v Nationality Policy
Environments v
Investment in India offers the attraction of a large and growing middle
class, availability of skilled manpower including competent professional managers at
moderate cost, a diversified domestic industrial base and well-developed capital markets,
banking infrastructure and financial services.
The policy and
regulatory environment in India is undergoing a radical change, opening up many more areas
of business opportunities. There is a big push to liberalisation through new fiscal,
trade, industrial and foreign investment policies. Curtailment in the areas reserved for
public sector, major progress in elimination of licensing/quantitative restrictions, and
simplification of procedures have been effected. The 1994 National Budget has seen a
reaffirmation of the Government's commitment to further liberalisation of the Indian
economy.
The Government is actively seeking foreign investment. Foreign exchange
controls have been substantially reduced and the rupee made convertible on the trade and
current accounts.Capital issues control has been relaxed. Price controls are being removed
and interest rates have been largely deregulated. Most capital goods and raw
materials/components required for industrial use may now be imported without a specific
import licence. Fiscal policy reforms are continuing with custom duty/income tax rates
being reduced/rationalised.
Non-resident Indians(NRIs) are offered a whole range of additional
facilities such as tax concessions, relaxation of applicable foreign exchange controls in
their case and higher foreign equity participation than is generally permissible.
The
various measures taken by the Government since mid-1991 to reform the Indian economy has
started showing results. Foreign and direct portfolio investment, which was hardly US$
150million in 1991-92 is estimated to be more than US$ 4 billion in 1994-95. Indian
foreign exchange reserves which had touched a low of a little over US$ 1 billion in
mid-1991 are now around US$ 17 billion. Inflation rate is back in single digit after
touching a peak of 17% in September 1991.
Industrial
Licensing Policy
Foreign Investment
Foreign Tech. Agreements
Trade Policy
Foreign Exchange Control
Provisions for NRI's OCB's
Industrial Licensing Policy
: Only a few select areas, where security and strategic concerns predominate,
continue to be reseverd for the public sector (See List 1 attached). Private sector
including foreign investment, is being selectively allowed even in these areas.
Industrial Licensing has been abolished for all projects except for a short
list of industries related to security and strategic concerns, social reasons, problems
related to safety, and Overriding environmental issues, and manufacture of products of a
hazardous nature (See List 2 attached). Industries reserved for the small scale sector
continue to be so reserved , though up to 24 percent equity participation by other
industrial undertakings is permissible in the capital of a small scale industrial unit.
In
locations other than cities of more than 1 million population, there is no requirement of
obtaining industrial approvals from the Central Government except for industries subject
to compulsory licensing. In respect of cities with population greater than 1 million,
industries (other than those of a non-polluting nature such as electronics, computer
software and printing) are required to be located outside 25 km of the periphery, except
in prior designated Industrial areas.
Foreign Investment :
India welcomes, and the Government is actively seeking, foreign investment.
Foreign investment upto 51% of equity is given automatic approvals in 35
identified sectors (See List 3 attached) and in case of trading companies primarily
engaged in exports, provided foreign equity covers the cost of imported capital
goods(which must be new and not second hand). The automatic approval process is
administered by the Reserve Bank of India. Higher foreign equity in these areas and
percentage foreign equity allowed in other sector is decided on a case by case basis by
the Foreign Investment Promotion Board(FIPB).
The IFPB considers foreign investment proposals in totality free from
pre-determined procedures and parameters. A large number of projects envisaging 100%
foreign ownership has been approved by the FIPB.
100% foreign ownership is allowed for Non-resident Indians (NRIs) and
Overseas Corporate Bodies(OCBs) primarily owned by them, on a repatriable basis in all
high priority (Refer List 3) and certain other areas.
Subject
to the terms of specific approvals, divided out of profits made by units with approved
foreign investment may be freely repatriated except for investments in specified consumer
goods industries, where such remittances are required to be balanced by foreign exchange
earnings of the unit during on initial period of 7 years after commencement of commercial
production.
Foreign Technology Agreements :
Automatic permission is granted by the Reserve Bank of India for foreign technology
agreement involving payments upto a lumpsum of Rs.10 million and / or 5% royalty on
domestic sales and 8% on exports, subject to total payments of 8% of sales over a 10 years
period from date of agreement or 7 years from commencement of production. The prescribed
royalty rates may be net of taxes. Royalty computation has to be as per a prescribed
formula and excludes value of imported components and standard bought outs.
Foreign
technology agreements envisaging payment in excess of the above limits are considered on a
case by case basis by Government.
Trade Policy : Import of
capital goods, raw materials, components etc. is freely allowed except for a few items on
specified negative list. There is no requirement of an import licence except for import of
items on the negative list.
Duty Structure : Duty rates are being progressively
reduced and recent budgets have effected significant and wide ranging tariff reduction,
particularly in respect of raw materials and capital goods. The maximum import duty is
currently pegged at 50% of CIF value of the imported item, except in the case of a few
items including passenger baggage and alcoholic beverages. 100% export oriented project
are allowed to import tariff free capital goods and raw materials/components while other
units may be eligible for duty free imports of inputs for production of goods for the
export market.
All
capital equipment imported for setting up a new project or substantial expansion of an
existing unit in certain identified sectors (industrial plant, irrigation projects, power
projects, mining projects, oil exploration project and other projects notified by the
Government on a case to case basis)are eligible for concessional import duty. The general
rate of project imports is 25% with lower rates for priority sector projects such as
fertiliser, power, coal mining, petroleum refining and electronics. Concessional duty
rates of 15% may be availed to import capital goods, subject to an export obligation of 4
times the CIF value of imported equipment over a period of 5 years, to be met through
export of products manufactured with the imported capital goods.
