India was liberated by non-violence, from British Colonial Rule, under the able leadership of respected Mahatma Gandhi, a barrister-at-law turned freedom fighter, on 15th August, 1947. We the people of India gave unto ourselves ‘Constitution’ on 26th January, 1950, – Liberty, Equality and Fraternity and declared as Republic of India. It is a vast country, the second largest country by population – home to about a sixth of the human population – the seventh largest country by sheer land mass. It is also the world’s largest democracy. It is an ancient cultured, spiritual and religious country with population consisting of Hindus, Jains, Buddhist, Mohammedans, Christians and Sikhs. Diversity in unity-all religions co-exist – we believe ‘LIVE, LOVE & LET LIVE’. India is a multilingual country with Hindi as National Language. Each State has its own language and has a large English – speaking population. It still lives in villages. It has Unity in Diversity - a common thought, common flag and commonality of interest with national spirit.

It has cultural, traditional, religious and spiritual similarity with the great country of Japan. Buddhism spread to Japan and other countries from India.

India is a colourful and hospitable country like Japan.

The Indian woman is charming, gracious, beautiful, sweet, humble, courteous with compassion and can stand with honour with its counter-part in Japan.

Government is alive to ‘Women Empowerment’.

Number of legislations have been enacted to enhance their status in the society and to eliminate gender discrimination.

On adopting liberalization of India’s economy in 1991, India experienced unprecedented growth and have become an integral part of the global economy, to reckon. India is now the world’s fourth largest economy and has been growing at an astounding annual rate of 7.8% since 2002. India’s growth has resulted in a quantum leap from a primarily agrarian society in the 1950s to an increasingly service and industry oriented economy. India’s resilient and growing domestic markets along with its robust and well-regulated banking and foreign exchange laws have ensured that the current global economic slowdown does not greatly affect the country’s economy. The recession in economy of United States of America affected a large number of countries over the globe. However, its impact in India was minimal.

It primarily affected its exports and the realty market, that too for hardly 6 to 8 months. It is again on the wheels and is likely to maintain an annual GDP growth of about 8% over the next five years. Its regulatory system and fiscal policy; enshrined habit of citizens to save and indulge less in credit facility along with its population growth needing the consumables got it back to normalcy quickly.

There has been a tremendous growth in educational centres. Literacy amongst rural population and womenfolk is on increase. Number of universities, technical institutes and academies have grown, attracting a large number of foreign students in all fields. To promote education, loans are made available on reasonable and concessional rate of interest. It has created a reservoir of talent with intellect superfine. Medical hospitals and diagnostic facilities are qualitative, quick and cheap. Tourism and Hotel industry has grown. India has large number of religious, scenic beauty spots, historic heritage resorts and entertainment destinations. Its entertainment industry and railways net-work is presently largest in the world.

India is also the world’s largest democracy with an overall free market economy. It is further strengthened by the re-election of a stable Central Government, last year. The Government’s stimulus package to bolster domestic industry, infrastructure and construction has begun to bring in much needed stability to the economy. Stock market sentiments too, have begun to react positively to such measures.

Having emerged as a global centre for services and outsourcing, India is also becoming an attractive destination for outsourcing industrial production, specifically for specialty manufacturing. In addition, the expanding Indian middle class is about the same size as the population of the U.S.A. It has seen a significant rise in its ability to pay for and its desire to buy high-quality consumer products, thereby providing a large domestic market for companies that choose to set up consumer manufacturing operations and sales centres in India. Further, it is expected that as India continues to grow, its need for development of its physical and human infrastructure will correspondingly increase. In this context, it is anticipated that India will require some US$ 500 billion over the next five years in investments into the infrastructure sector. All in all, there is little doubt that India is one of the world’s most attractive investment destinations. India is shining on the world map.

As a former British colony, India adopted a common law based legal system, under which India’s basic commercial laws are similar to those of other Commonwealth jurisdictions. The Indian legal system is, therefore, based on a combination of legislation and judicial precedent. India is a constitutional republic with a partly federal system of governance.

The Union and the States, both legislate on subjects as laid out in its Constitution. For this reason, there are plenty of legislations and authorities, which make the practice of Indian law complex, well-laid out and flourishing.

