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DOING BUSINESS IN INDIA: OVERVIEW
PRACTICAL LAW COUNTRY Q&A 4-500-8980 (APPROX. 40 PAGES)
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DOING BUSINESS IN INDIA: OVERVIEW
1OVERVIEW
by Rajiv Luthra and Shinoj Koshy, L&L Partners (formerly Luthra & Luthra Law
Offices)*
Related Content
DOING BUSINESS IN INDIA: OVERVIEW
by Rajiv Luthra and Shinoj Koshy, L&L Partners (formerly Luthra & Luthra Law
Offices)*
Related Content
A Q&A guide to doing business in India.
This Q&A gives an overview of key recent developments affecting doing business
in India as well as an introduction to the legal system; foreign investment,
including restrictions, currency regulations and incentives; and business
vehicles and their relevant restrictions and liabilities. The article also
summarises the laws regulating employment relationships, including redundancies
and mass layoffs, and provides short overviews on competition law; data
protection; and product liability and safety. In addition, there are
comprehensive summaries on taxation and tax residency; and intellectual property
rights over patents, trade marks, registered and unregistered designs.
OVERVIEW
1. What is the general business, economic and cultural climate in your
jurisdiction?
ECONOMY
India's economy is a mixed developing economy. The 2019 novel coronavirus
disease (COVID-19) pandemic resulted in a 23.9% reduction in the country's GDP
for the first quarter of the 2020-2021 financial year. However, this was
reported to have decreased to 7.5% in the second quarter because of the lifting
of lockdown restrictions and stimulus measures announced by the Indian
Government.
DOMINANT INDUSTRIES
The major industries in India by share of GDP are construction, automobile
manufacturing, IT and ITeS, telecommunication services, financial services and
manufacturing. In view of the pandemic, contact-based services, manufacturing
and construction have been the most affected in the 2020-2021 financial year.
POPULATION AND LANGUAGE
India has an estimated population of 1.3 billion. While there is no official
language of communication, English and Hindi are the most widely used languages
for official purposes and there are also over 31 regional languages.
BUSINESS CULTURE
India has a formal work culture with business hours depending on the industry
and nature of employment. Normal banking hours are generally between 9.30am to
5.30pm from Monday to Friday and may vary on Saturdays.
2. What are the key recent developments affecting doing business in your
jurisdiction?
KEY BUSINESS AND ECONOMIC EVENTS
India announced a nation-wide 21-day lockdown on 25 March 2020 to restrict
rising infection numbers and casualties due to the COVID-19 pandemic. The impact
of the pandemic and the subsequent lockdown measures announced by the Indian
Government was deeply felt in industries such as travel and tourism, automotive,
retail and entertainment. At the same time, India witnessed a booming year for
foreign direct investment (FDI), with total FDI inflow reported at USD58.37
billion during April to November 2020. India also undertook measures amidst an
escalating border dispute with the Chinese Government, including banning more
than 250 Chinese-owned apps from digital stores for Indian consumers.
POLITICAL EVENTS
The parliamentary elections in 2019 led to the incumbent Narendra Modi led
government returning to power with a greater majority. The new government
promised stability against threats to India's national security from its
neighbours and improvement in India's position in ease of doing business
rankings. Facing a significant economic downturn in light of the COVID-19
pandemic, the government announced various rounds of policy measures, including
a stimulus package of 2.6 lakh crores (USD 34.6 billion), relaxation on income
tax reporting and payments, and direct incentives to stressed industries.
ECONOMIC AND LEGAL REFORMS
In addition to the political changes, other important steps taken to promote the
ease of doing business in India were:
* Decriminalising offences under the Indian Companies Act which "lack any
element of fraud or do not involve larger public interest" by replacement of
imprisonment with civil penalties.
* Introducing changes permitting certain classes of public companies to be
prescribed by the government which will be permitted to issue securities for
listing on stock exchanges in permissible foreign jurisdictions, without
requiring compulsory listing in India. Required amendments to listing
regulations by the Securities and Exchange Board of India (SEBI) are to be
notified.
* Introducing a Vivad Se Vishwas Scheme to resolve pending tax litigation
requiring taxpayers to pay the amount of disputed tax only (and not interest
and penalties) by 31 March 2021. In cases of disputes relating to penalty or
other interest or fee taxpayers would be permitted to settle the dispute by
payment of 25% of the amount in dispute by 31 March 2021.
* Granting exemptions to non-resident taxpayers/foreign companies in relation
to filing a return of income in India where the total income of the
non-resident taxpayer consists of royalty or fees for technical services
(FTS) (in addition to the exemption provided from the filing of tax returns
where total income consists of dividend income).
* Increasing FDI in defence manufacturing under the automatic route (see
Question 4) from 49% to 74%.
* Permitting 100% FDI in contract manufacturing through the automatic route
(see Question 4).
* Introducing amended Web Form 'SPICe+' (Simplified Proforma for Incorporating
Company Electronically Plus). This is an integrated web form offering
multiple services, for example, the reservation of company name and company
incorporation, which replaces the existing SPICe form for the incorporation
of companies.
* Launching SEBI Complaints Redress System (SCORES), a mobile application
enabling investors to lodge their grievances with SEBI in relation to the
securities market against listed entities and SEBI registered intermediaries.
* Suspending insolvency proceedings until 25 March 2021 under sections 7, 8, 9
and 10 of the Insolvency and Bankruptcy Code 2016 that provides for
initiation of corporate resolution proceedings by financial creditors,
operational creditors and corporate debtors.
* Introducing changes to the Indian Stamp Act 1899 to:
* bring uniformity to the rates of stamp duty on issue/sale of securities;
* enable states to collect stamp duty on securities market instruments in
one place by one agency (through the Stock Exchange or a clearing
corporation authorised by it or by the depository);
* introduce a mechanism for the sharing of stamp duty with relevant state
governments, based on the state of domicile of the buyer.
LEGAL SYSTEM
3. What is the general legal system in your jurisdiction?
India follows the common law system and has a written Constitution that provides
the framework for the separation of powers between the legislature, executive
and the judiciary. The Constitution has both federal and unitary features. It
provides for the distribution of legislative and executive powers between the
centre and state while also providing for a unified judiciary. The legislative
powers are divided between the central and state legislatures through:
* The Union List (which comprises 100 entries, which include subjects of
national significance such as national defence, taxation, incorporation of
companies and banking).
* The State List (which comprises 61 entries, which include subjects such as
agriculture, land, trade and commerce with the state territories).
* The Concurrent List (which comprises 52 entries, which include subjects such
as contracts, bankruptcy and insolvency, trust and trustees, on which both
the central and state level legislatures may legislate; however, in case of a
conflict, the central law prevails).
Additionally, the Constitution also provides for delegated legislation, allowing
the executive to exercise legislative power in the form of ordinances, rules and
regulations.
Further, the judiciary in India follows a hierarchical structure, with the
Supreme Court at the apex and a High Court in each state as the highest
appellate court. The decisions of the Supreme Court are binding on all the High
Courts and other subordinate courts or tribunals.
FOREIGN INVESTMENT
4. Are there any restrictions on foreign investment, ownership or control?
India does not have full capital account convertibility. Consequently, the
Indian Rupee is not a fully convertible currency and there are regulations
governing foreign investments into India. Non-residents investing in India are
required to comply with foreign exchange regulations, specifically the
regulations governing FDI. Most aspects of foreign currency transactions with
India are governed under the Foreign Exchange Management Act 1999 (FEMA) and the
associated delegated legislations.
GOVERNMENT AUTHORISATIONS
FDI into India can be divided into two broad categories:
* Investments under the automatic route (see below). These investments do not
require prior permission from the Indian Government, as long as they are
within the sectoral caps and in compliance with FDI-linked performance
conditions (if any).
* Investments under the approval route (see below). These investments can be
made only with the prior approval of the Indian Government. Proposals for
foreign investment are considered by the respective administrative
ministry/department.
* In addition to the FEMA related rules, foreign investment would be subject to
various sector-specific central/state legislations and may require approvals
from the sectoral regulators such as the Reserve Bank of India (India's
financial and forex regulator), the Insurance Regulatory and Development
Authority and the Competition Commission of India (India's anti-trust
regulator).
RESTRICTIONS ON ACQUISITION OF SHARES
Investments that do not Require Prior Governmental Permission. Investments under
the automatic route do not require prior permission from the government, as long
as such investments are within the sectoral caps set out under the policy
governing FDI into India (FDI Policy).
The sectoral caps for the sectors included under the automatic route include:
* Agriculture and animal husbandry at 100%.
* Plantation sector at 100%.
* Metal and non-metal ore and coal and lignite mining at 100%.
* Manufacturing at 100%.
* Defence industry at 74%, with government approval required beyond 74%.
* Broadcasting carriage services (such as teleports, direct-to-home, cable
networks and mobile TV) at 100%, and broadcasting content services at 49%,
with government permission needed beyond 49%.
* Airports, both greenfield and brownfield, at 100%.
* Air transport services (scheduled air transport service/domestic scheduled
passenger airline and regional air transport service at 49%, with government
permission needed beyond 49%; non-scheduled air transport services and
helicopter services at 100%).
* Other services under the civil aviation sector (ground handling services and
maintenance and repair organisations and flying training institutes at 100%).
* Construction development at 100%.
* Industrial parks at 100%.
* Private security agencies at 49%, with government approval required beyond
49% and up to 74%.
* Trading, including wholesale and business to business (B2B) e-commerce, at
100%.
* Marketplace model of e-commerce at 100%.
* Single brand product retail trading at 100%.
* Duty free shops at 100%.
* Railway infrastructure at 100%.
* Telecom services at 49%, with government approval required beyond 49%.
* Private sector banking at 49%, with government approval required for
investment between 49% and up to 74%.
* Asset reconstruction companies at 100%.
* Credit information companies at 100%.
* Other financial services activities regulated by specific financial sector
regulators, including the Reserve Bank of India (RBI) or any other financial
sector regulator as may be notified by the Indian Government at 100%.
* Private sector banking at 49%, with government approval required for
investment between 49% and up to 74%.
* Greenfield pharmaceuticals at 100%.
* Brownfield pharmaceuticals at 74%, with government approval required beyond
74%.
* Petroleum and natural gas, including exploration activities of oil and
natural gas fields, at 100%.
* Petroleum refining by public sector undertakings at 49%.
* Infrastructure companies in the securities market at 49%.
* White Label ATM Operations at 100%.
* Commodity exchanges at 49%.
* Insurance at 49% and insurance intermediaries at 100%.
* Pensions at 49%.
* Power exchanges at 49%.
* Manufacturing of medical devices at 100%.
Investments that Require Prior Governmental Approval. Under the approval route,
investments by foreign investors can be made only with the prior approval of the
Indian Government. Proposals for foreign investment under the government route,
are considered by the respective administrative ministry/department. The
sectoral caps for investments under the approval route include:
* Mining and mineral separation of titanium bearing minerals and ores at 100%.
* Retail trading (including e-commerce) in respect of food products
manufactured and/or produced in India at 100%.
* Publishing/printing of scientific and technical magazines/specialty
journals/periodicals at 100%.
* Print media, that is, publishing current affairs newspapers and periodicals
and publishing Indian editions of foreign magazines dealing with news and
current affairs, at 26%.
* The establishment and operation of satellites at 100%.
* Multi brand retail trading at 51%.
* Public sector banking at 20%.
* Broadcasting content services, such as frequency modulation (FM) radio and
the uplinking of news and current affairs TV channels, at 49%.
* Uploading/streaming of news and current affairs through digital media at 26%.
SECTORS PROHIBITED FROM FOREIGN INVESTMENT
While foreign investment is allowed in the vast majority of sectors in the
economy, it is specifically prohibited in the following sectors:
* Real estate businesses (however, this prohibition does not extend to the
development of townships, the construction of residential or commercial
premises, roads or bridges and real estate investment trusts (REITs)
regulated under the Securities and Exchange Board of India (SEBI) (REITs)
Regulations 2014).
* Chit funds (a form of a micro-finance organisation).
