Business Operations in India (Portfolio 966)

Tax Management Portfolio, Business Operations in India, analyzes India's Companies Act, foreign investment policies, foreign exchange management, anti-competition legislation, Income Tax Act, the liberal tax concessions granted for new investments and industrial undertakings, the special concessions for foreign enterprises and the provisions for the computation of the taxable income of nonresidents.

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Some indirect taxes such as excise and customs (import) duty, sales tax, value added tax and stamp duty are also discussed. Other topics explained in detail are foreign technology agreements, policies for setting up a 100% export-oriented unit and the legislation for troubled industrial companies.

The Worksheets feature a checklist of transactions, guidelines and government policies having corporate and tax significance.


Business Operations in India was authored by the following experts.
Adil K. Kotwal

Adil K. Kotwal, B.Com, F.C.A., Bachelor of Commerce, University of Bombay (1978), Fellow of the Institute of Chartered Accountants of India. He joined the firm in 1978 and is currently the Managing Partner and partner responsible for the firm's corporate finance and management consultancy and advisory practice. He has served as visiting faculty with the University of Bombay teaching Accountancy and Taxation.

Sunil P. Hansraj

Sunil P. Hansraj, B.Com, F.C.A., University of Bombay (1988), Fellow of the Institute of Chartered Accountants of India. He joined the firm in 1988 and is the partner responsible for the firm's practice relating to international taxation and advisory services to foreign clients investing in India.

Table of Contents

Detailed Analysis

I. Introduction

A. Geography

B. Climate

C. Population

D. Language

E. Transportation

F. Communications

G. Political Structure

H. Judiciary

I. Currency and Banking

J. Quality of Life

II. Operating a Business in India

A. The Indian Economy

1. Introduction

2. Economic Factors

3. India as Investment Location

B. Foreign Investment

1. Foreign Investment Policy

a. Foreign Direct Investment

(1) Automatic Route of Reserve Bank of India for Issue of Shares by an Indian Company

(a) General

(b) Foreign Investment in Trading Companies

(c) Foreign Investment in Small Scale Industrial Units

(d) Foreign Investment in a Small Scale Industrial Export Oriented Unit, a Unit in a Free Trade Zone or Export Processing Zone, or in a Software Technology Park or Electronic Hardware Technology Park

(e) Foreign Investment in Asset Reconstruction Companies

(f) Investment in Infrastructure Companies in the Securities Market

g. Investment in Credit Information Companies

h. Investment in Commodity Exchanges

i. Investment in Public Sector (Nationalized) Banks

(j) Others

(2) Issue of Shares by a Company Requiring Government Approval

(3) Guidelines for Calculation of Foreign Investment

b. Other Modes of Foreign Direct Investment

(1) Issue of Shares by International Offering Through American Depository Receipts and/or Global Depository Receipts

(a) Investment Via Rights Issue

(b) Acquisition of Bonus Shares

(c) Issue and Acquisition of Shares after Merger, Demerger or Amalgamation of Indian Companies

(d) Issue of Shares under Employees Stock Options Scheme to Persons Resident Outside India

(e) Reporting and Issue of Shares

(f) Pricing

c. Investments by Nonresident Indians

(1) Purchase/Sale of Shares and/or Convertible Debentures by a Nonresident Indian on a Stock Exchange in India on a Repatriation and/or Non-Repatriation Basis under the Portfolio Investment Scheme

(a) Report to the Reserve Bank of India

(b) Remittance/Credit of Sale/Maturity Proceeds of Shares and/or Debentures

(2) Purchase and Sale of Shares/Convertible Debentures by a Nonresident Indian, on a Nonrepatriation Basis

d. Investment by Foreign Institutional Investors

e. Investment by Asset Management Companies/Portfolio Manager

f. Purchase and Sale of Securities Other Than Shares or Convertible Debentures of an Indian Company by a Person Resident Outside India

