Import Duties | Documentation | Free-Trade Zones | Exchange Controls | Regulations Act | Foreign Investment
Corporate Taxes | Personal Income Taxes | Other Taxes | Tax Treaties | Tax Incentives | Regulatory Agency
Patents | Trademarks | Intellectual Property Rights in India | Copyright Protection in India
After almost half a century of extensive state controls, insulation from world markets, and slow rates of growth, India embarked on a process of liberalization and progressive integration into the global economy. This process has included the relaxation or removal of government controls, the redefining of taxation policies for certain industries, and governmental encouragement to increase export and import in the country as a whole.
Since July 1991, India has had a more open approach to foreign investment. The government announced cuts in tax rates and the Income Tax Act no longer makes a distinction between a foreign investor and indigenous investors. Many special tax incentives are available to new investors including a 100% tax exemption on profits for the first five years. If an industry is located in an area designated as an "export processing zone," both imports used in production and exports are tax-free. (See below under "Free-Trade Zones" for more information.) In addition, Indian banks are now willing to meet the lending and guarantee needs of investors.
These governmental moves toward economic liberalization have paid off. According to the World Bank, only 19 out of 137 countries have grown more rapidly than India, which has moved forward at a rate of over 6% per year throughout the last decade. India's gross domestic product (GDP) and per capita income have grown at a slower, but steady, pace. The growth in relative terms has been significantly higher than in the 1980s. India's population growth has marginally slowed while per capita income has accelerated.
Foreign Institutional Investors (FII) have made a net investment of Rs.7 billion as of July 2001. Gross purchases during the period stood at Rs. 30.7 billion and gross sales stood at Rs. 23.5 billion.
According to the latest estimates of the Central Statistical Organization (CSO), the GDP growth in 2000-01 is likely to be about 6% compared with 6.4% and 6.6% in the previous two years. The growth in the agricultural sector was at 0.9% during 2000-01 as against 0.7% in the previous year.
Here are some general sources for more information:
The Indian government portal: http://www.nic.in/
For quarterly reports and related articles: http://www.indiainfoline.com/
An excellent business resource: http://www.indnet.org/
On business policies: http://www.infodriveindia.com/ and http://www.indnet.org/res/busprac.htm
General information on Asian markets: http://www.asiandemographics.com/and http://www.ciionline.org/
India's middle class is predicted to grow at a rate of 7% annually. For more on the composition and purchase power of the middle class, see: http://www.indiaonestop.com/middleclassesindia.htm
India has the largest child and youth market in the world. In 2000 there were approximately 340 million people under the age of 15 years. In comparison, China's youth market in 2000 was approximately 298 million.
The largest adult market in India is the young householder, estimated to be at 23% of the sector. The young householder is considered the best educated of the adult groups in India. They have benefited from the liberalized economy and have shown a great interest in foreign products. In purchasing practice, they tend to be more experimental consumers. This market is projected to remain stable for decades to come.
Education in India has also improved over the past decade, which will positively impact markets and investment in India. For example, in 2000 illiteracy is estimated to have lowered to 1 in 5. Such educational improvements will expand markets as educated individuals are more willing to try new life styles, products, and services.
The service sector reports a higher than average yearly salary and is projected to expand by 3.45% per year. It will account for 15% of the labor force by 2010. These new workers represent a particularly attractive consumer market with their higher education, income, and spending power.
For more on the economic demographics of India, see: http://www.asiandemographics.com/forecastasia-india.htm
The most common business entity used by foreign investors in India is the locally incorporated company. Foreign investors may participate in either public or private companies. Private companies must restrict the transfer of their shares, limit the number of shareholders to 50, and prohibit public subscription of shares. Public companies are those with more than 25% of their shares publicly owned, those that own more than 25% of the equity of a public company, and those with a turnover of more than Rs. 100 million in any one year.
Public and private companies must register the memorandum and articles of association with a state registrar of companies. Branches, sole proprietorships, and partnerships are essentially closed to foreign companies.
Three other modes of interaction between the foreign investor and the Indian business may also be utilized:
1. The most common form of interaction is the licensing of technology, where no equity capital is involved. A foreign firm can sell its technology for a lump-sum payment and/or arrange royalties based on sales.
2. The second form is cooperation, which involves the direct purchase of designs and drawings.
Note: These two forms of interaction are especially popular with the Indian government as they satisfy government policies designed to increase the amount of technology flow into the Indian economy.
3. The third form is collaboration. This form of business interaction accounts for 15% to 20% of all foreign business. The foreign firm may receive lump sum and royalty payments for technology transfer as well as dividends.
