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Doing business in Contents

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Executive summary 4 This document is issued by Hongkong and Banking Foreword 6 Corporation Limited, India Incorporated in SAR Introduction – Doing business in India 8 with Limited Liability in with PricewaterhouseCoopers Conducting business in India 18 (PwC). It is not intended as an offer or solicitation for business to anyone in any jurisdiction. It is not 20 intended for distribution to anyone located in or resident in jurisdictions Audit and accountancy 28 which restrict the distribution of this document. It shall not be Resources and Law 29 copied, reproduced, transmitted or further distributed by any recipient. 30 The information contained in 31 this document is of a nature only. It is not meant to HSBC in India 32 be comprehensive and does not constitute financial, legal, or overview 36 other professional advice. You should not act upon the information Contacts 38 contained in this publication without obtaining specific professional advice. This document is produced by the together with PricewaterhouseCoopers (‘PwC’). Whilst every care has been taken in preparing this document, neither the Bank nor PwC makes any guarantee, representation or warranty (express or implied) as to its accuracy or completeness, and under no circumstances will the Bank or PwC be liable for any loss caused by reliance on any opinion or statement made in this document. Except as specifically indicated, the expressions of opinion are those of the Bank and/or PwC only and are subject to change without notice. This document is not a ‘Financial Promotion’.

The materials contained in this publication were assembled in 2012 and were based on the law enforceable and information available at that time. summary

Liberalisation of the Indian Extensive trade links Skilled workforce regulatory framework has enhanced its attractiveness Investors can leverage on India offers a highly-rated human as a destination for foreign India’s trade network with base recognised for its investors. This guide sets its regional and bilateral skills, knowledge and talent. out some of the key issues agreements that foreign investors should with many trading partners. Well-developed consider when establishing financial system their operations in India. Increasing infrastructure and good living standards Its financial system is well Key aspects of doing regulated and offers a broad business in India: A significant investment in range of services. Businesses infrastructure is taking place can also tap into its developed Growth in India, particularly in the capital markets as an alternative metropolitan . Coupled source of financing. the ’s largest with this, India offers good and the second- living standards with a robust Robust legal system fastest growing economy. transport system, superior healthcare facilities and first- The legal and judicial system Pro-business and class entertainment centres. here is robust and efficient, stable government thus, businesses can Competitive tax system on India’s rigorous enforcement India offers political stability of laws. that is vital to foreign India offers a very competitive investments. Government tax regime and comprehensive Great work ethics agencies, which have network of Tax . Indian a pro-business attitude, would be further modified India has great work ethics work closely with the by the introduction of Direct and a very professional way business sector to promote Taxes Code (which was expected of operating. Employees are economic growth. to be introduced in 2012 hard working and willing to but has been delayed) and work on holidays/weekends the Goods and Tax. if necessary.

4 Foreword

In today’s world, business must ’s expertise, offers the Stuart Milne compete on a much wider full range of banking and CEO playing field, no longer confined financial services to customers HSBC India within national . across 29 major Indian Post liberalisation in 1991, India and backed by our global has undergone a paradigm presence in 84 and shift owing to its competitive with around 6,900 stand in . The Indian offices worldwide***. We economy has been on a growth are well positioned to assist trajectory over the last decade entrepreneurs, multinationals with rapid strides across new and conglomerates eager age industries like Information to tap into this exciting Technology, IT enabled and booming market. services, and Pharma to a few. Today, India is the third Created in collaboration with largest economy in the world PricewaterhouseCoopers, this by GDP PPP (purchasing power guidebook, Doing business parity)*, seventh largest country in India, provides a thorough in the world by and second analysis of various options in largest by population** and establishing a business in India. there is ample reason for India’s It also provides an insight into viability as a destination for key opportunities available foreign investment. In addition in India, as well as taxation to the above-mentioned systems and laws applicable macroeconomic indicators, to businesses operating here. higher disposable incomes, emerging middle class, low As your trusted partner, HSBC cost but competitive and is looking for ways skilled workforce, all contribute to facilitate your business towards India being an growth. With this guide, I appropriate choice for investors. hope you find the impetus In India, the antecedents for building a successful of the HSBC Group can be venture in India and I wish traced back to setting up you a very prosperous future of the Mercantile Bank in in this land of opportunities. 1853. HSBC, with over 150

* Economic Times report quoting IMF data (http://articles.economictimes. indiatimes.com/2012-04-19/ news/31367838_1_ppp-terms-india-s- gdp-power-parity) **http://www.indembassy.co.il/ ***http://www.hsbc.com/1/2/about 6 Introduction Doing business in India

Economic Growth The Index of Industrial middle-class population in the • India is ranked as the second Production (IIP) registered country will reach 1 billion. most favoured destination for FDI The growth of the Indian a robust growth of 6.8 per Since 2001, the Indian middle- over 2010-12 (World Investment economy is based upon cent in 2012. Output class has seen increases in Prospects Survey 2010-2012, rapid urbanisation, of the sector its disposable income, and UNCTAD). alleviation and building (which constitutes over 75 consequently, consumption much-needed infrastructure. per cent of the index) grew by and savings have also risen. • India is the world’s top location for This creates significant 8.5 per cent while the With the current rate of non-financial services investment opportunities for foreign sector and electricity sector growth, analysts predict that and among the top three most investment. In addition to this, increased by 2.7 per cent and by 2025, India will become attractive international investment India is now ’s biggest 3.2 per cent respectively. the fifth largest consumer destinations (AT Kearney 2010 FDI buying economy, and has the Industrial production expanded goods market in the world Confidence Index). world’s largest growing middle by 4 per cent between and the Indian middle-class is class. The 2011 PwC report, April 2011-January 2012. set to assume the traditional • India ranked among the top three Profitable growth strategies role of the American and countries where British companies for the Global Emerging In light of the economic European middle-classes. can do better business during Middle (GEM) estimated uncertainties in , This view has also been 2012-14 (Report by University that by 2021, India will have although the Indian economy acknowledged by the Global Business School – commissioned by about 600 million people has slowed down recently, industry in particular. UK Trade & Investment (UKTI). constituting its emerging opportunities still exist for middle class segment. significant growth. The With an enhanced consumer • Offers great promise as a biggest problem in India has segment in terms of increased vital and high-potential market, According to the Economic been inflation which was consumption in consumer securing the top ranking in Survey 2011-12, the Indian averaging at 9.4% in 2011. durables furthering growth, both the AT Kearney’s 2009 Global economy is estimated to grow With monetary tightening and and a positive outlook on Development Index and the at 6.9 per cent in 2011-12 and slowing growth, inflation is employment and rising 2009 Global Services Location Index. 7.6 per cent in 2012-2013. expected to to 8% incomes, this has facilitated The growth forecast has this year and 7.3% in 2013. growth in consumption. broadly been based on the India’s performance has rebound in the The Asian Development been widely acknowledged sector which is expected to Bank has estimated that over by global agencies: grow around 2.5 per cent. the next two decades, the