(1) Permission for Foreign Institutional Investors

(2) Permission for Nonresident Indians

(3) Permission for Multilateral Development Bank

(4) Foreign Investment in Instruments Issued by Banks

(5) Method of Payment of Purchase Consideration

(6) Permission for Sale of Securities

(7) Remittance/Credit of Sale/Maturity Proceeds

g. Investment in an Indian Venture Capital Undertaking by a Registered Foreign Venture Capital Investor

(1) Maintenance of Account by a Registered Foreign Venture Capital Investor for Investment in Indian Venture Capital Undertakings/Venture Capital Funds or Schemes/Funds Set Up by Venture Capital Funds

(2) Forward Cover

(3) Valuation of Investments

(4) Adherence to Securities Exchange Board of India Guidelines

h. Investment in Partnership Firm/Proprietary Concern

(1) Investment in a Firm or Proprietary Concern in India by a Person Resident Outside India

(2) Investment in Sole Proprietorship Concern/Partnership Firm with Repatriation Benefits

(3) Investment by Nonresidents other than Nonresident Indians/Persons of Indian Origin

(4) Restrictions

i. Prior Permission of Reserve Bank in Certain Cases for Transfer of Security

(1) Transfer by Way of Gift or Sale by a Person Resident in India

(2) Transfer by Way of Sale Not Covered by the Regulations by a Person Resident Outside India

(3) Remittance of Sale Proceeds

2. Exchange Control

a. Foreign Exchange Management Act, 1999

b. Residential Status

c. Capital Account Transactions

d. Current Account Regulations

e. Foreign Companies

(1) Branch Office

(2) Liaison Office

(3) Project Office

(4) Procedure

f. Exports

g. Immovable Property

(1) Acquisition and Transfer of Immovable Property Outside India

(2) Acquisition and Transfer of Immovable Property in India

h. Remittance of Dividends and Interest

i. Other Provisions

C. Outward Investment from India

1. Direct Investment Outside India

a. Permission for Direct Investment in Certain Cases

b. General Permission for Investment in Agricultural Operations Overseas Directly or through Overseas Offices

c. General Permission for Investment in the Equity of a Company Registered Overseas

d. Investment by Mutual Funds

e. Investment in Financial Services Sector

f. Investment in a Foreign Security by Swap or Exchange of Shares of an Indian Company

g. Approval of the Reserve Bank in Certain Cases

h. Unique Identification Number

i. Investment by Capitalization

j. Export of Goods towards Equity - Procedure

k. Post Investment Changes/Additional Investment in Existing Joint Venture/Wholly Owned Subsidiary

l. Acquisition of a Foreign Company Through Bidding or Tender Procedure

m. Obligations of the Indian Party

n. Transfer by Way of Sale of Shares of a Joint Venture Wholly Owned Subsidiary Outside India

o. Transfer by Way of Sale of Shares Involving Write-Off

p. Pledge of Shares of Joint Ventures and Wholly-Owned Subsidiaries

q. Hedging of Overseas Direct Investments

2. Investments Abroad by Individuals in India

a. Prior Permission of the Reserve Bank for Direct Investment by a Proprietary Concern in India

b. Investment by Individuals

3. Investments in Foreign Securities Other than by Way of Direct Investment

a. Prohibition on Issue of Foreign Security by a Person Resident in India

b. Permission for Purchase/Acquisition of Foreign Securities in Certain Cases

c. Transfer of a Foreign Security by a Person Resident in India

d. General Permission for Acquisition of Foreign Securities as Qualification/Rights Shares