The Reserve Bank of India may approve the opening of representative or liaison offices in India. However, such offices cannot accept orders or sign contracts, and cannot generate profits. For more information, see the Reserve Bank of India: http://www.rbi.org.in/
Many U.S. companies find that one of the easiest means of working with Indian businesses is through an agent. An agent is extremely useful in relaying information, making local or government contacts, and booking orders, for example.
Sections 182 to 238 of the India Contract Act govern agent-principal relations. Brokers, auctioneers, del credere agents, and insurance agents are the types of commercial agents recognized under Indian law. The agent should be the "main distributor" since Indian law does not permit foreign companies to have marketing subsidiaries in India. The exclusive agency agreement is the most common type of agreement in India.
A company choosing an agent to function on their behalf in India is advised to choose one with an office in Delhi. As Delhi is the capital of the country, proximity will help insure that the agent has up-to-date notices of policy changes and government procurement notices.
 Stock brokers busily work the phones in Mumbai. |
Premature revocation or
termination of an agreement by the principal without just cause requires
that compensation be paid to the agent. Agent-principal relations may be
terminated prematurely if the agent is guilty of misconduct in the
discharge of duties.
While agent-principal contracts may vary, in general the agreement may be terminated upon expiration of the contract term, death or incapacity of the agent, death or incapacity of the principal, completion of the business, and/or impossibility of execution by reason of law or destruction of the subject matter. |
India's import licensing policy was previously designed to conserve foreign exchange and promote import substitution. However, the current five-year economic period, which is structured to liberalize the economy, has seen much reform and relaxation of previous laws. The revised policy has also abolished requirements that all goods be imported by the end-user, allowing imports for stock and sale by distributors and wholesalers.
Indian import controls still apply to some industrial items and most consumer goods. As a result, companies interested in the Indian market should become familiar with the licenses or other controls necessary for the import of their particular products.
Import Duties: Import duties are applied to almost all goods entering India. The tariff system is based on the Harmonized System with most tariffs being charged on an ad valorem basis. Tariffs are in the 40% to 60% range for basic raw materials, 60% to 100% for semi-processed goods, and 100% and above on finished and consumer goods. Luxury items can be taxed at rates up to 110%. Companies should check import duties for their particular product because rates are product specific.
For more information on the Harmonized System, see: http://pacific.commerce.ubc.ca/trade/HS.html
Documentation: Shipments to India require a commercial invoice, a packing list, and bill of lading. A certificate of origin is not required on imports originating in the United States.
Free-Trade Zones: India has six export processing zones. These facilities provide duty exemptions under certain conditions for the manufacture of export items. The zones are the Kandla Free-Trade Zone in Gujarat, the Santa Cruz Electronics Export Processing Zone (SEEPZ) in Mumbai (Bombay), the Madras EPZ in Chennai (Madras), the Falta EPZ in West Bengal, the Cochin EPZ in Kerala, and the New Okhla Industrial Development Area (NOIDA) EPZ.
Exchange Controls: The Reserve Bank of India (RBI) administers India's extensive foreign exchange controls and regulations. All foreign exchange transactions are subject to the control and approval of the RBI, including the transfer of profits and dividends. Controls on outflows of foreign funds are stringent due to India's foreign exchange shortage. The Indian government provides no guarantees against inconvertibility. Companies with 40% or more foreign equity are subject to certain provisions of the Foreign Exchange Act.
For further information, see the Reserve Bank of India: http://www.rbi.org.in/
Regulations Act: Regulations governing the remittance of dividends state that the foreign currency outflow due to dividends may not exceed export earnings and that automatic approval is granted on preference and equity shares up to certain limits. There are no limitations applied to interest payments on foreign loans although there are limits applied to the repatriation of capital. There is a cap on royalties paid under technology licensing agreements equal to 8% of export sales or 5% of domestic sales.
Businesses can consult the Exchange Control Manual of the Reserve Bank of India for all rules and regulations governing India's foreign exchange controls management.
For further information, see: www.infodriveindia.com/tradelaw/rbi/rbi.htm
Foreign Investment: In 1991, the government liberalized the number of industries open to foreign investment, loosened approval requirements, and allowed majority foreign equity ownership. There are frequent changes in the regulations governing equity percentage permitted and the industries open to foreign participation. Companies wishing to enter the Indian market should make efforts to obtain the most up-to-date information.
