An Introduction To Doing Business in India 2017

An Introduction to
Doing Business
in India
2017
Years
1992-2017
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This edition of Doing Business in India was produced by a team of professionals at

Dezan Shira & Associates, with Koushan Das and Melissa Cyrill as Editors.
Creative design of the guide was provided by Jessica Huan, Kking Lu and Belén Rodríguez.
© 2017 Dezan Shira & Associates
Disclaimer
The contents of this guide are for general information only. For advice on your specific business, please contact a qualified professional advisor.
Copyright 2017, Asia Briefing Ltd. No reproduction, copying or translation of materials without prior permission of the publisher.
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About Dezan Shira & Associates

At Dezan Shira & Associates, our mission is to guide foreign companies through Asia’s
complex regulatory environment and assist them with all aspects of establishing, maintaining
and growing their business operations in the region. Since its establishment in 1992, Dezan
Shira & Associates has grown into one of Asia’s most versatile full-service consultancies with
operational offices across China, Hong Kong, India, Singapore and Vietnam, as well as liaison
offices in Italy, Germany and the United States, and partner firms across the ASEAN region.
With over 25 years of on-the-ground experience and a large team of professional advisers,
we are your reliable partner in Asia
AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 3

Preface
India surged ahead of China in receiving foreign direct investment (FDI) in 2016. In the first six ADAM LIVERMORE
months of 2016, there was a 30 percent increase in FDI – equaling US$21.6 billion as compared Partner
to US$16.6 billion the previous year as per the Department of Industrial Promotion & Policy Dezan Shira & Associates
(DIPP). As the government pushes toward the ease of doing business, India is now perfectly
positioned to compete with the world’s premier investment locations.
India can offer investors a unique array of advantages. Its skilled and low-cost labor force is one
of the largest in the world, and it has a high level of English fluency relative to other countries
in Asia. The reforms that have been implemented are numerous and include infrastructural
improvements, the raising of FDI caps, and the simplification of visa obtainment procedures.
This publication, designed to introduce the fundamentals of investing in India, has been created
using the most up-to-date information at the time. It was compiled by Dezan Shira & Associates,
a specialist foreign direct investment practice that provides corporate establishment, business
advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review
services to multinationals investing in emerging Asia.
CONTACT
Dezan Shira & Associates
[email protected]
www.dezshira.com

Dezan Shira & Associates India
Dezan Shira & Associates expanded into India in 2007, opening offices in Mumbai and later ROHIT KAPUR
New Delhi in 2008. The launch of Dezan Shira’s India offices was coupled with the launch of Country Manager
India Briefing, which is now a premier source of business and regulatory intelligence related Dezan Shira & Associates
to the Indian market. India Offices
Our services in India include corporate establishment, business advisory, tax advisory and
compliance, accounting, payroll, due diligence, and financial review. Dezan Shira & Associates’
experienced business professionals in India are committed to improving your understanding
of investing and operating in emerging Asian markets.
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Email: [email protected] Email: [email protected]

Committed to Economic
Reform and Digitalization:
The Indian Economy in 2017
2016 ended on an epochal note for India’s economy as the government implemented the
demonetization of high-denomination currency notes (Rs 500 and Rs 1000) in an effort to combat
counterfeit currency and formalize the parallel (black) economy to increase tax jurisdiction. Old
currency was allowed to be exchanged till December 30, in tranches, and was monitored by tax
authorities for discrepancies. Only in the case of non-resident Indians (NRIs), this exchange will
be allowed until June 30, 2017; Indians who were abroad between November 9 and December
30, 2016 will be allowed a grace period till March 31, 2017.
In the initial weeks, demonetization led to cash shortages as the central bank imposed
restrictions on withdrawals to manage the distribution of new and small denomination currency.
Inevitably, this resulted in the slowdown of consumer spending and industrial growth, leading
to a dip in the country’s growth forecast at 6.6 percent.
Nevertheless, this slowdown is most likely to be temporary as India remains one of the fastest
growing economies of the world. In the medium term, growth prospects look good precisely
as the drive towards accelerating domestic manufacturing, infrastructure investments, support
for startups, and the digitalization of the economy will continue undeterred.
Bolstering this overall positive outlook is the expected implementation of the Goods and
Services Tax (GST) in the forthcoming financial year. Finally, the government is committed to
various economic, legislative, and regulatory reforms that will ease the entry, investment, and
expansion of business operations in India.

Table of Contents
Preface 04
Part 1 | Establishing and Running a Business 09

What are my options for investment? 10
Liaison office 10
Branch office 12
Project office 13
Setting up a wholly foreign-owned business in India 15

Establishing a wholly owned subsidiary 15
Navigating FDI caps and restrictions 18

FDI routes and forms 18
Changes to FDI caps and approval routes 18
Investing 21
Part 2 | Tax and Accounting in India 22

Key taxes in India 23
Value Added Tax 23
Service Tax 27
Customs duty 29
India’s Audit Process 38

Understanding annual audit: An overview 38
Types of audits 39
Ensuring a smooth audit: Key considerations 45
Miscellaneous 47
Summary 48

Part 3 | Human Resources and Payroll Considerations 51
Key considerations when hiring staff 52
Visa application 52
Visa registration 53
Payroll and Social Insurance 60

Withholding tax returns filing 60
Individual Income Tax (IIT) 60
Income tax returns 61
India’s Provident Fund scheme 63
Part 4 | Operational Issues 65

Import and export procedures 66
Import procedures 66
Export procedures 67
Duties explained 69
An introduction to sourcing from India 72

India’s sourcing edge 72

Establishing and Running a Business
What are my options for investment?

1
Setting up a wholly foreign-owned business in India
Navigating FDI caps and restrictions

What are my options
for investments?
A foreign investor may set up in India either as an ‘unincorporated entity’ or an ‘incorporated

entity’.
Unincorporated entities permit a foreign company to do business in India by establishing a

liaison office, branch office, project office, or a trust. An incorporated entity in India has a more
structured set up and is governed by the provisions of the Companies Act, 2013 / Limited Liability
Partnership Act, 2008. We discuss the prominent unincorporated entity structures in India.
• Liaison office
• Branch office
• Project office
Liaison office
Foreign companies can open a liaison office in India to facilitate and promote the parent
company’s business activities and act as a communications channel between the foreign
parent company and Indian companies. Unable to engage in commercial, trading, or industrial
activities, liaison offices must be sustained by private, inward remittances received from their
foreign parent company.
A liaison office is permitted to engage in the following activities:
• Facilitate communication between the overseas head company and parties in India
• Promote imports/exports between countries
• Establish financial and technical cooperation between overseas and Indian companies
• Represent the overseas head company in India
The Foreign Exchange Management Act (FEMA) , administered through the Reserve Bank of
India (RBI), governs the application and approval process for the establishment of a liaison or
branch office. Under the Act, foreign enterprises must receive specific approval from the RBI
or through an ‘authorized dealer’ bank to operate a liaison office in the country. Applications
are to be submitted through Form FNC (Application for Establishment of Branch/Liaison Office
in India). The approval process generally takes 20 to 24 weeks and permission to operate a
liaison office is granted for a three-year period, which can be extended at a later date.
CONTACT
Additionally, an enterprise must also meet the following conditions before qualifying for the
establishment of a liaison office:
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• Must have profitable operations during the immediately preceding three years in the home
country
• Must have a minimum net worth of US$50,000 verified by the most recent audited balance
sheet or account statement

If the company does not meet these requirements, but is a subsidiary of another company, that
parent company may submit a Letter of Comfort on the subsidiary’s behalf as long as it meets
the conditions as mentioned above. A company must submit a Certificate of Incorporation or
Memorandum and Articles of Association, and a copy of the parent company’s latest audited
balance sheet. The liaison office must also obtain a Permanent Account Number (PAN) from
the income tax authorities.
Within 30 days of establishment, the liaison office must register with the Registrar of Companies
(RoC) by filing Form FC-1 through the Ministry of Corporate Affair’s online portal. The following
documents must also be provided:
• A copy of the liaison office charter or Memorandum and Articles of Association in English
• Full address for the enterprise’s principal place of operation outside of India
• Name and address of the liaison office in India
• List of directors
• Name and address of the company’s official representative based in India (e.g. the person
authorized to accept delivery of notices and documents served to the company)
Sale of Goods
HQ Payments Customers
Communication
OVERSEAS
INDIA
Communication
Manufacturer
LIAISON OFFICE
Exporter
Each year, the liaison office must file an Annual Activity Certificate (AAC), prepared by a chartered
accountant, to the RBI verifying the office’s activities are within its charter. An AAC should also
be filed with the Directorate General of Income Tax within 60 days of the close of the financial
year. Only applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong, Kong, Macau
and Pakistan have to register with the state police.
Copy of approval letter for citizens from these countries shall be marked by the AD Category I bank
to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New Delhi for
necessary action and record. All other countries are exempt from registering with the state police.

Branch office
Foreign companies, including those engaged in manufacturing and trading activities, are able
to establish branch offices to carry out business activities substantially the same as those
carried out by their parent company. Branches are permitted to carry out trading activities,
but may not engage in manufacturing activities on their own—these may be subcontracted to
Indian manufacturers. Branch offices operating in SEZs, however, are permitted to undertake
manufacturing and service activities in sectors with 100 percent FDI approval.
Branch offices are permitted to engage in the following activities:
• Export/import of good
• Rendering professional or consultancy services, IT services, or technical product support
• Carrying out research work in which the parent company is engaged.
• Representing the parent company as a buying/selling agent or in order to establish technical
or financial collaborations with Indian companies
• Operating as a foreign airline or shipping company
• Promoting technical or financial collaboration between Indian companies and parent or
overseas group company
• Rendering technical support to the products supplied by parent/group companies
Sale of Goods
HQ Payments Customers
Can Provide Service & Receive

Payment in Foreign Currency
OVERSEAS
INDIA
Can Provide Service & Receive
Payment in Foreign Currency
Manufacturer* BRANCH OFFICE
* Can manufacture if in SEZ with 100 percent FDI

FEMA also governs the application and approval process for the establishment of a branch office,
requiring that companies receive approval from the RBI. Permission to operate a branch office
is granted for a three-year period, which can be extended at a later date. An enterprise must
also meet the following conditions before qualifying for the establishment of a branch office:
• Must have profitable operations during the immediately preceding five years in the home
country
• Must have a minimum net worth of US$100,000 verified by the most recent audited balance
sheet or account statement
If a company does not meet these requirements, but is a subsidiary of a company that does,
the parent company may also submit a Letter of Comfort on the subsidiary’s behalf during the
application process. The process for establishing a branch office is identical to that required for
a liaison office, and the same documents including Form FNC , the Certificate of Incorporation
or Memorandum and Articles of Association, and an audited balance sheet must be submitted.
A PAN must also be acquired, and the office must register with the Registrar of Companies
through the Ministry of Corporate Affair’s online portal.
Each year, the branch office must file an AAC, prepared by a chartered accountant, to the
RBI verifying the office’s activities were within its charter. An AAC should also be filed with the
Directorate General of Income Tax within 60 days from the end of the financial year. All profits
earned by the branch office may be remitted from India, and will be subject to payment of all
applicable taxes. Only applicants from Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong,
Kong, Macau and Pakistan shall have to register with the state police.
Copy of approval letter for persons from these countries shall be marked by the AD Category
I bank to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New
Delhi for necessary action and record. All other countries are exempted from registering with
the state police.
Project office
If a foreign company has secured a contract from an Indian company to execute a project in
India and has attained the appropriate funding source or governmental clearance, a project
office may be established.
One of the following criteria must be met in order to obtain permission to establish a project
office:
• The project is funded directly by inward remittance from the overseas head company
• The project is funded by a bilateral or multilateral international financial agency such as the
World Bank or IMF

• The project has received clearance by the relevant authorities within India
• The Indian company awarding the contract has been granted a term loan for the project
RELATED NEWS
If none of the above criteria are met, an overseas company looking to establish a project office New Forms for Company
in India must make a specific request with the Central Office of the RBI for approval. Incorporation in India
India Briefing News
The project office should notify the relevant regional Director General of Police within five days November, 2016
of the office’s establishment. Within two months the overseas company must also submit a
report to the relevant regional office of the RBI through the authorized dealer branch bank (AD)
AVAILABLE HERE
that will be used by the foreign company. This report should include:
• Name and address of the overseas company

• Reference number and date of project contract
• Particulars of the authority awarding the project contract
• Total amount of the contract
• Brief details of both the project undertaken and authorized dealer branch bank
• Project details, including project office tenure and contact information
Each year, the project office will be required to submit a Project Status report compiled by a
chartered accountant to the company’s AD branch. This report ensures the activities undertaken
by the project office conform with the activities permitted by the RBI. Only applicants from
Bangladesh, Sri Lanka, Afghanistan, Iran, China, Hong, Kong, Macau and Pakistan shall have
to register with the state police.
Copy of approval letter for persons from these countries shall be marked by the AD Category
I bank to the Ministry of Home Affairs, Internal Security Division – I, Government of India, New
Delhi for necessary action and record. All other countries are exempted from registering with
the state police.
Project offices may open a non-interest bearing foreign currency banking account with an
authorized dealer branch in India for project expenses and credits. The office may maintain
both a foreign currency account and a rupee account while operating in India. Project offices
are allowed occasional remittances to their parent companies and must provide a chartered
accountant certificate verifying the offices can still meet their liabilities. Following project
completion, the project office may repatriate any capital surplus once all tax liabilities have
been paid, a final audit of the project accounts has been completed, and a document verifying
the remittable surplus provided.

