Foreign Direct Investment (FDI) – Some Basic Concepts


Ajit Kumar AJIT KUMARWISDOM IAS, New Delhi.



ENTRY STRUCTURES




INCORPORATING A COMPANY IN INDIA: It can be a private or public limited company. Both wholly owned & joint ventures are allowed. Private limited company requires minimum of 2 shareholders.


LIMITED LIABILITY PARTNERSHIPS: Allowed under the Government route in sectors which has 100% FDI allowed under the automatic route and without any conditions.


SOLE PROPRIETORSHIP/PARTNERSHIP FIRM: Under RBI approval. RBI decides the application in consultation with Government of India.


EXTENSION OF FOREIGN ENTITY: Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the activities specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is available to BO/PO meeting certain conditions.


OTHER STRUCTURES: Foreign investment or contributions in other structures like not for profit companies etc. are also subject to provisions of Foreign Contribution Regulation Act (FCRA).


STEPS INVOLVED IN INVESTMENT

- Identification of structure
- Central Government approval if required
- Setting up or incorporating the structure
- Inflow of funds via eligible instruments and following pricing guidelines
- Meeting reporting requirements of RBI and respective Act
- Registrations/obtaining key documents like PAN etc.
- Project approval at state level
- Finding ideal space for business activity based on various parameters like incentives, cost, availability of man power etc.
- Manufacturing projects are required to file Industrial Entrepreneur’s Memorandum (IEM), some of the industries may also require industrial license.
- Construction/renovation of unit
- Hiring of manpower
- Obtaining licenses if any
- Other state & central level registrations
- Meeting annual requirements of a structure, paying taxes etc.



TYPES OF INVESTORS




INDIVIDUAL: (I) Foreign Venture Capital Investor (FVCI); (II)Pension/Provident Fund; (III) Financial Institutions.


COMPANY: (I) Foreign Trust; (II) (III) Sovereign Wealth Funds; (IV) NRIs / PIOs


FOREIGN INSTITUTIONAL INVESTORS: (I)Private Equity Funds; (II) Partnership / Proprietorship Firm; (III) Others

 Note : Citizen or entity from Bangladesh & Pakistan can invest only under the government route also investor from Pakistan cannot invest in defence, space, atomic energy and sectors prohibited for foreign investment.



REPATRIATION OF DIVIDENDS & CAPITAL




REPATRIATION OF DIVIDEND : Dividends are freely repatriable without any restrictions (net after tax deduction at source or Dividend Distribution Tax.


REPATRIATION OF CAPITAL : (I) AD Category-I bank can allow the remittance of sale proceeds of a security (net of applicable taxes) to the seller of shares resident outside India, provided the security has been held on repatriation basis, the sale of security has been made in accordance with the prescribed guidelines and NOC / tax clearance certificate from the Income Tax Department has been produced.

(II) Investments are subject to lock-in period of 3 years in case of construction development sector.


REPATRIATION OF INTEREST : Interest on fully, mandatorily & compulsorily convertible debentures is also freely repatriable without any restrictions (net of applicable taxes).



ASPECTS OF TAXATION




DIRECT TAXES : The investor is required to pay tax on net income earned in India. The rates of taxes differ among structures.


COMPANY : The company incorporated in India is required to pay 30% tax+surcharge+education cess on net income earned. It is also required to deduct tax on profits distributed @15.5%+surcharge+education cess.


BRANCH OFFICE / PROJECT OFFICE / LIAISON OFFICE OR PERMANENT ESTABLISHMENT : The fixed place of business in India is treated as a permanent establishment and is required to pay tax @40%+surcharge+education cess. There is no tax on profits distributed.


LLPS : LLPs are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.


MINIMUM ALTERNATE TAX : 18.5%+SC+EC- Indian tax law requires MAT to be paid by corporations in cases where the tax payable according to the regular tax provisions is less than 18.5% of their book profits. However MAT credit (MAT-actual tax) can be carried forward in next 10 years for set-off against regular tax payable during the subsequent years subject to certain conditions. 


Please Note : Please note transactions between associated enterprises needs to follow transfer pricing regulations.



INCENTIVES




CENTRAL GOVERNMENT INCENTIVES :


- Investment allowance (additional depreciation) at the rate of 15 percent to manufacturing companies that invest more than INR 1 billion in plant and machinery available till to 31.3.2015.

- Incentives available to unit’s set-up in SEZ, NIMZ etc. and EOUs.
- Exports incentives like duty drawback, duty exemption/remission schemes, focus products & market schemes etc.
- Areas based incentives like unit set-up in north east region, Jammu & Kashmir, Himachal Pradesh, Uttarakhand.
- Sector specific incentives like M-SIPS in electronics.


STATE GOVERNMENT INCENTIVES : (I) Each state government has its own incentive policy, which offers various types of incentives based on the amount of investments, project location, employment generation, etc. The incentives differ from state to state and are generally laid down in each state’s industrial policy.

(II) The broad categories of state incentives include: stamp duty exemption for land acquisition, refund or exemption of value added tax, exemption from payment of electricity duty etc.


SPECIAL DISPENSATION

Special dispensations have been envisaged for NRI investments in the following : (I) Construction development; (II) Ground Handling & Air transport services; (IV) NRI investing on non repatriable basis; (V) FDI from NEPAL & BHUTAN is allowed in Indian rupees



 





Friday, 26th Dec 2014, 07:04:27 AM

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