2008 Investment Climate Statement - India
Openness To Foreign Investment
India continues controlling foreign investment with limits on equity and voting rights, mandatory government approvals, and capital controls. Since 1991, as it has slowly implemented a program of economic reform, the GOI has gradually relaxed many of these constraints. Nonetheless, a complex array of restrictions remains, along with an undercurrent of resentment towards foreign investment from some quarters. Foreign direct investment (FDI) is still prohibited in some sectors or sub-sectors.
Since the mid 1990s, India has allowed "automatic" FDI approvals in many sectors, gradually expanding the list over time. Where applicable, foreign investors do not need government licenses or approvals and simply notify the Reserve Bank of India (RBI) of their investments. Other sectors require approval by either the Foreign Investment Promotion Board (FIPB) or the Cabinet Committee on Foreign Investment. Under the Government approval route, applications for FDI proposals, other than by Non-Resident Indians, and proposals for FDI in Single Brand, product retailing, are received in the Department of Economic Affairs. Proposals for FDI in Single Brand, product retailing and by NRIs are received in the Department of Industrial Policy & Promotion, Ministry of Commerce and Industry. The rules vary from industry to industry and are frequently changed.
Although the changes have tended toward greater liberalization, the investment process is not always transparent or straightforward. In January 2005, for example, the GOI relaxed restrictions on new FDI in India by foreign partners of joint ventures. The previous rules, issued in Press Note 18 in 1998, had required a release by the Indian partner and GOI approval for any new investment, a provision often subject to abuse. The new rules maintain restrictions on the majority of existing joint ventures, but leave new ones to negotiate their own terms on a commercial basis. A local firm's ability to restrict its foreign partner's business strategy has been reduced, but the way out of a current joint venture remains uncertain.
Equity caps for foreign portfolio investment are sometimes included in FDI caps. There are no universal rules specifying the combination of FDI and foreign portfolio investment allowed in share holding of a particular company. In some cases, the portfolio investment is included within the FDI cap; in others, foreign portfolio investment is not subject to the FDI cap, although the government of India does spell out where different caps are in place. The GOI is now planning to formulate uniform guidelines on FDI across all sectors.
An amendment to the Companies Act denies voting rights to foreign investors holding preferred stock in Indian companies if their holdings exceed the FDI limit.
Foreign investment is prohibited in many areas of real estate, multi-brand retailing, legal services, security services, and railways. Some forms of realty development, such as integrated townships, are permitted FDI. Non-Resident Indians (NRIs), however, are allowed to invest in housing and real estate development. They are also allowed to hold up to 100 per cent equity in civil aviation companies, where foreign equity is otherwise limited to 49 percent. NRIs now allowed to claim dual citizenship enjoy new investment opportunities in India as citizens. Capital outflow restrictions for Indian citizens are incrementally being relaxed.
To curb the flow of funds by Indian residents through their NRI counterparts overseas, the Indian government in 2003 banned all investments by Overseas Corporate Bodies (OCBs -- a company or other entity owned by NRIs directly or indirectly to the extent of at least 60 percent) in Indian companies through the portfolio as well as FDI routes. The GOI also withdrew the facility of opening and maintaining new Non-Resident External accounts, foreign currency non-resident accounts and non-resident ordinary accounts in India by OCBs. A ban on OCB investment in the stock market under the portfolio investment scheme remains in place.
The GOI's privatization policy permits foreign investors to bid for the sale of the state-owned units. Its privatization program, however, stalled after a change in government in May 2004. Foreign investors are given national treatment at the time of initial investment or after the investment are made. In sectors where licensing is required, procedures do not discriminate against foreign companies. However, in certain consumer goods industries export obligations and local content requirements are imposed on foreign investors.
Existing companies can also use automatic FDI approval to obtain foreign equity for FDI/NRI investment, provided the sector falls under the "automatic" route. Requirements are (i) the equity increase must accompany an expansion of the company's equity base (i.e., the NRI/foreign investors cannot simply acquire existing shares); (ii) the investment must involve a foreign currency remittance; and (iii) the Indian company's Board of Directors must give its approval.