Setting up a wholly
foreign-owned business in India
Establishing a wholly owned subsidiary

RELATED READING
Under Indian law, foreign investors are able to establish wholly owned subsidiary companies
(WOS) in the form of private limited companies if they operate in sectors that permit 100
percent foreign direct investment (FDI). With India’s recent loosening of FDI caps, companies
are now also able to establish WOS in the telecom services and asset reconstruction sectors.
Establishing a private limited company can be a lengthy and complicated process involving
multiple steps.
First, a minimum of two directors (at least one must be a resident in India) must be appointed and
registered through India’s e-filing system for Director Identification Numbers (DIN). Minimum
requirements for the establishment of a private limited company include the existence of two
directors, two shareholders (who may be the same person as the directors), and a minimum
share capital of US US$1,500 (INR 100,000 (1 lakh)).
Pre-Investment Due
Second, a suitable name must be selected that indicates the main objectives of the company,
Diligence in India
and submitted with the RoC along with a brief description of the business’s proposed functions
May, 2016
to verify both the name’s appropriateness and availability. Upon successful name registration,
the applicant company has 60 days to file its Memorandum of Association (MOA) and Articles
We examine issues related
of Association (AOA), and proceed with formal incorporation filings. Both the MOA and AOA
to pre-investment due
must be stamped with the appropriate duty after the needed RoC fees and stamp duty have
diligence in India. We
been paid, and both forms signed by at least two subscribers with a witness.
highlight the different
regulatory, tax, and socio-
The following forms are required to be filed with the Ministry of Corporate Affairs for establishing
economic issues that
a WOS.
a company should be
aware of before entering
• Form INC-1; Name approval form
the Indian market. We
• Form INC-7 or INC-2: Form INC-7 for Application for incorporation of a company (Other than
also detail some of the
One Person Company) or Form INC-2 for Application for Incorporation of OPC.
topics related to entry
• Form INC-22: Notice of situation or change of situation of registered office based on the
structures while investing
option chosen in Form INC-7.
in the Indian market, as
• Form DIR-12: Particulars of appointment of directors and the key managerial personnel and
well as cultural and HR
the changes among them.
due diligence, which may
differ from state to state.
Upon successful submission of the above documents, the RoC will issue a Certificate of
Incorporation and a Corporate Identification Number (Corporate Identity). The process generally
takes seven to eight weeks to complete, and private limited companies are permitted to AVAILABLE HERE
commence business immediately following their successful incorporation.
Ministry of Corporate Affairs has introduced SPICe Form INC-32 which is Simplified Proforma
for Incorporating Companies Electronically. SPICe or Form INC-32 can help incorporate a
company with a single application for reservation of name, incorporation of new company and/
or application for allotment of Director Identity Number (DIN).

Applicable taxes
While India has been liberalizing its governing policies since 1991, the country’s tax structure
remains among the most complex and difficult to navigate in the world. Understanding the wide
variety of laws, regulations and procedures can be confusing for even the savviest of business
operators. Foreign companies that do not seek specialized advice often end up overpaying on
taxes or on the associated penalties and interest that go along with them. What follows is a brief
description of the various taxes which should be taken into consideration when incorporating
a private limited WOS company in India.
Tax Rates for Foreign Companies

Taxable income is Taxable income Taxable income
Particulars
< US$150,000 > US$150,000 < US$1.4 million > US$1.4 million
Basic rate 40.00% 40.00% 40.00%
Surcharge 0 2.00% 5.00%
Basic rate + surcharge 40.00% 40.80% 42.00%
Edu. cess@ 3% 3% 3% 3%
Effective tax rate 41.20% 42.02% 43.26%
Domestic Companies with Turnover/Gross Receipts of Less Than US$750,000

Particulars Taxable income < US$150,000 Taxable income > US$150,000 < US$750,000
Basic rate 29.00% 29.00%
Surcharge 0 2.00%
Basic rate + surcharge 29.00% 29.58%
Edu. cess@ 3% 3% 3%
Effective tax rate 29.87% 30.46%
Domestic Companies with Turnover/Gross Receipts of More Than US$750,000

Taxable income is Taxable income Taxable income
Particulars
< US$150,000 > US$150,000 < US$1.4 million > US$1.4 million
Basic rate 30.00% 30.00% 30.00%
Surcharge 0 7.00% 12.00%
Basic rate + surcharge 30.00% 32.10% 33.60%
Edu. cess@ 3% 3% 3% 3%
Effective tax rate 30.90% 33.06% 34.61%

Tax on the distribution of dividends
Corporate entities are subject to a tax on the distribution of dividends. However, in the case of
shareholder dividends, the associated income is exempt from tax. The current effective rate of
the Dividend Distribution Tax is 20.358 percent (15 percent plus a 12 percent surcharge and
an education cess of 3 percent grossed up to the amount distributed.). No exemption from
payment of the DDT is granted for the profits relating to SEZ developers In addition, individuals,
firms and HUF residents in India receiving dividend income in excess of US$150,000 (INR
10 lakhs) shall be charged additional tax at 10 percent plus surcharges and cess (may be
applicable) on a gross basis.
To avoid a situation of double taxation being created by the DDT, it is permitted that, for the
purpose of computing the tax, any dividend received by a domestic company during any financial
year from its subsidiary shall be allowed to be deducted from the dividend to be distributed.
This is provided the dividend received by the domestic company has been subject to DDT
and the domestic company is not the subsidiary of any other company.
Minimum alternate tax

All companies declaring low or zero taxable income are subject to the Minimum Alternate Tax
(MAT). Presently, MAT is levied at 18.5 percent of book profits plus the applicable surcharges
and education cess. The MAT is levied on companies whose tax payable under normal income
tax provisions is less than 18.5 percent of book profits. Additionally, MAT is applicable to SEZ
developers/units for income arising on or after April 1, 2012.
Taxation of royalties/technical fees

Under domestic tax law, the royalties/technical fees that are payable to non-residents with a
permanent establishment in India are taxed on a different basis compared to non-residents
without permanent establishment in India. Concessional tax rates apply if the agreement relates
to a matter that has been approved by the government of India. The payments made are subject
to tax avoidance agreements entered into by the non-resident’s country.
Wealth tax
As of April 1 2016, Wealth Tax has been abolished. For information on the indirect taxes that a
company will encounter in India, see our Tax and Accounting in India section.
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Navigating FDI caps
and restrictions
Amendments in Indian FDI policy has opened a number of key business sectors to increased
foreign investment and, in several instances, eliminated the need for foreign investors to obtain
approval from the Indian government before investing. These amendments have been further
augmented, with several sectors significantly increasing the amount of foreign investment
permitted.
FDI routes and forms

Foreign investment into India falls under one of two FDI routes:
• Government Route: For investment in business sectors requiring prior approval from the
Foreign Investment Promotion Board (FIPB).
• Automatic Route: For investment in business sectors that do not require prior approval from
the government, but the filing of a notification after the incorporation of the company and
issue of initial shares.
Foreign investment takes one of two principal forms:
• Foreign Direct Investment (FDI): The acquisition of shares or other securities in an Indian
company.
• Foreign Institutional Investment (FII): Investment by foreign institutional investors (such as
hedge funds, insurance companies, or mutual funds) registered with the Securities and
Exchange Board of India (SEBI).
These distinctions are important when interpreting recent changes in foreign investment policy,
as FDI caps and approval routes often vary by both industry and investor.
Changes to FDI caps and approval routes

FDI amendments are now being further augmented under the Narendra Modi administration,
with several sectors significantly increasing the amount of foreign investment permitted. Of
particular interest are the hikes that will be seen in the private sector banking and railway
sectors; the former rising from 74 percent to 100 percent, and the later from 0 percent to a
massive 100 percent.

India’s current FDI caps look like this:
India’s current FDI caps

Previous Policy 2017 Policy
Sector/Industry Investment Cap Approval Route Investment Cap Approval Route
Commodity exchanges 49% ( FDI + FII ) Government 49% Automatic
Power exchanges 49% ( FDI + FII ) Government 49% Automatic
Asset reconstruction 74% ( FDI + FII ) Government 100% Automatic
Insurance 26% ( FDI ) Automatic 49% ( FDI + FII ) Automatic
Up to 49% Automatic Up to 49% Automatic

Telecom services Above 49% Above 49%
Government Government
and up to 74% and up to 100%
Courier services 100% Government 100% Automatic
Test marketing 100% Government 100% Automatic

Petroleum refining by public
49% Government 49% Automatic
sector undertakings
49% Automatic
Defense production 26% ( FDI ) Government
Above 49% Government
Railway infrastructure N/A 100% Automatic
Print media 26% Government 26% Government
100% Government
Brownfield pharmaceuticals 100% Government
74% Automatic
Multi-brand retail 51% Government 51% Government
E-commerce (B2B only) 100% Automatic 100% Automatic
Civil aviation 100% except in 100% except in
• Scheduled air transport 49% Automatic

service / domestic scheduled
49% Automatic 100% Government
passenger airline
• Regional air transport service Automatic for Non-
100%
Resident Indians

Single and multi-brand retail trading
While previous FDI policy only permitted one non-resident entity with ownership of a brand
(or rights to a brand) to invest in Indian companies engaged in the retail trading of that brand,
policy changes now allow multiple non-resident entities to invest in Indian entities engaged in
single-brand retail trading of that brand (as long as each own or have rights to the brand via
a legally binding agreement).
Single-Brand Retail Trading

Cap Route
Former position 100% Government
Up to 49% Automatic
Revised position
Above 49% and up to 100% Government
In respect to multi-brand retail trading, changes made in 2012 permitted up to 51 percent FDI with
prior government approval. Conditions for investment, however, required companies to invest at
least 50 percent of the total FDI proceeds into ‘back-end infrastructure’ such as manufacturing,
processing, packaging and distribution. Changes made in 2013 now clarify that at least 50
percent of the first US$100 million invested must be in ‘back end infrastructure’ within three years.
Furthermore, the previous requirement for multi-brand retail trading companies (MBRTCs)
regarding manufacturing and processing 30 percent of products in ‘small industries’ has
been discontinued, and companies are now permitted to source their products from any
manufacturing or processing entity so long as investment in plant and machinery is below
US$2 million at the first engagement. MBRTCs are now also allowed to establish outlets in
a wider range of locations, as the previous restriction to cities with populations of at least 1
million has been scaled back. State governments now possess the authority to permit MBRTCs
to operate in their region.

Investing
RELATED READING
The issuance of shares by Indian companies falls under the compliance guidelines outlined
in the Foreign Exchange Management Act (FEMA). Companies seeking capital through the
public route should base the issuance price on SEBI guidelines. Unlisted companies seeking
capital may not issue private shares at a price less than fair value determined according to
internationally accepted pricing methods or arm’s length basis. The price will be determined
by a SEBI registered banker or a chartered accountant. The acquisition of unlisted shares by a
non-resident from an Indian resident must be exchanged at fair value based on the SEBI guidelines.
Units operating in SEZs may issue shares at a price based on the valuation against the import
of capital goods. This valuation must receive approval from a Development Commissioner
Committee and the appropriate customs officials. Shares must be officially issued within 180
days of receipt of invested capital, or the funds must be refunded to investors.
Taking Advantage of India’s

Upon the issuance of shares to foreign investors, the issuing company has 30 days to file Form
Improving Business
FC GPR, which outlines the company’s activities and relevant details, through the regional
Environment
office of the RBI. A certificate declaring compliance with the Companies Act 2013, should be
December, 2016
submitted at the same time. The issuing company should also obtain a certificate confirming
that the price of issue is in line with the prescribed guidelines.
We look at the important
regulatory reforms, policy
Foreign investors should be familiar with Indian investment regulations and compliance
initiatives, and increased
requirements before moving to invest in regulated sectors. Despite India’s liberalized investment
incentives for investing
and an improvement in the ease of doing business rankings environment, the nation still
in the Indian market that
ranks among the most difficult countries in which to start and conduct business according to
have emerged since
the World Bank. As such, firms and individuals considering investment in the country should
Prime Minister Narendra
strongly consider consulting a professional services firm before attempting to navigate India’s
Modi took office in 2014.
foreign investment environment.
Foreign companies should
take note of the pro-
business agenda of the
current government and
stay updated with the
new reforms and sectoral
policies that might ease
their entry, investment,
and expansion of business
operations in India.
AVAILABLE HERE

2
Tax and Accounting in India
Key taxes in India
India’s audit process

Key taxes in India
Value Added Tax

India has a Federal structure of taxation. The graphic below provides a description of the existing
administration.
The Central Sales Tax imposes a tax on manufacturing, and the state government imposes a
tax on the selling and distribution of goods. Hence, the manufacturer and service provider pay
excise duty and service tax and claim credit for the same at the time the goods are sold to
manufacturers under the nomenclature of CENVAT Credit (i.e. Centralized Value Added Tax),
and the dealer pays VAT and claims VAT credit.
Federal Structure of Taxation
AUTHORITY TO TAX
State Government Central Government
Excise Duty Value Added Tax
CustomsDuty Central Sales Tax

(duty to collect)
Service Tax
Central Sales Tax
Value Added Tax (VAT) is a tax on the final consumption of goods or services, and is ultimately
borne by the consumer. It is a multi-stage tax with the provision to allow Input Tax Credit (ITC)
on tax at an earlier stage, which can be appropriated against the VAT liability on subsequent
sale. This credit means setting off the amount of input tax by a registered dealer against the
amount of output tax. It is given for all manufacturers and traders for the purchase of inputs/
supplies meant for sale, irrespective of when these will be utilized/sold. The VAT liability is RELATED SERVICES
calculated by deducting input tax credit from tax collected on sales during the month. If the
tax credit exceeds the tax payable on sales in a month, the excess can be carried over to the Dezan Shira & Associates
end of the next financial year. If there is any balance excess or unadjusted input tax credit at provides tax consulting
the end of second year, then the same shall be eligible for refund. for foreign companies in
India. For more information,
VAT is managed exclusively by respective states. The state governments, through taxation please contact us at
departments, carry out the responsibility of levying and collecting VAT. The central government [email protected]
plays the role of facilitator for the successful implementation of VAT.

Every dealer of goods and commodities is required to register under the relevant state act as
applicable according to their area of operation. The limit for the threshold is set by the states
which may vary between US$7,700 (INR 5 lakhs) to US$30,700 (INR 2 lakhs). Further, the premise
of availing the tax credit for any amount of VAT paid is based on the issue of an invoice. An
invoice plays a pertinent role in the functioning of the VAT system as it aids in substantiating
the VAT claim during subsequent sales. The entire system of claiming input tax credit is crucially
based on the documentation of a tax invoice or bill. Mandatory to follow, this tax invoice is to
be signed and dated by the dealer, showing the requisite particulars.
For identification/ registration of dealers under VAT, the tax payer’s Tax Identification Number
(TIN) is used. TIN consists of 11 digits with its first two characters representing the state code
and the set-up of the next nine characters varying by state.
Presently, there are three basic rates of VAT (4, 5, and 12.5 percent). There is also an exempt
category and a special rate of 1 percent for a few select items. Gold, silver, and precious stones,
for example, have been put in the 1 percent schedule. VAT paid on items such as motor spirit
(petrol, diesel and aviation turbine fuel), liquor, etc. are not eligible for offsetting VAT payment.
Some of the other VAT features at the state level are:
• State taxes on the purchase or sale of goods subsumed in VAT, not excluding Entry Tax.
• A provision for allowing Input Tax Credit (ITC) which is the basic feature of VAT.
• An intra-state transaction does not cover inter-state sales transactions (i.e. credit for VAT
paid within the state shall not be allowed on inter-state purchases).
• Items destined for export have been made zero-rated by giving credit for all taxes on inputs/
purchases related to such exports.
• The procedure for the VAT system is favorable for businesses as it provides for self-
assessment by dealers. Further, there is a provision for introducing a threshold limit for the
registration of dealers when annual turnover is US$15,000 (INR 10 lakhs) and a provision for
the composition of tax liability up to an annual turnover limit of US$75,700 (INR 50 lakhs).
It should also be noted that no credit is available on the basis of invoices provided by
unregistered dealers or to those opting for the composition scheme.

