOYEE STOCK OPTION PLANS (ESOPs)

ESOPs refer to the schemes offered by employer-companies to their employees for acquiring a stake in the employer-company. The stake may be in various forms such as allotment of shares, grant of stock options that entitle the employee to acquire the shares in the future, or simply by way of rewarding an employee based on the appreciation in the value of shares.

Amongst the various types of ESOPs offered are the following:

• Stock Option Scheme: the company grants an option to the employee to apply for the shares of the company during a specified period of time at a price that is predetermined or is to be determined at an agreed price;

• Share Purchase Scheme: the company offers shares to the employees which are allotted against the payment of the offer price;

• Stock Appreciation Rights: the employee is paid the appreciation in the price or value of the shares from the point of grant to the exercise date.

The following aspects must be considered in the process of setting up and implementing an ESOP scheme:

• Ensuring adequate reward linked with performance;

• Compliance with SEBI guidelines, wherever applicable;

• Ensuring optimal tax treatment for employer and employee;

• Proper accounting and disclosure in the financial statements of the company issuing shares under the ESOP.

ESOPs are subject to tax as perquisites at the time of allotment or transfer of shares, on the excess of the fair value as on the date of vesting, and the Exercise Price. Income tax Rules prescribe the basis for valuation of specified securities (being an equity share) and other securities.

SEBI has prescribed the accounting treatment for securities issued under ESOPs.

AB. TAXATION OF LIMITED LIABILITY PARTNERSHIPS (LLPs)

The Limited Liability Partnership Act, 2008 (LLP) has come into effect in 2009. The LLP has features of both a body corporate as well as a traditional partnership. The Income‐tax Act provides for the same taxation regime for a LLP as is applicable to a partnership firm. It also provides tax neutrality (subject to fulfillment of certain conditions) to conversion of a private limited company or an unlisted public company into an LLP.

An LLP being treated as a firm for taxation has, inter alia, the following major tax advantages over a company under the Income‐tax Act:‐

It is not subject to MAT It is not subject to DDT It is not subject to surcharge.

In order to preserve the tax base vis‐a‐vis profit‐linked deductions, it is proposed to introduce AMT on LLPs which would work as under:

(a) Calculate Regular Total Income as per the provisions of the Act other than chapter XII‐BA (RTI)

(b) Calculate Regular tax on (a) as per the provisions of the Act other than chapter XII‐BA (RT)

(c) Calculate Adjusted Total Income (ATI) as under:

(d) AMT = ATI x 18.5%

(e) Tax payable = (Higher of RT and AMT) + (Cess on the higher amount)

(f) Credit of tax paid by a LLP shall be allowed to the extent of the excess of the AMT paid over the RT.

This tax credit shall be allowed to be carried forward up to the 10th AY immediately succeeding the AY for such credit becomes allowable. It shall be allowed to be set off for an AY in which the RT exceeds the AMT to the extent of the excess of the RT over the AMT.

INDIRECT TAXATION

India has the following indirect taxes:

A. EXCISE DUTY

B. CUSTOMS DUTY

C. OCTROI DUTY

D. STAMP DUTY

E. SALES TAX/VALUE ADDED TAX

F. SERVICE TAX

G. SECURITIES TRANSACTION TAX

The indirect taxes are discussed below.

A. EXCISE DUTY

Central Excise Duty

Excise Duty is levied on goods manufactured or produced in India. It is levied under the authority of the Central Excise Act at the rates prescribed in the First Schedule and Second Schedule to the Central Excise Tariff Act as periodically amended. The effective rates may be lower pursuant to general/ specific notifications issued by the Government granting whole or partial exemption from duty.

The Central Excise Act through a deeming fiction extends the scope of the term “manufacture” to include certain processes or activities such as repacking, relabeling, declaration or alteration of retail sales price, etc. in relation to certain specified goods, which may not amount to manufacture as per the principles evolved by the Courts or as per the conventional sense of the term.

The duty in most cases, is levied on the basis of value of the excisable goods. Value is the ‘transaction value’ which is the value/price:

• For delivery at the time and place of removal;

• Where the buyer is not a related person; and

• Price is the sole consideration.

Excise duty is payable by the manufacturer but is, commercially, recovered from the buyer as a part of consideration for sale of goods. Duty to pay is fastened on manufacturing, but for administrative purpose it is collected at the time of clearance.

To avoid a cascading effect, a scheme known as CENVAT has been in force from April 1, 2000. Under the CENVAT Scheme, a manufacturer can avail of the credit of the Central Excise Duties or Additional Duties of Customs including education cess paid on specified inputs and capital goods used in the manufacture of excisable goods and utilise it in discharging duty on finished excisable goods. The credit mechanism has been further expanded to allow inter-sectoral credit of tax paid on goods and services (see Service Tax, below).

Types of Excise Duties

Excise duties are of following types:

Basic Excise Duty

Basic Excise duty also termed as CENVAT is levied at the rates specified in First Schedule to the Central Excise Tariff Act. The present general rate is 8%.

This duty is applicable to almost all excisable goods. There is partial exemption to a few products.