8 Demographic advantage decades, India’s position is 1. Gross Domestic (GDP) Diagram 1, illustrates the Leading multinationals today 2. Major Trading Partners strengthening: this is a product and Major Sectors GDP contribution made by are setting up their R&D centres India is today one of the three of its high birth rate, which each sector in 2011-12. in India, thereby acknowledging India’s top-ten trading partners largest Asian economies in terms will last until around 2050. India is the fourth largest India’s true potential. (for and imports) in of . The A young, eager and well- economy in the world in PPP The agriculture and allied 2010-2011, and their respective median age of India’s population educated workforce is the terms with a per capita GDP sectors contribute towards While the prospects of sectors share in India’s total trade are is 25, which in comparison to key to India’s future prosperity. level of US$3,039. 13.9% of India’s GDP with such as IT, Telecommunications, shown in Diagram 2. other Asian countries, puts industry and the services Healthcare and India in a very favourable In the modern knowledge The economy is constantly sector accounting for a have been well recognised, the India’s Top demographic position. economy, this favourable evolving and growth share of around 27% and Indian Media and Entertainment Destinations demographic phase provides opportunities are present across 59% respectively. Industry, Financial Services, UAE, US and were The predicts India with a significant multiple sectors. As the supply Real Estate, Renewable India’s leading trading partners that India’s working age competitive advantage and has of products and services is The trade, hotel, transport Energy, Travel and , in 2011-12 (April to ), population (15-64 ) will important implications for the insufficient for the 1.2 billion and communications sector Retail, , and Auto accounting for 11.9%, 11.3% increase by 135 million in one country’s economic growth people, this creates a significant account for the dominant Components among others, are and 6.2% respectively, of decade, that is, by 2020. So trajectory and social stability. and sustained investment share GDP followed by also attracting global attention. India’s overall trade. while most countries such as potential across all sectors Agriculture & allied sectors. those in Europe, and the Highlighted here are some ranging from infrastructure and US will witness a decrease of the key attributes of energy to consumer goods and Diagram 2. in workforce in the coming the Indian Economy. financial services. Percentage Share of Exports of Top 10 Countries in 2011-2012

Diagram 1. China 5.2% Hong Kong 4.5% Sector-wise composition of India’s GDP 3.1% Singapore 6.2% UK 2.8% 2.7% Finance, Insurance, Real Agriculture & Allied 14% Belgium 2.5% Estate & Business 17.9% USA 11.3% 2.0% Mining & Quarrying 2.1% Electricity, Gas & Water Supply 1.9%

Manufacturing 15.3% UAE 11.9%

Others 47.8% Trade, Hotel, Transport & 7.8% Communications 28.1% Social & Personal Services 13%

Source: http://business.mapsofindia.com/india-gdp/ Source: Economic Survey 2011-12 (April - Sept 2011) 2011-12

10 India’s T op chemicals and related products India’s Top Import Sources Manufacturing Exports with respective shares in overall exports in 2011-12 China, UAE and Switzerland The top four items in India’s (April to September) of 21.9%, were India’s leading import manufactured exports are 19.1%, 15.1% and 12%. partners in 2011-12 (April to engineering goods, September) contributing with products, gems and , shares of 11.8%, 7.5% and 6.6% respectively.

Diagram 3. Diagram 4. India’s Top Commodity Exports in 2011-2012 Percentage Share of Imports of Top 10 Countries in 2011-2012 30 30

25 25

20 20 3.0% 3.1% 15 15 Others 46.7% Germany 3.3% 10 10 3.4% 5 5 3.9% 0 0 ABCDEFGHI USA 4.7% % 2010-11 % 2011-12 Saudi Arabia 6.0% A. Engineering Goods B. Petroleum Products Switzerland 6.6% C. Gems and Jewellery China 11.8% D. Chemicals and Related Products UAE 7.5% E. Agriculture and Allied Products F. Textiles and Textile Products Source: Economic Survey 2011-12 (April - Sept 2011) G. Others H. Ores and Minerals I. Leather and Manufactures

Source: Compiled from Ministry of Commerce and Industry and DGCI&S data (April - Dec 2011-12)

12

India’s Top Commodity 3. Foreign Investments Country-wise, investment repatriation of profits on capital Imports routed through investment is permitted, subject The FDI regime has been remains the largest to payment of taxes and other Petroluem and petroleum progressively liberalised during component of FDI infl ows specified conditions. products, capital goods and the of the into India in 2011-12 followed and were India’s (particularly after 2000). by Singapore and the UK. • Indian capital markets are open top commodity imports in A of restrictions on to FIIs. 2011-12 (April to September) foreign investment have been Features of the government’s accounting for 30.6%, 19.9% removed and procedures foreign investment policies • Indian companies are permitted and 12.6% respectively, of have been simplified. and incentives offered by it: to raise funds from international India’s overall imports. capital markets. With limited exceptions, • No government approval is Diagram 5. foreigners can invest directly required for FDI in majority • Special investment and tax India’s Top Commodity Imports in 2011-, either on their own or of the sectors/activities, incentives are given for exports as a joint venture in industries except for a small negative list and sectors, including power, 35 35 where foreign investment formulated by the government. electronics, software and is restricted. Moreover, food processing. 30 30 investment ceilings, which • The government has formulated 25 25 are applicable in certain ‘Sector-Specific Guidelines for • ‘Single ’ clearance cases, are gradually being FDI,’ wherein investments up facilities and ‘investor 20 20 removed/phased out. India to specified sectorial caps are escort services’ are available has witnessed a steady covered under the automatic in various states to simplify 15 15 increase of foreign infl ows route, with a few exceptions. the approval process for over the years. FDI net infl ows new ventures. 10 10 have grown at a rate of over • Foreign Investment Promotion 5 5 30% compounded annually Board considers proposals for 4. Physical and Economic over the last decade. FDI foreign participation that do not Infrastructure 0 0 infl ows were US$36.5 billion qualify for automatic approval. ABCDEFGHI during April 2011-March India’s process of economic % 2010-11 % 2011-12 2012 (US$16.0 billion in • Decisions on all foreign reform is fi rmly rooted in a the corresponding period investment proposals are political consensus that spans A. Engineering Goods of the preceding year). usually taken within 30 days its diverse political parties. Its B. Petroleum Products Portfolio infl ows fell sharply of submitting an application. political institutions have fostered C. Gems and Jewellery from US$31.3 billion a year an open society with strong D. Chemicals and Related Products earlier to US$3.3 billion • Free repatriation of capital collective and individual rights E. Agriculture and Allied Products during April- 2011, investment is permitted, and an environment supportive F. Textiles and Textile Products mainly as a result of the provided the original investment of free economic enterprise. G. Others uncertainty and risk in the (on a repatriable basis) was H. Ores and Minerals global economy in relation made in convertible foreign India’s time-tested institutions I. Leather and Manufactures to the eurozone crisis. exchange. Further, free offer foreign investors a