VAT procedure
RELATED READING
• Input VAT - Payable on goods purchased from another dealer.
• Output VAT - Payable on goods rendered.
INPUT VAT PAYABLE
Goods and Service purchased
Manufacturer Supplier
Tax, Accounting and

OUTPUT VAT PAYABLE Audit in India 2016-2017
August , 2016
Goods and Service sold
Tax, Accounting, and Audit
Dealer Customer
in India 2016 is designed to
introduce the fundamentals
of the tax regime as well
as the critical accounting
and auditing practices
in India. As such, this
VAT PAYAPABLE = OUTPUT VAT - INPUT VAT
comprehensive guide
is ideal for not only
businesses looking to enter
the Indian market, but also
for companies who already
have a presence here and
want to stay up-to-date
with the most recent and
relevant policy changes.
AVAILABLE HERE

A registered dealer under VAT affects purchases and sales, both locally, in a year
Input Output
Exempted goods 200,000 Exempted goods 150,000
Goods taxable at 4% 300,000 Goods taxable at 4% 180,000
Goods taxable at 12.5% 800,000 Goods taxable at 12.5% 670,000
TOTAL 13,00,000 TOTAL 10,00,000
Input tax credit Output tax credit
Exempted goods 0 Exempted goods 0
Goods taxable at 12.5% 100,000 Goods taxable at 12.5% 83,750
TOTAL 1,12,000 TOTAL 90,950
VAT payable
Output VAT payable 90,950
Input VAT available 112,000
VAT payable NIL
VAT credit carried forward 21,050
A registered dealer under VAT affects purchases and sales, both locally and inter-state, in a year
Input Output
Exempted goods 200,000 Exempted goods 150,000
TOTAL 400,000 TOTAL 330,000

VAT payable NIL
No liability under VAT Act, since total turnover under VAT Act is
less than US$7,500 (INR 5 lakhs)
OUTPUT(CST)
Goods taxable at 4% -150,000 (with Form C)
The dealer is liable under the CST Act irrespective of total turnover under the VAT Act. There is no liability
under the VAT Act, but the dealer can avail input tax credit for liability under the CST Act.
Input tax credit (under VAT) Output tax credit (Central Sales Tax)
Exempted goods 0 Exempted goods 0
Goods taxable at 4% 8,000 CST due 6,000
Goods taxable at 12.5% 100,000 Adjustment from Input Tax credit 6,000
CST payable NIL
Input Tax Credit (to be carried over to next month) 2000

Service Tax
A tax on services was put into effect in India for the first time in 1994. With the initial imposition of
only three services, over the years various other services have been added raising the count to
119 in the year 2011. The basic premise of imposing a service tax is that the manufacturing sector
can only be taxed to a certain extent on specified activities while fostering healthy competition.
Presently, services form more than 52 percent of India’s GDP, and are expected to reach around
70 percent. This tax will be subsumed into the Goods and Services Tax (GST), which is expected
to be in place in the near future. The regulatory provisions pertaining to service tax are given in
Chapter V and V(A) of the Finance Act 1994. The levy of the service tax extends to the whole of
India except that it does not extend to a service provider offering taxable services from the state
of Jammu and Kashmir by virtue of section 64, Chapter V, of the Finance Act.
A new service tax regime was introduced in India’s 2012 budget, under which all services are
taxed, with services specified under the negative list entry otherwise exempted. The CBEC also
issued a notification in June 2012, commonly referred to as the ‘Mega Exemption Notification’
enumerating the services which shall be exempt from the payment of service tax with effect
from July 2012. Earlier there were numerous notifications and litigations challenging the service
tax. The present rate of service tax is 15 percent, inclusive of 0.5 percent swach bharat cess and
0.5 percent krishi kalyan cess. The negative list of services signifies that all services, excluding
those specified by the negative list, will be subject to service tax. Additionally, there will be
exemptions, abatements, and composition schemes as issued by the CBEC from time to time.
WFOE Setup Procedure
1. FILING THE SERVICE TAX REGISTRATION FORM (FORM ST – 1) ONLINE
2. ONLINE GENERATION OF ACKNOWLEDGMENT AND PROVISIONAL SERVICE TAX NUMBER
3. ARRANGEMENT OF RELEVANT DOCUMENTS
4. SUBMISSION OF DOCUMENTS WITH JURISDICTIONAL OFFICER
5. VERIFICATION OF DOCUMENTS BY THE JURISDICTIONAL OFFICER
6. AWARD OF CERTIFICATE OF REGISTRATION
The Mega Exemption Notification mentions 38 services on which service tax can be exempted,
thereby including all other services. A simplistic approach has been laid out that services which
are not mentioned in the negative list will attract service tax liability. Services covered in the
negative list category are as follows on next page.

Mega exemption negative list
1. Health care services by a clinical establishment, an authorized medical practitioner or paramedics; -
1
2. Services provided by way of transportation of a patient in an ambulance, other than those specified in (i) above
Services by an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) by way of charitable
2
activities
Services by a person by way of-

3 a. renting of precincts of a religious place meant for general public; or
b. conduct of any religious ceremony
Services provided by -
a. an arbitral tribunal to -
1. any person other than a business entity; or
2. a business entity with a turnover up to rupees ten lakh in the preceding financial year; or
b. an individual as an advocate or a partnership firm of advocates by way of legal services to,-
4 1. an advocate or partnership firm of advocates providing legal services;
2. any person other than a business entity; or
3. a business entity with a turnover up to rupees ten lakh in the preceding financial year; or
c. a person represented on an arbitral tribunal to an arbitral tribunal
This does not include services provided by senior advocate. However, services by a senior advocate would be exempt
when the service is provided to a person other than
5 Services by way of training or coaching in recreational activities relating to arts, culture, or sports
Services provided,-
a. by an educational institution to its students, faculty and staff;
b. to an educational institution, by way of,-
6 1. transportation of students, faculty and staff;
2. catering, including any mid-day meals scheme sponsored by the Government;
3. security or cleaning or house-keeping services performed in such educational institution;
4. services relating to admission to, or conduct of examination by, such institution;
Services provided to a recognized sports body by-
7 a. an individual as a player, referee, umpire, coach or team manager for participation in a sporting event organized
by a recognized sports body;
b. another recognized sports body.
Services provided in relation to serving of food or beverages by a restaurant, eating joint, or a mess, other than those
8
having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year;
Services provided in relation to serving of food or beverages by a canteen maintained in a factory covered under the
8A
Factories Act, 1948 (63 of 1948), having the facility of air-conditioning or central air-heating at any time during the year.
Transport of passengers, with or without accompanied belongings, by non air-conditioned contract

9 carriage other than radio taxi, for transportation of passengers, excluding tourism,
conducted tour, charter or hire.
Note: The above table is an essential illustrative. The exhaustive list including the act, circulars, and notifications issued by the government
authority should be analyzed to see which services are covered under the exemption category.

The payment of service tax must be completed on a monthly basis. The due date is the 7th of the
month following the month to which the amount of tax pertains. Additionally, a service tax return
must be filed on a half yearly basis. The due date for filing the return falls on the 25th of the
month following the period ending in September and March.
Customs duty
Customs duty is levied by the central government on the import and export of goods from
India. The rate of customs duty applied to imported and exported products depends on its
classification under the Customs Tariff Act (CTA). In the case of exports from India, duty is
levied only on a very limited list of goods. The Customs Tariff is aligned with the internationally
recognized Harmonized Commodity Description and Coding System of Tariff Nomenclature
promulgated by the World Customs Organization. The Indian central government has the power
to exempt any specified goods from the whole or part of the customs duties.
In addition, preferential/concessional rates of customs duty are available under the various
bilateral and multilateral trade agreements entered into by India. Customs duty is levied on the
transaction value of the imported or exported goods. Under the Customs Act, 1962, transaction
value is the sole basis of valuation for the purposes of import and export. Although India has
adopted general principles of valuation for goods that are in accordance with the World Trade
Organization’s agreement on customs valuation, the central government has established
independent Customs Valuation Rules applicable to the import and export of goods. India has
no uniform rate of customs duty, thus duty applicable to any product is based on a number of
components. The types of customs duties are as follows:
• Basic Customs Duty (BCD) - BCD is the basic component of customs duty levied at the
effective rate stipulated in the First Schedule to the Customs Tariff Act, 1975 (CTA) and
applied to the landed value of the goods.
• Countervailing Duty (CVD) - CVD is equivalent to, and is charged to counter the effect
of, the excise duty applicable on goods manufactured in India. CVD is calculated on the
landed value of the goods and the applicable BCD.
• Educational Cess (EC) - EC at 2 percent and Secondary & Higher Education Cess (SHEC)
at 1 percent are also levied on the CVD. Further, EC at 2 percent and SHEC at 1 percent
are also levied on the aggregate customs duties. An Additional Duty of Customs (ADC) at
4 percent is also charged.
Duties of excise
Central Value Added Tax (CENVAT) is a tax levied by the central government on the manufacture
or production of movable and marketable goods in India. The rate at which excise duty is

leviable on the goods depends on the classification of the goods under the Excise Tariff. The
Excise Tariff is primarily based on the eight digit Harmonized System Code. The excise duty
on most consumer goods is charged based on the MRP printed on the good’s packaging.
Abatements are admissible at rates ranging from 20 percent to 50 percent of the MSRP for
the purposes of charging Basic Excise Duty (BED). Goods other than those covered by an
MSRP assessment are generally charged based on the “transaction value” of the goods sold
to an independent buyer.
In addition, the central government has the power to fix tariff values in order to charge ad valorem
(“according to value”) duties on specific goods. Occasionally, notifications granting partial or
complete exemption to specified goods from payment of excise duties are also issued. EC at
2 percent and SHEC at 1 percent are applicable on the aggregate excise duties.
The central excise duty is a modified form of Value Added Tax (VAT) where a manufacturer is
allowed credit on the excise duty paid on locally sourced goods as well as on the CVD paid
on imported goods. The CENVAT credit can be utilized for payment of excise duty on the
clearance of dutiable final products manufactured in India. In light of the integration of the
goods and services tax initiated in 2004, manufacturers of dutiable final products are eligible
to apply CENVAT credit to the service taxes paid on input services used in or in relation to the
manufacture of final products as well as on clearances of final products up until the point of
removal. In addition, CENVAT credit is allowed on the following input services:
• Services used in relation to setting up, modernization, renovation or repairs of a factory, the
premises of a service provider or an office relating to such a factory or premises
• Advertisement or sales promotion services
• Services relating to the procurement of inputs
• Activities relating to businesses such as accounting, auditing, financing, recruitment and
quality
• control, coaching and training, computer networking, credit rating, share registry and security,
inward transportation of inputs or capital goods, and outward transportation
A manufacturer of dutiable and exempt goods, using common inputs or input services and opting
not to maintain separate accounts, may choose between reversing the credit attributable to the
inputs and input services used for manufacture of the exempted goods, to be worked out in a
manner prescribed in the rules, or paying a percentage of the value of the exempted goods.
Goods and Services Tax

The Government of India is committed to replace all the indirect taxes levied on goods and
services by the Centre and States and implement Goods and Services Tax (GST) by July 2017.
With GST, it is anticipated that the tax base will be comprehensive, as virtually all goods and
services will be taxable, with minimum exemptions. GST will create a common Indian market

and reduce the cascading effect of tax on the cost of goods and services. It will impact the SAHIL AGGARWAL
tax structure, tax incidence, tax computation, tax payment, compliance, credit utilization and Manager
reporting, leading to a complete overhaul of the current indirect tax system. International Business Advisory
India Offices
GST is a value-added tax levied at all points in the supply chain with credit allowed for any tax
“
paid on input acquired for use in making the supply. It would apply to both goods and services,
with exemptions restricted to a minimum. In keeping with the federal structure of India, GST The Goods and
will be levied concurrently by the Centre (CGST) and the States (SGST). Both CGST and SGST Services Tax will create
would be levied on the basis of the destination principle. Thus, exports would be zero-rated,
and imports would attract tax in the same manner as domestic goods and services. Inter-state a common Indian market
supplies within India would attract an Integrated GST (aggregate of CGST and the SGST of and reduce the cascading
the destination State). In addition to the IGST, in respect of supply of goods, an additional tax
effect of tax on the cost of
”
of up to 1 percent has been proposed to be levied by the government. Revenue from this tax
is to be assigned to origin states. This tax is proposed to be levied for the first two years or a goods and services.
longer period, as recommended by the GST Council.
• The advantages of GST are:
»» Seamless availability of credit across goods & services

»» Integration of prevailing indirect taxes to ensure uniformity
»» Preventing cascading of taxes
»» Simplified compliances
»» Availability of credit even for inter-state procurements
»» Harmonization of Centre and State taxes to achieve common market
»» Wider tax base, necessary for lowering tax rates and eliminating classification disputes
• Taxes to be subsumed:
GST would replace most indirect taxes currently in place such as:
Central Taxes State Taxes
• Central Excise Duty [including • Value-added tax

additional excise duties, excise • Octroi and Entry tax
duty under the Medicinal and Toilet • Purchase tax
Preparations (Excise Duties) Act, 1955] • Luxury tax
• Service tax • Taxes on lottery, betting and gambling
• Additional Customs Duty (CVD) • State cesses and surcharges
• Special Additional Duty of Customs (SAD) • Entertainment tax (other than the
• Central Sales Tax ( levied by the tax levied by the local bodies)
Centre and collected by the States) • Central Sales tax ( levied by the
• Central surcharges and cesses (relating Centre and collected by states)
to supply of goods and services)

Navigating India’s bilateral & multilateral free trade agreements
Free trade agreements (FTAs) are normally made between two countries, or a larger nation and
a regional trading bloc. Many governments, including India, have either signed FTAs or are in
the process of negotiating new bilateral free trade and investment contracts.
There are typically two types of FTAs: bilateral and multilateral, although India categorizes these
in a somewhat different manner than most other nations.
Every customs union, trade common market, economic union, customs and monetary union
has also negotiated free trade areas. India looks at these more regional trading arrangements
(RTAs) as building blocks towards the overall objective of trade liberalization and future “Free
Trade” status. Therefore, it is participating in a number of RTAs that include structures such
as FTAs, Preferential Trade Agreements (PTAs), and Comprehensive Economic Cooperation
Agreements (CECAs). In this article we will discuss each of these structures and identify their
participating partner nations.
Free Trade Agreements

An FTA between two countries or group of countries agrees to abolish tariffs, quotas and
preferences on most, if not all, of goods traded. Countries often agree to FTAs if their economic
structures are complementary, not competitive. India enjoys FTAs, to date, with the following
two countries: Sri Lanka (December 28, 1998) and Thailand (October 9, 2003). However, it has
also negotiated far-reaching FTAs with a number of trade blocs.
Early Harvest Scheme

An “Early Harvest Scheme” (EHS) is a precursor to an FTA between two trading partners. This
is to help the two trading countries identify certain products for tariff liberalization pending
the conclusion of actual FTA negotiations. A good example of an EHS is that between India
and Thailand signed in October 2003, wherein the duties on 83 products were identified to
be reduced to zero in a phased manner. The EHS has been used as a mechanism to build
greater confidence between trading partners in order to prepare them for even bigger economic
engagement. India has been keen on these schemes and has numerous EHS agreements in
place; some within existing treaties.
Trade agreements
These are bilateral or multilateral treaties, or any other enforceable compact, that commit
two or more nations to specified terms of commerce. They mostly involve mutually beneficial
concessions.