e. Prior Permission of Reserve Bank of India in Certain Cases

f. Investment by Mutual Funds

D. Industrial Policy

1. General

2. Exemption from Industrial Licensing

3. Industries Subject to Compulsory Licensing

4. Industries Reserved for the Public Sector

5. Substantial Expansion/Broad Banding

6. Filing of Memoranda

E. Monopolies and Restrictive Trade Practices

1. General

2. Monopolistic Trade Practices

3. Unfair Trade Practices

4. Restrictive Trade Practices

5. Interconnected Undertakings

6. Administrative Machinery

F. Competition Act 2002

1. General

2. Overall Scheme

3. Competition Commission of India

4. Acts Taking Place Outside India but Having an Effect on Competition in India

III. Business Organization

A. Business Presence of a Foreign Investor

B. Types of Companies

1. Private Company

2. Public Company

C. Company Formation

D. Memorandum of Association

E. Articles of Association

F. Holding and Subsidiary Company

G. Shares

1. Kinds of Shares

2. Payment of Commission

3. Buy-back of Shares

4. Issue of Rights Shares

5. Rights of Preference Shareholders

6. Stock Option Scheme

a. For Public Sector Enterprises

b. For Companies Listed on Recognized Stock Exchange

7. Issue of Shares at Premium

8. Issue of "Sweat Equity" Shares

9. Other General Provisions

H. Debentures

I. Public Offering/Foreign Borrowing

1. Public Offering in India

2. Public Offering Overseas

3. External Commercial Borrowings

J. Transfers of Shares and Debentures

K. Registration of Charges

L. Commencement of Business

M. Shareholders' Meetings

N. Dividends

O. Audit and Accounts

P. Directors

Q. Selling Agents

R. Intercorporate Loans and Investments

S. Compromise, Arrangement, Reconstruction and Amalgamation

T. Protection of Minority and Public Interests

U. Winding Up and Dissolution

V. Foreign Corporations

W. Administration

X. Depositories Act, 1996

1. Creation of Depositories

2. Depository and Participant

3. Options to Receive Security Certificates or Hold Securities with Depository

4. Securities to Be Fungible

5. Ownership Records and Hypothecation

IV. Principal Taxes

Introductory Material

A. Income Tax

B. Wealth Tax

C. Gift Tax

D. Service Tax

E. Excise Duty

F. Customs Duty

G. Sales Tax

H. Stamp Duty

V. Direct Taxation

A. Income Tax

1. Tax Year

a. Assessment Year

b. Previous Year

2. Residence

a. Individuals

b. Hindu Undivided Family/Firm/Association of Persons

c. Companies

d. Other Persons

e. Scope of Income Chargeable to Tax

3. Charge of Income Tax

a. Principles

b. Revenue and Capital Receipts

c. Taxable Income

d. Agricultural Income

e. Income Deemed to Accrue or Arise in India

f. Transfer Pricing

g. Avoidance of Tax by Transactions Resulting in Transfer of Income to Nonresidents

h. Avoidance of Tax by Way of Certain Transactions in Securities

i. Expenditure Incurred in Relation to Income Not Includible in Total Income

j. U.S. Pension Trust

4. Categories of Income

a. Salaries

b. Income from House Property

c. Income from Business or Profession

(1) General

(2) Statutory Liabilities

(3) Maintenance of Accounts

(4) Auditing of Accounts

(5) Method of Accounting

d. Capital Gains

e. Income from Other Sources

(1) General

(2) Dividends

5. Deductions in Computing Income from Business or Profession

a. Depreciation Allowance

b. Deduction of Deposits in Site Restoration Fund

c. Expenditure on Scientific Research

d. Amortization of Patents and Copyrights

e. Expenditure on Know-How

f. Amortization of Expenditure on License Acquired to Operate Telecommunication Services

g. Amortization of Preliminary Expenses

h. Expenditure on Eligible Projects or Scheme

i. Expenditure by Way of Payment to Associations and Institutions for Carrying Out Rural Development Programs

j. Amortization of Expenditure in the Case of Amalgamation or Demerger

k. Amortization of Expenditure on Prospecting, etc., for Development of Certain Minerals

l. Amortization of Expenditure Incurred Under Voluntary Retirement Scheme

m. Special Provisions Relating to Income of Shipping Companies

n. Concessions for Financial Corporations, Housing Finance and Banking Companies

o. Expenditure for Unlawful Purposes

p. Expenditure in Cash

q. Bad Debts

r. Securities Transaction Tax

s. Commodities Transaction Tax

t. Provision for Bad and Doubtful Debts in Case of Banks and Financial Institutions