Sector-Specific Guidelines for FDI in key industries (alphabetical order):
Conversion and Transfer Policies
There are no restrictions on remittances for debt service or payments for imported inputs. In some sectors, like investments in the development of integrated townships and NRI investment in real estate may be subject to a "lock-in" period. Profits and dividend remittances are permitted without approval from the Reserve Bank of India (RBI). Income tax payment clearance is required, but there are generally no delays beyond 60 days. RBI approval is required to remit funds from asset liquidation. Foreign partners may sell their shares to resident Indian investors without approval of RBI, provided shares were held on a repatriation basis. GDR/ADR proceeds from abroad may be retained without restrictions except for an end-use ban on investment in real estate and stock markets. FIPB approval is required for converting non-repatriable shares to repatriable ones. Up to $1 million may be remitted for transfer of assets into India. Individual professionals including journalists and lawyers are allowed to keep 100 percent of their earnings from consultancy services rendered abroad in foreign currency accounts.
The Indian rupee is fully convertible for current account transactions. Current account transactions are regulated under the Foreign Exchange Management Rules, 2000. Prior RBI approval is required for acquiring foreign currency above certain limits for specific purposes (foreign travel, consulting services, foreign studies). Capital account transactions are open for foreign investors, subject to various clearances. Since 2004, with growing foreign exchange reserves, the Indian government has taken additional steps to relax foreign exchange and capital account controls for Indian companies and individuals. For example, individuals are now permitted to transfer abroad for any purpose up to $200,000 a year without approval. The GOI now allows all NRI proposals for conversion of non-patriable equity into repatriable equity under the automatic approval route. At the end of 2007, the exchange rate was Rs.39.20 to $1, compared to Rs.44.70 at the end of 2006.
Foreign Institutional Investors (FIIs) may transfer funds from rupee to foreign currency accounts and vice versa at the market exchange rate. They may also repatriate capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes without approval.
The RBI accords automatic approval to Indian industries for foreign collaboration agreements up to 400 per cent of the net worth of the Indian company. For technology-transfer agreements with foreign companies, Indian firms may remit royalties up to 5 percent for domestic sales and 8 percent for exports without approval; but recurring royalty payments, such as patent licensing, are normally limited to eight percent of the selling price over a ten-year period. Royalties and lump sum payments are taxed at 20 to 30 percent. Where technology transfer is not involved, royalty payments for the use of trademarks and brand names are limited to 2 percent on exports and 1 percent on domestic sales. In case of technology transfer, payment of royalty includes the payment of royalty for use of trademark and brand name of the foreign collaborator.
Foreign banks may remit profits and surpluses to their headquarters, subject to the banks compliance with the Banking Regulation Act, 1949. Banks may also issue credit cards without RBI approval. Banks are permitted to offer foreign currency-rupee swaps without any limits to enable customers to hedge their foreign currency liabilities. They may also offer forward cover to non-resident entities on FDI deployed after 1993.
Expropriation and Compensation
There have been few instances of direct expropriation since the 1970s. While a program of privatization of state-owned enterprises stalled since 2004 with a change in the ruling government, there has been no reversal in the overall movement away from public ownership of industry.
After years of negotiation, the Government of India in 2005 persuaded state-owned financial institutions and the State of Maharashtra to reach a settlement with U.S. investors, the Overseas Private Investment Corporation, and other foreign lenders on the investment dispute surrounding the Dabhol power project. A comprehensive commercial settlement was thereby achieved in 2006. There has been significant progress in resolving several payment disputes that American power sector investors have with the State of Tamil Nadu. The GOI, which has limited jurisdiction over commercial disputes involving matters under state jurisdiction, has been helpful in convincing Tamil Nadu to settle these commercial disputes. The United States continues to urge the GOI that to create an attractive and reliable investment climate, India and its political subdivisions need to provide a secure legal and regulatory framework for the private sector, as well as institutionalized dispute resolution mechanisms to expedite resolution of commercial issues.