The Supreme Court of India is the apex judicial authority in India. The Supreme Court generally receives appeals from 21 High Courts that occupy the tier below it. Most States have a High Court which has certain important areas of law and have dedicated tribunals in order to facilitate the speedy dissemination of justice by individuals qualified in the specific fields. These include the Company Law Board, the Income Tax Appellate Tribunal, the Labour Appellate Tribunal, the Copyright Board, Competition Commission and others. National Tax Tribunal and Company Law Appellate Tribunal are in offing. Certain disputes may be referred to in-house dispute redressal systems within certain government bodies and government companies. The jurisdiction of a court, tribunal or authority may depend upon fulfilment of certain conditions or upon the existence of a particular fact. If such a condition is satisfied, only then does the authority or court, as the case may be, have the jurisdiction to entertain and try the matter. Beneath the High Courts are the civil and criminal courts that are classified according to whether they are located in rural or urban areas and by the value of disputes such courts are qualified to adjudicate upon. Courts are slow and have a large backlog of pending cases. Indians are litigants by nature.

There are three constitutional wings, the Legislature, the Executive and the Judiciary. The legislature is headed by the President – the Executive is headed by the Prime Minister who has Ministers in his cabinet – Judiciary is headed by the Chief Justice of India with his companion judges, High Court and Subordinate judiciary. Each State has its own Legislative Assembly with Chief Minister and team of Ministers. Law and order is the State subject. Life is secured with infiltration from Pakistan and other neighbour countries and also domestic and international terrorists. Still there is peace and prosperity. People are simple, sincere and nonaggressive.

To set up operations or make investments, it is advisable to observe the economic and political environment in India and to understand the ability of the investor to carry out operations in India, the location of its customers, the quality and location of its workforce. Many tax incentives are based on locations and field of operation. The provisions of Foreign Exchange Management Act, 1999, the Companies act, 1956, Specific Laws relating to Financial Services, Infrastructure and other sectors apart from the Direct Tax Laws and Indirect Tax Laws need to be considered.

Setting up of operations in India or investing in India requires conformity with India’s foreign exchange regulations, specifically, the regulations governing foreign direct investment (‘FDI’). Most aspects of currency transactions with India, including investments, are governed by the Foreign Exchange Management Act, 1999 (‘FEMA’) and the delegated legislation under the Act. FDI, upto 100%, is permitted in most sectors in India under the ‘automatic route’.

Under the automatic route, a company investing in India does not require the prior approval of India’s central bank, the Reserve Bank of India (‘RBI’) from the FEMA perspective before making such an investment. Certain sectors however, do have caps on the amount of FDI allowed. There are some sectors where FDI is prohibited. Further, certain sectors and businesses in India have minimum capitalization norms under which a foreign investor intending to invest in these sectors must invest a certain minimum amount. Regular Press notes are being issued.

Following options, subject to requirement, are open for a foreign company to set up in India :–

(1) Liaison Office : It requires prior consent of the Reserve Bank of India (RBI). It cannot undertake any commercial activities and must maintain itself from the remittances received from its parent foreign company. The approval is valid for three years.

(2) Branch Office: Consent of the RBI is necessary. It can act as buying or selling agent of the parent company. It is permitted to remit surplus revenues subject to the taxes applicable.

(3) Project Office: It can be set up under the automatic route subject to certain conditions being fulfilled. The activities must be related to or incidental to the execution of the relevant project. It can operate a Bank account and may remit surplus revenue.

(4) Limited Liability Partnership (LLP): LLPs are governed by the Limited Liability Partnership Act, 2008. The LLP is a body corporate and exists as a legal person separate from its partners. However, foreign investment is not permitted in LLPs.

(5) Partnership: A partnership is not a legal entity independent of its partners. All the partners are agent and agree to share the profits of a business carried on by all of them, or any of them acting for all of them. The liability of the partners is joint and several.

(6) Joint Venture / Association of Persons: Two or more persons join together, each member contributing, performing its own part and sharing or forming a Consortium to execute certain work or render services or provide project consultancy.

(7) Private Limited Company: A private limited company must have a minimum paid-up share capital of INR 100,000 (approx. US$ 2100).

It carries out business in accordance with its memorandum and articles of association.