u. Expenditure on Interest, Royalty, Fees for Technical Services and Other Payments on Which Tax Is Deductible at Source

v. Interest Paid with Respect to Capital Borrowed for Specific Purposes

6. Setoff and Carryforward of Losses and Depreciation

a. Setoff of Losses

b. Setoff and Carryforward of Unabsorbed Depreciation

c. Carryforward of Losses

(1) General

(2) Business Losses Other than Speculation Losses

(3) Speculation Losses

(4) Capital Losses

(5) Losses Incurred in Business of Owning and Maintaining Race Horses

(6) Losses Incurred under Head House Property

d. Carryforward and Setoff in Amalgamation or Demerger

7. Tax Rates

a. Individuals

b. Companies

c. Minimum Alternate Tax

8. Dividends and Income Distribution

9. Tax Concessions

a. General

b. Concession for Industrial Undertakings in Free Trade Zones

c. Concession for 100% Export-Oriented Undertakings

d. Concession for Industrial Undertakings in the North-Eastern Region

e. Special Provisions in Respect of Newly Established Units in Special Economic Zones

f. Special Provisions in Respect of Export of Certain Articles or Things

g. Concession for Projects Executed Outside India

h. Concessions for Public Financial Institutions, Banks, etc.

i. Concessions for World Bank-aided Housing Projects

j. Tax Incentive for Exports

k. Concession for Hotel and Foreign Tourist Businesses

l. Concession with Respect to Profits from the Export of Computer Software

m. Concession with Respect to Profits from the Export of Film Software

n. Concessions for Royalties, etc., from Foreign Enterprises

o. Tax Holiday

(1) Industrial Undertakings or Enterprises Engaged in Infrastructure Development

(2) Other Industrial Undertakings

(3) Certain Undertakings or Enterprises in Special Category States

(4) Industrial Undertaking or Enterprise Engaged in Development of Special Economic Zone

(5) Industrial Undertakings Engaged in the Business of Hotels and Convention Centers in Specified Area

(6) Undertakings Engaged in Business in North-Eastern States

p. Concessions for Investor Protection Funds

q. Concessions for Venture Capital Funds/Undertakings

r. Concessions for Infrastructure Capital Funds/Companies

s. Concession with Respect to Profits from Collecting and Processing Biodegradable Waste

t. Concessions for Employment of New Workmen

u. Special Privileges for Business Reorganization

v. Stock Lending Scheme

w. Concession for Certain Income of Offshore Banking Units and International Financial Services

10. Advance Tax and Tax Deducted at Source

a. Advance Tax

b. Tax Deducted at Source

(1) Foreign Companies

(2) Nonresident Individuals

(3) Residents

(a) Salaries

(b) Interest on Securities

(c) Other Interest

(d) Payments to Contractors and Subcontractors

(e) Rent

(f) Fees Paid for Professional and Technical Services

(g) Commission or Brokerage

(h) Income from Dividends

(i) Winnings from Lotteries, Crossword Puzzles, Card Games and Other Games

(j) Insurance Commissions

(k) Winnings from Horse Races

(l) Payments to Nonresident Sportsmen or Sports Association

(m) Payments in Respect of Deposits Under National Saving Scheme or Deferred Annuity Plan

(n) Payments on Account of Repurchase of Units by Mutual Fund or Unit Trust of India

(o) Commission on Sale of Lottery Tickets

(p) Payment of Compensation on Acquisition of Certain Immovable Property

(4) Payment of Tax Deducted at Source

(5) Income from Units of Nonresidents

(6) Offshore Funds, Income from Notified Bonds/Shares and Foreign Institutional Investors