Source: Compiled from Ministry of Commerce and Industry and DGCI&S data (April - Dec 2011-12)

14 transparent environment that 6. Legal System guarantees the security of their long-term investments. India’s The Indian has a dynamic and highly competitive reputation of being independent private sector has long been and non-partisan. Judges the backbone of its economic are not appointed on political activity. It accounts for over 75% considerations. They enjoy of its a high standing in society. and offers considerable scope for joint ventures and collaborations. The Judicial system has a unified structure. The Supreme Court, Today, India is one of the most the High Courts and the lower exciting emerging markets in Courts constitute a single the world. Skilled managerial Judiciary. Broadly, there is and technical manpower that a three-tier division. the best available in the world and a middle class whose The influence of the British size exceeds the population of Judicial System continues the USA or the , to be significant. The provide India with a distinct official for Court cutting edge in global competition. proceedings in the High Court & the Supreme Court 5. Financial System is English. The procedural law for land, as well as most of Its financial system is well the commercial and corporate regulated and offers a broad laws, are modelled on English range of services including laws. English case law is often banking, insurance, asset referred to, and relied upon, management and both by and judges. services. Businesses here can easily tap into its deep and liquid capital markets as an alternative source to raise funds.

16 Conducting business in India

A foreign company setting in the same field/area of Operating as a • Project office – Representing the parent up operations in India has activity or who brings synergy Foreign Company Foreign companies planning to company in India and acting as the following options: to the foreign investor’s plans execute specific projects in India a buying/selling agent in India. for India. Sometimes joint • Liaison office can set up temporary project/ Operating as an ventures are also necessitated Setting up a liaison or site offices in India for this – Rendering services in Indian Company due to restrictions on foreign representative office is a purpose. The RBI has granted information technology and ownership in certain sectors. common practice for foreign general permission to a foreign development of software • Wholly-Owned companies seeking to enter the entity for setting up a project in India. Subsidiary Company The foreign investment Indian market. The role of such office in India, subject to the A foreign company can set guidelines for investment offices is limited to collecting fulfilment of certain conditions. – Rendering technical support upa wholly-owned subsidiary in an Indian company have information about the possible The foreign entity needs only for the products supplied by company in India to carry out already been discussed above. market and to providing to provide a report to the parent/group companies. its activities. Such a subsidiary information about the company jurisdictional Regional Office is treated as an Indian resident • Limited Liability and its products to prospective of the RBI giving the particulars – Acting as a foreign / and an Indian company for all Partnership (LLP) Indian customers. of the project/. shipping company. Indian regulations (including LLP is a new form of business , Foreign Exchange structure in India. It combines Such offices act as listening and • Branch Office In general, manufacturing Management Act, 1999 and the the advantages of a company, transmission posts and provides Foreign companies engaged activity cannot be undertaken ), despite being such as being a separate a two-way information flow in manufacturing and trading through a branch office. 100% foreign-owned. At least legal entity having perpetual between the foreign company activities abroad can set up However, foreign companies two shareholders, for a private succession, with the benefits and the Indian customers. branch offices in India for the can establish a branch office/unit limited company, and seven of organisational flexibility A liaison office is not allowed following purposes, with the for manufacturing in a Special shareholders, for a public limited associated with a partnership. to undertake any business prior approval of RBI: Economic Zone subject to the company, are mandatory. At least two partners are activities other than liaison fulfilment of certain conditions. required to form a LLP and they activities in India and cannot, – Export/import of goods. • Joint Venture with an Indian have limited liability. LLP is therefore, earn any income Citizens of specified countries Partner ( Participation) comparatively easier to manage in India, under the terms of – Rendering professional are prohibited from establishing Although a wholly-owned with less compliance levels as approval granted by the RBI. or consultancy services. a project office or any other subsidiary has proved to be compared to a company form place of business in India the preferred option, foreign of organisation. Further, a LLP – Carrying out research without the prior permission companies have also is not subject to mandatory work in which the parent of the RBI. operations in India by forging requirements applicable to company is engaged that strategic with Indian a company with regard to promotes technical or financial partners. The trend is to provision of depreciation and collaborations between Indian choose a partner who is transfer to reserves prior to companies and a parent or distribution of profits. The overseas group company. FDI policy for LLPs has been notified recently making this a possible viable entity form for Indian business operations of foreign investors.