Framework agreements
These set the period for future substantive liberalization by defining the scope and provisions
of orientation for some new area of discussions.
Preferential Trade Agreements (PTAs)

This type of agreement gives preferential right of entry to certain products. This is done by
reducing tariffs, but does not abolish them completely. A PTA is established through a trade
pact and is a stepping stone towards better economic relations with the concerned country.
India enjoys PTAs with Afghanistan and Chile.
India’s multilateral & trade bloc FTAs

ASEAN
The Association of Southeast Asian Nations (ASEAN) was founded on August 8, 1967, and now
consists of Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines,
Singapore, Thailand and Vietnam. India is one of the four “Summit level Dialogue Partners” of
ASEAN.
ASEAN’s economic, political and strategic significance in the larger Asia-Pacific region is the
primary mover behind India’s relationship with the organization. It also provides a link for India
to bond with the Asia-Pacific-centered economic policies that are shaping the 21st century
marketplace. Conversely, ASEAN seeks admission to India’s professional and technical strengths.
A Framework Agreement on Comprehensive Economic Cooperation between ASEAN and

India was signed on October 8, 2003, in Bali (Indonesia). The agreement encompassed areas
of economic cooperation and provided for an Early Harvest Programme (EHP), which covers
areas of economic cooperation and a common list of items for exchange as an assurance
building measure.
India further signed an FTA in services and investments with ASEAN in September, 2014, which
is due to be ratified. Trade between India and ASEAN stood at US$65.04 billion in 2015-16 and
comprises 10.12 percent of India’s total trade with the world.

MERCOSUR
Formed in 1991, MERCOSUR is a trading community in Latin America comprising Argentina,

Brazil, Paraguay and Uruguay. It has Chile and Bolivia as its associate members.
A framework agreement was signed between India and MERCOSUR on June 17, 2003. The
plan of this framework agreement is to:
• Generate circumstances and mechanisms for discussions;

• Grant mutual tariff preferences;
• Bargain a free trade area between the two parties in line with the rules of the World Trade
Organization.
BIMSTEC
The Bay of Bengal Initiative for Multi Sectoral Technical and Economic Cooperation (BIMSTEC)
is a Technical and Economic Cooperation forum formed in 1997 and includes Bangladesh,
India, Myanmar, Sri Lanka and Thailand. Bhutan and Nepal joined the group in February, 2004.
Because it includes five members of SAARC (India, Bangladesh, Bhutan, Nepal & Sri Lanka)
and two members of ASEAN (Thailand, Myanmar), it is seen as a bridge between these two
major regional organizations.
Cooperation is proposed in 13 sectors and each sector is led by one member country.
SAARC
The South Asian Association for Regional Cooperation (SAARC) is a regional body that promotes
cooperation and investment in South Asia. Recognized in Dhaka in December, 1985, its members
include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, who
collectively have the world’s third largest GDP (PPP).

SAFTA (South Asian Free Trade Agreement)
South Asia’s FTA was approved by all the member states of SAARC during the twelfth “SAARC
Summit” held in Islamabad between January 4-6, 2004. SAFTA came into force from January
1, 2006.
The purpose of SAFTA is to endorse and improve mutual trade and economic cooperation
among the “Contracting States” by:
• Eliminating blockades to trade in, and facilitating the cross-border movement of goods
between, the territories of the Contracting States;
• Promoting conditions of fair competition in the free trade area, and ensuring equitable
benefits to all Contracting States, taking into account their respective levels and patterns
of economic development;
• Creating an effect mechanism for the implementation and application of this Agreement,
for its joint administration and for the resolution of disputes; and,
• Establishing a framework for further regional cooperation to expand and enhance the mutual
benefits of this Agreement.
How to evaluate India’s FTAs for your business

FTAs are, by nature, complicated documents. To establish whether the contents are applicable
to your business, the following questions need to be addressed:
• Is your product or service included within the FTA’s remit?

• If so, what are the dutiable advantages?
• What are the implementing rules and documentary requirements on claiming lower duties?
• Are there any tax advantages that may apply to my business operations?
• How can I implement and claim these?
Such advice typically needs to be handled by a professional firm that is familiar with India’s
FTA agreements and can assist with on-the-ground administration in order to ensure benefits
can be obtained.
India has tended to be somewhat long-winded and bureaucratic about some of its trade
agreements. Despite this, certain FTAs, such as those with ASEAN and the GCC, have provided
and will continue to provide significant reductions on dutiable trade. This is evidenced in India’s
annual bilateral trade with ASEAN doubling to US$80 billion in the four years since the FTA
came into effect. To compare, India-U.S. trade per annum currently stands at some US$64 billion.
While navigating India’s FTAs can be a protracted process, their benefits cannot be overstated
and should always form part of your overall business strategy for investing in India.

Using India’s double tax agreements
RELATED NEWS
India has taken a positive view when it comes to entering into Double Tax Agreements (DTA)
with other nations – it now has over 90 such treaties, many of them recent. Singapore and India
to Include Limitation
DTAs are useful as they enshrine within a bilateral agreement the treatment of many forms of of Benefits in DTAA
tax – including corporate income tax, individual income tax, withholding tax and dividends tax, Amendment
amongst others. They are useful not just for companies that have a presence in both nations, India Briefing News
but also for trading companies that do not have a permanent presence in India but services January, 2017
to an India-based entity. Such services are typically subject to withholding tax, but effective
use of the applicable DTA can halve this burden. AVAILABLE HERE
The legal and tax professions are effectively split in India, with a third profession – the Corporate
Secretarial position – also prominent when it comes to Indian tax administration. Ignoring DTAs
when structuring foreign investments into India can be problematic; these investments should
be negotiated up front with the relevant tax officials in India. Failure to do so can result in tax
overheads that are far more expensive than necessary.
That said, this problem can be resolved – but only through a firm both qualified to do so and
with an understanding of India’s regulations, from both the legal and the tax perspective. India
has always been a tax structural play for foreign investors at the start-up stage. Companies
should ensure that they do not miss out on the benefits of bilateral agreements.
Typical DTA benefits

Apart from the principal of an individual or corporation not being subject to “double taxation” –
being taxed both in one country and then back home – most DTAs also include “tax sweeteners”
that international businesses can take advantage of. These include, but are not limited to, the
following reductions.
Dividends distribution tax

In addition to a 40 percent corporate income tax (CIT) for foreign investors, India charges a 15
percent dividends distribution tax (DDT) upon profit repatriation overseas. Many DTAs provide
for a clause that reduces the dividends tax portion by 50 percent.

Withholding tax
Withholding Tax (WT) is charged on an array of service fees billed by a firm’s HQ to a company
(which could be either a client or a subsidiary) in India for a service provided by the former
to the latter. As profits tax cannot be charged to a company that is non-resident, WT takes its
place. The amount of WT varies considerably depending upon the service provided.
Interested businesses should check the applicable rate per service. However, as a general rule
of thumb, withholding tax in India is 20 percent of the total invoice value. DTAs can in many
cases halve this amount. Services charged by the parent for use of royalties for trademarks
by its own subsidiary, for example, may be remitted to the parent at a 10 percent rate – far
more preferable to the combined CIT and DDT rate of 55 percent if the money is left in India.
While India-based foreign-invested entities can sign a variety of service agreements with foreign
companies, including with their HQ, these agreements can sometimes be looked upon with
suspicion as “constructed channels” for sending money between the HQ and its subsidiary. It
is up to firms themselves to inform the local tax office in India of their intention to use the DTA
- the application for which requires copies of the DTA, Articles of Association, and business
license of the company. Permission is required from tax officials in India to reduce the amount
of taxes due from a company, as they need to provide an explanation for doing so to their
own superiors. Accordingly, a well presented case needs to be made. It is advisable that this
involve assistance from a professional firm in India qualified to do so. The tax savings obtained
typically outweigh the fees charged for such services.
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<Dezan Shira & Associates>

India’s Audit Process
Understanding annual audit: An overview

Audit season in India can be a hectic and confusing time for foreign invested enterprises (FIEs)
operating in the country. While most foreign executives in India leave auditing to chartered
accountants and professional services firms, it is important to maintain at least a basic
understanding of the audit process, how to prepare an FIE for audit, and key considerations
that should be taken into account.
There are two primary objectives associated with annual audit in India. The first objective is for
auditors to report to shareholders and the government whether or not the company’s balance
sheet provides a true and fair reflection of its state of affairs and any profit or loss derived during
the financial year. The second, an incidental objective, concerns the detection and prevention
of fraud and error. Hiring an experienced firm to complete annual audit in a timely and accurate
manner is critical to achieving both of these objectives.
The basics
Audits of company accounts have been compulsory in India since the passing of the first
Companies Act in 1913. Since then, the Institute of Chartered Accountants of India (ICAI), a
statutory body established under the Chartered Accountants Act, 1949, has regulated the
profession of chartered accountants in India and ensured the maintenance of India’s accounting
standards. All chartered accountants are members of the ICAI, and must comply with the
standards stipulated by the ICAI and the Audit and Assurance Standards Board (AASB).
Essentially, an audit is the inspection of an individual, business or organization’s accounts,

and is traditionally completed by an independent individual or firm with specialized skills and
knowledge of auditing procedures in the country in question. In other words, accountants verify
that a company’s business transactions were recorded accurately, and provide a true and fair
reflection of that company’s financial situation.
The importance of the audit process cannot be understated, as the results can be used for
the following purposes:
• Helping investors know the financial health of the company

• Assuring the government that the company is properly discharging its legal duties
• Helping lenders evaluate the credibility of the company
• Drawing management’s attention to any shortcomings in the company’s business operations
• Helping management improve business efficiency

Auditing objectives
As mentioned earlier, there are two key objectives associated with annual audit in India:
expressing to shareholders and the Indian government a true and fair view of the company’s
financial statements, and detecting and preventing instances of fraud and error.
Ensuring a company’s balance sheet provides a true and fair reflection of its current state of
affairs requires an auditor who, after completing the audit process, will express their opinion of
the company’s financial statements via an auditor’s report. These financial statements should
include Balance Sheet, Profit & Loss Account, Cash Flow Statement and Notes to Accounts.
A “true and fair view” can only be satisfied if the financial statements are accurate and not
misleading. A company can expect the auditor to feel they have provided a true and fair
assessment if the following criteria are satisfied:
• The accounts are prepared with reference to the entries in the account books
• Entries are supported by proper vouchers, documents, or other evidence
• No entry in the account book is omitted while preparing the financial statements, and nothing
is included in the financial statements that were not in the account books
• The financial statements are prepared in accordance with the relevant accounting standards
An incidental objective associated with annual audit in India is the detection of errors or fraud in
a company’s financial statements. If an irregularity is detected, the auditor has a duty to report
the details to management, who is then expected to remedy such an error.
Types of audits
Basic audits in India are generally classified into two main types:
1. Statutory Audits
2. Internal Audits
Statutory audits are conducted to report the current state of a company’s finances and
accounts to the Indian government and shareholders. Such audits are performed by qualified
auditors working as external and independent parties. The audit report of a statutory audit is
made in the form prescribed by the government agency.
Internal audits are conducted at the behest of internal management in order to check the
health of a company’s finances, and analyze the organization’s operational efficiency. Internal
audits may be performed by an independent party or by the company’s own internal staff

In India, every company whose shares are registered on the stock exchange must have an
internal auditing system in place. This includes:
• Every unlisted public company having:
a. Paid up share capital of US$7 million (INR 50 crore) or more during the preceding
financial year; or
b. Turnover(income) of US$29 million (INR 200 crore) or more during the preceding financial
year; or
c. Outstanding loans or borrowings from banks or public financial institutions exceeding
US$14 million (INR 100 crore) or more at any point of time during the preceding financial
year; or
d. Outstanding deposits of US$3 million (INR 25 crore) or more at any point of time during
the preceding financial year; and,
• Every private company having:
a. Turnover of US$29 million (INR 200 crore) or more during the preceding financial year; or
b. Outstanding loans or borrowings from banks or public financial institutions exceeding
US$14 million (INR 100 crore) or more at any point of time during the preceding financial
year
Statutory audits
In India, statutory audits are conducted for each fiscal year (April 1 to March 31) and not the
calendar year. The two most common types of statutory audits in India are:
1. Tax Audits
2. Company Audits
Tax audits
Tax audits are required under Section 44AB of India’s Income Tax Act 1961. This section
mandates that those whose business turnover exceeds US$149,200 (INR 1 crore), and those
working in a profession with gross receipts exceeding US$75,000 (INR 50 lakhs), must have
their accounts audited by an independent chartered accountant. The audit report is made using
Form 3CD along with either Form 3CA (for companies) or Form 3CB (for entities not included
under Form 3CA). The provision of tax audits are applicable to everyone, be it an individual,
a partnership firm, a company, or any other entity. The tax audit report is to be completed by
November 30 after the end of the previous fiscal year. Non-compliance with the tax audit
provisions may attract a penalty of 0.5 percent of turnover or US$1,500 (INR 100,000) whichever
is lower. There are no specific rules regarding the appointment or removal of a tax auditor.
audit evidence and is, therefore, unable to express an opinion on the financial statements.