Education Cess and Secondary and Higher Education Cess

Education cess of 2% and a secondary and higher education cess of 1% are imposed on aggregate of the excise duties.

Duties under other Acts

Some duties and cesses are levied on manufactured products under other Acts. The administrative machinery of central excise is used to collect those taxes. Provisions of Central Excise Act and Rules have been made applicable for levy and collection of these duties/cesses. Some of such duties are national calamity contingent duty, additional duty on goods of special importance, additional excise duty on panmasala and tobacco products, duty on medical and toilet preparations, additional duty on mineral products, additional duty on textiles and textile articles, etc.

B. CUSTOMS DUTY

Customs duties are levied on import of goods in the country under the authority of the Customs Act and in certain instances, on exports. It is levied at the rates specified in the Customs Tariff Act. The effective rates of customs duties may vary pursuant to general and/or specific exemption or concession notifications issued by the Government.

Types of duties

Under the custom laws, the effective rate of duty is approx. 24.42%. The following are the various types of duties which are leviable.

Basic Duty

The peak rate of customs duty on non-agricultural goods is 10%.

Additional Duty

It is also referred to as Countervailing Duty (CVD). This duty is equivalent to excise duty leviable on a like product manufactured in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product had it been manufactured or produced in India is applied. If the product is leviable to duty at different rates, the highest rate among those rates is applied. Such duty is leviable on the value of goods plus basic custom duty payable. Current rate applicable to most of the industrial products is 8%.

Special Additional Duty

It is also referred to as Special CVD. This duty counter balances sales tax, Value Added Tax (VAT), local tax or other charges leviable on like articles on its sale, purchase or transaction in India. Such duty does not exceed 4% of the value of the article.

Education Cess and Secondary and Higher Education Cess

Education cess of 2% and a secondary and higher education cess of 1% are imposed on the aggregate duties of customs.

General

In addition, anti-dumping and safeguard duties are levied on specified products for specified periods. Special excise duties are also levied on certain products listed in various schedules of the Customs Tariff Act.

The importer is required to pay customs duty at the time of clearance of goods from port/airport. The rate of duty depends on the classification of goods, which is based on internationally accepted Harmonized System of Nomenclature.

The duty is largely levied on ad-valorem basis, i.e. based on the value of the goods. The duty is levied on the ‘transaction value’ which is the value of the imported goods between unrelated persons and where price is the sole consideration for the sale.

In addition to ad-valorem duties, for some products, Customs Tariff Act has prescribed specific rates of duties, i.e. the rate of duty is specific in rupee terms and not based on value.

The Special Valuation Branch (SVB) investigates transactions involving imports between ‘related’ parties. The SVB examines and rules on the correctness of the value adopted.

C. OCTROI DUTY

Octroi duty is a tax levied on the entry of goods within certain city limits.

D. STAMP DUTY

Stamp duty is imposed on execution of specified instruments. Stamp duty is charged on the instrument and not on the transaction. The levy is governed by the Indian Stamp Act or the respective State Stamp Acts. Some states have enacted separate legislations, whereas some have adopted Indian Stamp Act with or without modifications. The rates of stamp duty vary from state to state. The Bombay Stamp Act and certain provisions of the Indian Stamp Act apply to the state of Maharashtra. The instruments executed in the state and enlisted in the Schedule to the Act are chargeable to stamp duty at the applicable rate. Instruments executed outside the state are liable to duty only on their receipt in the state, provided it relates to property situated in the state or a matter or thing to be done in the state. All other instruments would be charged under the Indian Stamp Act, or not at all.

An instrument is defined to include every document by which any right or liability is or is purported to be created, transferred, limited, extended, extinguished or recorded. However, it does not include a bill of exchange, cheque, promissory note, bill of lading, letter of credit, policy of insurance, transfer of share, debenture, proxy and receipt which are under purview of the Indian Stamp Act as applicable to Maharashtra.

Other provisions are:

• Stamp duty can be paid by way of adhesive or impressed stamps on the instruments;

• The stamp papers must be in the name of one of the parties to the transaction;

• The date of issue of the stamp paper must be not more than six months prior to the date of the transaction;

• The cost of the stamp duty is a matter of agreement between the parties to the transaction. However, the Act provides for methods to break the deadlock in specified cases;

Some of the important articles governing stamp duty on certain documents is mentioned in Schedule I of the Stamp Act. Depending upon the instrument, the duty may be payable based on the true market value of the property, area, or any other criteria;

Any person can apply to the Collector of Stamps for adjudication of the stamp duty payable on the instrument;

All instruments chargeable with duty and executed by any person in Maharashtra shall be stamped before, or at the time of execution or immediately thereafter or on the next working day following the day of execution.

Any instrument which is inadequately/not stamped is inadmissible as evidence for any purpose. Such instruments can be admissible only on payment of the requisite amount of duty alongwith interest at 2% per month, subject to the penalty not exceeding twice the amount of duty.