* A Nidhi company (a form of non-banking finance organisation).
* Gambling and betting including casinos.
* Lottery businesses.
* Trading in transferable development rights relating to land.
* Manufacturing of cigars, cheroots, cigarillos and cigarettes, of tobacco or
of tobacco substitutes.
* Construction of farm houses.
* Atomic energy.
* Railway operations.
Additionally, FDI in LLPs is permitted under the automatic route in LLPs
operating in sectors/activities where 100% FDI is allowed, through the automatic
route and there are no FDI-linked performance conditions. Additionally, an
Indian LLP, having foreign investment, is permitted to make downstream
investment in sectors in which 100% FDI is allowed under the automatic route and
there are no FDI-linked performance conditions.
Listed Companies. In addition to FDI related limits for the acquisition of
shares, the maximum non-public shareholding permitted in the case of a company
listed on a recognised stock exchange in India is 75%. Therefore, a company
whose securities are listed must have at least 25% of its securities held by
public shareholders which could include domestic or foreign institutional
investors or retail shareholders.
5. Are there any restrictions or prohibitions on doing business with certain
countries, jurisdictions, entities, organisations or individuals?
There are certain restrictions under the FEMA, and the foreign trade policy of
India in respect of the countries as outlined below:
* With effect from 22 April 2020, an entity of a country, which shares a land
border with India or where the beneficial owner of an investment into India
is situated in or is a citizen of any such country, can invest only under the
government approval route (see Question 4). In the event of the transfer
(directly or indirectly) of ownership of any existing or future FDI in an
entity in India which results in the beneficial ownership being transferred
to or held by a citizen of a country which shares a land border with India,
such subsequent change in beneficial ownership will also require government
approval.
* A citizen of Pakistan or an entity registered/incorporated therein cannot
establish a place of business in India without the prior approval of the RBI.
However, a citizen of Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong
Kong or Macau, or an entity registered/incorporated there, does not need
prior approval of the RBI except for opening a place of business in the
cities/states of Jammu and Kashmir, the North East region and the Andaman and
Nicobar Islands. A citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan,
Iran, China, Nepal, Bhutan, Hong Kong or Macau is not permitted to acquire or
transfer immovable property in India without the prior approval of the RBI.
However, such citizens can acquire or transfer property by way of lease,
which must not be for more than five years.
* A citizen of (or an entity registered in) Bangladesh and Pakistan can invest
in India only under the government approval route (see Question 4). However,
a citizen of or an entity registered in Pakistan cannot invest in defence,
space and atomic energy sectors/activities.
* The import or export of arms and ammunition, to or from Iraq is prohibited,
except for such export to the Government of Iraq which can be made after
securing a "No Objection Certificate" from the Department of Defence
Production.
* The direct or indirect export or import of various items (as provided under
the Foreign Trade Policy of 2015-2020, which remains in effect until 30
September 2021), to or from 'North Korea is prohibited.
* The direct or indirect export or import of all items, materials, equipment,
goods and technology that could contribute to Iran's reprocessing, enrichment
related or heavy water-related activities, or to the development of nuclear
weapon delivery systems, to or from Iran, is prohibited.
* The direct or indirect import of charcoal from Somalia is prohibited, on
account of the UN Security Council Resolution 2036 of 2012. Importers of
charcoal are required to submit a declaration to customs authorities that the
consignment has not originated in Somalia.
Further, in order to align with the objectives of the Financial Action Task
Force (FATF), an Indian party is prohibited from making any direct investment in
an overseas entity (set up or acquired abroad directly as a joint venture or
wholly owned subsidiary or indirectly as step down subsidiary) located in the
countries identified by the FATF as "non-cooperative countries and territories"
as per the list available on the FATF website or as notified by the RBI from
time to time.
6. Are there any exchange control or currency regulations or any registration
requirements under anti-money laundering laws?
The exchange control is regulated by the RBI under the FEMA. FEMA as it stands
today encompasses provisions relating to all transactions that have an
international financial implication. The general principle for transactions
involving foreign exchange is that transactions which are in the nature of
capital account transactions are restricted unless specifically permitted under
the provisions of FEMA. However, the opposite is true for current account
transactions. Capital account transactions are transactions which result in the
alteration of the overseas assets or overseas liabilities (including contingent
liabilities) of an Indian resident, or the alteration of Indian assets or
liabilities of a person resident outside India (for example, FDI or overseas
direct investment or external commercial borrowings by an Indian entity). These
transactions are not permitted unless they are specifically allowed and the
prescribed conditions are satisfied.
Current account transactions are transactions which arise on account of foreign
trade, other current business, services and short-term banking and credit
facilities in the ordinary course of business. The Indian currency is fully
convertible (except for certain specified restrictions) for trade and for
current account purposes (that is, one can freely purchase foreign currency in
exchange for Indian currency for the purposes of settlement of trade and current
account transactions).
FEMA envisages the RBI as having a controlling role in the management of foreign
exchange. RBI maintains exchange control primarily by providing special or
general permission for dealing in foreign exchange and specifying conditions for
payment in respect of capital account transactions.
Further, the Department of Economic Affairs, Ministry of Finance maintains
exchange control by regulating the transfer or issue of foreign securities to
residents in India and Indian securities to non-residents.
The accounts of non-resident banks and rupee accounts of non-residents other
than banks are also governed by the RBI.
The Prevention of Money Laundering Act 2002 (PMLA) aim to prevent instances of
money laundering and the use of 'proceeds of 'crime from certain identified
offences under the PMLA. The PMLA requires banks, financial institutions and
other intermediaries to verify the identity of its clients and their beneficial
owners (that is, an individual who, in the case of a company, has a controlling
ownership interest of more than 25% or who exercises control through other
means), maintain records of financial transaction and 'know your customer'
information (which may be specified by sectoral regulators, such as the RBI),
and report any suspicious transactions in exceed of specified values.
7. What grants or incentives are available to investors?
GRANTS AND INCENTIVES
Incentives and grants that are permitted for investors vary depending on the
sector, geographic areas, and are commonly in the form of tax concessions. To
encourage exports, the foreign trade policy of India enlists various schemes,
such as export-oriented units, electronics hardware technology parks, software
technology parks, bio-technology parks and special economic zones (SEZ), which
provide for exemptions in respect of tax, import and export duties and
restrictions on investments. The incentives also vary depending on whether they
are granted at the central level or state level. The incentives from the central
government are applicable across the country. State level incentives are limited
to that particular state and generally relate to:
* Land being made available at concessional rates.
* The relaxation in stamp duty in respect of the sale or lease of land.
* Power tariff incentives.
* A concessional rate of interest on loans.
* Investment subsidies or tax incentives.
* Subsidies for areas of the state in need of development and state aid.
* Special incentive packages for mega projects.
The following central and state-level incentives are also available:
* With effect from 1 April 2020, the dividend distribution tax (DDT) will not
longer be payable by the company declaring the dividends. Prior to the
change, Indian companies which distributed dividends were required to pay DDT
at 15% plus a surcharge of 12% and health and education cess (or levy) of 4%.
The effective rate of DDT was 20.56%. Subsequent to the change, dividend
income will be subject to tax in the hands of the dividend recipient. This
enables foreign investors to take benefit of double tax avoidance agreements
(DTAAs) to lower their tax liability on profits repatriated outside India.
* In the aviation sector, incentives have been granted to aircraft leasing and
financing companies for capital gains, aircraft lease rentals or royalty paid
to foreign lessors established in the International Financial Services Centre
(IFSC) at Gujarat.
* Certain production-linked incentive (PLI) schemes have been set up in sectors
such as electronic/technology products, telecom and networking products and
pharmaceuticals. The PLI scheme provides incentives starting from 4% and
going up to 6% on incremental sales of goods manufactured in India for five
years with effect from the base year (that is, 2019 to 2020). Under the
second round of the PLI Scheme, incremental incentives of 5% and 3% will be
extended on incremental sales of goods manufactured in India over the base
year for a period of four years.
FOREIGN INVESTORS
Income earned by non-resident unit holders of a Category-III Alternate
Investment Funds established in the International Financial Services Centre
(IFSC) at Gujarat in IFSC is exempt from taxable income.
BUSINESS VEHICLES
8. What are the most common forms of business vehicle used in your jurisdiction?
Foreign investors can establish a presence in India through an incorporated or
unincorporated entity. The decision regarding the choice of the type of entity
must be based on the nature of the work to be undertaken. The common forms of
business vehicles used in India are set out below.
MAIN BUSINESS VEHICLES
Private Company. A private company is the most common form of business vehicle
adopted by entities doing business in India. It has a minimum of two and maximum
of 200 members and contains restrictions in its charter documents regarding the
right to transfer shares in the company. A private company is prohibited from
inviting the public to subscribe to its securities. The Companies Act 2013
requires that all companies must have at least one resident director who stays
in India for at least 182 days during the financial year. A private company also
enjoys fewer restrictions and requirements as compared to a public company.
Public Company. A public company must have a minimum of seven members and there
is no restriction on the maximum number of members. It can invite the general
public to subscribe to its securities and its securities can be listed on a
recognised stock exchange and traded publicly. The securities of a public
company are freely transferrable. However, private arrangements between the
shareholders of a public company restricting the right of transfer are
enforceable.
Joint Venture. A foreign investor may collaborate with an Indian partner to
establish a joint venture company in India. This can be the preferred option in
cases where the percentage of shares which may be held by a foreign investor are
subject to sectoral caps under the FDI Policy. Where FDI is permitted on the
100% automatic route (see Question 4) a foreign investor may also establish a
wholly-owned subsidiary (WOS) in India.
Limited Liability Partnership. A limited liability partnership (LLP) in India is
the preferred mode of incorporation used by private businesses. It permits its
members to have limited liability and ease of operation since the internal
affairs of the LLP are governed based on the LLP agreement. There are also fewer
compliance requirements for an LLP regarding maintenance of statutory records
and corporate filings.
Trust. In India, a trust is understood as an obligation annexed to the ownership
of property which is transferred by one person (the settlor) to another (the
trustee) who manages that property for the benefit of the owner or other persons
(beneficiaries). A trust may be a private trust (for a designated and
identifiable set of beneficiaries) or a public trust (without having an
identified set of beneficiaries and commonly with charitable or religious
purposes). Private trusts may be established as a vehicle for investments, such
as mutual funds and venture capital funds due to the tax benefits available to
unit holders.
Liaison Office. A liaison office can be set up after securing the prior consent
of an authorised dealer (a person authorised by the RBI to deal in foreign
exchange or foreign securities). A liaison office can be set up in a sector in
which 100% FDI is allowed under the automatic route. In other sectors, the
foreign investor must seek the RBI's approval. Such approval is granted by the
RBI after consultation with the Ministry of Finance. In order to secure the
RBI's permission, the investor must have a:
* Profit-making track record during the immediately preceding three financial
years in the home country.
* Net worth of not less than USD50,000 (or its equivalent).
A liaison office is a representative of the parent foreign company in India.
However, it cannot undertake any commercial activities and must maintain itself
only on the remittances received from its parent. This option is usually
preferred by foreign companies that wish to explore business opportunities in
India.
Branch Office. This is similar to a liaison office, and can represent the parent
foreign company as its buying or selling agent. In order to secure the RBI's
permission, the investor should also have a:
* Profit-making track record during the immediately preceding five financial
years in the home country.
* Net worth of not less than USD100,000 (or its equivalent).
However, a branch office cannot carry out any retail, manufacturing or
processing activities. The branch office is permitted to remit surplus revenues
to its foreign parent company subject to the payment of applicable taxes. This
option is useful for undertaking research activities in India.
Project Office. A foreign company can open project office(s) in India provided
it has secured a contract to execute a project in India and one of the following
occurs:
* The project is funded directly by overseas inward remittance.
* The project is funded by a bilateral or multilateral international financing
agency.
* The project has been cleared by an appropriate authority.
* A company or entity in India awarding the contract has been granted a term
loan by a public financial institution or a bank in India for the project.