18 Taxation in India Corporation Income Tax

Corporate tax rates are as follows: Alternate Minimum Tax (AMT) Particulars Tax Rates*

Where A modified version of MAT, Resident Non-resident For a company Other cases exceeds INR10 million termed AMT is applicable to LLPs and certain other a) Short-term capital assets1 Normal corporate/ Normal corporate/ Domestic Company 32.45% 30.9% taxpayers (other than (other than (b) below) individual tax rates individual tax rates companies) who are availing (30% surcharge of 5% plus from specified profit-linked tax b) Short-term capital assets- (30% plus education cess of 3%) education cess of 3%) incentives. In such cases, AMT listed equity shares and units of equity-oriented funds at 18.5% is payable on adjusted 15% 15% Foreign Company 42.02% 41.2% total income. which have been charged to Securities Transaction (40% plus surcharge of 2% and Tax (STT) (40% plus education cess of 3%) Unadjusted AMT can be education cess of 3%) carried forward until the tenth c) Long-term capital assets-listed year following the year in which equity shares in a company or Exempt Exempt Dividend Distribution be paid/distributed/declared by companies whose tax payable the credit arises. unit of an equity-oriented fund Tax (DDT) such a domestic company for under normal income tax which have been charged to STT the purpose of computation provisions is less than 18.5% Dividend income is exempt in of DDT, provided that DDT has of profits. The current d) Long-term capital the hands of the shareholders. been paid for by the subsidiary. effective rates are as below. assets-unlisted securities 10% 10% However, a DDT is levied (other than (c) above)2 on companies declaring Minimum Alternate A credit of such tax paid under dividends. The effective DDT Tax (MAT) MAT provisions is allowed e) Other long-term 20% 20% rate is 16.22% (15% plus 5% against the tax liability which capital assets3 surcharge and education cess The MAT ensures that arises in the subsequent of 3%). In order to mitigate companies with low (or zero) ten years under the normal the cascading effect of DDT, tax liabilities under normal provisions of the Income-tax Act. *An applicable surcharge and education cess would also be levied on the above tax rates. any dividend received by a tax rules are still subject to a 1. A short-term capital asset is one which is held for a period of not more than 36 months domestic company during corporation tax charge. Thus, Unadjusted MAT credit can be (not more than 12 months in the case of shares, listed securities, units of mutual funds any financial year from its MAT of 18.5% on book profits, carried forward until the tenth and zero coupon bonds). subsidiary is allowed to be along with surcharges and year following the year in which reduced from the dividend to education cess is levied on the credit arises. 2. Effective FY commencing , 2012 long-term capital gain arising from sale of unlisted securities in the case of non-residents will be taxed at the rate of 10% (earlier 20%). Such gains are to be computed before giving effect to currency fluctuations or any indexation benefits.

3. Indexation of cost of acquisition and improvement of a long-term capital asset of any nature (other than debentures) is available to residents. However, the benefit of indexation is available to non-residents only on long-term capital assets other than shares/debentures of an Indian company acquired in foreign currency. Further, long- Where taxable income exceeds term capital assets being listed securities, including equity shares in a company or For a company Other cases unit of an equity-oriented fund, which have not been charged to STT, may be taxed INR10 million at 10% (plus applicable surcharge and education cess) without giving any indexation benefit at the option of the taxpayer. Domestic Company 20.01% 19.05%

Foreign Company 19.44% 19.05%

20 Computation of Total For certain priority items, area’. Transactions between any undertaken or is proposed to The Indian provisions require the with this documentation and Income – General such as energy-saving taxpayer and a party located be undertaken. Certain notified computation of an ‘arm’s length reporting requirement will be devices and control in a notified jurisdictional area residents may also apply to the price’ to be based on ‘ subjected to significant penalties. • All incomes accruing or arising equipment, depreciation is could have implications such Authority for Advance Rulings mean’ of comparable results. in India are taxable in India allowed at higher rates. as higher withholding tax on to seek a ruling concerning the Furthermore, the law provides Once the accountant’s certificate to a non-resident taxpayer payments, taxability of receipts computation of total income. flexibility in ALP by allowing has been filed, the relevant subject to the Withholding taxes and non-deduction of expenses. variance of around 5% of the assessing officer with the Avoidance Agreement (DTAA) Such an advance ruling would transaction value. However for FY approval of CIT may refer the with the country of residence There is an obligation on Double be binding on the person seeking 2011-12 the case to Officers of the taxpayer. the payer both resident as Agreements it in relation to the transaction has removed the 5% variance (TPO) for detailed review. The well as non-resident, to and the and instead they would notify TPO can also review any other • Taxable income is computed for withhold tax when certain Double Tax Avoidance cannot disregard the ruling unless the variance percentage. In international transaction for a accounting year, i.e. the specified income/payments Agreements override the there is some change in the facts addition, from FY 2012-13 the determination of ALP that from 1 April to 31 March. are credited and/or paid. Indian Income-tax Act or law affecting it. onwards, an upper ceiling of may be noted by him during provisions to the extent that 3% is put in place in respect the course of proceedings • The taxable income is called Transactions with persons they are more beneficial to Transfer Pricing of the Central Government before him. Based on available ‘Total Income’, which is located in Notified Territories the taxpayers (concessional notifying the tolerance information, the TPO may adjust computed after adding tax rates applicable under Indian transfer pricing regulations range for the determination or recompute the prices of the certain disallowances, such In order to discourage certain double tax avoidance provides that the pricing of of arm’s length price. international transactions. The as loss on sale of assets and transactions with persons conventions that India has any transaction between order of such a TPO would miscellaneous expenditure located in a country which signed with various countries). associated enterprises (AE), Burden of Proof have to be considered by written off and the reduction does not effectively exchange is granted in respect where either or both entities are and Assessment the Assessing Officer when of certain allowances/benefits information with India, certain of income chargeable to non-resident for tax purposes finalising the assessment. Such from the book profits. anti-avoidance measures were tax, both under the Income- (international transaction), is to The burden of proving that the an adjustment would attract tax introduced from 1 2011. tax Act of India and the be computed with regard to international transactions are in and interest on the additional Depreciation These measures would enable domestic tax laws in that other the arm’s length principle. Two accordance with the arm’s length amount. A penalty of 100% the Government to designate country, in order to promote enterprises are considered to principle lies with the taxpayer. (rising to 300%) of the tax on the Depreciation is allowed any Country/ jurisdiction not mutual economic relations, be associated if there is direct/ For this purpose, the Income-tax adjusted amount may be levied. separately at the following rates exchanging information with trade and investment. indirect participation in the Act requires the maintenance for computing taxable income. India as a ‘notified jurisdictional management or control or capital of prescribed information Dispute Resolution Advance Rulings of an enterprise by another and documents relating to enterprise or by the same international transactions In order to expedite the resolution Factory Building 10% To facilitate full planning and persons in both enterprises. undertaken between AEs. of disputes of the MNCs, India to avoid any future disputes The transfer pricing provisions Additionally it is also mandatory introduced an alternative dispute and fittings 10% under the Income-tax Act, a generally follow the relevant to report all the international resolution mechanism in the non-resident can approach the Organisation for Economic transactions with AEs during form of Dispute Resolution Plant and machinery (general) 15% Authority for Advance Rulings Co-operation and Development the year. For this purpose a Panels (DRP). These DRPs are to determine the income tax (OECD) guidelines. However, tax payer is required to file an comprised of three CITs. Such Computers (including software) 60% aspects of any proposed or there are certain fundamental Accountant’s Certificate in the an alternate scheme of dispute current transaction. differences. Effective from prescribed format by the due resolution is applied in respect Motorcars, other than those used in a business of FY commencing on 1 April date of filing return of foreign companies/companies 15% running them on hire An advance ruling can also 2012, the scope of transfer i.e. 30 following the facing adjustments on transfer be sought by a resident to pricing regulations has also end of the relevant financial pricing orders passed on or Intangible assets (such as know-how, patents, determine the tax liability been extended to a number year. This certificate is obtained after 1 2009 which are copyrights, trademarks, licences, franchises or any 25% of a non-resident with whom of specified domestic from an independent Chartered prejudicial to the assessee. In other business or commercial rights of a similar nature) a transaction has been related party transactions. Accountant. Failure to comply such cases, the Assessing Officer 22