E. SALES TAX/VALUE ADDED TAX

Sales Tax

Sales tax is a levy on purchase and sale of goods in India. Sales tax is levied under authority of both Central legislation (Central Sales Tax) and State Government legislations (State Sales Tax). Central Sales Tax is governed by the Central Sales Tax Act (CST Act) which covers inter-state transactions of sale of goods as well as exempts transactions of import of goods into or export of goods out of India. The State Sales Tax is governed by the respective State Sales Tax Acts, under which tax is levied on intrastate transactions of sales.

Under the Sales tax scenario, there is a cascading effect because of lack of full setoff/ credit mechanism. To plug this loophole and to bring the Indian indirect tax structure in tune with the WTO standards, the State Governments in consensus with the Central Government have implemented Value Added Tax (VAT). The State Sales Tax Acts in most of the states have been replaced by the Value Added Tax Acts. The Value Added Tax systems adopted by the States are similar at a broader level but may vary from state to state on different points. The important features of the Value Added Tax Act in Maharashtra are discussed hereunder.

Value Added Tax Act

The Maharashtra VAT Act, 2002 (MVAT Act) came into force on April 1, 2005. Under the MVAT Act, a dealer is liable to pay tax on the basis of turnover of sales or purchases within the state. The term dealer includes persons who buy or sell goods in the state whether for commission, remuneration or otherwise in the course of their business, a broker, commission agent, auctioneer, public charitable trusts, clubs,

association of persons, departments of the Union Government and State Government, Customs department, port trusts, railways, insurance and financial corporations, transport corporations, local authorities, shipping and construction companies, airlines, advertising agencies and also any corporation, company, body or authority, which is owned, constituted or subject to administrative control of the Central Government, any State Government or any local authority.

However, an agriculturist, educational institution and transporters are deemed not to be a dealer, subject to fulfilment of specified conditions. Every dealer whose sales turnover and the turnover of taxable goods (purchased or sold) exceeds the limits specified in the table below, is required to get registration under the MVAT Act and will be liable to pay VAT:

Turnover limits for the purpose of liability/registration:

Category of dealer

Total turnover INR

Turnover of taxable goods purchased or sold INR

Importer 1,00,000 10,000 Others 5,00,000 10,000

Indicative rates of tax are as follows:

Nature of goods Rate of tax Essential commodities. Nil Gold, silver, precious stones, pearls, etc 1% Industrial inputs, Aviation Turbine Fuel sold at small airports except Mumbai and Pune and such other specified goods

4%

Declared goods, Tea, Dry fruits (other than raisins, currants and cashews), Vada-Pav (sold in restaurants), Sales made under section 8(5) to electricity generating, transmission, distribution units, telecom industry, defence and railways

5%

Carbonated soft drinks, Molasses and certain tobacco products including cigars and cigarettes

20%

Foreign liquor, country liquor and liquor imported from foreign countries

25%

Certain petroleum products Varies from 10% to 33% (in few cases specific duty of INR 1 per liter also applicable.)

All other goods, not covered above (Revenue Neutral Rate)

12.50%

Every registered dealer is required to file a correct, complete and self-consistent return, in the prescribed form, by the due date.

The tax payable, if any, as per the return, shall be paid into the Government treasury along with the return.

The dealer is entitled to claim a refund of the excess payment made in respect of the period for which the return has been filed, or may carry forward the same for adjustment towards the tax payable as per the return to be filed for any subsequent period.

Refunds can be adjusted in subsequent months return. However, refunds cannot be adjusted against liability of the subsequent year.

All registered dealers are entitled to set- off the VAT paid on inputs like raw material, finished goods and packing material, within the State of Maharashtra against their output tax liabilities.

The set off is subject to the following:

• Set-off is allowed only to a registered dealer;

• A valid tax invoice is necessary to claim set-off;

• Proper accounts must be maintained;

• The set-off on eligible goods has to be claimed in the tax period in which the goods have been purchased.

No set-off shall be admissible in respect of:

• Purchase of motor vehicles (being passenger vehicles);

• Purchase of motor spirit (other than by a dealer in motor spirit);

• Purchase of crude oil, used by an oil refinery for refining;

• Any purchase of consumables or capital assets by a job worker (labour job); whose only sales are waste or scrap of goods obtained from such labour job;

• Any purchase made by a dealer holding Entitlement Certificate under a Package Scheme of Incentives;

• Any purchase of goods of incorporeal or intangible nature other than an Import Licence, export permit or licence or quota, credit of duty entitlement pass book, SIM cards, software in hands of software dealer, copyright which is resold within 12 months of the date of purchase;

• Purchases by way of works contracts in building construction;

• Purchases of building material, which are not resold but used in the activity of building construction;

• Purchases of Indian Made Foreign Liquor or of country liquor if the dealer has opted for composition scheme;

• Certain purchases of capital assets by a hotelier;

• Purchase of mandap, tarpaulin, pandal, shamiana, decoration etc. if the dealer has opted for composition scheme;

• Purchases by a dealer for corresponding sales of food, beverages, bakery items, foreign liquor, second-hand passenger motor vehicle, where the dealer has opted for a composition scheme;

• Purchases of motor spirits by a dealer for corresponding sales at retail outlet of motor spirits, other than aviation turbine fuel and aviation gasoline.