The Indian government encourages foreign investment on a large scale that will have a favorable impact on the Indian balance of payments position and will bring new technology to India. The government has designated a list of 34 high-priority industries open to foreign investors. Rules and regulations governing foreign investment in India stipulate the following:
1. All foreign investment projects, not
considered a priority industry eligible for automatic clearance by the Reserve
Bank of India, require approval by the Foreign Investment Promotion Board or a
newly created committee for review of smaller investment
projects.
2. The government permits foreign firms to
hold up to 51% equity in an Indian venture on a case-by-case
basis.
3. Automatic approval is granted to foreign
investments of up to 51% equity in 34 high-priority industrial
sectors.
4. For businesses that solely focus on
export-oriented manufacturing, 100% ownership is available.
5. Foreign companies are permitted to acquire land and own buildings as long as permission is obtained from the Reserve Bank of India.
The following restrictions are placed on foreign investment:
 |
1. Foreign investment in
non-priority sectors is generally restricted to 40% of common stock.
2. Restrictions on 100% foreign ownership may apply, depending on the nature of the business. |
Source: http://europa.eu.int/comm/external_relations/india/eco/trade.htm
Corporate Taxes: Indian corporate tax rates are high and the pertinent laws complex. The standard corporate income tax rates are 45% for public companies, 65% for branches of foreign companies and 50% for all other companies. If companies utilize tax incentives available to them, the typical rates vary between 30% and 50%. The tax rates are lowest for widely held companies incorporated in India. Companies are strongly encouraged to employ a tax specialist familiar with the Indian tax structure. A 25% tax is levied on dividends paid to non-resident corporate bodies, with a minimum 30% tax being applied if the non-resident is not a corporation. Interest is taxed at a rate of 25%, with a 3.125% surcharge. Royalties are taxed at a rate of 30%.
Personal Income Taxes: A resident of India is considered to be an individual who spends at least 183 days in India during a given year. Residents are taxed on a progressive scale ranging from 20% to 30% on their worldwide income. Non-residents are taxed only on the income arising from sources within India.
Other Taxes: There is a 5% sales tax applicable to most goods along with excise taxes on alcohol, medicines, automobiles, cosmetics, cigarettes and air conditioners. States also levy sales taxes ranging from 4% to 10%. A number of luxury, real estate, and other taxes may also apply.
Tax Treaties: The United States and India have signed a treaty to avoid double taxation.
Tax Incentives: No specific tax incentives exist to attract foreign investment. However, there are incentives available to Indian companies with some share of foreign ownership. Tax and non-tax incentives may be granted to businesses that will increase Indian exports. For example:
Tax depreciation allowances and investment
allowances are available for various businesses and tax holidays for projects
undertaken in specified underdeveloped areas.
Tax deductions are available during the
first 10 years of operation for new industrial undertakings established anywhere
in India. These deductions apply to the hotel and shipping
industries.
Under certain conditions, 100% export-oriented projects are exempt from taxation.
Soft loans and concessional credits are
available to specified industries.
Five-year tax holiday for industrial
undertakings in free trade and export processing zones. Exemption from licensing
regulations, excise taxes, customs duties, and sales tax are also available to
businesses operating in these areas.
Businesses that manufacture and process goods for export are eligible for customs and excise duty drawbacks. These drawback schemes also apply to raw materials.
The state governments offer some non-tax incentives. Examples of these include the availability of land on concessional terms, facilities for business use, and water and power at reduced rates.
Regulatory Agency: The Office of the Chief Controller of Imports and Exports (CCIE) in the Ministry of Commerce issues import licenses. (See module 5 for other contacts.)
For more information, contact:
Indian Chamber of Commerce
445 Park Avenue, 18th Floor
New York, NY 10022
Telephone:
(212) 755-7181
Also see these sites:
www.nasscom.org/business_in_india/default.asp
www.indianembassy.org/policy/ipr/ipr_2000.htm
For more on tax incentives, see: finance.indiamart.com/exports_imports/incentives/general_tax_incentives.html
For a statement from the Indian government, see: www.nic.in/indiainfra
Patents: Patents in India are protected under the Patent Act of 1970. The Act protects foreign companies on the same basis as Indian nationals as long as there is reciprocity of protection. An invention must be original, be the result of ingenuity, and have utility. India's Patent Act grants patent protection for 14 years from the date of filing.
India's Patent Act prohibits patents for any invention intended or capable of being used as a food, drug or relating to substances prepared or produced by chemical processes. The process by which drugs, foods and related items are produced is patentable, but the patent term for these processes is limited to the shorter of five years from the grant of patent or seven years from patent application filing.