11. Submission of Returns

12. Tax Administration in India

a. Income Tax Authorities

b. Administration of Income Tax Act

c. Assessment Procedures

d. Reassessment Procedures

e. Rectification of Mistakes

f. Appeals Procedure

g. Revisional Powers of Commissioner

h. Advance Rulings

i. Assessment of Undisclosed Income

j. Provisions for Assessment of Undisclosed Income

B. Wealth Tax

VI. Special Provisions Applicable to Nonresidents

A. Residence

1. Individuals

2. Companies

B. Scope of Income Chargeable to Tax

C. Computation of Taxable Income: Special Provisions

1. Business of Mineral Oil Exploration

2. Business of Operating Aircraft

3. Shipping Business

4. Business of Civil Construction for Turnkey Power Projects

5. Head Office Expenses

6. Income from Prospecting for Mineral Oils

7. Income from Royalties or Fees for Technical Services

D. Rates of Tax

1. Individuals

2. Companies

E. Special Concessions for Foreign Enterprises/Foreign Nationals

1. Dividends

2. Royalties and Fees for Technical Services

3. Interest Tied to Foreign Currency

4. Interest on Foreign Loans and Credits

5. Tax Paid on Behalf of Foreign Company

6. Income of Offshore Funds

7. Income of Foreign Institutional Investors

8. Income from Interest on Specified Securities/Bonds

9. Income or Capital Gains from Bonds or Global Depository Receipts Purchased in Foreign Currency or Dividends on Global Depository Receipts Purchased in Foreign Currency

10. Foreign Technicians and Academics

a. Employees of Foreign Enterprises

b. Consultants

11. Income from Leasing of Aircraft

12. Income of European Union

13. Income of European Investment Bank

F. Tax Deducted at Source

1. Foreign Companies

2. Nonresident Individuals

3. Income from Units of Nonresidents

4. Offshore Funds, Income from Notified Bonds/Shares and Foreign Institutional Investors

G. Submission of Returns

VII. Indirect Taxation

A. General

B. Service Tax

1. Taxable Services Defined

2. Special Provisions for Nonresident Taxpayers

3. Special Provisions Where Payment Is Received in Foreign Exchange

4. Invoices

5. Rebate

6. Value of Taxable Services

7. Rate of Service Tax

C. Excise Duty

1. Power to Levy Excise Duty

2. Charge of Excise Duty

3. Basis of Charge

4. Administration

5. Export Concessions and Procedures

6. Central Value Added Tax

D. Customs Duty

1. Scope and Coverage of Customs Law

2. Taxable Event

3. Customs Tariff Act, 1975

4. Rules and Regulations

5. Types of Customs Duty

6. Valuation for Customs Duty

E. Sales Tax

1. Local Sales Taxes

2. Central Sales Tax

F. Stamp Duty

1. General

2. Application of Stamp Act to Instruments

3. Instruments Chargeable with Stamp Duty

4. Multifarious and Multi-description Instruments

5. Payment of Stamp Duty

6. Valuation

G. Securities Transaction Tax

H. Commodities Transaction Tax

I. Fringe Benefit Tax

1. Basis of Charge

2. Meaning of "Fringe Benefits"

3. Deemed "Fringe Benefits"

4. Valuation of "Fringe Benefits"

5. Deduction from Business Income

6. Return of "Fringe Benefits"

7. Advance Tax

8. Assessment

9. Appeal

10. Refund

11. Penalty

12. Recovery of Fringe Benefit Tax

J. Bank Cash Transaction Tax

VIII. "Sick" Industrial Companies

IX. Transfer Pricing

X. Double Taxation Relief

A. General

B. Unilateral Double Taxation Relief in India

C. Agreements for the Relief of Double Taxation

D. Adoption by Central Government of Agreements Between Specified Associations for Double Taxation Relief

Working Papers

Working Papers

Table of Worksheets

Worksheet 1 Exemptions and Privileges for Private Company1

Worksheet 2 Stamp Duty and Fees Payable for Registration of Companies

Worksheet 3 Memorandum of Association of a Company Limited by Shares

Worksheet 4 Regulations for Management of a Company Limited by Shares (Schedule I - Table A).