If during a tax period (month/quarter/six months) the tax on total turnover of sales is less than the amount of input tax credit, then such excess amount of credit may either be adjusted by the dealer against his tax liability under the CST Act for the same period or may be carried forward to the next period. The excess credit may be carried forward in this manner till the end of the accounting year. The balance, if any, thereafter can be claimed as a refund from the department.

No tax is payable on export of goods out of India. However, a set-off is available of input tax paid on purchases, from within the State, used in such exports. The VAT paid on purchases (inputs), may be adjusted against the VAT/CST liability or claimed as a refund.

Works Contracts Tax

States also levy tax on transactions which are ‘deemed sales’ like works contracts and leases. A works contract essentially comprises of a contract for carrying out work involving supply of labour and material, property in which passes during execution of the contract.

The rate of tax, on such deemed sales of goods, used in the execution of works contract, is the same as prescribed in the relevant schedules, to the respective goods. However, the sale price of such goods has to be determined in accordance with the provisions contained in the Maharashtra Value Added Tax Rules.

Accordingly, the value of goods at the time of the transfer of property in the goods (whether as goods or in some other form) involved in the execution of works contract has to be determined by effecting the following deductions from the value of entire contract in so far as the amounts relating to the deduction pertain to the said works contract:

• Labour and service charges for the execution of the works;

• Amounts paid by way of price for sub-contract, if any, to sub- contractors;

• Charges for planning, designing and architect’s fees;

• Charges for obtaining on hire or otherwise, machinery and tools for the execution of the works contract;

• Cost of consumables such as water, electricity, fuel used in the execution of works contract, the property in which is not transferred in the course of execution of the works contract;

• Cost of establishment of the contractor to the extent to which it is relatable to supply of the said labour and services;

• Other similar expenses relatable to the said supply of labour and services, where the labour and services are subsequent to the said transfer of property;

• Profit earned by the contractor to the extent it is relatable to the supply of said labour and services.

Where the contractor has not maintained accounts which enable a proper evaluation of the different deductions as above or where the Commissioner finds that the accounts maintained by the contractor are not sufficiently clear or intelligible, the contractor or, as the case may be, the Commissioner may in lieu of the deductions as above provide a lump sum deduction as prescribed and determine accordingly the sale price of the goods at the time of the said transfer of property.

Under the Works Contract Composition Scheme, a dealer, may, at his option, choose to pay tax @ 5% on construction contracts (as notified) or in case of other contracts @ 8% on the total contract value, after deducting therefrom the amount paid towards sub-contract, if any.

However, in respect of such contract/s, where the dealer has chosen to pay tax by way of composition, the amount of set off available on inputs will be restricted to 96% of the total amount of set off for respective goods used in a construction contract and 64% in the case of any other contract. Tax is required to be deducted at source and paid as prescribed.

Tax on Right to Use Goods (Leasing and Hiring)

Earlier the tax on leasing and/or hiring charges were payable under the Maharashtra Tax on Right to Use Goods Act. Presently, all such transactions of ‘deemed sale’ are liable to tax under the MVAT Act at the same rate of tax as prescribed in the Schedules.

The MVAT Act requires certain dealers/persons to get their accounts audited by an accountant within the prescribed period from the end of the year. The report of such audit is required to be furnished in the prescribed format.

The Central Sales Tax Act (CST Act)

Every dealer is liable to pay tax under the CST Act, on sales of goods (other than Electrical Energy) effected by him in the course of inter-state trade or commerce during the year. The tax is payable if the sale or purchase:

• Occasions the movement of goods from one state to another; or • Is effected by a transfer of documents of title to the goods during their movement from

one state to another.

Further, the dealer is liable to pay tax on sale of taxable goods effected by him in the course of inter-state trade or commerce, notwithstanding that the turnover limit of sales or purchases for registration and liability for tax has not been exceeded under the relevant State tax laws.

No tax is payable on any transaction of sale in the course of import of goods into the territory of India and a transaction of sale in the course of exports outside of India.

Further, no tax is also payable on a transaction of penultimate sales, i.e. the last sale preceding the sale occasioning the export of goods.

A single inter-state sale of any amount effected by a dealer attracts tax liability under the CST Act and consequential liability for obtaining a certificate of registration. The application for registration shall be made within 30 days from the date on which the first inter-state sale is affected. However, the dealers registered under the State Sales Tax Act may get registration even without effecting any inter-state sale. Dealers effecting sales in the course of inter-state trade are required to obtain a declaration in Form ‘C’ from the purchaser of goods to apply concessional rate. Rates of tax on sale in the course of inter-state trade or commerce are prescribed by the Act, as follows: Particulars With form “C” Without form “C”

Goods specified in registration certificate of the registered dealer.

2% or local rate, whichever is lower

Local rate

All other sales. - Local rate

Transfer of goods from one state to another to one’s own place of business is exempt from the levy of tax. A declaration in Form ‘F’ must be obtained from the branch. The purchasing dealer is required to get these forms from the prescribed authority under his seal and signature. The dealer issuing the forms shall keep a record of forms used by him.