9. What are the main formation, registration and reporting requirements for the
most common corporate business vehicle used by foreign companies in your
jurisdiction?
REGISTRATION AND FORMATION
A private limited company incorporated under the Companies Act 2013 is one of
the preferred business vehicles in India owing to its separate legal character
and limited liability.
Incorporation of a private company can be done with the Registrar of Companies
(ROC) of the relevant state where the foreign investor seeks to establish a
presence. A permanent account number in relation to taxation, digital signatures
of the directors and managerial personnel, and director identification numbers
are the primary requirements to initiate the incorporation process. Thereafter,
an application for approval of the name of the company must be submitted with
the ROC. The ROC must be provided with one preferred name and a maximum of five
alternate names, which should not be similar to that of any existing company.
Subsequent to this, the proposed shareholders of the company must prepare and
adopt the memorandum of association (memorandum) and articles of association
(articles) of the company suitable to the needs of the business activity to be
undertaken by the company. The memorandum and articles must then be filed with
the ROC.
Information in respect of the first directors and the registered address of the
company is also required to be filed with the ROC. Post-incorporation, the
company will be required to hold its first board meeting and appoint auditors
within 30 days from the date of incorporation. The company must also register
itself with statutory authorities such as indirect tax authorities and
employment law authorities.
In order to facilitate doing business in India, the procedure for incorporation
of a company in India requires a single form to be filed with one regulatory
body. The incorporation is completed within a timeframe of less than 48 hours
after submission of the requisite documents. Information with respect to
registration in the companies register can be obtained at the website of the
Ministry of Corporate Affairs (MCA) (www.mca.gov.in).
At the time of incorporation, the investee company must file Form FC-GPR (in
case of the issue of securities to non-residents) under the FDI Policy.
REPORTING REQUIREMENTS
After registration and formation, there are various annual and event-based
compliances which the company must comply with on a regular basis. The mandatory
compliances include the filing of annual returns and annual accounts in
prescribed formats. Examples of event-based reporting requirements include
reporting in relation to the:
* Creation of charges.
* Appointment and resignation/removal of directors.
* Appointment of auditors.
* Acceptance of deposits by the company.
* Transfer of shares and so on.
Other compliances include directors' reports based on the audited financials of
the company, and convening of the annual general meeting within six months from
the end of the financial year to approve the directors' report and audited
financials.
Additionally, the company must also adhere to the relevant secretarial and
accounting standards.
10. What is the standard management structure and key liability issues for the
most common form of corporate business vehicle used by foreign companies in your
jurisdiction?
MANAGEMENT STRUCTURE
It is mandatory for a private limited company to have a minimum of two directors
and at least one resident Indian director (that is, an individual who has stayed
in India for a period of at least 182 days in the financial year).
MANAGEMENT RESTRICTIONS
A private limited company may appoint a managing director or manager, for a term
not exceeding five years at a time. Such managing director or manager needs to
fulfil the following conditions:
* Be aged between 21 and 70 years of age (unless the appointment of a person
older than 70 years of age is approved by a special resolution of
shareholders).
* Must not be an undischarged insolvent or at any time been adjudged as an
insolvent.
* Must not have suspended payments to his/her creditors or made a composition
with them (at any time).
* Must not have been convicted of an offence by a court and sentenced to more
than six months imprisonment (at any time).
The managing director or manager of a company is required to be a resident of
India. However, a private limited company is exempt from this requirement.
Therefore, a private company may appoint a non-resident as its managing director
or manager, subject to the conditions specified above. Private companies are
also exempted from rules relating to the amount of remuneration payable to
managing directors/managers.
DIRECTORS' AND 'OFFICERS' LIABILITY
The duties and liabilities of a director are provided under the Companies Act
2013, which mandates him/her to act with due and reasonable care in accordance
with the objects of the company and the best interests of the stakeholders. In
the case of a contravention of the applicable laws and regulations, the
directors of the company may also be held liable for violations based on the
relevant law. For instance, in the case of certain violations of the Companies
Act 2013, FEMA, or the Income Tax Act (ITA), liability can extend to the
directors who were in control of the decision-making process that led to the
violation.
PARENT COMPANY LIABILITY
India recognises the principle of separate legal identity. A company is treated
as having its own legal existence separate from its shareholders. A company has
the authority to acquire property, enter into contracts and sue and be sued in
its own name. However, Indian courts have recognised judicially developed
principles of 'piercing the corporate 'veil in certain situations which require
authorities to look behind the corporate entity structure. Some of these
circumstances may be perpetuation of fraud and tax evasion.
ENVIRONMENT
11. What are the main environmental regulations and considerations that a
business must take into account when setting up and doing business in your
jurisdiction?
The key environment related laws in India are:
* Environment (Protection) Act 1986 (EP Act). This is the primary legislation
which enables the Indian Government to undertake measures for the protection
and improvement of the environment, and the prevention and control of
environmental pollution. The following rules have been notified under the EP
Act:
* Environment Impact Assessment Notifications;
* Hazardous and Other Waste (Management and Transboundary Movement) Rules
2016;
* E-Waste (Management) Rules 2016;
* Bio-Medical Waste Management Rules 2016;
* Solid Waste Management Rules 2016.
* Water (Prevention and Control of Pollution) Act 1974 (Water Act).
* Air (Prevention and Control of Pollution) Act 1981 (Air Act).
The Ministry of Environment, Forests and Climate Change (MoEFCC), the state and
central pollution control boards (SPCBs and CPCB) and the National Green
Tribunal (NGT) are the primary environment regulators in India. Depending on the
nature of activity undertaken by an industry, it may be required to obtain
various consent and permits under the above legislations. Commonly, an
industrial unit may be required to obtain a "Consent to Establish" under the
Water Act and the Air Act for initial approval for constructions from the
respective SPCB, and a "Consent to Operate" for the commencement of industrial
activity. Further, an Environment Clearance and an Environment Impact Assessment
(EIA) may also be required for operating in certain hazardous industries
notified by the MoEFCC.
The EP Act, Water Act and Air Act contain specific provisions imposing penalties
on offences committed by companies. The pollution control board have the power
to issue show-cause notices in the event of any contravention and may institute
proceedings before the NGT in case of serious instances of non-compliance. The
SPCBs can also impose environmental compensation penalties if an industrial unit
is found to be releasing pollutants in excess of the permitted thresholds.
However, Indian courts have also recognised principles such as absolute
liability and "polluter pays", wherein the Supreme Court and High Courts have in
the past imposed exemplary costs based on the degree of environmental harm and
the financial capacity of the party responsible for the contravention.
EMPLOYMENT
LAWS, CONTRACTS AND PERMITS
12. What are the main laws regulating employment relationships?
Labour falls under the Concurrent List of the Indian Constitution. Therefore,
both the Indian Parliament and state legislatures can make laws regulating
labour.
In 2019, the Ministry of Labour and Employment introduced four bills (or codes)
to consolidate and regulate wages, industrial relations, social security, and
occupational safety, health and working conditions:
* Industrial Relations Code, 2020 (IRC 2020). The IRC 2020 consolidates and
subsumes the provisions of the:
* Trade Unions Act 1926;
* Industrial Employment (Standing Orders) Act, 1946;
* Industrial Disputes Act, 1947.
* Code on Wages 2019 (Wages Code). The Wages Code consolidates and subsumes the
provisions of the:
* Payment of Wages Act 1936;
* Minimum Wages Act 1948;
* Payment of Bonus Act, 1965;
* Equal Remuneration Act 1976.
* Code on Social Security, 2020 (SSC 2020). The SSC 2020 consolidates and
subsumes the provisions of the:
* Employee's Compensation Act 1923;
* Employees' State Insurance Act 1948;
* Employees' Provident Funds and Miscellaneous Provisions Act 1952;
* Employment Exchanges (Compulsory Notification of Vacancies) Act 1959;
* Maternity Benefit Act 1961;
* Payment of Gratuity Act 1972;
* Cine-Workers Welfare Fund Act 1981;
* Building and Other Construction Workers' Welfare Cess Act 1996;
* Unorganised Workers' Social Security Act2008.
The rules under the IRC Code, Wages Code and SSC 2020 are expected to be
notified into law. Until the time of notification, the existing labour
legislations continue to be applicable, as set out below:
* Industrial Disputes Act 1947. This is the most important labour legislation
in India, and provides for the mechanism of collective bargaining and dispute
resolution between employers and employees. The statute also contains
provisions with respect to unfair labour practices, strikes, lock-outs,
lay-offs, retrenchment, transfer of undertakings and closure of businesses.
* Trade Unions Act 1926. This provides for the registration of trade unions and
sets out the law relating to registered trade unions.
* Employees' Provident Fund and Miscellaneous Provisions Act 1952 (EPF Act).
This provides for a contributory social security mechanism and applies to
establishments that have at least 20 employees. An employee whose basic
salary is less than USD200 per month, or who has an existing provident fund
membership based on a previous employment arrangement, is eligible for
benefits under the EPF Act.
* Employees' State Insurance Act 1948. This statute is applicable to all
factories, industrial and commercial establishments, hotels, restaurants,
cinemas and shops. Employees earning below USD280 per month are eligible for
benefits under this statute. The statute provides for benefits in cases of
sickness, maternity and employment-related injury and certain other related
matters.
* Factories Act 1948. This statute prescribes, among other things, the
necessary terms of health, safety, working hours, benefits, overtime and
leave requirements in respect of factories in India.
* Shops and Commercial Establishments Acts. These are state-specific statutes
regulating the conditions of work and employment in shops, commercial
establishments, residential hotels, restaurants, eating houses, theatres,
places of public amusement/entertainment and other establishments located
within the state. These statutes prescribe the minimum conditions of service
and benefits for employees, including working hours, rest intervals,
overtime, overtime wages, holidays, leave, termination of service, employment
of children, young persons and women and other rights and obligations of an
employer and employee.
* Contract Labour (Regulation and Abolition) Act 1970. This statute applies to:
* all establishments employing 20 or more persons (or that have employed 20
or more persons) on any day of the preceding 12 months;
* contractors employing (or who have employed) 20 or more workmen on any day
of the preceding 12 months.
This statute does not govern establishments where work of a casual or
intermittent nature is carried out. It regulates the conditions of employment
of contract labour, the duties of a contractor and principal employer and
provides for the abolition of contract labour in certain circumstances.
* Sexual Harassment of Women at Workplace (Prevention, Prohibition and
Redressal) Act 2013. This statute aims to provide women with protection
against sexual harassment in the workplace and prescribes detailed guidelines
for employers and employees for the prevention and redress of complaints of
sexual harassment.
* Minimum Wages Act 1948. This statute provides for the fixing and revision of
minimum wages by the respective state governments.
* Payment of Wages Act 1936. This statute provides for the conditions of
payment of wages, and is applicable to factories, railways, tramways, motor
transport services, docks, wharves, jetties, inland vessels, mines, quarries
and oil fields, workshops, establishments involved in construction work and
other establishments as notified by the appropriate state governments.
* Payment of Bonus Act 1965. This statute applies to every factory and
establishment in which 20 or more persons are employed on any day during an
accounting year. It further provides for the payment of bonuses to employees
whose salary or wage is up to USD280 per month.
* Payment of Gratuity Act 1972. This statute applies to every factory, mine,
oil field, plantation, port, railway company, shop and commercial
establishment where ten or more persons are employed or were employed on any
day of the preceding 12 months. An employee is eligible to receive a gratuity
only in cases where he has completed a continuous service of at least five
years at the time of cessation of employment.
* Child Labour (Prohibition and Regulation) Act 1986. This statute prohibits
the employment of children younger than 14 years of age in certain
occupations such as automobile workshops, bidi-making (a type of cigarette),
carpet weaving, the handloom and power loom industries, mines and domestic
work. Further, in light of the Right of Children to Free and Compulsory
Education Act 2009, the government has amended the statute to prohibit the
employment of children under 14 in all occupations except where the child
helps his/her family after school hours.
