TAX AND REGULATORY Investing in India October 2010 kpmg.com/in Table of contents © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 1 India overview 01 2 Brief economic overview 03 3 Sector presentations 07 4 Regulatory framework for investment in India 23 5 Investment vehicles for foreign investors 29 6 Repatriation of foreign exchange 33 7 Company law 39 8 Direct taxes 43 9 Tax incentives 65 10 Transfer pricing in India 69 11 Direct taxes code, 2010 75 12 Indirect taxes 81 13 Goods and services tax 87 14 Labour laws 89 15 New visa regulations 93 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investing in India - 2010 INDIA OVERVIEW 01 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investing in India - 2010 India is the world's largest democracy and the second fastest- growing economy. The past decade has seen fundamental and positive changes in the Indian economy, government policies and outlook of business and industry. Total Area 3.29 million square kilometers Capital New Delhi Population Over 1 billion Political System and Government The Indian Constitution provides for a parliamentary democracy with a bicameral parliament and three Head of State President Head of Government Prime Minister Territories There are 28 states and 7 Union territories Languages Spoken Multilingual society with Hindi as its national language. English is the preferred business language Literacy rate 65.4 percent Time zone GMT + 5 1/2 hours Currency Unit Indian Rupee (INR/Rs.) US, UAE, Hong Kong, UK, China, Singapore, Belgium, Japan, Italy, Bangladesh, Sri Lanka, France, Netherlands, Indonesia, Principal Markets for Exports Saudi Arabia, Germany, Spain, Malaysia US, China, Belgium, Switzerland, UK, Germany, Spain, Austrailia, Korea, Indonesia, UAE, Malaysia, Singapore, South Africa, Principal Markets for Imports Hong Kong, Italy, France, Russia, Saudi Arabia, Sweden Country fact file Political framework Judicial framework • India is the world’s largest democracy • Independent judiciary • Primacy of rule of law • Supreme Court, the apex judicial authority, is vested with powers • Free and vocal media. to enforce fundamental rights and act as a guardian of the Constitution. • High Courts in every state and lower courts at the town level • Alternative dispute resolution mechanisms to assist in the resolution of pending cases through either arbitration or conciliation. © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 02 Investing in India - 2010 BRIEF ECONOMIC OVERVIEW 03 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investing in India - 2010 The Indian economy has witnessed phenomenal growth during the Foreign trade3 last decade. The country posted decent growth during the recent In the last five years, India’s exports witnessed robust growth to slowdown and is among one of the countries to lead the recovery reach a level of around USD 185 billion in 2008–09 from USD 63 path. The growth in real Gross Domestic Product (GDP) stood at 6.9 billion in 2003–04. India’s share of global merchandise trade was percent in 2009-20101. The GDP growth projection for 2010-2011 is 0.83 percent in 2003 which rose to 1.45 percent in 2008 as per WTO 7.1 percent1. The key drivers of India’s growth include a booming estimates. India’s share of global commercial services export was domestic marked by increasing consumption and a surge in 1.4 percent in 2003 which also rose to 2.8% in 2008, and at the investment, supported by certain inherent fundamental strengths same time, its share in goods and services increased to 1.64% in such as favorable demographics. 2008 from 0.92 percent in 2003. However, burgeoning inflationary pressures are posing as an area of concern for the government. Rising inflation has led to stringent controls in the domestic financial environment. The Reserve Bank of Foreign reserves4 India (RBI), India’s central bank, has given high precedence to India's foreign exchange reserves stood at USD 283.5 billion at the uphold price stability, contain inflation expectations and sustain the end of December 2009 as against USD 252 billion in 2008, making it growth momentum the third largest stock of reserves among the emerging market economies. Transforming the domestic market2 • Favorable Demographics: India, where about 50 percent of the Mergers & Acquisitions (M&A) and Private population is below 25 years of age, has one of the youngest populations in the world compared to the aging populations of Equity deals (From EMIS – Emerging the US, China, Japan, and the UK Market Information Service) • Increased Urbanization: By 2025, due to migration and population The total number of M&A Deals announced during the 12 months of growth, the urban population is estimated to account for 37 2009 stands at 330 with a total announced value of USD 11.96 billion percent of the total population. By the same time, the Indian as against 454 deals with a total announced value of USD 30.95 consumer market is likely to largely be an urban affair with 62 billion in 2008 and 676 deals amounting to USD 51.11 billion in 2007. percent of consumption in urban areas versus 38 percent in rural There were 174 domestic deals in 2009-2010 (both acquirer and India. target being Indian) with an announced value of USD 6.70 billion and • Rise of the Middle Class: The middle class (including aspirers), 156 cross-border deals with an announced value of USD 5.26 billion. which, in 2005, accounted for 45 percent of total households is expected to rise to 68 percent by 2025. • Increased Consumption: Aggregate consumption in India is expected to grow four-fold in real terms from USD 420.7 billion in 2006 to USD 1.73 trillion by 2025. 1 Central Statistical Organization (CSO) 4 Directorate General of Foreign Trade 2 NCAER 3 Directorate General of Foreign Trade © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 04 Investing in India - 2010 Foreign direct investments inflows Portfolio investments in India • India’s favorable regulatory regime continues to attract foreign • India has been a preferred emerging capital market for foreign investment. According to the global survey of corporate capital inflows in the last decade. Net investment by Foreign investment plans carried out by KPMG International, released in Institutional Investors (FIIs) into India touched USD 65,636 million June 2008, India is likely to see the largest growth in its share of from April 2000 to February 20106. foreign investment and become the world leader for investment in manufacturing in the next 5 years. Corporate investment Capital market strategists from over 300 of the largest multinational companies • The Indian capital market has witnessed transformation over the in 15 major economies participated in the survey. The results last decade and India is now placed among the most mature of showed a move away from investment in the US, Japan, the world. Singapore and the UAE, and a big increase in flows to Brazil, • The BSE Index has a market capitalization (as of December 31, Russia, India and China (BRIC). 2009) of USD 13.14 trillion, the highest among major Asian 7 • Foreign direct investments (FDI) into India went up from USD economies including Japan, China, Malaysia, and Hong Kong . 4,029 million in 2000-2001 to USD 33,053 million in 2009-2010 (upto Feb ’10), one of the highest among emerging economies. Cumulative amount of FDI inflows from April 2000 to March 2009 amount to USD 89, 840 million5. 5 Economic Survey of India 2009-2010 7 Bloomberg 6 Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, April 30, 2010 05 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investing in India - 2010 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 06 Investing in India - 2010 SECTOR PRESENTATIONS 07 © 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Investing in India - 2010 Introduction Introduction • India’s conventional image has made a paradigm shift from being Auto and auto components a mere source of inexpensive labour to a pool of high caliber human capital. Moving beyond the perception of a service-led economy, India’s manufacturing sector is scaling new heights. Banking and financial services The country has been successful on a number of fronts and leading multinationals today are setting up their R&D centers in Food processing India, thereby acknowledging India’s true potential • While the prospects of sectors such as IT, Telecommunications, IT- ITeS Healthcare and Biotechnology have been well recognized, the Indian Media and Entertainment Industry, Financial Services, Infrastructure Real Estate, Renewable Energy, Travel and Tourism, Retail, Education, and Auto Components among others, are also attracting global attention Media and entertainment • This report identifies and highlights the investment attractiveness Power and business potential of various industries.