Trademarks: Trademarks are protected under The Trade and Merchandise Marks Act of 1958, which establishes the rights for the first user of the trademark. Trademarks are registered for seven years with renewal of the registration allowed for an additional seven-year period. Foreign or Indian companies with 40% or more non-resident interest to use a trademark must obtain permission from the Reserve Bank of India. See their site for more information: http://www.rbi.org/
Intellectual Property Rights in India: There is a well-established statutory, administrative, and judicial framework to safeguard intellectual property rights in India, whether they relate to patents, trademarks, copyrights, or industrial designs. Well-known international trademarks have been protected in India even when they were not registered there locally. The Indian Trademarks Law has been extended through court decisions to service marks in addition to trademarks for goods. Computer software companies have successfully curtailed piracy through court orders. Computer databases have been protected. The courts, under the doctrine of breach of confidentiality, accorded extensive protection of trade secrets. Right to privacy has been recognized in India even though some developed countries have not recognized it.
Protection of intellectual property rights in India continues to be strengthened further. The year 1999 witnessed the consideration and passage of major legislation with regard to protection of intellectual property rights in harmony with international practices and in compliance with India's obligations under the Trade-Related Aspects of Intellectual Property Rights (TRIP) agreement.
The Government of India has taken several measures to streamline and strengthen the intellectual property administration system in the country. Projects relating to the modernization of patent information services and trademarks registry have been implemented with help from the World Intellectual Property Organization (WIPO) and the United Nations Development Project (UNDP).
The Government of India has begun to modernize its patent offices at a cost of Rs.756 million. They intend to incorporate several components in this restructuring, such as human resource development, recruiting additional examiners, infrastructure support, the computerization and re-engineering work practices, and the elimination of the backlog of patent applications.
The Government of India also proposes to strengthen and modernized the Trade Marks Registry. A project for modernization was earlier implemented during 1993-96. Further strengthening of the Registry is being taken up at a cost of Rs.86 million. The main thrust now is to strengthen the infrastructure of the Trade Marks Registry, and to quickly remove the backlog of pending applications, to transfer records to CD-ROMs, to re-engineer the work processes, and to appoint additional examiners, among other activities.
As regards enforcement, Indian enforcement agencies are now working very effectively and there has been a notable decline in the levels of piracy. In addition to intensifying raids against copyright infringement, the Indian government has taken a number of measures to strengthen the enforcement of copyright law. Special cells for copyright enforcement have been set up in 23 States and Union Territories. In addition, for collective administration of copyright, copyright societies have been set up for different classes of works.
The Indian Patent laws are neutral in their application to domestic or foreign inventions. In order to provide necessary and adequate safeguards for the protection of public interest, national security, bio-diversity, and traditional knowledge, provisions are established for disqualification, compulsory licensing, and exclusion from the ability to be patented . These stipulations are within the sphere allowed under Articles 27, 30 and 31 of the TRIP agreement.
Copyright Protection in India: India has some of the most modern copyright protection laws in the world. India is a member of the Universal Copyright Convention and the Berne Convention for the Protection of Literary and Artistic Works. The Copyright Act of 1957 provides protection during the author's life, plus 50 years after death.
One major development in copyright law was the amendment in 1999 to the Copyright Act of 1957 to make it fully compatible with the provisions of the TRIP Agreement. Called the Copyright (Amendment) Act 1999, this amendment came into force on January 15, 2000. The International Copyright Order 1999 extended the provisions of the Copyright Act to nationals of all World Trade Organization (WTO) Member countries.
The earlier 1994 amendment to the Copyright Act of 1957 provides protection to all original literary, dramatic, musical and artistic works, and cinematography, as well as films and sound recordings. It also brought sectors such as satellite broadcasting, computer software and digital technology under Indian copyright protection.
The Copyright Act is now in full conformity with the TRIP agreement obligations.
Up-to-date official information can be
found at the Indian Embassy's web address: www.indianembassy.org/policy/ipr/ipr_2000.htm.
Also, see: commin.nic.in/doc/wtomar.htm
For an article in the Ministry of Commerce's online journal, search: http://commin.nic.in/doc/welcome.html
For detailed information on India's
Export/Import, Exim, Policy 2000-01, as well as other important issues, see: pib.nic.in/archieve/eximpol/eximpolicy2001/eximpolicy2001.html
For more information on Export/Import
regulations and incentives, see: finance.indiamart.com/exports_imports/importing_india/regulations/inspection.html
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Last update: 4 February 2002. Comments & Contact Information.