‘C’ form declarations can be issued by dealers registered under the Central Sales Tax Act, in respect of those goods only; which are included in the relevant list of their Registration certificate under the Central Sales Tax Act, for resale, for packing, for use in the manufacture or processing of goods for sale, or for use in mining or for use in telecom industry or for use in the generation or distribution of electricity or any other form of power.

The tax is to be collected by the registered dealer, who sells goods in the course of interstate trade or commerce and shall be paid to the Government treasury, along with a return, within the time as may be prescribed by the State Government in the local Act.

F. SERVICE TAX

Service tax is levied on specified categories of services. Service tax is a Union levy and is governed by Chapter V of Finance Act, 1994, as amended from time to time. The rate of Service tax is presently 10.3% (Service tax @ 10% plus education cess @ 2% and secondary and higher education cess @ 1%). Service tax is charged on the gross value of services. Generally, it is payable on receipt basis, i.e. liability to payarises on receipt of value for services charged. It is payable by the service provider and is recovered from the recipient of services. Service tax affects a person in the following ways:

i) As a Service Provider

A person may be liable for Service tax on rendition of any of the 118 categories of services provided or to be provided (includes advances received).

ii) As a Service Receiver

• Services received from persons based outside India;

• Insurance companies are liable to pay Service tax in respect of services provided by insurance agents;

• Mutual Fund/Asset Management Companies to pay Service tax on mutual fund distribution services;

• Sponsor of an event to pay service tax in case of sponsorship services;

• Transportation of goods by road service.

Person’ includes individual, Hindu Undivided Family (HUF), partnership firms, companies, Body of Individuals (BOI), Association of Persons (AOP). Service tax is not applicable where the service providers’ taxable service does not exceed INR 1 million in a financial year. Services provided by overseas service providers has been brought within the

purview of Service tax. In such case the recipient of the services in India would be liable to register and pay service tax (popularly referred to as reverse charge mechanism).

Import of Services

For the purpose of taxability services provided from outside India and received in India have been categorized as follows:

Services, based on location of property that are provided in relation to immovable property, shall be considered as imported if the immovable property is situated in India;

Services based on performance that are wholly or partly performed in India, shall be considered as imported;

Services based on location of service recipient, where the recipient of service is located in India and the services are used in relation to commerce or industry, i.e. commercial use, shall be considered as imported.

Export of Services

Services exported by an Indian entity are not liable to Service tax on fulfilment of certain conditions:

• The service is provided from India and used outside India;

• Payment for such service is received by the service provider in convertible foreign exchange.

The rules have categorized the services under the following three categories.

• Services based on location of property that are provided in relation to immovable property, shall be considered as exported if the immovable property is situated outside India;

• Services based on performance, that are wholly or partly performed outside India shall be considered as exported;

• Services based on location of service recipient shall be considered as exported:

Where the services are provided and used in or in relation to business or commerce the services shall be considered as exported if the recipient of the service is located outside India. However, if such a recipient of service has any commercial establishment or office in India, the services shall be considered to be exported only if the order for provision of such services is made by the recipient of the service from any of his commercial establishment or any office located outside India.

Where the services are not provided and used in or in relation to business or commerce (such as for personal use), the services shall be considered as exported if the recipient of the service is located outside India at the time of provision of such services.

Service tax rebate is given on the following services subject to certain conditions.

Nature of Service Abatement of “gross amount charged”

Mandap keepers

- Mandap keepers providing catering services, i.e. supply of food;

- Hotels providing mandap keeper services including catering services, i.e. supply of food.

40%

40% Tour operator providing

- Package tour, i.e. accommodation cum transport, part of tour;

- Non-package tour (say transport);

- Only accommodation booking forming part of a tour.

75%

60%

90% Rent-a-cab scheme operator. 60% Convention services along with catering services. 40% Outdoor catering (involving supply of food) 50% Pandal and shamiana services including catering services.

30%

Erection, commissioning or installation under a contract for supplying plant, machinery or equipment and erection commission or installation of such plant, machinery or equipment.

67%

Commercial or industrial construction service. 67% Construction of complex. 67% Transport of goods through waterways 75%

Registration

Ordinarily, every person liable to pay service tax is required to register with t h e Service tax authorities and comply with procedural requirements. In situations governed by the reverse charge mechanism provisions, the recipient/ specified person is required to register.

A person liable for payment of Service tax should register with the relevant authorities within 30 days from the date of commencement of the business of providing of taxable service. Additionally, certain persons have been specified as being required to obtain registration compulsorily. Any service provider whose aggregate value of taxable services in a financial year exceeds INR 900,000 is required to make an application for registration within a period of 30 days of exceeding the aggregate value of taxable service of INR 900,000.

Payment of Service tax

Entities Service Tax received during the period

Payable by

Individuals, Proprietary Concerns, Partnership Firms.

April 1 – June 30 July 1 – September 30 October 1 – December 31 January 1 – March 31

July 5 October 5 January 5 March 31

AOP, BOI, Companies. April to February March 5th of the following month March 31

Returns

• For the period April 1 to September 30: By October 25;

• For the period October 1 to March 31: By April 25.