At least two U.S. pharmaceutical companies with production and distribution facilities in India have yet to resolve long-standing disputes with the GOI (dating from the 1980s) resulting from India's drug price-control regime.
Foreign investors frequently complain about a lack of "sanctity of contracts." Although Indian courts are independent, they are backlogged with unsettled dispute cases. Critics say that liquidating a bankrupt company may take as long as 20 years. In an attempt to unify its adjudication of disputes over commercial contracts with the rest of the world, India enacted the Arbitration and Conciliation Act of 1996, based on the UNCITRAL (United Nations Commission on International Trade Law) Model Law. Foreign awards are enforceable under multilateral conventions like the Geneva Convention. The International
Center for Alternative Dispute Resolution (ICADR) has been established as an autonomous organization under the Ministry of Law and Justice and Company Affairs to promote settlement of domestic and international disputes through different modes of alternate dispute resolution. India is not a member of the International Center for the Settlement of Investment Disputes, but is a member of the New York Convention of 1958. The Permanent Court of Arbitration (PCA, Hague) and the Indian Law Ministry have agreed to establish the regional office of the PCA in New Delhi to make available an arbitration forum to match the facilities offered at The Hague at a far lower cost.
Performance Requirements and Incentives
Local sourcing is generally not required, but has been mandated for certain sectors in the past. In some consumer goods industries, the GOI requires the foreign party to ensure that the inflow of foreign exchange and foreign equity covers the foreign exchange requirement for imported goods. In 2002, the GOI removed measures previously requiring local content and foreign exchange balancing in automobile industry.
Plant Location: Industrial undertakings are free to select the location of a project; in case of cities with population of more than a million, the proposed location should be at least 25 kilometers away from the Standard Urban Area limits of that city. Electronics, computer, and printing as well as other non-polluting industries are exempt from such location restrictions. Environmental regulations and local government zoning policies can delay projects.
Employment: There is no requirement to employ Indian nationals. Restrictions on employing foreign technicians and managers have been eliminated, though companies complain that hiring and compensating expatriates is time-consuming and expensive. The RBI has raised the remittable per-diem rate from $500 to $1000, with an annual ceiling of $200,000 for services provided by foreign workers payable to a foreign firm. Employment of foreigners in excess of 12 months requires approval from the Ministry of Home Affairs. However, there are certain employment restrictions in the telecommunications industry. The majority directors on the boards of these companies including the Chairman, Managing Director and Chief Executive Officer, should be resident Indians. The Chief Technical Officer and the Chief Finance Officer should also be resident Indian citizens. However, the Department of Telecommunication has proposed a relaxation of these restrictions to allow the Chairman, MD, CEO and CFO of telecommunication companies to be foreign nationals, subject to annual clearance by the home ministry. The chief officer in charge of the technical network operations and the chief security officer for all telecom companies have to be resident Indian citizens.
Taxes: The GOI provides a 10-year tax holiday for knowledge-based start-ups. Most state governments also offer fiscal concessions. Large state and central government fiscal deficits, along with attempts to reform both the direct and indirect tax regimes throughout Indian, have increased uncertainty over tax liability for investors. The general trend, however, has been toward simplification of the tax code, a reduction in tax rates and exceptions, and greater transparency in tax administration.
The Foreign Trade Policy introduced in 2007 continued tax-relief incentives for export-oriented industries and other targeted sectors, such as high-tech products. For example, the policy allows exemption to exporters from service tax, duty-free import of inputs and capital goods, exemption from excise taxes on capital goods, textile machinery, components and raw materials, as well as exemption on sales tax at the federal and state level. Import of consumables, professional equipment, and spare parts in the service sector are allowed duty-free up to 10 percent of the average foreign exchange export earnings in the preceding three years. Tax holidays are available in the form of deductions for priority sectors. Deduction of 100 percent of the profits from business for a period of 10 years is available for infrastructure industries. Income by way of dividend, interest or long term capital gains in respect of infrastructure companies is 100 percent tax exempt.