FOREIGN EMPLOYEES
The labour legislations set out above are applicable to all establishments in
India. Therefore, every establishment incorporated or set up in India would be
required to comply with the labour legislations applicable to such establishment
in respect of its employees, irrespective of their nationality.
EMPLOYEES WORKING ABROAD
The framework of labour legislations is only applicable to establishments,
employers and employees within India.
MANDATORY RULES OF LAW
Labour legislations in India are generally mandatory rules of law which, by
force of public policy, apply to the benefit of all workers/employees employed
by an establishment in India.
13. Is a written contract of employment required?
The usual practice in India is for employees to be issued with an offer letter
by the employer which outlines the terms and conditions of employment including
their probationary period, remuneration and the documents required to be
produced at the time of joining. However, it is advisable to execute an
employment contract. The important clauses that should be included in an
employment contract are:
* The terms of employment and termination of employment (including as a result
of misconduct).
* The compensation structure (that is, remuneration and bonuses).
* The duties and responsibilities of the employee.
* The nature of the contract, terms and conditions and leave entitlements.
* The duty to avoid conflicts of interest.
* The duty to maintain confidentiality and non-disclosure of information.
* Terms concerning intellectual property and assignment.
* Non-compete and non-solicitation obligations.
* A dispute resolution clause.
IMPLIED TERMS
Terms and conditions of service under a contract of employment would be subject
to the labour legislations which would be applicable to the particular industry
and/or establishment. Therefore, provisions relating to working hours (in case
of a shop/establishment under the Shops and Establishment Act) compensation,
payment of gratuity etc. would be implied terms in a contract of employment.
COLLECTIVE AGREEMENTS
Collective bargaining agreements may be negotiated by members of a trade union
and the employer to govern the terms and conditions of work and compensation of
employees. Since the terms and conditions would be subject to the applicable
labour legislations, these tend to require a higher duty of care on the part of
the employer and better terms and conditions of employment for the employee.
14. Do foreign employees require work permits and/or residency permits?
WORK PERMITS
Foreign employees are required to have an employment visa. Employment visas are
granted subject to the fulfilment of the following conditions:
* The applicant is a highly skilled and/or qualified professional, who is being
engaged or appointed by a company/organisation/industry/undertaking in India
on a contract of employment basis. However, the employment visa must not be
granted for jobs for which qualified Indians are available or for routine,
ordinary or secretarial/clerical jobs.
* The foreign national being sponsored for an employment visa in any sector
should receive a minimum salary of USD21,600 per annum.
* The employment visa must be issued from the country of origin or from the
country of domicile of the foreign employee, provided the period of permanent
residence of the applicant in that particular country is more than two years.
Foreign investors can also apply for a business visa, subject to submitting
proof of their financial standing and documentation in support of the intended
business visit to India. However, the foreign national will not be permitted to
visit India for the business of lending or for running a small business or small
trade (such as operating a food cart), or for full-time employment in India.
Foreign nationals, including their family members, intending to stay in India
for more than 180 days, are required to register with the Foreign Regional
Registration Office (FRRO) within 14 days of arriving in the country.
RESIDENCY PERMITS
The Indian Government has launched the "Permanent Residency Scheme", under which
a foreign investor can invest a minimum of USD1.33 million to be brought into
India within 18 months or USD3.33 million to be brought into India within 36
months and obtain residency for a period of ten years with multiple entries. The
foreign investment should also result in the generation of employment for at
least 20 resident Indians every financial year. There is no stipulation that the
investor must stay in India, and these investors will be exempt from
registration requirements with the FRRO.
Foreign citizens may also obtain citizenship in India by naturalisation on being
resident in India for a period of 12 years (throughout the period of 12 months
immediately preceding the date of application and for a period of 11 years in
the aggregate in the 14 years preceding the 12 months).
TERMINATION AND REDUNDANCY
15. Are employees entitled to management representation and/or to be consulted
in relation to corporate transactions (such as changes in control, redundancies
and disposals)?
Generally, a right of representation at the management level is not granted to
employees, and employees do not have a general right to participate or be
consulted in the decision-making process in relation to corporate transactions.
However, the lack of such consultative rights is compensated for by the concept
of a retrenchment compensation equivalent to 15 days' average pay for every
completed year of continuous service or any part thereof in excess of six
months.
16. How is the termination of an individual's employment regulated?
TERMINATION
Termination of an employee is governed under the retrenchment provisions of the
Industrial Disputes Act. As per the Industrial Disputes Act, retrenchment means
the termination by the employer of the service of a "worker" ("workers", under
the Industrial Disputes Act, are typically blue collar workmen engaged in
manual, unskilled, skilled, technical, operational, clerical or supervisory work
for hire) for any reason whatsoever, other than as a means of disciplinary
action, and does not include:
* Voluntary retirement.
* Retirement of the worker on reaching the age of superannuation.
* Termination as a result of the non-renewal of the contract of employment.
* Termination on the grounds of continued ill-health.
The Industrial Disputes Act does not apply to employees employed in a managerial
and administrative capacity and termination of such employees is governed by the
terms of their individual employment contracts.
Retrenchment (that is, termination of individual employment contracts) must be
carried out in accordance with the provisions of the Industrial Disputes Act.
According to the provisions of this statute, a worker employed in any industry,
and who has been in the continuous service of an employer for at least one year,
must be retrenched by that employer subject to the fulfilment of the following
conditions:
* The worker has been given one month's notice in writing, indicating the
reasons for such retrenchment and when the period of notice will expire, or
the worker has been paid in lieu of such notice, wages for the period of the
notice.
* The worker has been paid, at the time of retrenchment, compensation which is
the equivalent to 15 days' average pay for every completed year of continuous
service or any part thereof in excess of six months.
* Notice in the prescribed manner is served on the appropriate government, or
such authority as may be specified by the appropriate government, by
notification in the Official Gazette.
Further, the employer must also comply with the notice and termination
conditions under the various state-specific Shops and Establishments Acts.
FAIR DISMISSAL
Termination can also be made on disciplinary grounds. An employer must follow
the principles of natural justice when conducting a disciplinary or grievance
procedure. Certain federal laws relate to the handling of disciplinary and
grievance procedures, such as the Industrial Employment (Standing Orders) Act
1946 and the Industrial Disputes Act. In all cases the employee must be provided
with the opportunity to be heard and the process should be reasonable and fair.
Further, if an establishment has 20 or more workers, a grievance committee or a
similar mechanism must be established to handle employee grievances.
Statutory Minimum Notice. See above, Termination.
Severance Payment. See above, Termination.
Grounds for Unfair Dismissal. See above, Termination..
Remedies. In case of wrongful termination, the labour courts may grant relief in
the form of setting aside the order of dismal or retrenchment and reinstatement
on terms and conditions it deems fit, such as back-wages, continuous service or
compensation.
CLASS OF INDIVIDUALS
The lay-off and retrenchment provisions under Industrial Disputes Act are
applicable to workmen, that is, those engaged in manual, unskilled, skilled,
technical, operational, clerical or supervisory work for hire. Employees hired
in a managerial and/or administrative capacity are exempted from the application
of the Industrial Disputes Act. Therefore, the laws in relation to termination
or dismissal are generally applicable to blue collar workers. However, an
establishment would also be required to comply with the respective state's Shops
and Establishments Act which may provide a notice period for termination and
would be applicable in the case of all employees engaged by such establishment.
17. Are redundancies and mass termination regulated?
REDUNDANCIES AND MASS TERMINATION
Mass lay-offs and redundancies are not specifically regulated in India. However,
the Industrial Disputes Act provides for layoffs in general, and for the closure
of undertakings. According to the statute, every worker should be paid
compensation of 50% of the total of their basic wages, and an allowance that
would be due to the worker had they not been laid off, for all days during which
he or she is laid off. Therefore, if a worker is laid-off due to the closure of
an undertaking, then as compensation he or she is entitled to 50% of their basic
wages and an allowance which is calculated to include even the days on which he
or she was actually laid off preceding the actual closure of the undertaking,
which lead to the termination. This is applicable to undertakings or
establishments that employ more than 50 workers. Also, the employer must provide
a 60 days' notice to the government, providing reasons for such lay-offs.
In the case of undertakings or establishments employing more than 100 workers,
these workers can only be laid off with the prior permission of the government.
Prior approval from the government must be obtained 90 days before the date of
lay-offs.
Additionally, when several workers are terminated or laid off by reason of
redundancy, it must be based on the principle of "last-in-first-out". This means
that the employer must retrench the worker who was the last person to be
employed. In such cases, when re-employment is required, initial offers must
first be made to these workers.
PROCEDURAL REQUIREMENTS
See above, Redundancies and Mass Termination.
TAX
TAXES ON EMPLOYMENT
18. In what circumstances is an employee taxed in your jurisdiction?
TAX RESIDENCE
A person's income tax is determined by their residential status. A person is
considered a "resident" of India if he or she was in India either:
* For a minimum of 182 days during the tax year.
* For a minimum of 60 days during the tax year and for a minimum of 365 days
during the previous four tax years. This period will increase to:
* 182 days for a citizen of India who leaves India in any tax year as a
member of crew of an Indian ship or for the purpose of employment outside
of India, or for a citizen of India, or person of Indian origin (based
outside of India) who visits India during any tax year;
* 120 days for a citizen of India or a person of Indian origin, with a total
income (excluding income from foreign sources) exceeding INR1.5 million.
A citizen of India with a total income (excluding income from foreign sources),
exceeding INR1.5 million during the tax year will be deemed to be resident in
India, if he/she is not liable to tax in any other country or territory by
reason of his/her domicile or residence or any other criteria of a similar
nature.
A person is said to be "resident but not ordinarily resident" in India in the
following cases:
* If they have been a non-resident for nine out of ten tax years or have been
in India for a period of 729 days or less in the previous seven tax years.
* If they are an Indian citizen or person of Indian origin with income (other
than income from foreign sources) exceeding INR1.5 million and are present in
India for between 120 and 182 days of the tax year.
* If they are an Indian citizen who is deemed to be resident of India as he/she
is not liable to tax outside of India (see above).
In other scenarios, a person is treated as "ordinarily resident" in India.
The following sets out the taxable income under the Indian laws:
* Income received or deemed to be received in India whether earned in India or
elsewhere: paid by resident and ordinary residents, "not ordinary" residents
and non-residents.
* Income which accrues or arises or is deemed to accrue or arise in India,
whether received in India or elsewhere: paid by resident and ordinary
residents, "not ordinary" residents and non-residents.
* Income which accrues or arises outside India and is received outside India,
from a business controlled from India: paid by resident and ordinary
residents, "not ordinary" residents; not paid by non-residents.
* Income which accrues or arises outside India and is received outside India
from any other source: paid by resident and ordinary residents, but not paid
by "not ordinary" residents and non-residents.
The tax incidence on foreign nationals working in India will also be subject to
the double taxation agreements between India and such foreign country.
19. What income tax, social security and other tax or contributions must be paid
by the employee and the employer during the employment relationship?
Individuals are taxed on a progressive basis, with a maximum marginal rate of
tax of 42.75%, under the Income Tax Act. There are no special exemptions or
deductions available to foreign nationals working in India and the rates of
income tax are similar to those applicable to Indian nationals. India has also
entered into more than 90 treaties for the avoidance of double taxation. A
taxpayer may be taxed either under domestic law provisions or the tax treaty to
the extent it is more beneficial. A non-resident claiming treaty relief would be
required to file tax returns and furnish a tax residency certificate issued by
the tax authority in its home country.
Employees are also subject to social security contributions such as those under
the 'EPF Act. The present rate of contribution under the EPF Act is generally
12%. However, a 10% rate is applicable for:
* Any establishment in which less than 20 employees are employed.
* Any "sick industrial company" which has been declared as such by the Board
for Industrial and Financial Reconstruction. A "sick industrial company" is a
financially unviable business which is being restructured to allow it a
chance at a financial revival. Technically, it is a stage where the company
is trying to avoid being declared insolvent.
* Any establishment which has, at the end of any financial year, accumulated
losses equal to or exceeding its entire net worth.