Company audits
The provisions for company audits are contained in the Companies Act, 2013 as applicable.
Every company, irrespective of its nature of business or turnover, must have its annual accounts
audited each financial year.
For this purpose, the company and its directors must first appoint an auditor at the outset.
Thereafter, at each annual general meeting (AGM), an auditor is appointed by the shareholders
of the company who will hold the position from one AGM to the conclusion of the next AGM,
Listed companies and companies belonging to prescribed class of companies will not appoint
or re-appoint the auditor for:
• More than two terms of five consecutive years, if the auditor is an audit firm;
• More than one term of five consecutive years, if the auditor is an individual.
Only an independent chartered accountant or a partnership firm of chartered accountants can

be appointed as the auditor of a company. The following persons are specifically disqualified
from becoming an auditor per the Companies Act:
• A body corporate;
• An officer or employee of the company;
• A person who is partnered with an employee of the company, or employee of an employee
of the company;
• Any person who is indebted to a company for a sum exceeding US$15 (INR 1,000) or who has
guaranteed to the company on behalf of another person a sum exceeding US$15 (INR 1,000);
• A person who has held any securities in the company after one year from the date of
commencement of the Companies (Amendment) Act, 2000;
• A person who has been convicted by a court of an offence involving fraud and a period of
ten years has not elapsed from the date of such conviction.
The auditor is required to prepare the audit report in accordance with the Company Auditor’s
Report Order (CARO) 2016. CARO requires an auditor to report on various aspects of the
company, such as fixed assets, inventories, internal audit systems, internal controls, and statutory
duties, among others. The audit report must be obtained before holding the AGM, which itself
should be held within six months from the end of the financial year.

According to the ICAI, audit can be defined as follows:
Auditing is defined as a systematic and independent examination of data, statements,

records, operations and performance (financial or otherwise) of an enterprise for a stated
purpose. In any auditing situation, the auditor perceives and recognizes the proposition
before him for examination, collects evidence, evaluates the same and on this basis
formulates a judgment which is communicated through an audit report. An audit is an
independent examination of financial information of an entity, irrespective of its size and
form, when such examination is conducted with a view of expressing an opinion thereon.
Audit reporting
As discussed earlier, audits are conducted to ensure a company’s financial statements present
a true and fair view of its financial affairs. Therefore, the auditor’s opinion expressed in the
ultimate report is based on the information gathered during the audit and the verification of
financial statements. Upon completing the report, the auditor may express one of the following
four opinions:
1. Unqualified opinion
2. Qualified opinion
3. Disclaimer of opinion
4. Adverse opinion
Unqualified opinion
An unqualified opinion is expressed when the auditor concludes that the financial statements
give a true and fair view in accordance with the financial reporting framework used for the
preparation and presentation of the financial statements. It confirms that:
• Generally accepted accounting principles are consistently applied in the preparation of

financial statements
• Financial statements comply with the relevant statutory requirements and regulations
• There is adequate disclosure of all material matters relevant to the proper presentation of
financial information (subject to statutory requirements)

Qualified opinion
A qualified opinion is expressed when the auditor concludes that an unqualified opinion cannot
be expressed, but that the effect of any disagreement with management is not so material
and pervasive as to require an adverse opinion, or the limitation of scope is not so material
and pervasive as to require a disclaimer of opinion. A qualified opinion should be expressed
as being “subject to’” or “except for” the effects of the matter to which the qualification relates.
Disclaimer of opinion
A disclaimer of opinion is expressed when the possible effect of a limitation on scope is so

material and pervasive that the auditor has not been able to obtain sufficient and appropriate
audit evidence and is, therefore, unable to express an opinion on the financial statements.
Adverse opinion
An adverse opinion is expressed when the effect of a disagreement is so material and pervasive
to the financial statements that the auditor concludes that a qualification of the report is not
adequate to indicate the misleading or incomplete nature of the financial statements.
IFRS/IAS convergence
While accounting standards in India differ slightly from the International Financial Reporting
Standards (IFRS), Indian Accounting Standards (AS) are likely to converge with the IFRS in the
foreseeable future. The MCA through a notification on February 16, 2015 issued the Companies
(Indian Accounting Standards) Rules, 2015 (Rules) which lay down a roadmap for implementation
of Ind AS converged with IFRS through i) voluntary adoption and ii) Mandatory applicability. This
applies to companies other than insurance, banking and non-banking finance companies (NBFC).
India’s eventual “convergence” with the IFRS will differ from “adoption” in that AS will be altered to
conform with the IFRS rather than requiring full-fledged adoption of the standards outlined by the
International Accounting Standards Board (IASB). This will preserve differing terminologies
between the IFRS and AS while adding some new concepts and models such as the Acquisition
Method in lieu of the Purchase Method.
The chart in the next page highlights key differences between the IFRS/IAS and current AS.

Key Differences between the IFRS/IAS and Current Indian Accounting Standards
Topic IFRS/IAS Current Indian Accounting Standards
• Deals with overall considerations, • Does not deal with these aspects.
including presentation, off-setting, Refers to Schedule VI of Companies
Disclosure of comparative information, and format Act 1956 for these aspects
accounting policies
• Provides for preparing statement
• No such account prescribed
of change in equity
• Prescribes same cost formula for all • There is no stipulation for use
inventories having a similar nature of same cost formula
Valuation of inventories • When inventory is purchased on deferred
terms, excess over normal price is treated • No such provision in AS
as interest over the period of financing
• Bank overdraft is not treated

• Bank overdraft is treated as a component of cash
as a component of cash
Cash flow statement • Provides option to classify interest
and dividends either under operating • No such option available
activities or financing activities
Contingencies and
• States that proposed dividends should • Specifically requires proposed
events occurring after
not be shown as liabilities dividends to be shown as liabilities
the balance sheet date
• Requires retrospective effect to be given

Changes in accounting • Requires only prospective effect in case
by adjusting opening retained earnings in
policies of change in accounting policy
case of change in accounting policy
• Requires retrospective re-computation

• Change in method of depreciation to
of depreciation where there is change
Depreciation have prospective effect, and treated
in depreciation method, and treated
as change in accounting estimate
as change in accounting policy
• Contract revenue is measured at the fair value • Contract revenue is measured as the
Construction contract
of the consideration received or receivable consideration received or receivable
• Allows only percentage of completion • Allows option of completed service contract

method for services rendered method or proportionate completion method
Revenue recognition
• Interest income is recognised on an • Interest income is recognised
effective interest rate basis on a time proportion basis
• Subsequent costs incurred for replacement

of a part of a fixed assets are required to • Only expenditures that increase the capacity
Fixed assets
be capitalized and, simultaneously, the of an asset have to be capitalized
replaced part has to be de-capitalized

Ensuring a smooth audit: Key considerations ROHIT KAPUR
Country Manager
Many investors are concerned about India’s reputation for having notoriously unclear rules and
India Offices
procedures, and approach the audit season with no small degree of trepidation. With proper
“
advice and some relevant knowledge of the local operating environment, however, investors
will find that India’s legal and financial operational procedures are not as complex as they may
Investors will find that
have initially thought.
India’s legal and financial
An audit does not need to be a costly and disruptive exercise for businesses, and an audit report operational procedures are
can be invaluable in helping companies manage their business better and address problems
or loopholes going forward by identifying irregularities and errors. This article explains the
not as complex as they may
”
processes a foreign-invested enterprise (FIE) in India can expect to undergo during statutory have initially thought.
audit, and what companies need to know and prepare to make the audit process go smoothly.
Initial brief
Auditors should be provided with an overview of a company’s business activities and structure
so as to enable them to provide the most thorough and accurate feedback possible. While
most auditors have some general industry knowledge, briefing auditors on the specific activities
a business conducts, its supply chain and procurement procedures, and existing internal
controls can allow the audit process to proceed smoothly. While auditors are expected to
perform checks on internal controls independently, it can be beneficial to first explain how
these internal controls function.
Purchasing and procurement procedures

Auditors will closely examine purchasing and procurement procedures, and will likely request
a flow chart during audit proceedings that outlines the specifics of this process. Preparing this
flow chart beforehand can save valuable time during the audit process, and providing this to
auditors even if they do not request it can enable the provision of thorough feedback that will
allow businesses to better understand the efficiencies and deficiencies of their operations.
Businesses can also expect auditors to examine major purchases to ensure the company is
not being overcharged for the purchase of raw materials and other supplies. It is not atypical
for dishonest employees to elect to purchase from more expensive, lower quality suppliers
with whom they may have some personal connection or relationship (i.e. family connections
or businesses and suppliers paying them a commission on purchases). By closely surveying
purchasing and procurement procedures, these deficiencies can be identified and halted in
the aftermath of an audit.
Auditors will additionally compare purchase vouchers with the relevant tax invoices received
from the sellers of goods received notes (GRNs) to confirm whether or not the quantities and

amounts match. This will allow auditors to check whether the rates of materials on invoices
correspond to purchase orders raised by the company, and whether the dates on GRNs relate
to the current accounting period. These checks can be time consuming, and it is recommended
to have a properly trained accounting team in place to assist with these checks and make it
easier for auditors to evaluate a complete paper trail.
The production process

An effective auditor will additionally make note of an FIE’s production and manufacturing process,
and the various steps a company follows to convert raw materials into marketable goods. It
is helpful to prepare a list of the main raw material inputs a business is using in production to
facilitate this process. Companies can also expect auditors to check internal controls at this
stage, especially those relating to the input of raw materials. In some respects, this aspect of
the audit process relates back to the examination of purchasing and procurement procedures.
Journal vouchers, tax expense, and cash

A company’s auditor will also seek to verify whether the bills supporting journal vouchers and
expenditures relate to the current period. While examining journal vouchers, an auditor will
ensure that the tax deduction at source (TDS) was in fact deducted, wherever applicable. It is
relatively common for companies to neglect to deduct TDS by mistake, and it is essential to
ensure internal processes have not made such an oversight.
When claiming travel and other related expenses for tax deductions, companies should always
ensure that supporting documentation is retained and provided to an auditor when necessary.
It would be prudent to include in executives’ job descriptions and employment contracts that
they must provide evidence of expenditure on business trips and other related expenses so
as to avoid any doubt or oversight in this respect. Auditors will often seek to confirm that these
expenses are within the prescribed limits outlined in the relevant job description.
Auditors are also required to check that any payment in cash or aggregate payments in cash
totaling over INR20,000 in one day are not claimed as a deduction (in accordance with Section
40A(3) of the Income Tax Act 1961), and also check other credit balances in cash. A company’s
Bank Reconciliation Statement should also be spot-checked by an auditor to verify expenditures.
Inventory
Manufacturing businesses need to demonstrate that they have maintained their RG 23 books
and stock registers for manufacturing or processing materials. An auditor will verify that this
has been done correctly, and will need to ascertain whether the RG 23A Part II / RG 23C Part
II are aligned with purchase registers, and whether input credits have been recorded correctly.

Auditors will also check a company’s Personal Ledger Account (PLA) register to ensure that
payments were accurately made through their PLA after considering input credit. Auditors are
also expected to perform a physical inspection of stock to confirm that inventory counts match
the company’s inventory register.
Other reconciliations
A company’s auditor will also need to reconcile the following items:
• Excise/VAT returns with purchases and sales

• Provident fund contributions
• Professional tax contributions
• Employee state insurance contributions
These contributions are mandatory under statute and apply to all companies in India.
Miscellaneous
Management accounts opening balances
Businesses should also have management accounts ready in the event that an auditor wants
to check that the opening balances in those accounts have been carried forward correctly
from the previous year’s audited financial statements. It is not uncommon for some minor
adjustments to be necessary.
Rental agreements
It is a good idea to ensure that the rent for a factory or office has been paid on time in accordance
with the rental agreement, and that the rental agreements are up-to-date in advance of an audit.
PANs for contractors

Companies must also ensure that they are properly maintaining photocopies of Permanent
Account Number (PAN) cards for any contractors that come under TDS applicability. If a company
has not been provided with a contractor’s PAN but is required to deduct TDS, it is necessary
to deduct TDS at the default rate of 20 percent.

Summary
Audits are often seen by companies as annoying and unwelcome disturbances to their normal
operations, and an audit in an unfamiliar country can be a particularly dreaded proposition.
However, audits perform two vital functions.
First, they ensure that a business is complying with all relevant laws and regulations in India. They
are needed to confirm that the business is correctly assessing its taxable income, backing up
claimed deductions with the necessary receipts, and making the appropriate TDS deductions
when required. Failure by an FIE to fulfill these legal obligations and improper record-keeping
can result not only in fines from the Indian government, but also potential penalties imposed
by other jurisdictions, such as under the U.S. Foreign Corrupt Practices Act or other similar
legislation in Europe.
The second vital function of an audit is to identify any weaknesses or areas of improvement for
a business. It is for this reason that many companies opt to conduct internal audits in addition
to their legally required annual audit, as auditors often have the independence and experience
to give valuable recommendations on how problems might be resolved. Audits can help to
improve management practices and a company’s internal controls should be prepared to
accommodate and assist with audits.
If a company’s annual audit reveals any deficiencies in its business processes or internal controls,
it may be wise to closely examine those processes and controls. This may include assessing
the staff charged with carrying out the company’s operations to ensure they are competent
in their roles. It is only by having adequate internal controls that a business can perform to its
full potential, and an annual audit is an independent and valuable measure of the adequacy
of those controls and procedures.
Detecting and avoiding fraud

As an incidental objective associated with annual audit, detecting fraud and error can be as
important as assessing whether a company’s balance sheet accurately represents its current
state of affairs. For companies with operations in India, it is important to maintain an awareness
of what constitutes fraud, and the fine line between fraud and error in the eyes of an auditor.
According to Deloitte’s 2016 India fraud survey, 65 percent of respondents believe that fraud
will continue to rise in the coming years. This is despite efforts by management to establish a
robust control environment. While management is inherently the first line of defense against
fraud and error, internal and external auditors are often considered the second line of defense.