Right To Private Ownership And Establishment
Subject to certain sector-specific restrictions, foreign and domestic private entities may establish and own businesses in trading companies, subsidiaries, joint ventures, branch offices, project offices and liaison offices. The GOI does not permit investment in real estate by foreign investors, except for company property used to do business. NRIs are permitted 100 percent equity investment in real estate. FIIs can now invest in real estate Initial Public Offerings (IPOs). They can also participate in pre-IPO placements undertaken by such real estate companies without regard to the FDI stipulations.
To establish a business, various approvals and clearances are required such as; incorporation of the company; registration and allotment of land; permission for land use in case of industry located outside an industrial area; environmental site approval; sanction of power and finance; approval for construction activity and building plan; registration under State Sales Tax Act and Central and State Excise Acts; and consent under Water and Air Pollution Control Acts. Industries such as petrochemicals complexes, petroleum refineries, cement thermal power plants, bulk drugs, fertilizers, dyes, and paper (among others) need to obtain environment clearance from the Ministry of Environment and Forest.
The GOI passed the Securitization Act in 2002 to introduce bankruptcy laws. The requirement to obtain government permission before shutting down some businesses, however, makes it difficult to dispose of company assets.
Protection of Property Rights
The legal system puts a number of restrictions and imposes a stamp tax on the transfer of land, making titles unclear, often making buying and selling transactions difficult. There is no reliable system for recording secured interest in property, making it difficult to use property as collateral or to foreclose against such property.
India has generally adequate copyright laws, but enforcement is weak and piracy of copyrighted materials is widespread. India is a party to the Berne Convention for the Protection of Literary and Artistic Works, Geneva Convention for the Protection of Rights of Producers of Phonograms and the Universal Copyright Convention, and a member of the World Intellectual Property Organization (WIPO) and UNESCO. India has not yet acceded to the WIPO Internet treaties. Efforts to update its copyright act have been stalled in inter-ministerial debate for several years.
Trademark protection is good and was raised to international standards with the passage in 1999 of a new Trademark Bill that codified the use and protection of foreign trademarks and service marks. Implementing regulations were not issued, however, until September 2003.
The law now accords national treatment for trademark owners and statutory protection of service marks. Although U.S. firms report few trademark related problems, India's weak and overworked judicial system can make it difficult to exercise rights established by the law. India is currently working on amending its Trademark Laws to implement the system of filing international trademark applications under the Madrid Protocol. The draft amendment Bill is expected to be presented in the Indian Parliament in 2008.
Effective January 1, 2005, India expanded product patent coverage to include pharmaceuticals and agro-chemicals, sectors of significant interest to U.S. firms. Embedded software may also now be patented. The GOI introduced these changes through presidential ordinance in order to meet on time India's commitments under the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS). On March 23, 2005, the Indian Parliament approved legislation to make permanent the change to India's patent law that the GOI had introduced by temporary ordinance. The new law extends product patent protection to pharmaceuticals and agricultural chemicals. However, the new law lacks specificity in several important areas such as compulsory license triggers, pre-grant opposition provisions and defining the scope of patentable inventions.
India provides protection for plant varieties through the Plant Varieties and Farmers' Rights Act.
Indian law does not provide for protection against unfair commercial use of test or other data that companies submit to the government in order to obtain marketing approval for their pharmaceutical or agricultural chemical products. The GOI is working on legislative changes based on recommendations made by the GOI data protection inter-minister group. A small but growing domestic constituency of Indian pharmaceutical companies, technology firms, and educational institutions favors improved patent protection.
India does not have a statutory law in place for protecting trade secrets. At present, trade secrets are protected in India by the parties entering into appropriate contracts.
In 2000, India passed legislation (Designs Act 2000) to meet its obligations under the TRIPS Agreement for industrial designs. The Indian government is now working on a new Design Policy to strengthen design education at different levels, encourage use of designs by small scale and cottage industries and crafts, facilitate active involvement of industry and designers in the development of the design profession, position and brand Indian designs within India and overseas, enhance design and design service exports, and create an enabling environment that recognizes and rewards original designs. India’s Semiconductor Integrated Circuits Layout Designs Act 2000 is based on standards developed by WIPO.