Employers are also required to make social security contributions under the EPF
Act and the Payment of Gratuity Act 1972. Under the EPF Act, the employer is
required to match the contribution made by the employee, that is, 12% of the
basic salary.
Further, the employer is required to pay a "gratuity" (that is, an ex-gratia
payment to recognise the employee's long association with the employer) of 15
days' wages, at the rate of the salary last drawn, to every employee who has
completed five years in continuous service, for every completed year of service.
The "gratuity" becomes payable on termination of employment on account of:
* Superannuation.
* Retirement or resignation.
* Death or disability due to accident or disease. The completion of five years
in continuous service is not mandatory in the case of death or disability.
BUSINESS VEHICLES
20. When is a business vehicle subject to tax in your jurisdiction?
TAX RESIDENT BUSINESS
The Income Tax Act (and the rules framed under it) is the primary piece of
legislation which deals with the levy and collection of income tax in India. A
resident company is taxed on its worldwide income in India.
A business vehicle, incorporated as a company (public or private), is said to be
resident in India if it is incorporated in India or has its "place of effective
management" in India. The "place of effective management" means the place where
key management and commercial decisions that are necessary for the conduct of
business of an entity as a whole are, in substance, made.
NON-TAX RESIDENT BUSINESS
A foreign company is subject to tax in India on income that is received or is
deemed to be received, accrues or is deemed to accrue, arises or is deemed to
arise, in India.
A foreign company is also liable to tax in India on income arising from the
transfer of foreign securities that directly or indirectly derive its value
substantially from assets situated in India. The securities of a foreign company
are deemed to derive their value from assets (tangible or intangible) located in
India, if the value of such Indian assets:
* Exceed USD1.35 million.
* Represent at least 50% of the value of all the assets owned by the
non-resident company.
21. What are the main taxes that potentially apply to a business vehicle subject
to tax in your jurisdiction?
CORPORATE INCOME TAX
A resident company is taxed on its worldwide income in India at 30% (plus any
applicable surcharge and education cess). However, a resident company with an
annual turnover or gross receipts of less than USD54 million in the 2018 to 2019
financial year is subject to corporate tax at the rate of 25% (plus any
applicable surcharge and education cess). The surcharge is levied on resident
companies at 7% where the annual income exceeds USD135,000 and 12% where the
annual income exceeds USD1.35 million.
For resident companies categorised as start-ups (meeting specified criteria), no
income tax is payable for a period of three consecutive years out of the first
ten years since their incorporation or set up.
A company incorporated on or after 1 March 2016 and engaged solely in the
business of manufacturing or production of any article is eligible to be taxed
on its income at the rate of 25% (plus any applicable surcharge and education
cess) and subject to compliance with prescribed conditions.
A company which is incorporated on or after 1 October 2019 and has commenced
manufacturing or production of an article or thing before 31 March 2023 can opt
for a lower tax rate of 15% (plus any applicable surcharge and cess) subject to
compliance of the prescribed conditions. A surcharge at a rate of 10% will be
applicable in such cases.
Domestic companies can also opt for a lower tax rate of 22% (plus any applicable
surcharge and cess) subject to compliance of the prescribed conditions. A
surcharge at the rate of 10% will be applicable in such cases.
A foreign company is subject to tax at a rate of 40% (excluding the surcharge
and education cess) on income that:
* Is received in India or is deemed to be received in India.
* Accrues in India or is deemed to accrue in India.
* Arises in India or is deemed to arise in India.
The surcharge is levied on resident companies at 2% where the annual income
exceeds USD135,000 and 5% where the annual income exceeds USD1.35 million.
All companies are liable to pay a health and education cess of 4%.
MINIMUM ALTERNATE TAX (MAT)
A company is liable to pay MAT on its book profits if its tax liability under
the general provisions of the Income Tax Act is less than 15% (excluding the
surcharge and education cess) of such book profits. A credit of the MAT paid is
available in subsequent years (up to fifteen years) where tax is payable under
the general provisions of the Income Tax Act. Further, the provisions of MAT
will not be applicable on companies which opt for lower tax rate of 15% and 22%
(see above).
CAPITAL GAINS
Capital gains income is subject to tax depending on the period of holding of
such an asset in the hands of the transferor. A capital asset held for a period
of three years is considered to be a long-term capital asset, except in the case
of:
* Listed shares, in which case the relevant period of holding is one year.
* Unlisted shares, in which case the relevant period of holding is two years.
Long-term capital gains income of a non-resident arising from the sale of listed
shares is taxable at 10% (plus any applicable surcharge and cess) provided
prescribed conditions are met regarding the payment of securities transaction
tax. Long-term capital gains for non-residents arising from unlisted securities
and shares of a company in which the public is not substantially interested are
taxed at the rate of 10% (plus any applicable surcharge and education cess). No
adjustment on account of inflation/foreign exchange rate fluctuation will be
available in the above cases.
A non-resident's short term capital gains income arising from the sale of:
* Listed shares is taxed at 15% (plus surcharge and education cess), provided
the securities transaction tax is paid on the transaction.
* Listed shares is taxed at 40% (plus surcharge and education cess) if the
transaction is undertaken on the floor of the stock exchange and no
securities transaction tax is paid on the transaction.
* Unlisted securities are taxed at the rate of 40% (excluding the surcharge and
education cess).
The above tax rates are subject to the benefits available to the non-resident
under tax treaty, if applicable.
DIVIDENDS, INTEREST AND IP ROYALTIES
22. How are the following taxed:
* Dividends paid to foreign corporate shareholders?
* Dividends received from foreign companies?
* Interest paid to foreign corporate shareholders?
* Intellectual property (IP) royalties paid to foreign corporate shareholders?
DIVIDENDS PAID
Dividends paid to foreign corporate shareholders and distributed by Indian
companies are taxable at the rate of 20% (plus any applicable surcharge and
cess) subject to beneficial rates available to such non-resident shareholders
under the tax treaty, if applicable. An Indian company distributing dividend is
under an obligation to apply appropriate withholding tax before distributing
dividend to foreign corporate shareholders.
DIVIDENDS RECEIVED
Dividends received by an Indian company from a foreign company are subject to
tax as corporate income. However, dividends received by an Indian company from a
foreign company in which such Indian company holds at least 26% equity shares is
subject to tax at a reduced rate of 15% (excluding the surcharge and education
cess).
INTEREST PAID
Interest paid to non-residents is taxed in India (subject to any reductions
under any applicable tax treaty) in the following manner:
* Interest on foreign currency borrowing: 20% (plus surcharge and education
cess).
* Interest on Rupee-denominated bonds issued by an Indian company or specified
trust on or before 1 July 2023: 5% (plus surcharge and education cess).
* Interest on monies borrowed by an Indian company or specified trust in
foreign currency by way of loan agreement on or before 1 July 2023, or by way
of issue of notified long term bonds including notified long-term
infrastructure bonds on or before 1 July 2023: 5% (plus surcharge and
education cess).
* Interest on monies borrowed by Indian company or specified trust by way of
issue of any long-term bond or Rupee-denominated bond on or before 1 July
2023, which is listed only on a recognised stock exchange located in any
International Financial Services Centre: 5% (plus surcharge and education
cess).
IP ROYALTIES PAID
IP royalties paid to foreign corporate shareholders by an Indian resident are
taxed in India at the rate of 10% (excluding the surcharge and cess) on the
gross amount, unless reduced under any applicable tax treaty.
GROUPS, AFFILIATES AND RELATED PARTIES
23. Are there any thin capitalisation rules (restrictions on loans from foreign
affiliates)?
Under thin capitalisation rules, if any Indian company (other than a company
engaged in banking or insurance business) or permanent establishment of a
foreign company in India, pays an interest amount exceeding INR10 million to its
non-resident associated enterprise (related party), the interest will not be
deductible while computing taxable income to the extent such interest arises
from any "excess interest". The term "excess interest" is defined to mean an
amount of total interest paid/payable in excess of 30% of earnings before
interest, taxes, depreciation and amortisation (EBITDA) of the borrower or the
interest paid/payable to the associated enterprise, whichever is less. However,
any such interest that is disallowed may be carried forward up to a period of
eight years and may qualify for a future deduction against taxable income of the
Indian company (subject to the limit of 30% of EBITDA).
24. Must the profits of a foreign subsidiary be imputed to a parent company that
is tax resident in your jurisdiction (controlled foreign company rules)?
India does not have any controlled foreign company rules.
25. Are there any transfer pricing rules?
The Indian transfer pricing rules prescribe that income arising from
international transactions or specified domestic transactions between associated
enterprises should be computed by having regard to the arm's-length price. The
arm's length price is determined using the prescribed methods. The law mandates
the entities to maintain comprehensive documentation relating to their
international transactions. The documentation requirements have been updated
recently to also include country-by-country reporting.
DOUBLE TAX TREATIES
26. Is there a wide network of double tax treaties?
DOUBLE TAX TREATIES
India has entered into more than 90 treaties for the avoidance of double
taxation and the exchange of information with various nations, including the US,
the UK, Mauritius, Singapore, Australia and the Netherlands.
The Income Tax Act allows a taxpayer to choose to be taxed under the domestic
law or the tax treaty, whichever is more beneficial to it (subject to general
anti avoidance rules in India). A non-resident claiming treaty relief would be
required to file tax returns in India and furnish a tax residency certificate
issued by the tax authority in its home country. The tax treaties also provide
avenues for exchange of information and incorporate measures to curb fiscal
evasion.
GOODS AND SERVICES TAX (GST)
GST is a comprehensive indirect tax levied on the sale and consumption of goods
and services. It has replaced most of the indirect taxes levied on goods and
services by the state governments and the central government. India has adopted
the dual GST model in which both the central and the state governments levy tax.
Goods and services are classified in four groups and based on the classification
they attract GST at the rate of 5%, 12%, 18% or 28%. Generally, goods and
services attract GST at the rate of 18%. Further, certain services provided by
non-residents to Indian residents via a digital platform are also subject to GST
in India.
CUSTOMS DUTIES
27. How are imports and exports taxed?
The Customs Act 1962 governs the levy and collection of duty on imports to and
exports from India, related procedures, prohibitions, penalties and offences.
Import of goods into India attracts a levy of basic customs duty (BCD) and
integrated goods and service tax (IGST).
BCD is levied under the Customs Act 1962 and the rate applicable to the import
of goods depends on the tariff rate under the Customs Tariff Act1975 (CTA) and
the duty exemption/concession, if any, provided by the Central Government under
an exemption notification. The tariff classification of goods under the CTA is
broadly based on the internationally accepted Harmonised System of Nomenclature
(HSN) classification.
In addition to the BCD, import into India is subject to levy of Social Welfare
Surcharge (SWS). SWS is levied at the rate of 10% on the BCD amount.
IGST is levied on goods imported into the territory of India, under the IGST
Act. The rate of IGST depends on the classification of the goods under the CTA
and the duty exemption/concession, if any, provided under a notification issued
by the Central Government under the IGST Act. IGST is calculated on the value,
including the BCD and SWS. Further, compensation cess is levied on the import of
specific goods under the GST (Compensation to States) 2017 Act. Cess is
calculated on the value, including the BCD and SWS.
COMPETITION
28. Are restrictive agreements and practices regulated by competition law? Is
unilateral (or single-firm) conduct regulated by competition law?
COMPETITION AUTHORITY
The Competition Act 2002 (Competition Act) contains specific provisions on
anti-competitive agreements, the abuse of dominant positions and the regulation
of mergers and acquisitions (combinations). The Competition Commission of India
(CCI) has been established to monitor, regulate, control and adjudicate on
anti-competitive agreements, abuse of dominant position and combinations.
RESTRICTIVE AGREEMENTS AND PRACTICES
There is a general prohibition on entering into any kind of agreement for the
production, supply, distribution, storage, acquisition or control of goods or
provision of services that causes, or is likely to cause, an appreciable adverse
effect on competition in India (section 3, Competition Act). Any agreement
between competitors is presumed to cause an appreciable adverse effect if it:
* Directly or indirectly determines purchase or sale prices.