Worksheet 5 Master Circular On External Commercial Borrowings and Trade Credits (Guidelines on Policies and Procedures for External Commercial Borrowings (ECBs)

Worksheet 6 Guidelines for Overseas Public Offering of Equity and Related Instruments

Worksheet 7 Rates of Depreciation (Schedule XIV, Companies Act, 1956)

Worksheet 8 Schedule XIII Conditions To Be Fulfilled for Appointment of a Managing or Full Time Director or a Manager Without the Approval of the Central Government

Worksheet 9 Schedule I to the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulation, 2000 Relating to Issue of Securities to Person Resident Outside India

Worksheet 10 List of Activities or Items for Which Automatic Route of Reserve Bank for Investment from Persons Resident Outside India Is Not Available/List of Activities or Items for which FDI is Prohibited

Worksheet 11 Sector Specific Guidelines for Foreign Direct Investment

Worksheet 11A Guidelines for Calculation of Total Foreign Investment (Direct and Indirect Foreign Investment in Indian Companies)

Worksheet 12 Reporting Under FDI Scheme - Revised Form FC-GPR

Worksheet 12A Return to be Filed by an Indian Company Who has Arranged Issue of GDR/ADR

Worksheet 12B Quarterly Return

Worksheet 13 Guidelines for the Consideration of Foreign Direct Investment (FDI) Proposals by the Foreign Investment Promotion Board (FIPB)

Worksheet 14 Prescribed Form for Application for Approval of Foreign Technology Transfer (Form FT RBI)

Worksheet 15 Prescribed Form for Composite Application to the Government for Foreign Investment and Foreign Technology Agreement Not Qualifying for Automatic Approval and for Grant of Industrial License (Form FC/IL SIA)

Worksheet 16 [Reserved]

Worksheet 16A Form of Annual Performance Report

Worksheet 17 List of Sectors for which Swap or Exchange of Shares Route is Available

Worksheet 18 [Reserved]

Worksheet 19 Form ODI - Application to Reserve Bank of India for Direct Investment in a Joint Venture (JV)/Wholly Owned Subsidiary Overseas (WOS) Approval/Reporting of Outward Remittances

Worksheet 20 [Reserved]

Worksheet 20A Schedule I to the Foreign Exchange Management (Transfer or Issue of any Foreign Security) Regulations, 2004

Worksheet 21 Lists of Industries for Which Industrial Licensing is Compulsory and Industries Reserved for the Public Sector

Worksheet 22 List of Cities with Population of 1 million and above According to the Provisional Results of the 2001 Census

Worksheet 23 Depreciation Table

Worksheet 24 Depreciation Table - Assets of an Undertaking Engaged in Generation or Generation and Distribution of Power

Worksheet 25 The Eleventh Schedule, Income Tax Act, 1961 List of Articles or Things

Worksheet 26 The Eighth Schedule, Income Tax Act, 1961 List of Industrially Backward States and Union Territories

Worksheet 27 Form ITR-6 - Income Tax Return for Companies

Worksheet 28 Table of Indices for Computation of Long-Term Capital Gains

Worksheet 29 Form No. 34C - Form of Application for Obtaining an Advance Ruling under Section 245Q(1) of the Income Tax Act, 1961

Worksheet 30 Notification dated August 21, 2001 - Rules for Determining Arm's Length Price, Information and Documents to Be Furnished under Transfer Pricing Regulations Pursuant to Sections 92 to 92F of ITA

Worksheet 31 Notification dated September 25, 2001 (As amended) - Rules for valuing perquisites provided by employer for the purpose of calculating income under the head "Salaries"

Worksheet 32 1989 India-United States Income Tax Treaty

Worksheet 33 List of Comprehensive Double Taxation Agreements and Related Protocols Signed by India as of March 1, 2008

Worksheet 34 Rules for Perquisites



Statutes (as amended):



Reference Books:

Law Reports: