There is no separate law governing setting up and doing business in India by foreigners. However there are compliances / regulations related to restrictions to foreign stake in an Indian company. This is covered in detail below. All taxes and duties applicable on Indian domestic companies are also applicable on foreign JVs and subsidiaries in the India. There are generally no restrictions or concessions for foreign JVs / subsidiaries in India unless specified. For example there are compliances under transfer pricing act and imports/ exports regulations for transactions between foreign JV/ subsidiary and their global group entities to ensure that no tax / duty loss occurs due to their close relationship.
Indian FDI Policy
India has liberal policy on FDI among the emerging economies. FDI under the current framework is permitted for all categories of investors and in all sectors except:
1. Retail Trading (except single brand product retailing which is allowed)
2. Atomic Energy
3. Lottery Business
4. Gambling and betting
For other sectors, there are two routes for investing in India:
(i) Automatic Route wherein the foreign investor does not require any prior approval from the RBI or Government of India. Post Investment, certain compliances are required and after completion RBI issues a registration number for FDI.
(ii) Prior Government Approval Route which applies in the following circumstances:
A. Activities/Items that require an Industrial License
B. Proposals in which the foreign collaborator has an existing financial/ technical collaboration in India in the same field
C. Proposals for acquisition of shares in an existing Indian company in:
a. Financial services sector and
b. Where Securities & Exchange Board of India (Substantial Acquisition of Share and Takeovers) Regulations, 1997 is attracted;
D. All proposals falling outside notified sectoral policy/caps or under sectors in which FDI is not permitted.
FDI OPTIONS IN INDIA
Trading in India B2B
B2B trading is allowed under the Automatic Route of RBI in India, it is irrelevant whether the goods are sold to business customer, who conducts retail or to business customer conducting operations other than retail such as restaurant or a hotel. The concept of B2B sales form part of the wholesale trading and cannot be termed as retail trade.
Repatriation of Capital and Profit
In case foreign investments are made by a foreign company as per the Reserve Bank policy and necessary compliances are made, the foreign exchange can be remitted freely to India and also remittances can be made from India for dividends and capital gains on sales of shares after payment of necessary income tax and compliances with certain procedures which are fairly established.
The foreign investments laws for investments from Europe, America, Hong Kong, Taiwan and China are same.
Upon compliance with necessary procedures and allotment of a registration number by Reserve Bank of India for the foreign investments, the dividends declared by the Indian Joint Venture or company are freely repatriable after payment of Dividend tax (presently taxed at 16.995% in 100% subsidiary in India.
Foreign investments in India are subject to valuation norms prescribed by Reserve Bank of India. Inward investments should be not be at a rate lower than valuation of the Indian company certified by Company Auditor or Chartered Accountant with experience of over 10 years or a Merchant banker.
Similarly while remitting funds upon sale of shares of Indian company to the foreign investor; the sale of shares cannot be at a rate higher than valuation of the Indian company certified by Company Auditor or Chartered Accountant with experience of over 10 years or a Merchant banker.
Government Control on Foreign Exchange
An economy is said to have capital account convertibility when there is complete freedom to convert local currency into foreign currency and vice versa – without the permission of the Reserve Bank, and without limits. Indian Rupee is not fully convertible. It is convertible for revenue transactions; however it is not convertible for capital transactions. This allows residents to receive and make payments in foreign currency for all purposes other than investments and loans.
One can buy most things foreign with rupees when they are imported. One can travel abroad and buy whatever dollars you need – well almost – over the counter. One can also incur expenses abroad on your credit card and pay for the dollars (or pounds, or Euros) expended in rupees.
The foreign exchange transactions on revenue account are largely free i.e. an Indian company (including Joint Ventures and subsidiaries of foreign companies) can import and export freely except for restrictions on few items. However transactions of capital nature i.e. foreign investments in India companies and debt from overseas entities including overseas investments by Indian enterprises are stilled controlled by Reserve Bank of India though the policy is very open and liberalized and there are clear rules and guidelines governing compliances of these controlled transactions.
Limit on Foreign Exchange inflows and outflows
There is generally no limit on foreign change inflows and outflows for foreign investments and purchase/sale of goods and services. However there are restrictions on certain transactions of capital nature. Necessary compliances/ documentation needed as prescribed. Some indicative details given below –
FDI inflows – No limit except for banned sectors or where sector limit is not 100%
Profit remittance – No limit within the approved FDI
Payment for Import of goods – No limit except for certain banned products
Exports proceeds – No limits
Import of services – No limits
Technical fees & services – No limit
Foreign Loans – This is not free. There are restrictions