is required to forward a draft order been initiated. Effective from FY 1 April 2005 in the majority of regard to exports from India, duties. Apart from the standard to the assessee. The assessee commencing from 1 April 2012 Indian states. At present, all the is levied only on a very rate, reduced rates of 6% and can file objections against the a reference can be made by a The sale of movable goods in Indian states have transitioned to limited list of goods. 2% are prescribed for certain draft order before the DRP. resident as well as a non-resident India is chargeable to tax at the VAT regime. specified products. The rate After considering all evidence/ to determine if the arrangement the central or state level. The The is aligned at which duty is levied objections and further enquiries, they propose to enter into would Indian regulatory framework Under this regime, the VAT with the internationally- on the goods depends on the the DRP is to issue directions be hit by the GAAR provisions. has granted power to state paid on goods purchased from recognised Harmonised classification of the goods under to the Assessing Officer within to levy tax on goods within the state is eligible for Commodity Description the Excise Tariff. The Excise Tariff nine months. The Assessing Advance Pricing sold within that state. Such sales VAT credit in the hands of the and Coding System of is primarily based on the eight- Officer passes an order within Arrangement (APA) are, therefore, chargeable to VAT purchaser. The input VAT credit Tariff Nomenclature (HSN) digit HSN classification adopted, one month in conformity with at the rates notified under the can be utilised against the VAT/ provided by the World so as to achieve conformity the directions of the DRP. The Effective from 1 July 2012, VAT laws of the relevant state. Central Sales Tax payable on the Customs Organisation. with the Customs Tariff. order passed by the assessing APAs have been introduced All goods sold in the course sale of goods. This ensures that officer pursuant to directions of with a view to significantly of interstate trade are subject the cascading effect of taxes is The peak rate of Basic Customs the DRP can be appealed both bring down TP litigation and to Central Sales Tax (CST). avoided and that only the value Duty (BCD) is currently set at by Revenue and taxpayers before provide certainty to foreign Where goods are bought and addition is taxed. Currently, there 10% for all goods other than The erstwhile Service tax Second Appellate authority. investors. APA is an agreement sold by registered dealers for is no VAT on imports into India agricultural and other specified regime, wherein service tax between a taxpayer and a tax trading or for use as inputs in and exports are zero-rated. This products. Customs duty is was levied on specified taxable GAAR authority on an appropriate the manufacture of other goods means that while exports are levied on the transaction value services, has been replaced with transfer pricing methodology or specified activities (such as not charged to VAT, VAT charged of the imported or exported the Negative List based taxation From FY commencing on for a set of transactions over a mining or telecommunications on inputs purchased and used in goods. While the general of services effective 1 July 2012. 1 April 2013 India’s legislative fixed period of time in future. networks), the rate of CST is the manufacture of export goods principles adopted for valuation In terms of the Negative List GAAR would come into force. 2%, provided Form C is issued or VAT paid on goods purchased of the goods in India are in based scheme of taxation, all Under these broad set of Rules an Direct Taxes Code (DTC) by the purchasing dealer to the for exports, is available to the conformity with the World Trade services are taxable except agreement could be categorised Seller. In the absence of Form C, purchaser as a refund. Organisation agreement on those mentioned in the Negative as ‘impermissible avoidance On 30 August 2010 the the applicable rate would be the customs valuation, the central List or specifically exempted agreement’ if the main purpose is government placed before the rate of VAT on such goods in the State VAT is charged at varying government has established under the mega exemption to obtain a tax benefit and one of the Direct Taxes Code originating state. rates of 1%, 4%, 5% and 20%. independent Customs Valuation notification. The existing rate of the specified supplementary tests , 2010. The Bill is modelled Goods other than those notified Rules applicable to the export service tax is 12%. In addition, is met. The consequences would on the draft Direct Taxes Code CST is sought to be phased to be covered under the above and import of goods. EC of 2% and SHEC of 1% be denial of tax benefits. The that was originally released in out before the introduction rates are charged at a general on the service tax is leviable onus to prove that the transaction August 2009, changes proposed of Goods and Services ranging from 12.5% to 15%. CENVAT (Excise Duty) and accordingly the effective is impermissible is on Revenue. in the Revised Discussion Paper (GST) in India, which is likely The general rate though was set rate of service tax is 12.36%. GAAR panel (not less than three released in June 2010 and further to be implemented post April at 12.5%, some of the states Central Value Added Tax members) will be constituted to suggestions and comments 2013. In the interim, CST will have varied these tax rates in (CENVAT), commonly referred to For most services, the service dispose of any references by the made on this by stakeholders. continue to co-exist with state view of revenue considerations. as excise duty is a tax levied on provider is liable to service tax. Revenue and would include an The Bill was referred to the VAT. Inter-state procurement the manufacture or production of However, for certain specified independent member from the Standing/Select of on which CST is charged in the Customs Duty movable and marketable goods services, both the service Ministry of Law. The GAAR order the Indian Parliament for further originating state is not eligible in India. The standard rate of provider and service recipient would be appealable with the deliberation. The committee for input in the Customs duty is levied on the excise duty for non-petroleum are liable to service tax on the Tribunal. CBDT has issued draft has submitted its report to the destination state. import of goods into, and export products is currently set at 12%. specified value of services guidelines for implementation of Government in March 2012. DTC from India. The rate of customs In addition, Education Cess (EC) and in certain other cases, the GAAR. Consultation process for was expected to be introduced in VAT duty applicable to a product to is set at 2% and Secondary liability has been cast on the finalising the GAAR guidelines has April 2012 but has been delayed. be imported/exported depends and Higher Education Cess service recipient to discharge State level sales tax was upon on its classification under (SHEC) is at 1%. These are service tax liability under replaced by VAT with effect from the Customs Tariff Act. With applicable on aggregate excise reverse charge mechanism. 24 Tax Incentives Scheme Personal Tax