Non-filing of returns in time will attract a late fee not exceeding INR 20,000.

G. SECURITIES TRANSACTION TAX

Securities transaction tax at the specified rates of the value of the securities transacted on a recognized stock exchange in India is levied as follows:

Taxable securities transaction Rate Payable by

Purchase of an equity share in a company or a unit of an equity oriented fund, where the transaction of such purchase is entered into in a recognised stock exchange and the contract for the purchase of such share or unit is settled by the actual delivery or transfer of such share or unit.

0.125% Purchaser

Sale of an equity share in a company or a unit of an equity oriented fund, where the transaction of such sale is entered into in a recognised stock exchange and the contract for the sale of such share or unit is settled by the actual delivery or transfer of such share or unit.

0.125% Seller

Sale of an equity share in a company or a unit of an equity oriented fund, where the transaction of such sale is entered into in a recognised stock exchange and the contract for the sale of such share or unit is settled otherwise than by the actual delivery or transfer of such share or unit.

0.025% Seller

Sale of an option in securities. 0.017% Seller

Taxable securities transaction Rate Payable by

Sale of an option in securities, where the option is exercised.

0.125% Purchaser

Sale of a futures in securities. 0.017% Seller

Sale of a unit of an equity oriented fund to the mutual fund.

0.25% Seller

The securities transaction tax is collected by the stock exchange and remitted to the exchequer.

The securities, on which such tax is levied, include:

• Shares, bonds, debentures, etc., or other marketable securities of a like nature, in or of any incorporated company or other body corporate;

• Derivatives;

• Units or any other instrument issued by any collective investment scheme to the investors in such schemes;

• Security receipts defined under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act;

• Government securities;

• Other notified instruments;

• In the case of option contracts, the value of the transaction would include the strike price and the premium;

The authorities under the IT Act shall administer the securities transaction tax.

With a view to giving impetus to its export drive, the government has set up Export Processing Zones (EPZs), which provide almost free trade environment for export production to make Indian export products more competitive in the world market.

The Government has introduced various schemes to offer special incentives and tax concessions to businesses engaged in exports such as the 100% Export Oriented Units (EOUs) Scheme, Software Technology Parks (STPs) Scheme and the Electronic Hardware Technology Parks (EHTPs) Scheme. The schemes provide for a minimum value addition to the cost of production and the units have to be a net positive foreign exchange earner.

G. SPECIAL ECONOMIC ZONE (SEZ)

FTP provides for setting up of SEZs in the country with a view to enable an internationally competitive and hassle-free environment for exports. The Special Economic Zone (SEZ) Scheme has become operational after issuing of notifications by the Government on 30 May, 2000.

The important features of the SEZ policy are enumerated below:

Special Economic Zones are to be specifically delineated duty free enclaves and shall be deemed to be foreign territory for the purposes of trade operations and duties and tariffs;

Goods going into the SEZ area from Domestic Tariff Area (DTA) shall be treated as deemed exports and goods coming from the SEZ area into DTA shall be treated as if the goods are being imported;

SEZ units can be set up for manufacture of goods and rendering of services, production, processing, assembling, trading, repair, remaking, reconditioning, re-engineering including making of gold/silver/platinum jewellery and articles thereof or in connection therewith;

SEZs may be set up in the public, private or joint sector or by State Governments SEZ should have the minimum prescribed area as per the policy; SEZ units would have to be positive Net Foreign Exchange Earners and would not be

subject to any minimum value addition norms for export obligation; 100% FDI would be permitted for all investments in SEZs except a few activities

under the negative list (tobacco, alcoholic beverages, arms and ammunition, etc.); The Development Commissioner would be responsible for administrative control of

the zone

Fiscal Incentives Available to SEZ Developers/ Units

Direct Tax Incentives for SEZ Developers

100% tax holiday for the business of developing SEZ available for a period of any 10 consecutive years out of 15 years beginning from the year in which the SEZ is notified;

Exemption from Minimum Alternate Tax (MAT) on income accruing or arising on or after April 1, 2005 from business carried on or services rendered;

No Dividend Distribution Tax (DDT) payable on dividends declared, distributed or paid from April 1, 2005 onwards out of current income;

The above benefits are also available in respect of co-developers providing infrastructure facilities

Direct Tax Incentives for SEZ Units

15 year tax holiday (100% for first 5 years, 50% for next 5 years and up to 50% for next 5 years subject to creation of reserves) on export profits available to units commencing business after April 1, 2005;

Certain exemptions also available in respect of IFSC/OBUs located in SEZs

Indirect Tax Incentives for SEZ Developers/ Units

SEZ developers and entrepreneurs are eligible for the following benefits for carrying out authorised operations in the SEZ:

Exemption from customs duty on goods/ services imported or exported [Supplies from Domestic Tariff Area (DTA) to SEZ to be treated as exports while those from SEZ to DTA to be treated as imports];

Exemption from excise duty on goods procured from DTA Drawback or any other admissible benefits on goods brought or services rendered

by DTA Exemption from service tax on taxable input services Exemption from Central Sales Tax on interstate sale or purchase of goods except for

newspaper; Removal of goods into DTA also permitted subject to prescribed conditions and on

payment of all applicable customs duty leviable on importation of such goods into India

SOFTWARE TECHNOLOGY PARKS (STP) SCHEME

The STP scheme is a 100 percent export oriented scheme for the development and export of computer software, including export of professional services using communication links or physical media. This scheme is unique in its nature as it focuses on one product/ sector i.e. computer software. The scheme integrates the government concept of 100% Export Oriented Units (EOUs) and Export Processing Zones (EPZs) and the concept of Science Parks/ Technology Parks, as operating elsewhere in the world.