* Limits or controls production, supply, markets, technical development,
investment or provision of services.
* Shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or
number of customers in the market or any other similar way.
* Directly or indirectly results in bid rigging or collusive bidding.
UNILATERAL CONDUCT
Unilateral conduct by companies is governed by the provisions for the abuse of
dominant position (section 4, Competition Act). A company which enjoys a
position of strength in the relevant market which enables it to operate
independently of competitive forces prevailing in the relevant market, or affect
its competitors or consumers or the relevant market in its favour will be
abusing its dominant position if it:
* Directly or indirectly imposes unfair or discriminatory conditions in the
purchase or sale of goods or services, or in the price of the purchase or
sale (including predatory price) of goods or service.
* Limits or restricts the production of goods or the provision of services in
the market, or the technical or scientific developments relating to goods or
services to the prejudice of consumers.
* Indulges in a practice or practices resulting in the denial of market access
in any manner.
* Makes the conclusion of contracts subject to acceptance by other parties of
supplementary obligations which, by their nature or according to commercial
usage, have no connection with the subject of such contracts.
* Uses its dominant position in one relevant market to enter into, or protect,
other relevant markets.
APPLICABILITY OF PROVISIONS AND NATURE OF SANCTIONS
The provisions of the Competition Act apply to all companies offering their
goods or services in markets in India, irrespective of whether they are domestic
or foreign entities. The key test to determine the applicability of the
provisions is the effect, if any, of impugned conduct on markets in India. The
CCI has held that such an assessment would need to be made at all levels of the
value chain (Nirmal Kaur Manshani v. Ruchi Soya Industries & Ors., CCI order
dated 28.06.2016).
The nature of the sanctions imposed relating to violations of the provisions of
the Competition Act are civil sanctions in the form of penalties computed using
the turnover or profitability thresholds laid out in section 27 of the
Competition Act. However, non-compliance of the orders of the CCI may entail
criminal sanctions in the form of imprisonment for a period of up to three
years.
29. Are mergers and acquisitions subject to merger control?
TRANSACTIONS SUBJECT TO MERGER CONTROL
The Competition Act follows a suspensory model. Under this model, if a merger or
acquisition (defined in the Competition Act as a "combination") meets certain
asset or turnover thresholds set out in the Competition Act, it must be notified
to the CCI. For the purposes of the Competition Act, "acquisitions" include
direct or indirect acquisitions of any shares, voting rights or assets of any
enterprise, or control over management or assets of an enterprise.
A filing/notification will be required if the merger/acquisition satisfies
certain criteria and thresholds.
Enterprise Level. The acquirer (consolidated) and target business must have:
* Assets of less than USD265 million and turnover of less than USD803 million
(in India).
* Assets of less than USD1 billion (with at least INR1000 crore located in
India) and turnover of less than USD3 billion (with at least 3000 INR crore
located in India) (worldwide, with a presence in India).
Group Level. The acquirer (consolidated) and target business must have:
* Assets of less than USD1.06 billion and turnover of less than USD3.18 billion
(in India).
* Assets of less than USD4 billion (with at least INR1000 crore located in
India) and turnover of less than USD12 billion (with at least 3000 INR crore
located in India) (worldwide, with a presence in India).
However, certain combinations involving acquisitions of relatively smaller
enterprises benefit from certain exemptions in specific circumstances.
TURNOVER TESTS
The thresholds for notification are based on the turnover and assets of the
parties. There is no market share test. The degree of scrutiny and resultant
remedies sought depends on a variety of factors, including the combined market
share of the parties to the combination. Combination notifications can be made
by way of a Form-I or a Form-II notification depending on the combined market
share of the resultant entity. A Form-I notification is required to be filed
when the combined market share of the parties at the horizontal level (that is,
within the same market) does not exceed 15%. A Form-II notification is required
to be filed when the combined market share of the parties at the horizontal
level exceeds 15% or the combined or individual market share of the parties at
the vertical level exceeds 25%.
In August 2019, the provision of notifying a combination via the '"Green
'Channel" procedure was also introduced, wherein once notified, the proposed
combination will be deemed to be approved by the CCI. However, the acquirer or
the notifying party will still be required to make a filing in the prescribed
Form-I/short form format along with an additional declaration. The 'Green
'Channel route is available in cases where there are no horizontal overlaps, no
existing or potential vertical relationships and no complementary business
activities among the combining parties or their respective group entities or
involving any entity in which any of the combining parties hold shareholding or
have control.
SUBSTANTIVE TEST
The main test to determine whether a combination can be approved is to determine
whether such combination would have the effect of or is likely to have an
appreciable adverse effect on competition in the relevant market (section 20,
Competition Act). While carrying out such an assessment, the following factors
will be considered (section 20(4), Competition Act):
* Actual and potential level of competition through imports in the market.
* Extent of barriers to entry in the market.
* Degree of countervailing power in the market.
* Nature and extent of vertical integration.
* Possibility of a failing business.
FOREIGN-TO-FOREIGN ACQUISITIONS
All combinations, including foreign-to-foreign acquisitions, which have a nexus
with markets in India and breach the thresholds prescribed under the Competition
Act would be liable to be notified to the CCI. Although parties may avail of
certain exemptions if the same are available to them, in the event a
foreign-to-foreign acquisition requiring notification is not notified, the CCI
may initiate gun-jumping proceedings in respect of such combination.
FOREIGN EXEMPTIONS
There are no specific exemptions available for foreign combinations. In the
event a combination meets the thresholds as prescribed under the Competition
Act, it would need to be notified to the CCI. However, certain general
exemptions have been provided under the Competition Act and the CCI (Procedure
in regard to the transaction of business relating to combinations) Regulations,
2011 (Combination Regulations). Exemption from notification is provided in
respect of share subscriptions or financing facilities from an acquisition by a
foreign institutional investor, a bank or a venture capital fund (section 6(4),
Competition Act).
SPECIFIC INDUSTRIES
The regulation of combinations does not vary on the basis of industry. However,
the Central Government may, by notification, exempt the application of the
provisions of the Act to certain industries (section 54, Competition Act).
ANTI-BRIBERY AND CORRUPTION
30. Are there any anti-bribery or corruption regulations affecting business in
your jurisdiction?
The Prevention of Corruption Act 1988 (PCA) is the main anti-bribery and
corruption legislation in India, and it prohibits the giving or accepting of any
kind of monetary gain or other gratification to public servants by the giver or
acceptor of such gratification. The Indian Penal Code 1860 (IPC) also sets out
various offences relating to anti-bribery and anti-corruption in India.
The PCA includes offences by commercial organisations and its employees who are
involved in the payment of bribes to public servants with the intention of
either:
* Obtaining or retaining business for such commercial organisation.
* Obtaining or retaining an advantage in the conduct of business for such
commercial organisation.
If any person associated with such commercial organisation gives or promises to
give any undue advantage to a public servant, the commercial organisation will
be held liable under the PCA. However, it will be a defence for the commercial
organisation to prove that it had in place adequate procedures to prevent
persons associated with it from undertaking conduct classified as an offence
under the PCA. Where an offence committed by a commercial organisation is
committed with the consent/connivance of its director, manager, secretary or
other officer, such officer can also be prosecuted and if found guilty, will be
punished with a period of imprisonment between three and seven years, and a
fine.
Commercial organisations in India are also required to comply with the PMLA and
the rules thereunder, which aims to prevent instances of money laundering and
the use of 'proceeds of 'crime from certain identified offences under the PMLA.
The PMLA permits the Enforcement Directorate in India to attach the properties
of persons accused of money laundering at the time of investigation. Further,
the PMLA also requires banks, financial institutions and other intermediaries to
maintain records of financial transaction and '"know your 'customer" information
(which may be specified by sectoral regulators, such as the Reserve Bank of
India), and report any suspicious transactions in excess of specified values.
Further, the Foreign Contribution (Regulation) Act 2010, regulates the
acceptance and use of foreign contributions and hospitality by individuals and
corporations. The receipt of foreign contributions requires prior registration
or prior approval from the Indian Ministry of Home Affairs.
INTELLECTUAL PROPERTY
31. What are the main IP rights that are recognised in your jurisdiction?
PATENTS
Definition and Legal Requirements. The patent regime in India is governed by the
Indian Patents Act, 1970 (Patents Act). A patent is an exclusive statutory right
granted by the state to a patentee, for making, using, selling and/or importing
a patented product or process, for a limited period of time. Such rights are
granted in exchange for full disclosure of an invention.
In order for an invention to be patentable under Indian Patent laws, an
invention is required to be novel, discrete and useful, and should not fall
under non-patentable subject matter as specified under the Patents Act.
Registration. India grants patent rights on a "first-to-apply" basis. The
application can be made by either the inventor or its assignee with the
Controller-General of Patents, Designs and Trade Marks. The procedure for filing
a patent application and its processing up to the grant/refusal, and maintenance
is explained in the Manual of Patent Office Practice and Procedure available on
the official website of the Indian Patent Office
(https://ipindia.gov.in/writereaddata/Portal/Images/pdf/Manual_for_Patent_Office_Practice_and_Procedure_.pdf).
Enforcement and Remedies. If a party uses a patented invention without the
permission or consent of the patentee, then it would amount to patent
infringement, unless such activity falls under a statutory exception. In case of
an infringement, the patentee can approach a court of law for obtaining relief,
including injunctions and damages. Further, an exclusive licensee of a patent
also has a right to sue for patent infringement.
Length of Protection. The total term of a patent in India is 20 years. The
patentee is required to pay a renewal fee for keeping the patent in force during
such 20 year period.
TRADE MARKS
Definition and Legal Requirements. The Indian Trade Marks Act, 1999 (Trade Marks
Act), along with its supplementary rules, governs the law of trade marks in
India. The term "mark" is defined to include a device, brand, heading, label,
ticket, name, signature, word, letter, numeral, shape of goods, packaging or,
combination of colours, or any combination of these. Therefore, the list of what
are defined as "marks" is inclusive and not exhaustive.
The Trade Marks Act provides for certain categories of marks, for example those
that:
* Are not distinctive.
* Consist exclusively of marks which designate geographical origin, quality,
quantity, kind, intended purpose, values, or the time of production of the
goods or rendering of the service or other characteristics of the goods or
service.
* Which have become common to the trade.
However, these examples are likely to be refused unless the trade mark has
acquired distinctiveness through use, or prior filing of the trade mark
application.
Further certain categories of marks are not registrable, including:
* Those prohibited under the Emblems and Names (Prevention of Improper Use) Act
1950.
* International non-proprietary names.
* Names of persons.
* Marks which comprise of any matter likely to:
* be religiously offensive;
* contain scandalous or obscene material;
* deceive the public or cause confusion.
Protection. A trade mark can be registered with the Registrar of Trade Marks in
India, for goods as well as services. A "registered trade mark" confers a bundle
of exclusive rights on the registered owner, including the right to exclusive
use of the mark in relation to the goods or services. However, registration of a
trade mark is not a mandatory requirement under the Indian Trade Marks law. An
owner of an unregistered trade mark can also initiate action against misuse of
its trade mark under common law for the tort of passing off.
Enforcement and Remedies. An action for infringement of a registered mark can be
initiated by the registered proprietor or a registered user of the trade mark.
The reliefs which can be sought in such an action include injunction, damages
and/or accounts for profit. Further, criminal action can also be initiated for
misuse of a trade mark under the Indian Trade Marks Act, which may be punishable
by fine and/or imprisonment.
Length of Protection and Renewability. The term of registration of a trade mark
is ten years, which can be renewed for further periods of ten years, on the
payment of a prescribed renewal fee.
REGISTERED DESIGNS
Definition. Industrial designs in India are protected under the Designs Act
2000, which incorporates the minimum standards for the protection of industrial
designs, in accordance with the Agreement on Trade-Related Aspects of
Intellectual Property Rights. It also provides for the introduction of an
international system of classification, as per the Locarno Classification. The
Locarno Classification was established by the Locarno Agreement in 1968. This is
an international classification used for the purposes of the registration of
industrial designs.