Fraud refers to the willful and deliberate misrepresentation of financial information with the
intention of deceiving others (i.e. shareholders, the government, etc.). This can entail both
defalcation involving the misappropriation of cash or goods, and the fraudulent manipulation
of accounts by management or employees.
Defalcation involving the misappropriation of cash or goods can encompass a number of

specific activities including, but not limited to:
• Recording fictitious or bogus payments

• Undercasting the receipt side total of a cashbook
• Showing the same payment twice
• Recording more payments than actual amounts paid by altering the figures on vouchers
• Misappropriating undisbursed wages
• Recording personal expenses as business expenses
Fraud through the manipulation of accounts typically implies presenting accounts more favorably
than they are in reality, and distorting the profit or loss of a business and its financial state of
affairs (also known as “window dressing”). This type of fraud is committed at the management
level, and auditors will oftentimes suspect fraud if they encounter:
• Missing vouchers, invoices, checks, or contracts

• Balances that do not add up
• Significant fluctuations in the gross profit and net profit margin ratio
• A difference between the stock as per records and physically counted stock
• When the control account does not agree with subsidiary books
• When parties provide contradictory explanations for Inconsistencies
The key difference between “fraud” and “error” often relates back to the intent to deceive,
and distinguishing between the two can be challenging. Auditors are charged with exercising
judgment when preparing their opinion for the final audit report, but do not make legal
determinations of whether fraud has actually occurred. Rather, the auditor’s opinion is persuasive
rather than conclusive in nature and based solely upon the information they reviewed and
analyzed during the verification of financial statements.
If fraud is suspected by an auditor, this suspicion will be reflected in their opinion and an
interested party may subsequently decide to carry out an investigation into the matter in
question.

Fraud risk management
According to the Association of Certified Fraud Examiners Global Fraud Study 2016, the
median loss caused by perpetrators of fraud in the first year of employment amounts to US
$49,000 while those with more than ten years at an organization can cause a median loss of
nearly US$250,000.
Mitigating the risk of fraud begins with a robust governance structure that includes the audit
of budgeting processes, ethics policies, quality control, monitoring procedures by senior
management, and rotation procedures. Any weakness in an organization’s governance structure
creates vulnerability for fraud.
Aside from ensuring an organization possesses a robust governance structure, providing an

anonymous hotline or other channel for whistleblowers to alert management of fraudulent
behavior can be an effective mode of fraud detection. The Companies Act, 2013 additionally
mandates listed companies to establish a mechanism for whistleblowers to alert management
of fraud at the director or employee level.

Human Resources and
Payroll Considerations
3
Key considerations when hiring staff
Payroll and social insurance

Key considerations
when hiring staff
Visa application
When applying for a long-term visa in India, there are a number of procedures and legal
frameworks that must be understood.
India provides two kinds of work-related visas: a business visa and an employment visa. For
these visas, Indian authorities require documentation from the applicant as well as the applicant’s
employer. Applicants and employers should plan to allow at least one week to prepare the
required documentation. Meanwhile, applicants applying for a visa by post should allow two to
three weeks for visa application processing, despite declared visa processing times.
The documents required by Indian authorities are dependent on the applicant’s nationality;
applicants and their employer should verify all required documentation with the Indian consulate
in the applicant’s home country. Nevertheless, the majority of the required visa application
documents are similar for most developed economies in Europe and North America.
Foreign nationals that intend to visit India for meetings with Indian companies should apply
for a business visa. Depending on the applicant’s nationality, a multiple entry business visa
can be granted for a period of up to ten years. However, the maximum allowable stay period
per visit is determined by the issuing Indian consulate. US applicants, for example, can obtain
a multiple entry business visa that is valid for ten years, but each period of stay is limited to
six months. To acquire a business visa for India, the application must ordinarily contain the
following documents.
For both business and employment visa applications, each document provided by the employer
needs to be drafted on company letterhead, signed by a senior manager, and marked with
the company’s official stamp. In addition, each of these documents need to be original copies.
The only exceptions to these stipulations are the Incorporation Certificate and the PAN card,
which can be scanned or photocopied. Still, these stipulations mean that employers must be
prepared to send original copies to the applicant by post.
Companies that have successfully sponsored business and employment visas in the past are
often well prepared to organize support documentation. However, companies that have not
previously sponsored these visas should consider contracting an India-based visa consultant.
Indian consular staff scrutinize and sometimes investigate the language of key documents, such
as invitation letters for business visas or permission and justification letters for employment
visas. Visa consultants are well acquainted with the application process and can provide form
letters and useful advice to mitigate the potential for problems.

Visa requirements for foreign nationals working in India
Employee Documents required

eligibility from employer
1. At least 18 years old 12. Permission letter that requests

2. In good health approval for the applicant’s visa
3. Filling a position unsuitable for a 13. Sponsorship letter
qualified Indian employee 14. Tax liability letter pledging responsibility for
4. Will not be working in a routine, the applicant’s income tax in India
secretarial or clerical job 15. Justification letter confirming that a qualified
5. Must have an annual salary in excess of US$ Indian candidate was unavailable/unsuitable
6. 25,000 (with the exception of language teachers, 16. Details of the applicant’s unique specialization
ethnic cooks, embassy staff and voluntary workers) and professional capabilities
17. Appointment letter detailing the job role and salary
18. Comprehensive employment contract
Documents required 19. Copy of the company’s Permanent
from employee Account Number (PAN) card
20. The company’s Incorporation Certificate
21. Application form
7. A completed visa application form
8. A valid passport
9. A passport sized photo
10. Proof of address, such as a driver’s license or utility bill
11. A detailed curriculum vitae Approximate time 6
to complete WEEK
S
Visa registration
Expatriates first in-country encounter with Indian bureaucracy often occurs at the Foreign Regional
Registration Office (FRRO). After obtaining an Indian visa, registering the visa at a FRRO is often an
afterthought for expatriates. Unfortunately, however, registering a visa is a cumbersome process.
If the duration of the visa exceeds six months (180 days), the visa holder must register the visa
within 14 days of arrival at a FRRO. The only exception to this is for Pakistan nationals, who must
register within 24 hours.
Long-term visa holders should plan to register their visa as soon as possible; failing to register a
visa within the specified time period can result in a fine, and in some cases, an investigation. An
investigation can take several weeks – the visa holder is not permitted to leave the country during
this time period. In addition, investigations may complicate any future visa applications or renewals.

Registration documents
Before visiting a FRRO to register an employment visa, a visa holder needs to prepare the
registration documents required by Indian authorities. Like the visa application, both the visa
holder and their employer must provide support documents to register the visa. This process
requires coordination between the visa holder and their employer; visa holders and their
employer should plan to allow 2-3 days to gather and complete these documents.
The visa holder must ordinarily provide:
• A completed visa registration application form

• Six passport size photos of the applicant
• A copy of the photo page within the passport
• A copy of the visa page within the passport
• Proof of address, such as a driver’s license or utility bill, from the visa holder’s home country
• A notarized copy of a lease deed/agreement or a C-Form from a hotel of residence
• Visa registration fees
The employer must ordinarily provide:
• Two copies of a permission letter that requests approval for the applicant’s visa registration
• Two copies of a sponsorship letter that pledges responsibility for the applicant’s activity
in India and promises to repatriate the applicant at company cost if any adverse conduct
comes to notice
• Two copies of a letter confirming the visa holder’s residential address in India
• Two copies of an employment contract that specifically states the monthly salary, designation,
tenure of employment, etc.
• The company’s Incorporation Certificate
All documents, with an exception for the Incorporation Certificate, must be original copies,
drafted on company letterhead, signed by a senior manager, and marked with the company’s
official stamp.
Visiting FRROs
After the registration documents have been completed, visa-holders can register their visa at
FRROs located across India.
Indian authorities ask visa-holders stationed outside of these regional centers to register their
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visa with the local police. However, visa-holders should attempt to register their visa with a
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FRRO if possible. Local police are often unaware of the visa registration process, which can
@IndiaBriefing
lead to unnecessary delays and complications. Moreover, local police officers in rural and un-
developed areas are often under-resourced.

For these reasons, many visa-holders stationed in rural and un-developed areas register their
visa at a FRRO. This ensures that visa-holders receive the swiftest possible service and maintain
privacy at their field location. To do so, the applicant must stay at a regional center with an FRRO
for several days, listing a local affiliate office – such as a sales office – as a place of business.
The latest available listing shows that FRROs are located in the following cities:
FRRO Locations
Amritsar
Punjab state
Delhi
Delhi
National CapitalRegion
National Capital Region
Lucknow
Lucknow
Uttar Pradeshstate
Uttar Pradesh state
Ahmedabad
Ahmedabad Kolkata
Kolkata
Gujarat
Gujarat state
state West Bengalstate
West Bengal state
Mumbai
Maharashtra state
Hyderabad
Hyderabad
Telangana state
Telangana state
Panaji
Goa state
Bangalore
Bangalore
Karnataka state Chennai
Tamil Nadu state
Cochin
Kerala state
Calicut
Kerala state
Trivandrum
Trivandrum
Kerala state
Kerala state

Registering your visa
RELATED READING
To register a visa, the applicant must bring all required documentation and physically visit an
FRRO. Visa holders may schedule a visa registration appointment; however, many visa holders
simply visit the FRRO at a time of their choosing. Visa holders that have not scheduled a
registration appointment should arrive at the FRRO as early as possible to avoid large crowds.
While visa holders will likely need to wait several hours for a registration officer, well-organized
applicants will receive a registration certificate from the officer in a matter of minutes. Once
the process is completed, the visa holder becomes legally eligible to work and reside in India
for the allowed period.
Although visa holders seeking to register their stay in India can successfully do so independently,
many companies employ a local visa consultant. These consultants, who are often certified
lawyers, can provide form letters and crosscheck registration documents to ensure that
registration applications do not invite any undue scrutiny. Hiring, Terminating and
Retaining Employees
In addition, visa consultants can enter the FRRO with the visa holder to provide support during in India
the registration. Visa holders are not allowed to bring local guests into the FRRO; the presence February, 2016
of a visa consultant ensures that the applicant is accompanied by someone who can speak
the local language and answer technical questions during the registration. We examine issues related
to hiring, firing and retaining
employees in India. We
Cumbersome but valuable experience highlight the most common
legal issues that arise
Although registering an employment visa can be a burden for freshly arrived expatriates, from India’s employment
the experience provides important insights into the Indian bureaucratic process. Expatriates process, summarize the
unfamiliar with Indian bureaucracy will learn local practices that are critical for preparing and procedures for terminating
submitting official documents in India. Moreover, the process can help managers understand an employee, and detail
the amount of time and energy required for doing business with local government offices. some of the most important
factors for attracting talent.
In addition, we outline some
Hiring employees in India: Common legal issues cultural considerations for
foreign personnel working
Human resource (HR) teams that have not worked in India may find the country’s hiring process
with Indian employees.
complicated. Identifying and engaging talent can be a time-consuming and tedious process,
while the administrative burdens of hiring employees are also complicated for the uninitiated.
AVAILABLE HERE
HR teams, however, that conduct some basic due diligence can prepare themselves to manage
the process quickly and efficiently.
The hiring of workers can depend on numerous factors, such as longevity of service, social
insurance, collective agreements, qualifications and experience. While India has a large labor
pool, skilled workers and senior management are typically difficult to recruit. Many employers
use websites such as Monster. com or Naukri.com to source employees, but the most successful

employers generally establish direct relationships with universities for graduate talent and
local recruiters for experienced talent. Local consultancies that produce market research can
assist foreign employers to gauge local labor markets and establish the relationships needed
to source premium talent.
Separately, employers in India are increasingly reporting instances of resume fraud during the
application process. This increase is largely a result of incongruence between a candidate’s soft
skills and their actual experience. Although not all employers are adversely affected by resume
fraud, employers in India should adopt a rigorous application review process for technical and
senior personnel, verifying employment, education, criminal records, as well as reference checks.
Many local service providers can provide employment screening services for employees at any
level, as well as more in depth background investigations for C-Suite candidates.
Beyond these general considerations, employers need to be aware of various federal and state
mandated compliances. The vast majority of labor laws that govern employment are found at
the national federal level, though employers will also find some sub-national variation at the
state level, particularly through the various Shop and Establishment Acts. Employers that are
unfamiliar with labor laws in India should engage a law firm or professional services firm to
review laws and compliances that impact their business. Although not comprehensive, here
we outline some of the key pieces of legislation that impact most employers in India.
Contracts
Indian labor laws provide a minimum of guarantees and benefits to all employees, and employers
should note that these laws supersede the provisions of labor contracts. In general, however,
there are three types of employment contracts in India:
• Permanent (direct) contract

• Fixed contract
• Temporary contract
When drafting contracts, employers should pay special attention to the Industrial Disputes Act,
which provides a large number of protections to employees; the Shops and Establishments
Act, which governs the hours of work, payment of wages, leave, holidays, terms of service
and other conditions; as well as the several wage and remuneration acts, which regulate the
payment of wages, bonuses, and equalize pay for men and women. Any termination policy
outlined within the contract should be checked against the current law prior to it being carried
out. For example, companies that employ more than 100 workers need government permission
to conduct layoffs.

Important HR Laws in India
Laws related to wages
The Payment of Wages Act, 1936; The Payment Designed to regulate the payment of wages
of Wages Rules, 1937; the Payment to employees. Stipulates the wage periods,
of Wages (Amendment) Act, 2005. time and mode of payment of wages.
The Minimum Wages Act, 1948; The Minimum Sets minimum wage levels that must be
Wages (Central) Rules, 1950 paid to skilled and unskilled workers.
Governs bonus payments. Seeks to provide employees
The Payment of Bonus Act, 1965; The
a share in the profits of a company. Applies to
Payment of Bonus Rules, 1970
a workplace with 20 or more employees
Laws related to working hours, conditions of service and employment
Provides a standard model of service conditions
The Industrial Employment (Standing Orders) Act, 1946 for employees. Applies to all establishments
where 50 or more workmen are employed.
The Factories Act, 1948 Designed to regulate working conditions in factories.
Designed to regulate the employment of contract laborers.
The Contract Labour (Regulations and Abolition) Act, 1970
Applies to organizations with 20 or more people.
Designed to regulate employee wages, hours
Shops and Establishment Act of work, leave holidays and terms of service.
Each state has its own version of the Act.
Laws related to gender
Regulates employment of women before and after child birth.
The Maternity Benefits Act, 1961
Applies to every establishment that has 10 or more employees.
Provides for the payment of equal wages
The Equal Remuneration Act, 1976
to men and women employees.
Maintains that during an inquiry following a written
Sexual Harassment of Women at
request, an internal committee may recommend
Workplace (Prevention, Prohibition and
to transfer the aggrieved woman to any other
Redressal) Act, 2013
workplace/grant leave of up to three months.
Laws related to social security
The Employees’ State Insurance Act, 1948; the Regulates employee compensation for injury
Workmen’s Compensation Act, 1923 by accident during employment.
The Employees’ Provident Fund & Miscellaneous Mandate the provision of the provident fund, pension
Provisions Act, 1952; The Employees’ Provident Fund fund and deposit-linked insurance fund. Applies
& Miscellaneous Provisions (Amendment) Act, 1996 to establishments with 20 or more people.
Mandates a gratuity payment to employees in a
The Payment of Gratuity Act, 1972 company with ten or more people and applies
to all employees regardless of salary.