Some major highlights –

Approvals are given under single window clearance scheme; A company can set up a STP unit anywhere in India; 100% Foreign Equity is permitted and approved by the Jurisdictional Director of STPI; All the imports of Hardware & Software in the STP units are completely duty free; Import of second-hand capital goods is also permitted; Minimal ‘Minimum Export Performance’ norms i.e. US$ 0.25 million or 3 times CIF

Value of imported goods whichever is higher & 10% Net; Foreign Exchange Earnings against Export Earnings to be achieved over a period of

five years; Use of computer system for commercial training purposes is permissible subject to

the condition that no computer terminals are installed outside the STP premises; Sales in the Domestic Tariff Area (DTA) shall be permissible up to 50% of exports in

value terms; STP units are exempted from payment of corporate income tax up to 2010; The capital goods purchased from the Domestic Tariff Area (DTA) are entitled for

benefits like exemption of excise Duty & reimbursement of Central Sales Tax (CST); Capital invested by foreign entrepreneurs, know-how fees, royalty, dividend, etc. can

be freely repatriated after payment of Income Taxes due on them, if any; Repatriation of foreign currency for payments can be freely done

H. Appendices Appendix I

Rates of Depreciation as per the Income Tax Act on the written down value method

SN Nature of the Asset Rate

1. Buildings

1.1 Building used mainly for residential purposes, except hotels and boarding houses

5%

1.2. Building forming part of water supply project or water treatment project which are put into use for providing specified infrastructure facilities

100%

1.3. Buildings other than the items in 1.1 and 1.2, above 10%

1.4 Temporary Structures 100%

2. Furniture and Fixtures including electrical fittings 10%

3. Plant and Machinery

3.1 General Items 15%

3.2 Motor cars other than those used for running them on hire and acquired after 1st April 1990

15%

3.3 Aeroplanes – Aeroengines 40%

3.4 Motor buses, Motor lorries and Motor taxies used in the business of running them on hire

30%

3.5 Moulds issued in rubber industries and refractories 30%

3.6 Air Pollution Equipment 100%

3.7 Water Pollution Equipment 100%

3.8 Solidwaste control equipment; recycling and resource recovery systems

100%

3.9 Machineries and Plant used in semi conductor industries 30%

3.10 Life saving medical equipment 40%

3.11 Containers made of glass/Plastic used as re-fillers 50%

3.12 Computer including software 60%

3.13 Machinery and plant used in water treatment system 100%

3.14 Wooden parts used in artificial silk manufacturing units 100%

3.15 Cinematograph films – bulbs of studio lights 100%

3.16 Wooden match frames of Match factories 100%

3.17 Tubs, winding ropes, haulage ropes, safety lamps 100%

3.18 Salt –works, salt pans – reservoirs 100%

Appendix I (Contd..)

Sr. No. Nature of the Asset Rate

3.19 Flour mill, rollers 80%

3.20 Iron – Steel industry – Rolling mills rolls 80%

3.21 Sugar works – Rollers 80%

3.22 Energy saving devices being

A. Instrumentation and monitoring system 80% B. Waste heat recovery equipment 80% C. Co. Generators systems 80% D. Specialized boilers and furnace 80% E. Electrical Equipment 80% F. Burners 80% G. Other Equipments 80%

3.23 Gas cylinders including valves and regulators 60%

3.24 Glass melting furnaces 60%

3.25 Plant used in Mineral oils concerns 60%

3.26 Renewable energy devices 80%

3.27 a) Books owned by tax payers carrying on a profession: - Books of annual publication; - Books other than items stated above.

b) Books owned by the tax payer carrying on the business in running lending libraries.

100% 60%

100%

4. Ship

4.1 General which includes dredgers, tugs, barges, survey launchers and fishing vessels

20%

4.2 Vessels used in inland waters 20%

4.3 Vessels used in inland waters as speed boats 20%

5. Intangible assets being know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature.

25%

Appendix II

Rates of Withholding Taxes [For F.Y 2011-12]

Sr. Particulars No.