A private limited company has certain distinguishing characteristics. It must, in its articles of association, restrict the right to transfer shares; the number of members in a private limited company is limited to 50 members (excluding the present and past employees of the company); its Articles of Association must prohibit any invitation to the public to subscribe to the securities of the company and must also prohibit the invitation or acceptance of deposits from persons other than members.

(8) Public Limited Company: A public limited company must have a minimum paid-up share capital of INR 500,000 (approx. US$ 10,500). It is defined as a company which is not a private company (but includes a private company that is the subsidiary of a public company). A public company can only commence business after being issued a ‘Certificate of Commencement of Business’. A public limited company may have more than 50 shareholders and may invite deposits from the public. A public limited company may also list its shares on a recognized stock exchange by way of an initial public offering (‘IPO’).

The Registrar of Companies (ROC) must be provided with one preferred name and five alternate names. A no objection certificate must be obtained in the event that the word is not an ‘invented word’.

The use of certain words in the name of the company requires minimum capitalization. The Memorandum and Articles of the company must be prepared in accordance with the needs of the business and the same must be filed with the ROC. The ROC will need to be provided with certain information as to the first directors and the proposed address of its registered office. The proposed directors will have to obtain ‘Director Identification Numbers’ and should also obtain ‘Digital Signature Certificates’.

A private limited company must have at least 2 shareholders and 2 directors whereas a public limited company must have at least 7 shareholders and 3 directors. On compliance of procedural requirements, a certificate of incorporation would be issued by the ROC. A private company can commence business immediately upon receiving its certificate of incorporation, whereas a public company may only commence business once it has obtained a ‘Certificate of Commencement of Business’ from the ROC. The company should preferably be capitalized within a month of receiving the certificate of incorporation.

After incorporation, the company must hold its first Board meeting, may appoint additional directors; must apply for permanent account number and tax deduction account number with the Income-tax Department; must register with statutory authorities such as indirect tax authorities and employment law authorities, must open a bank account after fulfilling the requirement ‘KNOW YOUR CUSTOMER” and may enter in to contracts with suppliers and customers essential to running the business. Statutory audit and audit of number of certificates from a Chartered Accountant is necessary.

The primary types of securities used in foreign investments into India are:-

1. Equity Shares: Equity shares are normal shares in the share capital of a company and typically come with voting rights and dividend rights. A private company may issue shares that have weighted voting rights or no voting rights at all.

2. Preference Shares: Preference shares are shares which carry a preferential right to receive dividends at a fixed rate as well as preferential rights during liquidation as compared to equity shares. Convertible preference shares are a popular investment option. Preference shares may be redeemable.

3. Debentures: Debentures are debt securities issued by a company, and typically represent a loan taken by the issuer company with an agreed rate of interest. Debentures may either be secured or unsecured, may also be convertible.

For the purposes of FDI, fully and compulsorily convertible preference shares and debentures are treated on par with equity and need not comply with the External Commercial Borrowings guidelines (“ECB Guidelines”). The ECB guidelines place certain restrictions and requirements on the use of ECBs.

Indian companies may only use ECBs up to a limit of US$ 500 million per company per year under the automatic route. In order to raise ECBs, the Indian company must be an eligible borrower and the foreign financier must be a recognized lender.

Further, there remain restrictions on the permitted end-uses of foreign currency expenditure such as for the import of capital goods and for overseas investments.

Earnings out of India can be remitted in numerous ways –

1. Dividend: A percentage of the nominal or face value of the share is declared as dividend based on the net earning of the company.

The dividend distribution tax is borne by the company. Thus dividend is tax free in the hands of a shareholder.

2. Buyback: Buyback of securities provides an investor the ability to extract earnings as capital gains and consequently take advantage of tax treaty benefits. However, buybacks in India have certain restrictions and thus need to be strategically planned.

3. Redemption: Preference shares and debentures can both be redeemed for cash. While redemption is perhaps the most convenient exit option for investors, optionally convertible securities, which are effectively redeemable, have been classified as ECB. This entails greater restrictions.

4. IPO: An initial public offering (‘IPO’) is the first offer for sale of the shares of a company to the public at large via listing the company’s stock on a stock exchange. While an initial public offering may usually be regarded as a longterm exit option, it is also usually included as an exit option in transaction documents as it may provide investors with large returns.