Wealth tax is charged net 100% Export-Oriented Units the SEZ. Exemption from DDT export profits for ten years up to A foreign national seconded incomes are subject to income wealth as on 31 March every (100% EOU) Scheme to SEZ developers has been 31 March 2011. to work in India, in general, tax if received or are deemed to year (referred to as the withdrawn from 1 June, 2011 and becomes liable to Indian be received in India, or accrue or valuation date). Wealth tax is – 100% EOUs are extended a host exemption from MAT has also Enterprises/Undertakings income tax. Other taxes arise or are deemed to accrue charged both on individuals of incentives and facilities, been discontinued with effect in Industrial Parks in to which an individual may or arise in India. However, and companies at the rate of including duty-free imports of from financial year 2011-12. Specified States become liable are capital gains income that accrues or 1% of the amount by which capital goods, raw material, and tax levied on disposal of assets arises outside India will also be the ‘net wealth’ exceeds INR3 consumables as well as tax Expenditure undertaken by a Income tax holidays and in India and wealth tax levied subject to tax in India. In other million. deductions against export income. developer on account of the exemptions from CENVAT on possession of taxable wealth. words, an expatriate who is ROR – These units are permitted to development of SEZ is also are available for units set up Taxation in India is based on is taxed on his/her worldwide The term ‘net wealth’ broadly be set up for a varied range exempt from duties of customs, in industrial parks in North the residential status of a income. represents the value of the of business activities including excise and central sales tax. East states, subject to certain person and not on citizenship. excess of certain assets over manufacture, services, software conditions. The residential status of a The Government has introduced the debts concerned. Assets development, agriculture, A unit set up in an approved SEZ person under the Income-tax compulsory social security include guest houses and aquaculture, animal husbandry, enjoys a 100% for Tax holiday in respect Act is determined solely based regulations for employees residential houses, motorcars, floriculture, horticulture and five years and 50% for the next of others on his or her physical presence holding foreign and jewellery/bullion/utensils of , without any ten years (during the last five in India, regardless of the working for an entity in India gold and silver, yachts, , restrictions of location. years subject to certain additional Undertakings engaged in purpose of the stay. A person to which the Provident Fund aircraft, urban land and cash in – Trading activities are not covered conditions) out of profits operating and maintaining a may qualify to be a Resident (PF) Rules apply. India has, hand. A debt is an obligation for the purpose of the benefits derived from actual exports of or engaged in the and Ordinarily Resident (ROR), principally, two types of Social to pay a certain sum of money extended to these units. goods and services. The tax business of hotel located in Resident but not Ordinarily Security schemes, namely, an incurred in relation to those – Undertakings set up in EOUs holiday period commences the specified having a Resident (RNOR) or a Non- Employees Provident Fund and assets which are included in were eligible for a deduction of from the year in which the SEZ World Site are eligible Resident (NR) in India. an Employee Scheme. the ‘net wealth’. 100% of the derived export profits unit begins to manufacture or for tax deduction of profits for 10 years up to 31 March 2011. produce or provide services. subject to certain conditions. Salary income is subject At the end of each year, a tax to if return has to be filed with the Special Economic Zone Electronic Hardware Investment linked incentives services are rendered in India, income tax authorities in the (SEZ) Scheme Technology Park (EHTP) irrespective of whether salary is prescribed form. The return is to Scheme and Software Investment linked tax incentives received in India or not. Other be filed at the latest by 31 July The SEZ Policy was introduced Technology Parks of India providing deduction of 100%- of the relevant assessment year. with a view to provide an (STPI) Scheme 150% in respect of specified internationally-competitive and capital expenditure is available to Personal Tax Rates unproblematic environment for These schemes offer a package certain businesses. Examples of Taxable Tax on exports. of incentives and facilities like qualifying investment are laying Not Over Percentage on duty-free imports in line with and operating a cross-country Income Over column 1 (INR) excess (%) SEZs are duty-free enclaves the 100% EOU scheme, as well pipeline network (INR) (INR) considered to be outside the as deemed export benefits and for distribution and storage, 0 200,000 – 0% customs of India for tax holidays. Export-oriented IT building and operating a new the purposes of carrying out enabled services like call centre hotel or hospital, developing 200,000 500,000 – 10% their authorised activities. SEZ services, data processing, and building a housing project, 500,000 1,000,000 30,000 20% developers are entitled to 100% medical transcriptions, etc. are new plant for production of tax holidays (of profits and gains also eligible to be registered fertilizer, setting up and operating 1,000,000 and above 130,000 30% derived from the business of under the STP scheme. an inland container depot, developing the SEZ) for ten bee-keeping and production of A resident senior citizen (aged above 60 but below 80 years) and very senior consecutive years out of 15 years Undertakings set up in EHTPs honey and , setting up citizens (aged 80 years and above) with income up to INR 250,000 and INR 500,000 beginning from the year in which or STPs were eligible for a and operating a warehousing respectively, do not have to pay tax. Further, an education cess at 3% of the tax is 26 the government is notified of deduction of 100% of derived facility for storage of . levied (irrespective of the level of income). Human Resources Audit and accountancy and Employment Law