Payment threshold

(INR)

Rate of Tax deduction at source (TDS)

1. Interest on securities 10%

2. Interest other than interest on securities

5,000 10%

No TDS if the interest amount is not exceeding INR 10,000 in the case of deposits in banks including Co-op. banks, cooperative societies engaging in the business of banking and post offices. No TDS if payment is made to the legal heirs

3. For winnings from lotteries and crossword puzzles

10,000 30%

4. For winnings from horse races

5,000 30%

5. Payments under a contract (including payments to a sub contractor and payments under advertising contracts)

30,000 per contract or contracts aggregating more than 75,000 in a tax year

Payments to: - individuals: - others:

Transport contractors/ subcontractors: (Refer Note 4)

1% 2% Nil

6. Insurance commission 20,000 10%

7. Payment of commission out of specified savings

2,500 20%

8. Payments made at the time of re- purchase of units

20%

9. Payment of commission, fees, etc., on sale of lottery tickets

1,000 10%

Appendix II (Contd)

SN Particulars

Payment threshold

(INR)

Rate of Tax deduction at source (TDS)

10. Brokerage commission 5,000 10% 11. Rent 180,000 For the use of

machinery, plant or equipment:

For the use of any land or building (including factory building) or land appurtenant to a building (including factory building) or furniture or fittings

2%

10%

12. Professional and technical services

30,000 10%

13. Payment of enhanced compensation

100,000 10%

Note:

1. There will be no levy of surcharge and cess on payments to resident corporate and non corporate tax payers.

2. TDS rates on payments to foreign companies/non residents will be subject to surcharge at 2.50% (if

aggregate payments are likely to exceed INR 10 million.

3. Where any person whose receipts are subject to TDS, does not furnish the Permanent Account No. (PAN) to the deductor, tax will be deducted at the highest of the following: a) Rate prescribed under the IT Act; b) Rate mentioned in the Finance Act; c) Rate of 20%.

4. Increased rates if PAN not quoted.

Appendix III

Upper limits of withholding taxes in India’s agreements for avoidance of Double Taxation

Dividends (inbound)

Interest

Royalty

Fees for technical services

Name of the country

Right of the state to tax

Rate Right of the

Rate Right of the state to tax

Rate Right of the state to tax

Rate

state to tax

Australia Both 15% Both 15% Both 10%, 15%, 20%

Source 10%, 15%, 20%

Austria Both 10% Both 10% Both 10% Both 10%

Brazil Both 15% Both 15% Both 25% 15%

**

Canada Both 15% 25%

Both 15% Both 10%, 15%, 20%

Both 10%, 15%, 20%

China Both 10% Both 10% Both 10% Both 10%

Cyprus Both 10% 15%

Both 10% Both 15% Both 10%

Denmark Both 15% 25%

Both 10%+ 15%+

Both 20% Both 20%

Finland Both 15%+ Both 10%+ Both 10%, 15%, 20%

Both 10%, 15%, 20%

Germany Both 10% Both 10% Both 10% Both 10%

Indonesia Both 10%, 15%

Both 10% Both 15% **

Italy Both 15%, 25%

Both 15%+ Both 20% Both 20%

Japan Both 15% Both 10%, 15%

Both 20% Both 20%

Malaysia Both 10% Both 10% Both 10% ** 10%

Mauritius Both 5%, 15%

Both *$ Both 15%+ **

Netherlands Both 10% Both 10% Both 10% 15% 20%

Both 10% 15% 20%

Appendix III (Contd)

Dividends (inbound)

Interest

Royalty

Fees for technical services

Name of

the country Right of the state

to tax

Rate Right of the state

Rate

Right of the state to tax Rate

Rate Right of the state to tax

Rate

to tax

New Zealand Both 15% Both 10% Both 10% Both 10%

Republic of South Africa

Both 10% Both 10% Both 10% Both 10%

Russian Federation

Both 10% Both 10% Both 10% Both 10%

Saudi Arabia Both 5% Both 10% Both 10% **

Spain Both 15% Both 15% Both 10% 20%

Both 20%

Sri Lanka Both 15%+ Both 10% Both 10% **

Sweden Both 10% Both 10% Both 10% Both 10%

Swiss Confederation

Both 10% Both 10% Both 10% Both 10%

Thailand Both 15%, 20%

Both 10%, 25%

Both 15% Both *

United Arab Emirates

Both 5% Both 5% 12.5%

Both 10% ***

United Kingdom

Both 15% Both 15% 10%

Both 10% 15% 20%

Both 10% 15% 20%

United States of America

Both 15% 25%

Both 10% 15%

Both 10%, 15%, 20%

Both 10%, 15%, 20%

* Not mentioned - tax law in the state, which has the right to tax, shall prevail. ** No separate provision- to be taxed as per domestic law. *** In the country of residence. As per domestic law.

+ Beneficial ownership may not be required. $ Interest exempt if beneficially owned by government or bank carrying on bonafide banking business. In other cases, rate is applicable as per domestic law.

Appendix III (Contd)

Note: 1) Royalties and fees for technical services received by a foreign company are taxed at

20% in India, if they are received in pursuance of an agreement made after May 31, 1997.

2) Royalties and fees for technical services received by a foreign company are taxed at

10% in India, if they are received in pursuance of an agreement made after May 31, 2005.

3) In addition to the above 29 countries, India has entered into comprehensive double tax avoidance

agreements with 49 other countries. Information regarding such other agreements is available at: http://law.incometaxindia.gov.in/TaxmannDit/IntTax/Dtaa.aspx