Transparency of the Regulatory System
Even though India has made much progress on economic reform since 1991, the economy is still constrained by excessive rules and a powerful bureaucracy with broad discretionary powers. Moreover, India has a decentralized federal system of government in which the state governments possess broad regulatory powers. Regulatory decisions governing important issues such as zoning, land-use and environment can vary from one state to another. Opposition from labor unions and political constituencies has slowed reform in such areas as exit policy, bankruptcy, and labor law reform.
Despite these shortcomings, central government efforts to establish independent and effective regulators in some sectors, such as telecommunications, securities, and insurance, have shown positive results. In December 2004, the GOI also created an independent pension regulator as part of its larger program to reform India's pension system. It also established a Competition Commission and has indicated its intention to strengthen the commodities futures markets. SEBI has begun to enforce corporate governance, though many companies are yet to comply. Corporate governance in India is considered better than many other emerging markets, according to foreign institutional investors. Financial disclosures are strict though there is scope for improvement.
Efficiency of Capital Markets and Portfolio Investment
The Indian capital market has grown rapidly in recent years, with market capitalization on the Bombay Stock Exchange hitting $1.7 trillion at end-2007, the tenth largest in the world. Spot prices for index stocks are usually market-driven and settlement mechanisms are close to international standards. India's debt and currency markets lag behind its equity markets. Although private placements of corporate debt have been increasing, the daily trading volume remains low. The Indian stock markets lack broad liquidity, although high transaction costs and systemic risk have come down with recent regulatory and administrative improvements. Institutional improvements and better regulations have helped to reduce episodes of market manipulation, which had caused a lack of confidence by retail investors who invested primarily in public sector debt instruments and debt-oriented mutual funds. SEBI has initiated further policy changes such as allowing all investors to short sell, introducing borrowing and lending of shares, and introducing Real Estate Investment Trusts that would be listed in the market. These measures add depth and breadth to the market making it more liquid than before.
In 2004, the GOI announced its intentions to integrate the commodities and securities markets and to revamp taxes on securities transactions, although this is still being debated. The GOI eliminated the tax on long-term capital gains on stocks and reduced the tax on short-term capital gains to 10 percent. At the same time, it put in place a securities transaction tax of 0.15 percent.
Foreign Institutional Investors (FIIs) have a relatively small (compared to their global portfolios) but growing presence in India with net inflows for India totaling around $16 billion for the calendar year 2007. While FIIs are allowed to invest in all securities traded on India's primary and secondary markets, in unlisted domestic debt securities, and in commercial paper issued by Indian companies, the GOI imposes several restrictions that vary by type of investment. For example, the GOI caps the amount of FII investment in government securities at $3.5 billion, except for corporate debt where the limit is $1.5 billion in a single fiscal year. FII equity holdings in a single company are also capped at a level below the overall sector-specific foreign investment limits unless specifically authorized by that company's board of directors.
FIIs investing in India's capital markets must register with the Securities and Exchange Board of India (SEBI). They are divided into two categories: (a) Regular FIIs – those which are required to invest not less than 70 per cent of their Indian exposure in equity-related instruments, and (b) 100 percent debt-fund FIIs -- those which are permitted to invest only in debt instruments. The list of eligible FIIs has been expanded to include endowment and university funds, foundations, \charitable trusts, and hedge funds. SEBI allows foreign brokers to work on behalf of registered FIIs. The FIIs can also bypass brokers and deal directly with companies in open offers. FII bank deposits are fully convertible and their capital, capital gains, dividends, interest income, and any compensation from the sale of rights offerings, net of all taxes, may be repatriated without prior approval.
Non-resident Indians (NRIs) are subject to separate investment limitations. They can repatriate dividends, rents and interest earned in India and their specially designated bank deposits are fully convertible.