Under the statute, "design" means the features of shape, configuration, pattern,
ornament or composition of lines or colours applied to any "article", whether in
two dimensional or three dimensional, or in both, forms, by any industrial
process or means, whether manual mechanical or chemical, separate or combined,
which in the finished article appeal to and are judged solely by the eye.
Registration. In India, designs are granted protection under the Designs Act
2000 (Designs Act). As defined under section 2 (d) of the Designs Act, a design
protection is granted only to the aesthetical shape of the article and not the
functional aspect of any design or a functional shape (that is, a shape dictated
solely by the function) and is registered with the Controller-General of
Patents, Designs and Trade Marks.
To be eligible for registration a design must:
* Be new or original.
* Not have been disclosed to the public anywhere in India or in any other
country by publication in a tangible form.
* Be significantly distinguishable from known designs or their combinations.
* Not comprise or contain scandalous or obscene matter.
Enforcement and Remedies. A proprietor of a registered owner can file an
infringement suit in India by way of a civil action. The civil remedies
available in such cases are injunctions, damages, compensation, or delivery up
of the infringing articles.
Length of Protection and Renewability. Registered designs are valid for a period
of ten years from the date of registration and the registration can be extended
for a further period of five years.
UNREGISTERED DESIGNS
Definition and Legal Requirements. There is no statutory definition of the term
"unregistered design". However, in common practice, a design which is not
registered under the Designs Act is termed as an unregistered design.
Enforcement and Remedies. If a design is not registered under the Designs Act,
the proprietor of such a design cannot take any action against the infringer
under the provisions of the Designs Act. However, the common law remedy of
passing off would be available to a proprietor of an unregistered design.
Length of Protection. There is no statutory protection offered to unregistered
designs in India.
COPYRIGHT
Definition and Legal Requirements. The Copyright Act 1957 (Copyright Act),
supported by the Copyright Rules 2021, is the law governing copyright protection
in India. The Copyright Act provides that copyright exists in an original
literary, dramatic, musical, artistic work, in cinematograph films and sound
recordings.
Protection. Broadly, the Copyright Act grants the owner of a copyright the
exclusive right to reproduce the work, issue copies of the work, communicate the
work to the public, and make a translation/adoption of the work.
An author of a work is granted "special rights", which subsist even after the
assignment (whole or partial) of the copyright in the work. The author has the
right to claim authorship of the work, and restrain or claim damages with
respect to any distortion, mutilation, modification, or other act in relation to
the work if such distortion, mutilation, modification, or other act, would be
prejudicial to his or her honour or reputation. These special rights can also be
exercised by the legal representatives of the author.
A copyright is infringed if a person without permission of the owner of
copyright does anything that the owner of the copyright has an exclusive right
to do. However, there are certain statutory exceptions to copyright
infringement, such as copying for the purpose of research or study or to
undertake criticism or a review of the work.
An application for registration of copyright can be filed with the Indian
Copyright Office. Registration of copyright is not a mandatory requirement under
the Indian Copyright Act and even an unregistered owner of copyright in a work
can file an action for infringement.
Enforcement and Remedies. The Copyright Act provides for both civil and criminal
remedies for copyright infringement. In the event of infringement, the copyright
owner is entitled to seek remedies by way of injunction, damages, and order for
seizure and destruction of the infringing articles.
Length of Protection and Renewability. The term of copyright in India is, in
most cases, the lifetime of the creator plus 60 years thereafter. However, the
same differs from work to work.
MARKETING AGREEMENTS
32. Are marketing agreements regulated?
Marketing agreements are generally governed under the Indian Contract Act 1872,
and the Competition Act. Any agreement will be required to comply with basic
principles of the contract laws such as offer and acceptance, consideration,
valid legal object and consent. Similarly, it has to be ensured that the
agreement in respect of marketing does not create any appreciable adverse effect
on competition and that the clauses in the agreement are not abusive of the
dominant position of a party if it has a dominant position under the terms of
the Competition Act.
E-COMMERCE
33. Are there any laws regulating e-commerce?
An e-commerce business is governed under the general body of Indian laws such as
the Indian Contract Act 1872, Sale of Goods Act 1930, Information Technology
Act, 2000 (IT Act) and Competition Act, which equally apply to other relevant
sectors of the economy. Additionally, the Consumer Protection (E-Commerce) Rules
2020 (E-commerce Rules) also apply to e-commerce businesses in India.
Further, the Department for Promotion of Industry and Internal Trade (DPIIT)
issues guidelines in relation to FDI in the e-commerce market in India under the
FDI Policy.
E-commerce entities which are owned or controlled by persons residents outside
India must only engage in B2B e-commerce and not in business to consumer (B2C)
e-commerce and are also subject to certain conditions.
34. Are online platforms regulated in relation to their use for marketing/sales
purposes?
In addition to the guidelines issued by the DPIIT (see Question 33), all
e-commerce entities operating in India would be governed by the E-commerce
Rules. The E-commerce Rules imposes certain duties on e-commerce entities in
their dealings with sellers and consumers on their e-commerce platforms.
Under the E-commerce Rules, an e-commerce entity must not adopt any unfair trade
practice in the course of business on its platform or otherwise, which includes
the giving of false or misleading facts, criticising the goods, services or
trade of another person. Every marketplace e-commerce entity must include a
description of any differentiated treatment which it gives or may give between
goods or services or sellers of the same category in its terms and conditions
generally governing its relationship with sellers on its platform. The
e-commerce entity must also maintain a record of relevant information allowing
for the identification of all sellers who have repeatedly offered goods or
services that have previously been removed or access to which has previously
been disabled under the Copyright Act, the Trade Marks Act or the IT Act.
Additionally, an e-commerce entity must:
* Provide information in a clear and accessible manner on its platform
regarding its legal name, address, website address, and contact details like
e-mail address, fax, landline and mobile numbers of customer care as well as
that of the grievance officer (see below).
* Establish an adequate grievance redressal mechanism having regard to the
number of grievances ordinarily received by such entity from India and must
appoint a grievance officer for consumer grievance redressal.
* Not manipulate the price of the goods or services offered on its platform in
such a manner as to gain unreasonable profit by imposing on consumers any
unjustified price having regard to the prevailing market conditions, the
essential nature of the good or service, any extraordinary circumstances
under which the good or service is offered, and any other relevant
consideration in determining whether the price charged is justified.
* Not discriminate between consumers of the same class or make any arbitrary
classification of consumers.
* Provide accurate information to its users relating to return, refund,
exchange, warranty and guarantee, delivery and shipment, cost of return
shipping, mode of payments, grievance redressal mechanism, and any other
similar information which may be required by consumers to make informed
decisions, all mandatory notices and information required by applicable laws,
available payment methods, the security of those payment methods, the
procedure to cancel regular payments under those methods, any fees or charges
payable by users, charge back options, if any, total price in single figure
of any good or service along with the breakup price for the good or service.
* Not falsely represent itself as a consumer and post reviews about goods and
services or misrepresent the quality or the features of any goods or
services.
* Ensure that the advertisements for marketing of goods or services are
consistent with the actual characteristics, access and usage conditions of
such goods or services.
* Bear appropriate liability in any action related to the authenticity of goods
or service where it explicitly or implicitly vouches for the authenticity of
the goods or services sold by it or guarantees that such goods or services
are authentic.
ADVERTISING
35. How is advertising regulated in your jurisdiction?
There is currently no main provision for the regulation of advertising in India.
However, advertisements would be governed by the requirements set out under the
Consumer Protection Act 2019 (CP Act). The CP Act classifies certain practices,
such as the adoption of any unfair method or unfair/deceptive practice for the
purpose of promoting the sale, use or supply of any goods/ services as '"unfair
trade 'practices". A consumer may seek redress by filing a complaint before the
consumer disputes redressal commission established under the CP Act.
Additionally, the Advertising Standards Council of India (ASCI) seeks to ensure
self-regulation in advertising and protecting the interests of consumers.
The ASCI has formulated a code for self-regulation in advertising (ASCI Code),
applicable to all individuals and entities engaged in advertising. The ASCI Code
applies to advertisements read, heard, or viewed in India, or directed to
consumers in India, or which are exposed to a significant number of consumers in
India, even if they originate or are published abroad.
The ASCI Code is non-statutory but is recognised under various Indian laws in
addition to being adopted by advertising-industry bodies. The ASCI Code provides
that it is not in competition with any law, its rules, or the machinery through
which they are enforced, and is designed only to complement legal controls under
such laws and not to usurp or replace them. With respect to content on
television, adherence to the ASCI Code is mandatory under the Cable Television
Regulation Rules 1994.
In accordance with the ASCI Code, any advertisement must:
* Be truthful and honest to consumers and competitors.
* Be within the bounds of generally accepted standards of public decency and
propriety.
* Not be used indiscriminately for the promotion of products hazardous or
harmful to society or to individuals, particularly minors, to a degree
unacceptable to society at large.
* Observe fairness in competition so that the consumer needs to be informed of
choices in the marketplace and that generally accepted competitive behaviour
in business is observed.
Advertisements are banned for various products and services, including (but not
limited to) tobacco and tobacco products, alcohol, legal services, physicians,
firearms, weapons and ammunitions.
DIGITAL ADVERTISING
India does not currently have a specific set of regulations governing digital
advertising. Digital advertisements would be subject to the requirements under
the IT Act, including that the material is not for the purpose of causing
annoyance or inconvenience or to deceive or to mislead the addressee or
recipient about the origin of such messages, and does not contain any material
depicting children in an obscene, indecent or sexually explicit manner.
The ASCI has also issued draft guidelines for '"influencer advertising on
digital 'media for stakeholder comments (Influencer Guidelines). The Influencer
Guidelines require influencers and advertisers to include a disclosure
label/hashtag (such as #ad, #collab, #promo, #sponsored, or #partnership) for
any paid-for communication addressed to the public or a section of it to
influence their behaviour and/or opinion.
DIRECT MARKETING
India does not have a specific set of regulations regarding direct marketing.
With respect to advertisements over telecommunication networks, the Telecom
Commercial Communications Customer Preference Regulations 2018, issued by the
Telephone Regulatory Authority of India requires telecom service providers to:
* Maintain records of consent(s) of subscribers acquired.
* Provide a facility for subscribers to revoke consent in relation to the
receipt of any unsolicited commercial communication.
Further, under the IT Act, any person who sends any electronic mail or
electronic mail message for the purpose of causing annoyance or inconvenience or
to deceive or to mislead the addressee or recipient about the origin of such
messages, would be punishable with imprisonment for a term which may extend to
three years and a fine.
36. How are sales promotions regulated in your jurisdiction?
India does not currently legislation regulating sales promotion. Promotional
activities would be governed under the ambit of the CP Act, which classifies
certain practices, as '"unfair trade 'practices", including the:
* Making of any statements which mislead the public as to the price at which a
product or like products or goods or services, have been or are, ordinarily
sold or provided.
* Offering of gifts, prizes or other items with the intention of not providing
them as offered or creating an impression that something is being given or
offered free of charge when it is fully or partly covered by the amount
charged, in the transaction as a whole.
* Conduct of any contest, lottery, game of chance or skill, for the purpose of
promoting, directly or indirectly, the sale, use or supply of any product or
any business interest, except as may be prescribed by the Central Government
under the CP Act.
A consumer may seek redressal by filing a complaint before the consumer disputes
redressal commission established under the CP Act.
Further, the ASCI Code provides certain requirements as to the truthfulness and
honesty of representations made to the public. As per the ASCI Code,
advertisements should not distort facts or mislead consumers by implications or
omissions. For example, where a claim is made that if one product is purchased,
another will be provided ''"free", the advertiser may be required to show to the
ASCI that the price paid by the consumer for the product which is offered for
purchase with the advertised incentive is no more than the prevailing price of
the product without the advertised incentive.
The ASCI Code also regulates lotteries or prize competitions advertised to the
public. Where an advertisement invites the public to take part in lotteries or
prize competitions permitted under law or holds out the prospect of gifts, it
must state clearly all material conditions so as to:
* Enable the consumer to obtain a true and fair view of their prospects in such
activities.