While foreign investment is freely permitted in most sectors, an investor for certain sectors and depending on the quantum of investment, may be required to obtain prior approval from the FIPB or the RBI. Foreign Direct Investment can be made either through the ‘automatic route’ or the ‘approval route’. Under the ‘automatic route’ neither the foreign investor nor the Indian company requires any approval from the FIPB or the RBI. The company in such cases is only required to file certain forms and declarations with the RBI. Under the ‘approval route’ prior approval of the FIPB would be required before asking the foreign investment.

Foreign investment is usually in the form of subscription to or purchase of equity shares and/ or convertible preference Shares/debentures of the company. The investment amount is normally remitted through normal banking channels or into a Non-Resident External Rupee (NRE)/Foreign Currency Non-resident (FCNR) account of the Indian company with a registered Authorized dealer (a designated bank authorized by the RBI to participate in foreign exchange transactions).

The company is required to report the details of the amount of consideration received for issuing its securities to the regional office of the RBI in the forms prescribed under the regulations relating to FDI together with copies of the Foreign Inward Remittance Certificate, arranged for by the Authorized dealer evidencing the receipt of the remittance along with the submission of the ‘know your customer’ report of the non-resident investor. A certificate from the Statutory Auditors or Chartered Accountant indicating the manner of calculating the price of the shares also needs to be submitted. All of these documents must be submitted within 30 days of the receipt of the foreign investment and must be acknowledged by the RBI’s concerned regional office, which will subsequently allot a Unique Identification Number for the amount reported. The Indian company is required to issue its securities within 180 days from the date of receipt of foreign investment. Should the Indian company fail to do so, the investment so received would have to be returned to the person concerned within this time-frame.

While it is possible for a company to raise external debt, the same is governed by the ECB guidelines prescribed by the RBI. These guidelines restrict both the source of funds as well as the use of such funds. Further, the ceilings on interest payable on the same may discourage foreign lenders from providing debt to Indian borrowers.

Domestic companies are taxed at 33.21% while foreign companies are taxed at 42.23% on net taxable income. Dividend distributed by Indian companies are taxed at about 17% payable by the company. When exiting or restructuring, capital gains tax is payable.

Certain types of payments in India require the payer to withhold tax as ‘tax deduction-at-source’ (TDS).

Minimum Alternate Tax (MAT) is payable at about 19%, if a company’s book profits are less than 15 per cent of the company’s income due to exemptions / deductions, etc. zero tax payment. Indirect taxes in India levied by the Union Government include Central Sales Tax, Central Excise, customs duty and service tax. States levy indirect taxes such as state level value added tax and stamp duty. Certain other taxes such as ‘entertainment tax’ and ‘luxury tax’ are also levied by certain states. To replace Central & State Indirect tax, Goods and Service Tax (GST) is likely to be introduced from 1-4-2011. Wealth tax is applicable in a restricted manner and levied only on specified assets and not on ‘business assets’. A new Direct Tax Code is proposed to be operative from 1-4--2011. Many tax reforms are in the pipeline.

India has entered into an agreement on 29-12-1989 with the Government of Japan for avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income.

On account of the DTAA, same income is not liable to be taxed in the two countries. Article 5 defines ‘Permanent Establishment (PE). In case of PE income earned would be assessable in the country where PE is situate. Separate articles exist on taxability of immovable property, profits of an enterprise, dividend, interest, royalty, fees, capital gains, professional services, etc. Main thrust of the said articles is that the income is assessed where the property is situate or profits of an enterprise are earned or dividends, interest, etc. are earned or accrue. In case of any doubt about the taxability or the rate, an application to Advance Ruling Authority can be filed which is binding on the Revenue authority. Tax audit by a Chartered Accountant is compulsory.

With a potential market of over 1 billion people, India is a lucrative export destination. The primary tax relevant to the import of goods into India is customs duty. Customs duties are levied whenever there is trafficking of goods through an Indian customs barrier; i.e., levied both for the export and import of goods. Export duties are competitively fixed so as to give advantage to the exporters. A large share of customs revenue is contributed by import duty.