The National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE), both based in Mumbai, use screen-based trading systems. Computers and reliable telecommunications links permit automated buy/sell transactions. Other regional exchanges and the National Over-the-Counter Exchange in Delhi also have computer- trading systems. The efficiency of the capital market has improved because of the compulsory depository system for most of the stocks, abolition of the traditional speculative "badla" system of carry forward trades, and introduction of derivatives trading by way of stock options and index trading. SEBI regulates all market intermediaries. Securities can be transferred through electronic book entry. The National Securities Depository Limited, which is promoted by the NSE, commenced operation in 1996. The BSE, the other market with national reach, has also set up a depository system. Together, the NSE and BSE account for 96 percent of total turnover in the stock markets. India's turnover ratio (annual value of stock traded over market capitalization), a measure of liquidity, is higher than those of many developed (e.g., UK, Japan, and Germany) and emerging markets (e.g., China and Singapore). The NSE and BSE are the world's fourth and fifth largest stock exchanges in terms of number of transactions, although they are smaller in terms of turnover value compared to the world's largest markets.
Companies incorporated outside India can raise resources in India's capital market through the issuance of Indian Depository Receipts (IDRs), subject to certain conditions established and monitored by SEBI. Companies are required to have pre-issue paid-up capital and free reserves of least $100 million, as well as an average turnover of $500 million during the three financial years preceding the issuance.
India's banking industry (with total assets of about $877 billion in March 2007) is split into three categories - - 28 public sector banks (70 percent of total assets in the banking system), 28 regional private banks (21 percent), and 29 foreign banks (about 8 percent). According to official figures, the ratio of non-performing loans to total assets for public sector banks was 2.6 percent in 2006-07 compared to 3.7 percent the previous year. A Board for Financial Supervision ensures compliance with guidelines on loan management, capital adequacy, and asset classification. All banks operating in India are regulated through the Reserve Bank of India (RBI) whose authority the GOI has limited gradually as part of the economic reform process.
Domestic banks are mandated to extend 40 percent of their loans to "priority" borrowers (agriculturists, exporters, and small businesses). A similar requirement for foreign banks is 32 percent of loans to exporters and small businesses. In April 2003, the lending commitment for regional rural banks in priority sectors was raised to 60 (from 40) percent. In addition to imposing sector lending requirements, the dominance of state-owned banks in the market also allows the GOI to exert influence over individual lending decisions.
The GOI allows external commercial borrowing (ECB) under the automatic route up to $500 million with minimum average maturity of 5 years, and up to $20 million for three-five years average maturity, with a total sectoral cap of $22 billion annually. The central bank also authorizes an additional $250 million in ECBs with average maturity of at least 10 years, under the approval route. ECB for financing equipment imports and infrastructure projects can go as high as $500 million. In August 2007, the government restricted rupee expenditures of ECBs to $20 million and with prior RBI approval, in order to stem surging capital inflows. All companies except banks, financial institutions and non-banking financial companies are eligible to pursue ECB or provide guarantees for such loans. ECB funds cannot be used for investment in the stock market or real estate.
Takeover regulations require disclosure on acquisition of shares exceeding five percent of total capitalization. Acquisition of 15 percent or more of the voting rights in a listed company triggers a public offer for an additional 20 percent stake as per SEBI's Substantial Acquisition of Shares & Takeovers Regulations. Companies may buy back their shares in the market to make inter-corporate investments. RBI and FIPB clearances are required to acquire a controlling stake in Indian companies. Cross shareholding and stable shareholding are not prevalent in the Indian market. The Hostile Takeover Code and the SEBI Takeover Committee regulate hostile takeovers. The Committee makes ad hoc decisions on takeovers, and tends to protect the target firm when takeover bids come from foreign entities.
In general, there have been few incidents of politically motivated attacks on foreign projects or installations in recent years. There are a few violent separatist movements in Kashmir and some northeastern states. There were no politically motivated attacks on U.S. companies operating in India in 2007.
Corruption is a major concern. In the past, the government procurement system, especially for telecommunications, power and defense, has been particularly subjected to allegations of corruption. Several government employees and public figures have been indicted or convicted under anti-corruption laws over the last seven years.