Businesses including both Human Resources legal and corporate status • Minimum Wages Act 1948, private and public companies on registered trade unions; seeks to determine the minimum and branches of foreign India has a large pool of all types rates of wages in certain companies are required to of labour as well as an adequate • Labour Act 1951, , a list of which is be audited by independent supply of office staff for both provides for the plantation contained in the legislation; certified public accountants. management/supervisory labour and regulates the and clerical posts. Skilled condition of work in ; • The Payment of Wages Act 1936, Most companies have voluntarily manpower and professional seeks to regulate the payment adopted 31 March as the date managers are available at a • Payment of Bonus Act 1965, of wages to certain classes for preparing their financial comparatively moderate cost. provides for the payment of of employees in an industry; statements because a uniform India is particularly rich in bonus to persons employed in accounting year ending on IT professionals. Both Indian certain establishments on the • Factories Act 1948, is a principal 31 March is required for tax and multinational recruitment basis of profits or on production legislation that governs the purposes. agencies exist in the market. or productivity, as well as health, safety and welfare of The Indian work culture matters connected therewith; factory workers; Company accounts must be is immensely diverse and prepared according to the extremely professional. • The Payment of Gratuity Act • Employees Provident Fund accrual basis of accounting and is used 1972, provides a scheme for and Miscellaneous Provisions on a historical-cost basis, but for much official communication. the payment of gratuity to all Act 1952, seeks to ensure the revaluation of capital assets is employees earning wages to financial security of employees permissible. The Companies Act Employment Laws do any skilled, semi-skilled, in an establishment by providing prescribes the form and content unskilled, manual, supervisory, a system of compulsory of the balance sheet and the India is a member of technical or clerical work, savings; information to be disclosed the International Labour whether the terms of such in the Profit and Loss Account. Organisation and complies with employment are express • The Maternity Benefit Act 1961, the conventions it has ratified. or implied, and whether regulates the employment of It has enacted comprehensive or not such employees are women in certain establishments legislations to provide a good employed in a managerial for prescribed period before and working environment for labour or administrative capacity; after childbirth; and and protects their interests. • The Workmen’s Compensation • Employees State Insurance Act The key labour laws applicable Act 1923, is to compensate an 1948, provides for healthcare to employers and employees in employee or his/her survivors and cash benefits to the India have been outlined below: in the vent of industrial accidents employees in case of sickness, or occupational diseases, maternity or injury suffered • The Industrial Disputes Act resulting in disablement or during the employment, 1947, is the main legislation death during the course of whether they are working in India that provides for the the person’s employment; in a factory, establishment investigation and settlement or elsewhere, or they are of industrial disputes; • Industrial Employment directly employed by the (Standing Orders) Act 1946, principal employee or through • Trade Unions Act 1962, provides requires employers in industrial an intermediate agency, if the for the registration of trade establishments to clearly employment is incidental or in unions of employers and define the conditions of connection with the factory or workers, and is administered by employment to their workers establishment. the state governments. It confers by issuing standing orders or 28 implementing services rules; Trade Banking in India

The government is committed India’s banking system There are generally no to liberalising its trade regime is among the strongest in the restrictions imposed on as part of an effort to double world and it has strict banking both resident and non-resident India’s share of world trade. The secrecy laws. As the regulator companies in holding bank government is also working to of India’s financial services accounts. Savings accounts improve customs clearance, and sector, the Reserve Bank of are, however, not offered in is in the process of negotiating India has prudential oversight India to companies. Opening a number of regional trade over the banking, securities, a bank account is a relatively pacts. India joined the World futures and insurance industries, simple and straight-forward Trade Organisation in 1995. It including administering the process. The extent of has negotiated the various statutes pertaining to paperwork required largely Free (SAFTA), money, banking, insurance, depends on each bank’s comprising other South Asian securities and the financial Know Your Client requirements. countries, and also concluded sector in general. Investors with good credit agreements with ASEAN and standing should generally while still negotiating be able to avail themselves of with . a myriad range of credit facilities in India. These credit facilities From a very high level, include overdrafts, short-term successive Indian governments advances to medium and long- have worked to bring down term loans, import and export tariff rates since the early financing facilities, etc. 1990s. While tariffs have been reduced and quantitative restrictions were largely eliminated in 2001, India has increasingly relied on non-tariff barriers, including technical standards and regulations, sanitary rules, local content schemes and quotas. Also, since January 2005, a new patent law has been in place, designed to bring India in line with international standards and put local intellectual property rights protection on a par with WTO and Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) provisions.

30 HSBC in India Who We Are

The antecedents of the HSBC The Bank is the founding and a 2003 HSBC Insurance Brokers 2005 First bank to provide 1998 First to introduce an Group in India can be traced principal member of the HSBC (India) Private Limited (ININ) a scorecard-based unsecured affinity card with a Club – back to October 1853 when Group which operates 6,900 overdraft offering to the the Club Card the Mercantile , offices in 84 countries and 2003 HSBC Operations and Indian SME (Small and China and London was founded territories in Europe, the Asia- Processing Enterprise (India) Medium Enterprise) 1996 First to provide NRI and in . The acquisition in Pacific region, the Americas, Private Limited (HOPE) foreign users international online 1959 by The Hongkong and the and . 2005 First bank to issue Private access to their accounts abroad. Shanghai Banking Corporation HSBC is one of the world’s 2008 Canara HSBC Oriental Label Credit Card in India Limited of the Mercantile largest banking and financial Bank of Commerce Life 1995 First to take on VISA Bank, was a decisive factor services organisations. Insurance Company Limited 2004 First bank to offer Plus acquiring business in laying the foundation for repayment flexibility for today’s HSBC Group. Founded Historical 2009 HSBC InvestDirect(HIDL) personal loan customers 1995 First to undertake in 1865 to serve the needs of Global ATM Switch System the merchants of the China Year of commencement Firsts in India 2003 First bank to offer 0% (GATS) issuing coast and finance the growing of operations in India surcharge on buying auto fuels trade between China, Europe A leader in bringing state- on credit card 1995 First to undertake GATS and the , HSBC 1853 The Mercantile Bank of-the-art electronic banking acquiring business has been an international of India, China and London technology to India and to its 2000 First bank to offer HSBC bank from its earliest days. customers, HSBC in India has Customers, hospital 1995 First to introduce 1867 The Hongkong and several ‘Firsts’ to its credit. access without initial deposit off-branch ATMs The Hongkong and Shanghai Shanghai Banking Corporation and emergency referral service Banking Corporation Limited Limited (HBAP) 2009 First Bank to launch an 1994 First bank to provide in India offers a full range of integrated E-Card for supply 1999 First bank to offer a online access to accounts banking and financial services 1995 HSBC Securities and chain farmers choice between Fixed and through its 50 branches and Capital Markets (India) Private Floating interest rates to 1989 First to have inter-branch, 142 ATMs across 29 cities. Limited (HSCI) 2009 First Bank in India to offer its Home Loan customers inter- connectivity Non-Life Insurance product HSBC is one of India’s leading 2000 HSBC Electronic Data through ATMs 1999 First to introduce 1987 First bank to provide ATMs financial services groups, with Processing India Private Export Factoring over 30,000 employees. Limited (HDPI) 2008 First Bank in India to 1985 First bank to offer HSBC Direct, a zero- 1999 First bank to integrate computerise operations HSBC’s network of branches 2001 HSBC Professional balance alternate-delivery electronic banking platform are located in , Services (India) Private Limited channel-driven proposition with an ERP solution (SAP R/3) , , (HPSI) targeted at the SME space , , Gurgaon, 1999 First foreign bank to raise , , , 2002 HSBC Software 2008 First Bank in India to 10-year Subordinated Debt , , , , Development (India) Private offer product , , Mumbai, Limited (HSDI) through ATMs 1999 First Forward Rate , , , New Agreement in the country , Nasik, , , 2002 HSBC Asset Management 2006 First Bank to offer , , Trivandrum, , (India) Private Limited (AMIN) security device (OTP token) and . for internet banking