Customs duty primarily has a ‘Basic Customs Duty’ for all goods imported into India and the rates of duty for classes of goods are mentioned in the Customs Tariff Act, 1975 (the ‘Tariff Act’), which is based on the internationally accepted Harmonized System of Nomenclature (‘HSN’). The general rules of interpretation with respect to tariff are mentioned in the Tariff Act. The rates are applied to the transaction value of goods (for transactions between unrelated parties) as provided under the Customs Act, 1962 (the ‘Customs Act’) or by notification in the Official Gazette. A further duty, known as Additional Customs Duty or the Countervailing Duty (‘CVD’) is imposed to countervail the appreciation of end price due to the excise duty imposed on similar goods produced indigenously. To bring the price of the imported goods to the level of locally produced goods which have already suffered a duty for manufacture in India (excise duty), the CVD is imposed at the same rate as excise duty on indigenous goods. In addition to the above, there are also Additional Duties in lieu of State and local taxes (‘ACD’) which are also imposed as a countervailing duty against sales tax and value added tax imposed by the States.

Human resources in India are abundant. With an increasingly educated middle class comprising almost 200-300 million individuals, there is no dearth of intellectual capital for any sort of business activity. Further, with a total population of over one billion, there is availability of skilled, semi-skilled and unskilled labour at much cheaper rate. India has many employment related legislations at both the central and state levels which are applicable to large cross sections of establishments and its employees. Labour laws support the employees.

Intellectual Property and the Rights attached thereto (‘IPRs’) have become precious commodities and are being fiercely protected. Well-established statutory, administrative, and judicial frameworks for safeguarding IPRs exist in India. India has complied with its obligations under the Agreement on Trade Related Intellectual Property Rights (‘TRIPS’) by enacting the necessary statutes and amending its existing statutes. Well known international trademarks have been afforded protection in the past by the Indian courts despite the fact that these trademarks were not registered in India. Computer databases and software programmes have been protected under the copyright laws in India, thereby allowing software companies to successfully curtail piracy through police and judicial intervention.

Although trade secrets and know-how are not protected by any specific statutory law in India, they are protected under the common law and through contractual obligation.

India is a signatory to many international conventions. By virtue of such membership, convention applications for the registration of trademarks, patents, and designs are accepted with the priority date claim; copyright infringement suits can be instituted in India based on copyright created in the convention countries. Patents, copy rights, trade marks, trade secrets, designs, etc. are protected under specific legislation. A company in India needs to ensure that it fully leverages the intellectual property developed by it as this may often be the keystone of its valuation. Further, it needs to establish systems to ensure that such intellectual property is adequately recorded, registered, protected and enforced. It needs to conduct IPR audits to ensure that any intellectual property developed by the company is not going unnoticed or unprotected. The company also needs to ensure that its employees do not violate any third party’s intellectual property rights knowingly or unknowingly. It must ensure that the rights are not only protected in India, but also in the country where it carries on its business, where its products are exported, or where it anticipates competition.

Disputes can be resolved through Courts and Tribunals. Court proceedings are time consuming. It is desirable to insert arbitration clause in the contract whereby the proceedings can be expedited under Arbitration and Conciliation Act, 1996. The Act is based on the UNCITRAL Model Law and facilitates International Commercial Arbitration as well as domestic arbitration and conciliation. Under the said Act, an arbitral award can be challenged only on limited grounds and in the manner prescribed. It also covers conciliation, which is a form of mediation.

India is party to the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.

While corruption still exists, the computerization of numerous public bodies has led to an increased level of efficiency and institutions such as the RBI and SEBI have become increasingly proactive and professional in dealing with foreign investment into India. It has helped India tremendously in avoiding any major internal impact of the ongoing financial crisis.

Despite the recessionary global economic state, India posted a growth rate of over 6 per cent in 2008-09 while most developed nations have faced negative growth patterns. It continue to be an attractive destination for investment and trade. Its expanding level of intellectual capital and large English-speaking population are likely to make it a global hub for services. And its significant internal market makes it an attractive destination for investments in services and manufacturing. Entrepreneurs and investors are invited as it is a safe destination to expand and earn.

[Source : Paper presented at “Luncheon discussion meeting” with the officials of Japan Federation of Certified Public Tax Accountants’ Associations, Tokyo, dated 10th June, 2010.]