The legal framework for fighting corruption is provided in the following laws: the Prevention of Corruption Act, 1988; the Code of Criminal Procedures, 1973; the Companies Act, 1956; and the Indian Contract Act, 1872. Amended anti-corruption laws since 2004 have given additional powers to vigilance departments in government bodies and made the Central Vigilance Commission (CVC) a statutory body. The GOI is now working to amend the Prevention of Corruption Act (PCA), 1988 through an inter-ministerial group to prescribe a sanction-granting authority for prosecution of Members of Parliament, Members of State Legislatures and local bodies.
U.S. firms have identified corruption as one obstacle to foreign direct investment. Indian businessmen agree that red tape and wide-ranging administrative discretion serve as a pretext to extort money. According to some foreign business representatives in India, corruption lies in the lack of transparency in the rules of governance, extremely cumbersome official procedures, and excessive and unregulated discretionary power in the hands of politicians and bureaucrats. Clusters have developed, however, such as in the New Delhi suburb of Gurgaon, where the business climate is relatively free of corruption. Officials of foreign businesses in these areas say that local political and bureaucratic machinery leave them generally alone.
Bilateral Investment Agreements
The GOI states that it has concluded 57 bilateral investment treaties. These included agreements with the United Kingdom, France, Germany, Malaysia, and Mauritius. Negotiations are underway with other countries. The United States does not have a bilateral investment treaty with India, but the two countries do have a double taxation avoidance treaty. Several tax disputes are pending which are addressed during regular meetings between the two countries' Competent Authorities.
OPIC and Other Investment Insurance Programs
The U.S. and India signed an Investment Incentive Agreement in 1987 that covers the Overseas Private Investment Corporation (OPIC) programs. OPIC is currently open in India for all its programs, specifically supporting three regional private equity funds and five global funds. OPIC projects in India are in the following sectors: energy and power, telecommunications, manufacturing, and services. India is a member of the World Banks Multilateral Investment Guarantee Agency (MIGA).
India has a very large pool of scientific and technical personnel. Around 20 percent of the Fortune 500 companies have research and development operations in India. Most managers and technicians, and many skilled workers, speak English. Most multinationals recruit managerial and engineering staff locally for their Indian operations. Nonetheless, illiteracy acts as a brake on labor productivity in the workforce as a whole.
India is a member of the International Labor Organization (ILO) and adheres to 37 ILO conventions that protect workers' rights. The Industrial Disputes Act of 1947 governs industrial relations. Workers may form or join unions of their choice. The Factories Act regulates working conditions. Other laws regulate employment of women and children and prohibit bonded labor.
Although there are more than 7 million unionized workers, unions represent less than one-fourth of the workers in the organized sector (primarily in state-owned concerns), and less than two percent of the total work force. Most unions are linked to political parties. Worker-days lost to strikes and lockouts have dropped 50 percent during the decade 1991-2000 from the previous decade.
The payment of wages is governed by the Payment of Wages Act 1936, and the Minimum Wages Act, 1948. Industrial wages range from about $3.50 per day for unskilled workers, to over $150 per month for skilled production workers. Retrenchment, closure and layoffs are governed by the Industrial Disputes Act, which requires prior government permission to layoff workers or close businesses employing 100 or more workers. Permission is not easily obtained. Private firms have successfully downsized using voluntary retirement schemes. Foreign banks are also required to get the RBI's approval for closing branches.
Approval for a new Comprehensive Legislation on Labor Reforms is stalled in the Parliament Consultative Committee due to lack of consensus. The approval has been pending for three years and is unlikely at least during this term of the GOI, due to Leftist opposition. It contains stringent provisions for strikes and lockouts. The Comprehensive legislation was meant to integrate both Trade Unions Act and the Industrial Disputes Act in one legislation. A key amendment to the Industrial Disputes Act would increase the threshold limit to 300 employees for seeking government approval before laying-off workers.