Besides company rules and regulations, employers are advised to incorporate the following
clauses into contracts:
• Non-disclosure
• Employee poaching
• Unfair competition
• Trademarks, patents and trade secrets
Due process in terminating an employee in India

Employers are exposed to a number of legal and reputational risks resulting from wrongful
termination, or not following due process. Employers should, therefore, plan to construct
contracts and human resource (HR) materials to ensure that senior management, HR personnel
and employees are fully apprised of their rights and responsibilities.
There is no standard process to terminate an employee in India. An employee may be terminated

according to the individual labor contract signed between the employee and the employer, if
the contract defines a process for termination. Employers should be aware, however, that labor
laws supersede the provisions of labor contracts – any termination policy or clause outlined
within a contract should be checked against the law by a professional.
In the case that there is no labor contract, or the labor contract does not define a method of
termination, then the employer has to follow the state law. In this scenario, an employer needs
to abide by India’s distinct, state-specific labor legislations in order to terminate the employee.

Payroll and Social Insurance
Withholding tax returns filing

Similar to China, businesses in India are required to withhold Individual Income Tax (IIT) from
an employee’s salary on a monthly basis. During the first seven days of each month, employers
must deposit the deducted tax from the previous month with the central government. The
only exception to this rule involves the month of March, during which tax deducted may be
deposited on or before April 30th.
Employers are required to withhold tax on various payments including rent, interest, dividend,
royalty, and service income. In this sense, the compliance requirements for employers are
more complex in India than in many other countries. Businesses should actively coordinate
with employees to understand the details of supplementary income they are receiving and
make the relevant calculations and submission of tax before deducting them from the salary.
Quarterly withholding tax return statements must also be submitted by the last day of the month
following the end of a quarter to the central government reporting the tax deducted at source
during the quarter. Failure to meet either this deadline or the monthly TDS deposit deadline
can result in both interest and penalties being imposed on a company.
Individual Income Tax (IIT)

Liability determination
For expatriates, the extent to which services rendered in India are taxable is irrespective of
whether the salary is received from inside India or outside India. The taxation of individuals is
determined by residence status. Under the Income Tax Act, an individual can have the status
of Resident and Ordinarily Resident, Non-resident, or Resident but not Ordinarily Resident. A
quick guide to residential status is as outlined below:
Period of Stay Residential Status
Conditions Resident Non-resident
Stay in India is 182 days during tax period

Basic Satisfies
Satisfies either
Stay in India is 60 days during tax period neither
Conditions condition
condition
and 365 days in 4 preceding tax periods
Resident and Resident but not

Conditions
ordinarily resident ordinarily resident
Non-Resident in at least 9 of the 10 preceding tax years

Additional Satisfies neither Satisfies either
Conditions Stay in India is less than 729 days condition condition
in 7 preceding tax periods

It is also important to note that under the following conditions, 60 days is substituted by 182
days for:
• An Indian citizen or a person of Indian origin who visits India during any tax period
• An Indian citizen who leaves India during any tax period for the purpose of employment
outside India
Income in the form of salaries includes remuneration in any form for personal services provided
under an expressed or implied contract of employment or service. Such income is subject to
tax on a ‘due’ or ‘receipt’ basis, whichever is earlier, and includes wages, annuity or pension,
gratuity, fees, commission, prerequisites, or profits in lieu of salary, advance salary, leave
encashment, etc. Except for under provisions dealing with short stay exemptions, no specific
expatriate concessions are available under India’s tax laws.
An expatriate can be a resident of two countries at the same time. In such a scenario, there
could be double taxation of the same income, but relief from double taxation may be available
under the relevant Double Taxation Avoidance Agreements (DTAAs). Taxation relief can be
available in the form of a tax credit in the country of permanent residency. Further, submission
of a Tax Residency Certificate containing prescribed particulars is a necessary condition for
availing of benefits under DTAAs. An application under Form 10FA must be made to obtain a
tax residency certificate in India.
Income tax returns

The process for filing income tax returns is a fairly straight forward one. You must:
1. Acquire a PAN number
A permanent account number (PAN) is absolutely necessary for income tax returns. It is
a ten-digit number that is issued on a laminated card, and will be used as your ID when
registering on CBDT’s website.
2. Select the appropriate tax return form
There are several income tax return forms according to your specific situation. These include
forms for individuals with a single house, for companies, and for persons who are applicable
for special taxation schemes, and can be found on Indian Income tax’s website. Ensure that
you select the relevant one.

3. Work out which rate of tax you are on
The rates of income tax are listed in the country’s Finance Bill, which is reviewed and
amended every year. Under current policy, the key rates of tax are:
»» For a resident individual aged between 60 and 80, the basic exemption limit is US$4,473
»» For a resident individual aged 80 or above, the basic exemption limit is US$7,455
»» Rebate from tax of up to US$75 or 100 percent of the tax, whichever is less available for
a resident individual whose total income is below US$7,455
»» A 15 percent surcharge is applicable, if the total income exceeds US$149,109. A marginal
relief is available.
»» A three percent education cess is applicable on income tax (inclusive of surcharge, if any).
Individual Income Tax Rates in India

Estimated yearly taxable income (TI) in US$
Tax rate
(for comparison only)
3,725 or less 0%
3,726 - 7,450 10%
7,451 - 14,910 20%
14,911 and above 30%
Domestic companies are taxed at a flat rate of 30 percent. Apart from that, education cess
is levied at a rate of two percent of income-tax and secondary and higher education cess
is levied at one percent of income-tax.
In addition, surcharge is levied at a rate of seven percent if net income exceeds US$149,064
but does not exceed US$1,490,646. If the total income exceeds US$1,490,646, the surcharge
levied is 12 percent.
Foreign companies are taxed a flat rate of 40 percent. Apart from that, education cess is
levied at a rate of two percent of income-tax and secondary and higher education cess is
levied at one percent of income-tax.
In addition, surcharge is levied at a rate of two percent if net income exceeds US$149,064
but does not exceed US$1,490,646. If the total income exceeds US$1,490,646, the surcharge
levied is five percent.

As mentioned previously, companies and individuals not working in India but earning an
income there are still applicable for tax. It used to be that long-term capital gains were
waved for taxation, but this is no longer the case. The rates of tax for non-residents are:
»» On any investment income, the income tax rate is 20 percent;

»» For long-term capital gains, the rate will either be 10 percent or 20 percent, depending
on the nature of your operation;
»» On short-term capital gains, 15 percent.
4. Calculate your income tax rate
»» You should then calculate your tax amount against the above rates of tax. You can use
the tax calculator on CBDT’s website to do this. Make sure that the information you enter
is absolutely accurate, otherwise your tax return application will be rejected.
»» After using the tax calculator, you can then follow the prompts on CBDT’s website to
complete your tax return. Alternatively, you can use a non-government website to perform
the tax return for you, but these will invariably charge a fee for doing so.
5. Retain your tax documents
Having completed your tax return, ensure that you retain printouts and statements of your
taxable income in the event that you are contacted by the tax authorities.
India’s Provident Fund scheme

While much of the Indian population does not participate in the country’s social insurance
program known as the Provident Fund scheme, Indian citizens in the organized sector are
entitled to coverage.
International workers including expatriates working for an employer in India are also eligible
to participate in the Provident Fund scheme. Employers are required to contribute 12 percent
of their employees’ specified salary to the scheme, and contributions must be deposited on a
monthly basis by the 15th of the subsequent month.
The Employee Provident Fund scheme (“EPF”) is one of the main platforms of savings for all
employees working in government, public, or private sector organizations. It came into existence
with the promulgation of the Employees’ Provident Funds Ordinance on the 15th November,
1951. It was replaced by the Employees’ Provident Funds Act, 1952 and is now referred as the
Employees’ Provident Funds & Miscellaneous Provisions Act, 1952 which extends to the whole
country except Jammu and Kashmir state.

A provident fund is created to provide financial security and stability to employees. The
contributions are made regularly. The primary purpose of the PF fund is to help employees
save a fraction of their salary every month so that they can use the same in an event that the
employee is temporarily unable to work or at retirement.
The tax free interest and the maturity award ensure a good growth to an employee’s money. The
PF can be used for multiple purposes at different moments as it guarantees benefits such as:
• Accumulation plus interest upon retirement, resignation, and death

• Partial withdrawals allowed for specific expenses such as house construction, higher
education, marriage, illness etc.
Employer and Employee Contributions

Contribution account Administration account Total
Particulars
EPF EPS EDLI EPF EDLI Total
Employee 12 0 0 0 0 12
Employer 3.67 8.33 0.5 0.85 0.01 13.36
Total 15.67 8.33 0.5 0.85 0.01 25.36
Possible changes for this year

The Employees’ Provident Fund Organization has recently proposed changes to India’s Provident
Fund scheme. Should the changes be accepted and implemented, the mandatory limit for
registration will decrease from 20 to 10 employees, and the compulsory contribution of between
10 and 12 percent will be reduced or even waived for a particular period.

Operational Issues
Import and export procedures
An introduction to sourcing from India

4
Import and export procedures
The Indian government has made efforts to relax regulations for importers and exporters recently.
Prime Minister Narendra Modi has pledged to streamline import and export procedures and
RELATED NEWS
further revamp laws that may obstruct foreign businesses engaged in importing and exporting.
This is partly reflected in the new Foreign Trade Policy 2015-2020, which simplified export Import and Export Licensing
schemes in the Single Merchandise Exports from India Scheme (MEIS), Service Exports from Procedures in India
India Scheme (SEIS) as well as the new freely transferable duty scrips system. Nevertheless, India Briefing News
most basic procedures remain the same. November, 2016
Imports and exports are governed by the Foreign Trade (Development & Regulation) Act, 1992
AVAILABLE HERE
and India’s Export Import (EXIM) policy. The country’s Directorate General of Foreign Trade
(DGFT) is the main governing body responsible for the EXIM policy. First time importers and
exporters must register with the DGFT and acquire an Importer Exporter Code Number (IEC),
which is done by submitting the Aayaat Niryaat Form (ANF2A) to the nearest regional authority
via the DGFT online portal, post or in person. Along with the ANF2A form, the following must
also be submitted:
• Two passport-sized photographs of the legally responsible person;

• Permanent account number (PAN) – a ten digit number which can be obtained by submitting
an application;
• Current bank account number;
• Banker’s Certificate.
Import procedures
The Indian Trade Classification – Harmonized System (ITC-HS) allows for the free import of most
goods without a special import license. However, certain goods that fall under the following
categories require special permission or licensing:
• Licensed (Restricted) items: Licensed items can only be imported after obtaining an import
license from the DGFT. These include some consumer goods such as precious and semi-
precious stones, safety and security products, some agricultural products such as seeds,
insecticides, pharmaceuticals and chemicals, and some electronic items.
• Canalized items: Canalized items can only be imported via specified transportation channels
and methods, or through government agencies such as the State Trading Corporation (STC).
These include petroleum products, bulk agricultural products such as grains and vegetable
oils, and some pharmaceutical products.
• Prohibited items: These goods are strictly prohibited from import and include tallow fat,
animal rennet, wild animals, and unprocessed ivory.

An importer also has to submit a Bill of Entry, which certifies the description and value of goods
entering the country. A Bill of Entry should be submitted with the following:
• The original and duplicate for customs;

• A copy for the importer;
• A copy for the bank;
• A copy for making remittances.
Under the Electronic Data Interchange (EDI), no formal Bill of Entry is required (as it is recorded
electronically), but the importer is required to file a cargo declaration after prescribing particulars
required for processing of the entry for customs clearance. Bills of Entry can be one of three
types:
• Bill of Entry for Home Consumption – This form is used when the imported goods clear
on payment of full duty. Home consumption means use within India. It is informally known
as the ‘white bill of entry’ due to its color.
• Bill of Entry for Housing – If the imported goods are not required immediately, importers
may store the goods in a warehouse without the payment of duty under a bond and then
clear them from the warehouse when required on payment of duty. This will enable the
deferment of payment of the customs duty until goods are actually required. This Bill of
Entry is printed on yellow paper and is thus often called the ‘yellow bill of entry’. It is also
called the ‘into bond bill of entry’ as the bond is executed for the transfer of goods in a
warehouse without paying duty.
• Bill of Entry for Ex-Bond Clearance – The third type is for ex-bond clearance. This is used
for clearance from the warehouse on payment of duty and is printed on green paper.
Payments can be made to member countries of the Asian Clearing Union (excluding Nepal)
and in any permitted currency. For all other countries payment can be made in any permitted
currency, including Indian Rupees.
Export procedures
The following is required to export from India:
• A PAN based Business Identification Number (BIN) from the DGFT. This must be acquired
before filling out a shipping bill or a bill of export for exported goods.
• If exporting by air or sea, a shipping bill must be filled out, or if exporting by road, a bill of
export must be completed. These bills contain information relevant to exporting from India,
including the name of the exporter, invoice number, consignee, description and quantity of
goods, free on board (FOB) value, etc.

• At the same time as submitting a shipping bill/bill of export, other relevant documents must
also be provided, including invoices, export contracts, and packing lists.
• A certificate of origin must also be submitted. This is used to verify where goods have been
produced.
Goods can be exported freely if they are not mentioned in the classification of ITC (HS). The
ITC classification of goods for export is as follows: restricted, prohibited and State Trading
Enterprise (STE).
Restricted goods
Before exporting any restricted goods, the exporter must obtain a license explicitly permitting
the exporter to do so. The restricted goods must be exported through a set of procedures
detailed in the license.
Prohibited goods
These are items which cannot be exported. The vast majority of these include wild animals,
and animal articles that may carry risk of infection.
State Trading Enterprise (STE)

Certain items can be exported only through designated STEs. The export of such items is
subject to the conditions specified in the EXIM policy.
In addition, certain restrictions apply to the import and export of goods from and to certain
countries. While most goods can be imported or exported to countries, India has a Most
Favored Nation (MFN) agreement, making trade with certain countries prohibited as per UN
sanctions or international conventions.
Mode of payment
The value of the exported goods is received through a bank in the following ways:
• Bank draft, pay order, banker’s or personal cheques

• Foreign currency notes/foreign currency travellers’ cheques from the buyer during his visit
to India.
• Payment out of funds held in the Foreign Currency Non Resident (FCNR) or Non Resident
Rupee (NRE) account maintained by the buyer
• International credit cards of the buyer.