32 Awards for Excellence

Awards Won in 2012 Awards Won in 2011 Corporate Sustainability HSBC’s programme partners are carrying out original • HSBC has been ranked No. 1 • HSBC India wins the ‘Best For HSBC, Corporate scientific research, developing amongst foreign in The Corporate for Volunteering’ Sustainability is about bringing demonstration projects, creating Financial Express-Ernst & Young award for 2011 social and environmental working models, and proving Best Banks for 2010-11 issues together with financial clear solutions so that • CHOICe (Canara HSBC OBC performance to maintain and governments can enact Life Insurance) has received grow a successful business for legislation for the adoption the India Insurance Review’s the benefit of our stakeholders. of low- policies. ‘Innovation Leader 2011’ Award for successfully establishing • We apply clear policies and The HSBC Partnership bancassurance business processes to manage potential was launched in India in social and environmental risk in January 2008 and supports • HSBC InvestDirect has been our lending and other financial Earthwatch, WWF, The Climate awarded India’s Best Market activities in sensitive sectors. Group and Smithsonian Tropical analyst in the category IPO at Research Institute to combat Zee Business Awards, 2011 • We help our clients to seize the the impact of climate change opportunities presented by the on , freshwater, cities • HSBC has been adjudged a shift to a low-carbon economy. and people. In 2008, HSBC winner for the ‘Top 10 Green launched Earth Sciences IT Enterprise Award 2011’. • We try to reduce our own in India, a Public Private This award was given by environmental footprint and Partnership between HSBC CIO magazine in association share good practice on this and the Ministry of Science with APC – Schneider with our clients and other and Technology and Ministry stakeholders. of Earth Sciences, Government • HSBCnet ranked ‘Best of India to find solutions to of Breed’ • We focus our community climate change. HSBC India Platform as per 2010 investment (philanthropic also supports community Greenwich Associates Online activities) on education and water harvesting, Services Benchmarking the environment. proofing and sustainable study (regional awards) livelihood projects as an Our education programmes help essential measure to reduce • HSBC ranked the Best to lift people out of poverty, build climate stress on agriculture. Domestic Cash Management financial and promote To reduce its , Bank for 2010 by Euromoney environmental awareness. HSBC India undertakes several (regional awards) energy, water, and waste Our environmental programme initiatives across the country. focuses on the HSBC Climate Partnership – a five-year HSBC sees volunteering environmental programme as a key driver to employee to reduce the impact of and an important climate change on people, contribution to the community, forests, freshwater and cities. with employees regularly participating in several community and outreach projects pan India. 34 Country overview

Capital city exchanges National Stock Exchange (NSE) (BSE) Area and population Area of 3,300,000 sq km and population of 1.2 billion Political structure Parliamentary democracy Language The is , but English is the preferred language for conducting business and is widely read and spoken Economic statistics GDP: US$1,848 billion (2011-12) FDI Inflows: US$36.5 billion Currency Indian (INR) Foreign Exchange Reserves: US$292.6 billion (as at January 2012) International dialling code +91 Fundamental Rights Guaranteed by the Constitution National Holidays Scheduled Public Holidays for 2013 State – there is no Milad-Un-Nabi (Birth of the Prophet Muhammad) 25 January Promotion of the people’s welfare in a social order Day 26 January of State Policy

Maha Shivratri 10 March Union of India 28 federal states and 7 union territories 27 March Good Friday 6 April Parliament Two houses – () and () Mahavir Jayanthi 23 April Buddha Purnima 25 May President Id ul Fitr (End of ) 9 August Prime Minister 12 August Janmashtami 28 August Independent Judiciary Supreme Court – highest judicial authority in India High Court – Head of judicial hierarchy in the individual states ’s Birthday 2 October Dussehra (Vijaya Dashami) 14 October Idu’l Zuha/Bakrid (Feast of the ) 16 October Deepavali or (Festival of Lights) 3 November (Islamic ) 5 November Muharram (Islamic New Year) 14 November ’s Birthday 17 November Day 25 December Business and banking hours Business hours: 9am to 6pm Bank hours: 10am to 5pm generally on Monday to Friday Bank hours: 10am to 1pm generally on Saturday

36 Contacts

Shyamal Joint Tax Leader

Contact No: +91 (0124) 3306000

Email: [email protected]

Website: www.pwc.com/india www.hsbc.co.in

Email: [email protected]

Phone: +91 (22) 2659 4254 +91 (22) 2268 1248

Head Office: The Hongkong and Shanghai Banking Corporation Limited, 52/60 M G , Fort, Mumbai 400001, India.

3rd Edition: July 2012

Copyright

Copyright 2012. All rights reserved.

‘PwC’ and ‘PricewaterhouseCoopers’ refer to the network of member firms of PricewaterhouseCoopers International Limited (PwCIL), or, as the context requires, individual member firms of the PwC network. Each member firm is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way. No member firm is responsible or liable for the acts or omissions of any other member firm nor can it control the exercise of another member firm’s professional judgment or bind another member firm or PwCIL in any way. 38 141TP_India_090212_2