Foreign Trade Zones/Free Trade Zones
The GOI has established several foreign trade zone schemes to encourage export-oriented production. These provide a means to bypass many of the domestic economy's fiscal and infrastructural obstacles that otherwise make Indian goods and services less competitive in international markets. The most recent of the schemes is the Special Economic Zone (SEZ), a duty-free enclave with separately developed industrial infrastructure. Other schemes include the Export Processing Zone (EPZ) and the Software Technology Park (STP), both of which are designated areas for export-oriented activities. In addition, India allows an individual firm to be designated an Export Oriented Unit (EOU). All of these schemes are governed by separate rules and granted different benefits. In May 2005, the GOI passed new legislation called the "Special Economic Zones (SEZ) Bill 2005" endorsing its commitment to a long-term and stable policy for the SEZ structure which had previously been only an administrative construct. Pursuant to certain controversies over land acquisition for SEZ development projects, the GOI issued new guidelines for SEZ in 2006. Although legislative changes have been introduced through a new Land Acquisition and Rehabilitation Act, some political unrest over SEZ development projects continue.
SEZs are regarded as foreign territory for the purpose of duties and taxes, and operate outside the domain of the custom authorities. SEZ units are allowed to retain 100 percent of their foreign exchange earnings in special Export Earners Foreign Currency Exchange accounts. They are free to sell goods in the domestic tariff area (DTA) on payment of applicable duties. Sales from DTA firms to SEZ units are on par with regular trade transactions and hence eligible to benefit from all export incentive and foreign currency exemption schemes. In addition, many state governments have granted a sales-tax exemption for DTA-SEZ sales. SEZ units are also exempt from the central government's service and excise tax regimes.
SEZ businesses are expected to be a positive foreign exchange earner within five years from the commencement of production. None of the FDI equity caps are applicable to units in SEZs, including those sectors reserved for small-scale industries. SEZs are exempted from the requirements of industrial licensing.
The new law increased the tax holiday period (phased out over time) from 10 years to 15-years for both SEZ developers and SEZ production units. The SEZ legislation also provides for the establishment of an International
Financial Services Centre to facilitate financial services for SEZ units. Offshore banking units (OBUs) are permitted to operate in SEZs, virtually like a foreign branch of a bank, to make available financing at international rates. The OBUs enjoy some exemptions from Reserve Bank (central bank) of India requirements, but other limitations have constrained their popularity.
Consequent to the first and main promulgation of SEZ Rules in February, 2006, 404 SEZ projects have been approved so far, and formal notifications for 172 SEZs have been issued. Land acquisition for SEZs has become a controversial issue because of the allocation of huge blocks of agricultural lands to upcoming SEZs. This has prompted the government to issue guidelines that only uncultivable land can be acquired for SEZ development or if fertile land is involved then it should not be more than 10 percent of the total area and adequate compensation and rehabilitation need to be provided. But, the compensation and rehabilitation provisions are not transparent.
EPZs are industrial parks with incentives for foreign investors in export-oriented business. STPs are special zones with similar incentives for software exports. EPZ/STP units may import intermediate goods duty-free. The minimum net foreign exchange earning as a percentage of exports by EPZ/STP units is required to be at least 3 percent. EPZ/STP units may sell up to 50 percent of their level of exports on the domestic market after payment of taxes, with the exception of motor cars, alcoholic beverages, tea, books, and refrigeration units.
EOUs are industrial companies established anywhere in India that export their entire production. There are approximately 2,300 fully operational EOUs in India. They are granted: duty-free import of intermediate goods duty- free; a ten-year income tax holiday; exemption from excise tax on capital goods, components, and raw materials; and waiver of sales taxes. EOUs may sell up to five percent of "seconds" on the domestic market after paying appropriate taxes.
* FDI inflows for April 2007-September
Note: The Indo-Mauritius investment agreement provides tax advantages that have attracted U.S. and businesses of other countries to make FDI into India from Mauritius, rather than the headquarter country.
Note: * data is for April – September 2007 only
Source: Secretariat for Industrial Approvals, Ministry of
Commerce and Industry, GOI