Export Incentives :
Export units enjoy a wide range of fiscal and non-fiscal incentives.
Non-fiscal incentives include permission for higher foreign equity
participation and priority in allocation of land, power connection etc.
Fiscal incentives include exemption/concessions in custom tariff (discussed
above) and other domestic taxes and duties. For instance, there is full tax exemption for
all exports profits. 100% Export Oriented Units and those located in Export Processing
Zones are eligible for full tax exemption for a block of five years during the first eight
years. This enables such units to avoid tax liability on profits from permitted domestic
sales(such units are allowed to sell a specified percentage of production in the domestic
market) in the initial years. The tax holiday benefit has now been extended to units set
up in, or designated as, software Technology Parks and Electronic Hardware Technology
Parks.
Further, exemption/refund of import duties is available for raw materials,
components, etc. imported for use in manufacturer of goods for export markets under
advance licensing or duty drawback schemes.
Units
are given priority in access to bank credit for meeting export production requirements.
The finance is made available at concessional terms and is exempt from interest tax.
Foreign Exchange Controls :
Since mid-1991 foreign exchange controls have been substantially reduced and the rupee is
now convertible on the trade and current accounts.
There is complete freedom for remittance of dividends for all approved
foreign investment projects except in the consumer goods industries where there is a
dividend balancing requirements(discussed above).
Foreign currency for permitted outward remittances may be purchase from
authorised dealers (banks) without specific Government / Reserve Bank of India approval,
provided it is in accordance with guidelines and within monetary limits of authority
delegated to the authorised dealers. Remittances in excess of these limits may also be
permitted on the basis of specific application to the Reserve Bank of India. The list of
permitted outward remittances covers most current business transactions(including
remittances for import of goods), travel, education and medical expenses.
Other exchange control restrictions are also being diluted. For example,
until recently a very restrictive policy was followed in allowing branch operations of
foreign companies. This policy has now been relaxed and foreign companies engaged in
manufacturing and trading activities abroad are permitted by the Reserve Bank to set up
branch operations for undertaking various activities in India, including acting as
buying/selling agents of foreign companies,undertaking export and import trading
activities and for promoting technical and financial collaborations between Indian
companies and overseas companies. Similarly, companies incorporated in India and having
more than 40 percent foreign equity(i.e. FERA companies) have been brought on par with
wholly owned Indian companies, by amending FERA to obviate the need for such companies to
obtain Reserve Bank permission for various activities/transactions.
Reserve Bank permission is no longer required for engagement of the
services of a foreign national by an Indian firm or company on a short term assignment and
for remitting the remuneration for such engagement, provided the total duration of
engagement does not exceed 12 person months in a calendar year.
Forward
exchange cover can be obtained from authorised dealers(i.e.commercial banks) for all
genuine transactions permitted under current regulations.
Special Provisions Relating to
Investment by non-residents Indians(NRIs) and Overseas Corporation Bodies(OCBs) :
Investment With Repatriation Benefits : NRIs and OCBs predominantly
owned by NRIs (at least 60% NRI holding) are allowed upto 100% equity stake in industries
which are not reserved for the public sector. This facility, earlier allowed only on a
non-repatriable basis, is now allowed with full repatriation benefits (for earnings and
capital) for investment in private/public limited companies and partnership firms.
Automatic approval is given for 100% NRI equity with full repatriation
benefits is high priority industries(Refer List 3) subject to the same conditions as
applicable in the case of automatic approval for upto 51% Foreign Direct Investment in all
other cases.
NRIs and OCBs predominantly owned by NRIs may be allowed to invest upto
100% equity with full repatriation benefits in other industries (i.e. except those
mentioned above and those reserved for the public sector) including those reserved for the
small scale sector and those subject to compulsory licensing. However, investment in
industries reserved for the small scale sector is subject to acceptance of export
obligation criterion prescribed for the industry. For NRI/OCB investment in these other
industries, approvals are given by the Government on a case-by-case basis. However,
approval for investment upto 40% with full repatriation benefits can also be obtained from
the Reserve Bank of India on an automatic approval basis.
Investment on Non-repatriation Basis. : NRIs/OCBs are allowed to own
100% of the capital of equity of a proprietary concern, partnership firm of company in
India engaged in any industrial, commercial or trading activity, on a non-repatriation
basis, except those engaged in agriculture, plantation or real estate business. This
investment can be made directly,i.e. without having to obtain any prior approval, if made
in accordance with rules. The restriction on investment in real estate business has been
relaxed to allow, with prior RBI permission upto 100% investment in a company engaged in
financing of housing development, real estate development and infrastructure areas such as
construction of roads, bridges etc. Recent amendments allow remittance on income of
investments/deposits made of a non-repatriation basis in a phased manner over a period of
three years, while the principal amount will continue to be non-repatriable
Other special provisions relating to NRIs/OCBs includes -
1) Relaxation of ceiling of 5% for foreign investment in
Shares/debentures of existing companies under Portfolio Investment Scheme to 24% subject
to certain conditions;
2) Concessional income tax on dividends, interest and
capital gains of assets purchased with convertible foreign exchange;
3) Permission for returning Indians to open and maintain
foreign currency accounts with banks of India;
4) Removal of the requirement for declaration of foreign
currency assets and immovable property to be used for business and trading activities by
NRIs returning to settle in India;
5) Relaxation of FERA rules in relation to ownership of
residential property.