In the early 1990s, India began economic reforms that have made its trade regime increasingly
transparent. The reforms have been accompanied by a decline in import tariff rates – from a
peak of 350 percent in June 1991 to a current average of 10 percent.
However, India’s tariffs are still relatively high by international standards. High tariffs and import
restrictions have constrained foreign firms from selling in India. They have also prevented
investors from importing competitively in several industries.
While India has progressively cut duties and taxes, domestic industry still enjoys relatively high
levels of protection in several areas. Foreign companies encounter tariff and non-tariff barriers,
including a complex tariff regime. Further, the Indian government is not shy about imposing
both civil and criminal penalties for not following customs regulations.
Duties explained
Customs or import duties are levied by the national government when goods are imported into
India. There is no de-minimis amount. All goods imported into India are subject to duty. The
value of imported goods is said to be the transaction value between parties.
While the basic customs duty rate is 10 percent, additional duties bring the aggregate customs
duty up to 29.44 percent in 2015. Rates may vary depending on the classification of goods. As
there are thousands of goods that are imported into India, it is not feasible to prescribe rates
of duty for each type of merchandise here. However, the basic calculation of import duties is
as follows:
Percentage of
Description of Duty Amount in US$
Duty Levied
Value of imported goods (including freight, insurance, and 1% customs handling fee) 1,000,000
Basic Customs Duty (BCD) 10 % 100,000
Basis for calculating CVD 1,100,000
Countervailing Duty Rate 12.5 % 137,500
Basis for calculating Education Cess 237,500
Education Cess 2% 4,750
Secondary Education Cess 1% 2,375
Basis for calculating Special CVD (Includes Assessable Value, BCD, CVD, Ed Cess) 1,244,625
Special CVD 4% 49,785
Total Customs Duty 294,410

Basic Customs Duty (BCD)
This duty is levied most commonly ad-valorem, based on the assessed value of the goods. The
duty is calculated on the value of the goods plus shipping and insurance charges. In general
the BCD rate is 10 percent. For capital goods, the rate is 7.5 percent. For agricultural goods
the rate is between 30 percent and 85 percent. Textile rates vary between 10 and 30 percent.
Countervailing Duty (CVD)

This duty is levied on the assessed value of goods plus basic customs duty. Goods that fall into
this category are imported goods that are similar to goods manufactured in India. The tax is
levied in lieu of the excise tax that is leviable on goods manufactured in India and is essentially
equal to the central excise duty on the goods in question. In general this rate is 12.5 percent.
All products imported by Special Economic Zones (SEZ) enjoy zero percent CVD.
Special Additional Countervailing Duty (known as Special CVD)

Special CVD tax is applicable on all items. It is levied at the rate of 4 percent of the basic
and the excise duty on all imports in order to countervail the VAT or sales tax on local goods
in India. This duty can be refunded to traders who sell imported goods in India after charging
VAT/Sales tax.
Anti-dumping duty
This is levied on specified goods imported from specified countries – including the U.S. – to
protect Indian industries. India can impose duties up to, but not exceeding, the margin of
dumping, or the difference between the normal value and the export price.
Safeguard duty
The Indian government may by notification impose a safeguard duty on articles after concluding
that increased imported quantities will cause or threaten to cause serious injury to domestic
industry. The government has broad authority to set rates for safeguard duties not exceeding
the amount which has been found adequate to prevent or remedy ‘market disruption’.
Customs education cess

Effective July 2004, India introduced an education cess (duty). The current rate for the Education
Cess is two percent with the Higher Education Cess set at one percent of BCD and CVD.

Customs handling fee
The Indian government assesses a one percent customs handling fee on all imports in addition
to the applied customs duty.
Total duty
Therefore, for most goods:
TOTAL DUTY PAYABLE = BCD + CVD + SPECIAL CVD + EDUCATION CESS + CUSTOMS HANDLING FEE
As an example, we can examine figures for a company that imported goods worth US$1,000,000
into India. The US$1,000,000 assessed value includes shipping, insurance, and the 1 percent
customs handling fee. In general, the customs duty would be calculated as above.
Customs duty rates are revised in each annual budget in February and are published in various
sources; however, there is no single official publication that has all information on tariffs and tax
rates on imports. Furthermore, each state has its own taxes on interstate commerce. As civil
and criminal penalties for violation of customs regulations are severe, it is recommended that
individuals and businesses importing goods into India consult with a professional.

An introduction to
sourcing from India
Choosing where to source from can be a stress-inducing process, for although the practice
is now commonplace, it is nevertheless still fraught with various risks and difficulties that
can just as easily cripple a business as make it more profitable. Key considerations include
understanding how to navigate the regulatory framework of the country in question, knowing
if it has a workforce capable of producing the intended goods for export, and identifying the
most suitable type of sourcing platform.
For the past twenty years, China has been dominant as a sourcing destination. The country’s
extensive, cheap and skilled labor force has long since established China as a sourcing favorite in
Asia, but its star no longer shines as bright as it once did. With a complex regulatory framework
and rising labor costs, businesses may wish to consider other locations in order to ensure their
competitive edge is not blunted.
India’s sourcing edge

Among China’s competitors, India is one of the most appealing alternatives at the moment. In
this section, we take a look at India’s export industry and analyze some of the key advantages
that the county possesses as a sourcing destination.
Low labor costs

One of India’s principal strengths is its cost-effectiveness. In contrast to China, India’s labor
costs have remained consistently low since the turn of the century, as can be seen in the
following graph.
Hourly compensation costs in manufacturing for China and India, in 2008-2012
India China Unit: US$
1.26 1.59 1.23 1.74 1.46 1.98 1.59 2.62 1.59 3.07
3.0
2.5
2.0
1.5
1.0
0.5
2008 2009 2010 2011 2012

This trend appears set to continue for the foreseeable future. Where the average Chinese
salary looks fixed to markedly increase for 2016, the average Indian salary will remain mostly
the same once inflation is taken into account, as shown in a recent salary report conducted
by Towers Watson:
Salary Increase
Country Overall Salary Increase
after Inflation
India 10% 4.40%
China 7% 4.70%
Cost of living
In most instances, the cost of living in India and China is roughly equal. Electricity prices in
both are amongst the cheapest in the world, each averaging approximately US$8 cents per
kilowatt hour. In the past year, both have raised their gas prices to roughly the same amount,
but India still slightly trumps China, averaging around US$8.40 per million British thermal units
(mmBtu) to China’s US$10.
One area that is seeing a great deal of fluctuation on China’s part is property prices. Rental
costs – which must be considered both for personal living and a sourcing platform’s office
space – have been continuously rising in China for the past four years. In Beijing, for instance,
rental prices rose by 6.2 percent in June 2013, according to Global Property Guide. Conversely,
India’s property prices have remained mostly stable. From Q4 2012 to Q1 2013, Mumbai’s
average rent fell between one and four percent, and Delhi’s remained mostly the same. Whilst
it was previously thought that prices may rise under the Modi administration, realty experts are
now predicting that no noticeable increase will come for some time.

Special Economic Zones
The government introduced India’s first special economic zones (SEZs) in April 2000. Structured
closely on the already successful model of China, they are designed to help stimulate both foreign
and domestic investment, boost India’s exports, and create new employment opportunities.
Notable zones include Nodia, Chennai, Cochin, and Falta, and the Indian government is now
accepting proposals for additional, far smaller SEZs. As of August 2016, almost 200 SEZs were
in operation and a further 565 were formally approved for operation.
The advantages of setting up a sourcing platform within a SEZ are numerous and include:
• Duty free domestic procurement of goods;

• 100 percent income tax exemption on export income for the first five years and 50 percent
for the five years following;
• Exemption from Minimum Alternate Tax, Central Sales Tax, Service Tax, State Sales Tax, and
a number of other taxes usually levied by local governments;
• External commercial borrowing allowed up to US$500 million per year without restriction;
• Permission to manufacture products directly, as long as the goods produced fall within a
sector which allows 100 percent FDI.
The impact of India’s new SEZ policy has been massive. Since 2005, exports from the country
have almost continually been increasing, as seen below:
Exports from SEZ’s from 2005-2015
Unit: US$ Billion
5.08 7.69 14.81 22.15 49.05 70.19 81.00 88.18 82.35 75.90 70.27
100
80
60
40
20
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

India’s world image and reputation has often hindered it from directly competing with China as
a sourcing destination. Unlike China, whose ‘Open Door’ and investor friendly policies stretch
back to the late 1970s, India’s economic reforms only began in the 1990s. Since then, the country
has struggled to eliminate some of the problems that have hindered foreign investment; namely,
some of its more complex trading regulations were not revamped, its infrastructure remained
largely underdeveloped, and corruption went mostly unchallenged.
Modi’s BJP party has already taken steps to eliminate some of the issues companies have had
about establishing a sourcing platform in India: money is being invested in the country’s poor
infrastructure, allowing for the easier transportation of goods within India’s borders, and the
government has raised the cap levels on numerous sectors for foreign direct investment (FDI),
including a massive increase in its railway sector from zero percent to 100 percent. Looking to
the future, Modi has said that the government will be introducing new laws to further simplify
the process for establishing a foreign presence in India.
India’s cost-effectiveness and policy reforms are what separate it from other sourcing
destinations and the India of yesteryear. This has already begun impacting the future of the
country’s existing foreign export industries. By 2020, back office service sourcing is estimated
to more than double from its current worth of US$23 billion to US$50 billion, and various
Western companies have announced their intention to increase the amount they source from
India in the near future. Whilst it is still a developing sourcing destination, India now presents
an exceptionally attractive global sourcing option.
Sourcing and procurement: Key considerations

As touched upon previously, there are numerous advantages a company can gain by global
sourcing. These advantages can be viewed as the objectives of a sourcing operation in India
and its success can subsequently be measured against them. Broadly speaking, a company
should ask whether their operation:
• Reduces operational costs;

• Enhances efficiency;
• Stabilizes the supply chain in the long term;
• Minimizes risk;
• Allows access to an appropriately skilled workforce.
Indirect and direct sourcing models

There are two principal options available to foreign companies seeking to enter and establish
a sourcing platform in India. The first is to find and agree terms with a local partner, who would
act as a company’s primary representative for their operation in India. This option is certainly
the easiest to execute, as exporting from India without maintaining a personal footprint there

will bypass the need to go through the legal processes that are necessary for establishing a
foreign presence.
Locating a sourcing partner
Choosing a sourcing partner can be a difficult process, as the choice will invariably have a
direct impact on the quality of a company’s products and, consequently, its reputation. It should
therefore be approached and conducted in a very careful manner. Key considerations include:
• The potential partner’s level of experience (whether they have exported from India before);
• The location of the partner and where the goods are being produced (whether they will be
operating in an SEZ and thus qualify for tax benefits?);
• Where the partner is based (answering questions such as if their location is near the coast
or factoring how much the added costs will amount to, based on their location, to procure
necessary materials)
Locating and screening a sourcing partner
There are a number of ways a company can go about finding a sourcing partner, with the most
common means being hiring a professional sourcing agent, consulting official government
databases, and searching on various sourcing websites, such as Alibaba.com and GlobalSources.
com.
The obvious downside of taking this route is the lack of direct control a foreign company would
have over its operations. Although a deep pool of skilled workers exists in India, leaving a
company’s platform indirectly supervised can negatively affect the rate and quality of production.
Using a sourcing partner in India can therefore be seen as an ‘indirect’ way of managing a
sourcing operation. Whilst it is comparatively simple and cheap, the lack of direct involvement
makes it harder to ensure that all sourcing objectives are being met. This should always be
born in mind when choosing to handle sourcing operations in India without a personal footprint
in the country.
Establishing an office on the ground
The second option is to actually establish a local presence within India. Although creating an
office on the ground inevitably necessitates a greater financial and legal burden for the company
in question, it is an effective means of ensuring higher performance levels for a sourcing platform
in India. This can be done by establishing a liaison office or branch office as mentioned earlier.

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An Introduction to

This edition of Doing Business in India was produced by a team of professionals at

© 2017 Dezan Shira & Associates

Dezan Shira & Associates Offices

About Dezan Shira & Associates

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 3

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 4

DELHI OFFICE MUMBAI OFFICE

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 5

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 6

Part 1 | Establishing and Running a Business 09

Setting up a wholly foreign-owned business in India 15

Navigating FDI caps and restrictions 18

Changes to FDI caps and approval routes 18

Part 2 | Tax and Accounting in India 22

India’s Audit Process 38

Ensuring a smooth audit: Key considerations 45

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 7

Payroll and Social Insurance 60

Individual Income Tax (IIT) 60

Income tax returns 61

India’s Provident Fund scheme 63

Part 4 | Operational Issues 65

An introduction to sourcing from India 72

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 8

What are my options for investment?

Navigating FDI caps and restrictions

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 9

A foreign investor may set up in India either as an ‘unincorporated entity’ or an ‘incorporated

Unincorporated entities permit a foreign company to do business in India by establishing a

A liaison office is permitted to engage in the following activities:

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 10

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 11

Branch offices are permitted to engage in the following activities:

Can Provide Service & Receive

Manufacturer* BRANCH OFFICE

* Can manufacture if in SEZ with 100 percent FDI

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 12

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 13

• Name and address of the overseas company

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 14

Establishing a wholly owned subsidiary

commence business immediately following their successful incorporation.

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 15

Tax Rates for Foreign Companies

Surcharge 0 2.00% 5.00%

Basic rate + surcharge 40.00% 40.80% 42.00%

Effective tax rate 41.20% 42.02% 43.26%

Domestic Companies with Turnover/Gross Receipts of Less Than US$750,000

Basic rate 29.00% 29.00%

Basic rate + surcharge 29.00% 29.58%

Effective tax rate 29.87% 30.46%

Domestic Companies with Turnover/Gross Receipts of More Than US$750,000

Surcharge 0 7.00% 12.00%

Basic rate + surcharge 30.00% 32.10% 33.60%

Effective tax rate 30.90% 33.06% 34.61%

AN INTRODUCTION TO DOING BUSINESS IN INDIA 2017 16

Minimum alternate tax

Taxation of royalties/technical fees