* Make adequate provisions for the judging of such competitions and
announcements of results and distribution of prizes or gifts according to the
advertised terms and conditions within a reasonable period of time.
DATA PROTECTION
37. Are there specific data protection laws? If not, are there laws providing
equivalent protection?
DATA PROTECTION LAWS
India does not currently have specific data protection legislation in place.
However, the Personal Data Protection Bill 2019 (PDP Bill) has been introduced
in Parliament and is currently pending approval of the lower house. It deals
with the rights of individuals (data principals) and liability of data
processors (fiduciaries) or entities collecting/processing information provided
by the owners of such information. The PDP Bill, when adopted by Parliament,
will replace the existing data protection framework, under the IT Act, including
the Information Technology (Reasonable Security Practices and Procedures and
Sensitive Personal Data or Information) Rules 2011 (Privacy Rules). The PDP
Bill, amongst others, sets rules in respect of the obligations of a data
processor in processing any personal data or sensitive personal data, data
localisation requirements, the rights of data principals and the establishment
of the Data Protection Authority of India (that is responsible for ensuring
compliance and protecting the interests of data principals).
At present, the IT Act, read with the Privacy Rules, recognises the concept of
personal information and sensitive personal data and to that limited extent
governs data protection and privacy in India. Article 21 of the Constitution of
India which provides for the right to life and liberty, sets out the overarching
principle of the right to privacy in India.
The IT Act and the Privacy Rules create a duty on any corporate entity to
provide a privacy policy for dealing with personal information and sensitive
data. Such a corporate entity is also required to comply with reasonable
security measures and procedures to protect any sensitive information provided
by any person (the data subject). The corporate entity is liable for any
wrongful loss caused to the data subject, or any wrongful gain caused to any
other person, on account of negligence in maintaining reasonable security
practices and procedures in relation to sensitive information provided by the
data subject.
The data subject can provide sensitive information to any organisation or
corporate entity under a lawful contract or under any applicable laws. Under the
Privacy Rules, an organisation or any person acting on its behalf must, prior to
the collection of sensitive information, obtain consent in writing from the data
subject, regarding the nature of how the information will be used. Additionally,
disclosure of sensitive personal data or information by an organisation to any
third party requires prior permission from the data subject.
Further, the transfer of personal data by an Indian entity to another entity
outside India is permissible when:
* The entity in the other country ensures and maintains the same level of data
protection as the Indian entity which is transferring the data.
* The transfer of the data is necessary for the performance of a lawful
contract between the Indian entity and the data subject.
* The data subject has consented to the transfer.
Companies, as a general practice, enter into several contractual agreements with
other companies, clients, agencies or partners to secure their information. Such
agreements usually contain confidentiality and privacy clauses and also
arbitration clauses for the purpose of resolving any dispute which may arise.
Such contractual obligations regarding data protection are governed by the
provisions of the Indian Contract Act 1872, which provide for remedies for
contractual damages by way of compensation for violation of the terms of the
contract or non-performance of the obligations. Further, any corporate entity is
liable to pay damages by way of compensation to the data subject, for negligence
in implementing and maintaining reasonable security practices and procedures.
Additionally, any disclosure of sensitive information in breach of a lawful
contract is punishable with imprisonment for three years or with a fine which
can extend up to USD7,100 (or both).
CONSUMER PRIVACY LAWS
India does not have a specific consumer privacy law. The data protection
framework set out above and the CP Act regulate the processing of personal
information provided by consumers to commercial entities. The CP Act classifies
the disclosure of any personal information given in confidence by a consumer as
an '"unfair trade 'practice" (see Question 36) and a consumer may seek redressal
by filing a complaint before the consumer disputes redressal commission
established under the CP Act.
PRODUCT LIABILITY
38. How is product liability and product safety regulated?
Product liability in India is primarily governed by the:
* CP Act (which now supersedes the previous legislation (Consumer Protection
Act 1986)).
* Sales of Goods Act 1930.
Any person who trades in goods (manufacturers, importers, distributors,
wholesalers, and so on) or services may be held liable for defective products.
The CP Act introduced a detailed framework on product liability. The CP Act
provides specific responsibilities and liabilities of '''product manufacturers,
product service 'providers and ''product sellers, of products/services, in
relation to compensation payable by them to a consumer in the event of harm
caused by a defective product or deficiency in services relating to such
product. A complaint may be filed by a person before a district commission or
state commission or national commission (depending on the value of the claim),
for claiming compensation for the harm caused to him. The CP Act sets out the
criteria for attracting liability by the product manufacturer, product seller
and product service provider, respectively for a defective product.
Similarly, as per the Sale of Goods Act 1930, there is an implied warranty or
condition in respect of the quality or fitness of the goods sold in the
following circumstances:
* Where the buyer, expressly or by implication, makes known to the seller the
particular purpose for which the goods are required, so as to show that the
buyer relies on the seller's skill or judgment, and the goods are of a
description which it is in the course of the seller's business to supply
(whether or not he/she is the manufacturer or producer or not), there is an
implied condition that the goods will be reasonably fit for such a purpose.
However, in the case of a contract for the sale of a specified article under
its patent or other trade name, there is no implied condition as to its
fitness for any particular purpose.
* Where goods are bought by description from a seller who deals in goods of
that description (whether or not he/she is the manufacturer or producer or
not), there is an implied condition that the goods will be of merchantable
quality. However, if the buyer has examined the goods, there will be no
implied condition as regards defects which such examination ought to have
revealed.
* An implied warranty or condition as to quality or fitness for a particular
purpose may be annexed by the usage of trade.
REGULATORY AUTHORITIES
39. What are some of the key regulatory authorities relevant to doing business
in your jurisdiction?
COMPETITION
Main Activities. The Competition Commission of India (CCI) was established under
the Competition Act to promote competition and eliminating practices that have
an adverse effect on competition, ensuring free trade in Indian markets and
protecting the interests of consumers. The CCI has the powers to inquire into
anti-competitive agreements (such as cartels, bid-rigging agreements), instances
of abuse of dominant positions (such as predatory pricing practices) and
combinations of one or more enterprises (as per the thresholds specified under
the Competition Act).
W www.cci.gov.in/
ENVIRONMENT
Main Activities. The Central Pollution Control Board and the State Pollution
Control Boards are the regulatory authorities in respect of environmental
matters in India. The role of the pollution control boards is to advise the
central and state governments on the prevention, control and abatement of air
and water pollution, provide technical assistance and carry out research, advise
state governments on the location and suitability of carrying on any industry,
lay down standards for treatment of sewage and trade effluents, carry out
inspection of industrial units and making orders for the preservation and
control of discharge of waste, initiate prosecutions against industries
operating in contravention of established standards and impose environmental
compensation penalties.
W http://moef.gov.in/en/
FINANCIAL SERVICES
Main Activities. India has two primary financial services regulators, the
Reserve Bank of India (RBI) which regulates India's banking and financial
systems and the Securities & Exchange Board of India (SEBI) which regulates the
Indian capital markets.
RBI. The RBI is the country's central bank which undertakes, amongst other
functions, consolidated regulation and supervision of the financial sector
comprising scheduled commercial and co-operative banks, small finance banks,
payments banks, credit information companies, non-banking finance companies etc.
W https://rbi.org.in/home.aspx
SEBI. THE SEBI IS RESPONSIBLE FOR THE DEVELOPMENT AND REGULATION OF THE
SECURITIES MARKET AND THE PROTECTION OF INVESTORS. THE SEBI ALSO REGULATES THE
CONDUCT OF VARIOUS INTERMEDIARIES INVOLVED IN THE SECURITIES MARKET SUCH AS
STOCKBROKERS, SUB-BROKERS, SHARE TRANSFER AGENTS, BANKERS TO AN ISSUE,
REGISTRARS TO AN ISSUE, MERCHANT BANKERS, UNDERWRITERS, PORTFOLIO MANAGERS,
INVESTMENT ADVISERS, DEPOSITORY PARTICIPANTS, FOREIGN PORTFOLIO INVESTORS,
CREDIT RATING AGENCIES, AND VENTURE CAPITAL FUNDS..
W www.sebi.gov.in/index.html
OTHER
Various other sectorial regulators such as the Registrar of Companies, Telecom
Regulatory Authority of India, Insurance Regulatory and Development Authority of
India, Bureau of India Standards are responsible for framing policies and
ensuring compliance by businesses operating in India.
OTHER CONSIDERATIONS
40. Is there anything else that is important relating to doing business in your
jurisdiction?
India's GDP has been projected to grow at 12% in 2021 as per data released by
Moody's Analytics. Domestic and international demand has seen improvement
leading to a rise in manufacturing output. However, reaching the estimated
milestone of 12% growth may prove difficult in the midst of a rising second wave
of COVID-19 infections. The Indian 'Government's monetary and fiscal response
may have to be reviewed in response to the dynamic circumstances for the
financial year 2021 to 2022.
*The authors would like to thank the following from L&L Partners, Abdullah
Hussain, Ajinkya Gunjan Mishra, Lokesh Shah and Purvi Khanna.
CONTRIBUTOR PROFILES
RAJIV LUTHRA, FOUNDER, MANAGING PARTNER
L&L PARTNERS (FORMERLY LUTHRA & LUTHRA LAW OFFICES)
T +91 11 4121 5100
F +91 11 2372 3909
E rajiv@luthra.com
W www.luthra.com
Professional Qualifications. Alumni, BA (Hons), Delhi University; Alumni, LLB,
Delhi University; Alumni, Harvard Law School
Areas of Practice. Banking and finance; capital markets; corporate, commercial
and M&A; project finance.
Languages. English, Hindi
Professional Associations/Memberships
* Supreme Court Bar Association, India.
* India International Bar Association.
* American Bar Association.
* Inter-Pacific Bar Association.
* International Union des Avocats.
* Round Table on Legal Education (a Department of Higher Education, Ministry of
Human Resource Development, a Government of India initiative).
* Advisory Board of the National Law University, Jodhpur.
* City of London Advisory Council for India.
* National Executive Committee of the Federation of Indian Chambers of Commerce
and Industry (FICCI).
* National Executive Committee of the Confederation of Indian Industry (CII).
SHINOJ KOSHY, PARTNER
L&L PARTNERS (FORMERLY LUTHRA & LUTHRA LAW OFFICES)
T +91 11 4121 5100
F +91 11 2372 3909
E skoshy@luthra.com
W www.luthra.com
Professional Qualifications. BA, LLB, National Law School of India University,
Bangalore, 2004 (Awarded the Justice V Ramachandran Gold Medal); Stanford Law
School, 2004; The University of Law (formerly, The College of Law), London,
2005; BPP University, London, 2007; Member of the Delhi Bar Council; Solicitor
of the Senior Courts of England and Wales (currently non-practising)
Areas of Practice. M&A; joint ventures; corporate and commercial advisory;
private equity and venture capital investments; corporate governance; capital
markets; dispute resolution: litigation and arbitration; management, labour and
employment.
'Languages. English, Hindi, Malayalam
Professional Associations/memberships. Member of the Jersey Advisory Group
involved in assisting and advising the Jersey Government in negotiating
international tax and investment protection agreements with India.
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Resource ID 4-500-8980
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2. 1Overview
3. 2Legal System
4. 3Foreign Investment
5. 4Business Vehicles
6. 5Environment
7. 6Employment
1. Laws, Contracts and Permits
8. 7Tax
1. Taxes on Employment
2. Business Vehicles
3. Groups, Affiliates and Related Parties
4. Double Tax Treaties
5. Customs Duties
9. 8Competition
10. 9Anti-Bribery and Corruption
11. 10Intellectual Property
12. 11Marketing Agreements
13. 12E-Commerce
14. 13Advertising
15. 14Data Protection
16. 15Product Liability
17. 16Regulatory Authorities
18. 17Other Considerations
19. 18Contributor profiles
1. Rajiv Luthra, Founder, Managing Partner
2. Shinoj Koshy, Partner
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