Limited Liability Partnership Act, 2008

The very long-awaited and eminently feasible entity - the Limited Liability Partnership (LLP) is now a ground reality…and it has’nt come easily. Parliament passed the Limited Liability Partnership Bill 2008, paving the way for an alternative corporate business vehicle that will give the benefits of limited liability and allow businesses to organize their internal structure as a partnership based on an agreement.

Viewed against the backdrop of the Service sector playing such a significant role in the national economy, the need for such enabling legislation for LLP was felt since long. However the gestation period proved to be a long one.

The Limited Liability Partnership Bill which was introduced in the parliament in 2006 was referred to the Parliamentary Standing Committee on Finance for examination and report. Based on the Committee’s recommendations the 2006 Bill was withdrawn, modified and reintroduced as ‘The Limited Liability Partnership Bill, 2008.

The salient features of the LLP Bill, 2008 are as follows: 

LLP shall be a body corporate and a legal entity separate from its partners with perpetual succession.

·   The LLP will be an alternative corporate business vehicle that would give the benefits of limited liability but would allow its members the flexibility of organizing their internal structure as a partnership based on an agreement.

·   The Bill does not restrict the benefit of LLP structure to certain classes of professionals only and would be available for use by any enterprise which fulfills the requirements of the Act.

·   While the LLP will be a separate legal entity, liable to the full extent of its assets, the liability of the partners would be limited to their agreed contribution in the LLP.

·   No partner would be liable on account of the independent or un-authorized actions of other partners, thus allowing individual partners to be shielded from joint liability created by another partner’s wrongful business decisions or misconduct. 

·   There is no upper limit on the number of partners in an LLP. The designated partners (at least one to be a resident in India) will be responsible for ensuring compliance with statutory obligations.

·   Foreign LLP may establish a place of business in India, in accordance with rules which are to be separately framed and notified by the government.

Acquisition and Transfer of Property in India by NRI and PIO

Home Sweet Home!

Those who have moved out of their place of birth for various reasons, mostly for better prospects, may have retained their Indian nationality/ citizenship or may have accepted the citizenship of a foreign country. Indians have been settling in various parts of the world and integrated with the local population, having stayed in their adoptive/host country for generations.

The first step adopted by the Government of India in recognising the aspirations of persons staying away from their home country was to liberalise the Foreign Exchange regime. This was brought in by the Foreign Exchange Management Act (“FEMA”) in 1999. Obviously, liberalisation is an ongoing process and there is need to constantly monitor the regulations and notifications issued by the Indian government and the Reserve Bank of India (“RBI”).

The regulatory framework under FEMA is regulated and administered by the R. Unlike other laws where everything is permitted unless specifically prohibited, under FEMA nothing is permitted unless specifically permitted.

Broadly speaking…

The concept of “residency” of a person varies from legislation to legislation e.g. the Indian Income Tax Act, 1961 and the Foreign Exchange regulation Act, 1999. This is because the purpose of each of such laws is different and accordingly different definitions suitable for specific intent and purpose are adopted.

Here, we are only dealing with the “residency” of a person vis-à-vis acquisition, inheritance, transfer and repatriation of immovable properties under FEMA.
Who is a Non-Resident Indian (“NRI”)?

In the present context an NRI is a person resident outside India, who is a citizen of India. A ‘person resident outside India’ is a person who has gone out of India or who stays outside India for the purpose of employment or carrying on business or vocation or any other circumstances which indicate his intention to stay outside India for an uncertain period.

Who is a Person of Indian Origin (“PIO”)?

PIO means an individual who (i) at any time, held Indian passport; or (ii) who or either of whose father or whose grandfather was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955. Even if the above-mentioned two conditions are met, citizens of Pakistan, Bangladesh, Nepal, Bhutan, Afghanistan, Iran, Sri Lanka, and China are excluded and cannot be PIOs.

Categories of Immovable Property

There are broadly three categories of immoveable property:

• Residential,
• Commercial, and
• Agricultural.

Of these, the status of residential and commercial property is nearly the same and is substantially liberalised. However, Agricultural property stands on a different footing.

Agricultural Property consists of agricultural land, plantations or farmhouses. To safeguard the interests of poor farmers and agricultural sector in general, strict restrictions regarding transfer and acquisition of Agricultural properties are put in place as a matter of long-standing policy of the Indian government.

Acquisition and Transfer by NRI

An NRI can purchase residential and commercial properties in India. Payment for purchase of property can be made only out of:

• Funds received in India through normal banking channels by way of inward remittance from any place outside India or
• Funds held in any non-resident account maintained in accordance with the provisions of the FEMA and the regulations made by Reserve Bank of India from time to time.
• Such payment cannot be made either by traveller's cheque or by foreign currency notes or by other mode other than those specifically mentioned above.

NRI can transfer any residential and commercial properties in India, whether inherited, self acquired or otherwise legally acquired, to:

• A person resident outside India who is a citizen of India ,or
• A person of Indian origin resident outside India, or
• A person resident in India.

Restrictions

An NRI cannot purchase agricultural land / plantation property / farm house without the prior permission of the RBI.

An NRI cannot transfer agricultural or plantation property or farmhouse, (which he may have inherited or purchased before he became NRI), except to Indian citizens permanently residing in India, without the prior permission of the RBI.

Acquisition and Transfer by PIO

Residential and Commercial Property

A PIO can acquire any immovable property in India except agricultural land / farmhouse / plantation property:-

• By way of purchase out of funds received by way of inward remittance through normal banking channels or by debit to his NRE / FCNR(B) / NRO account.
• By way of gift from a person resident in India or a NRI or a PIO.
• By way of inheritance from a person resident in India or a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force or FEMA regulations at the time of acquisition of the property.
• A PIO can acquire a residential or commercial property by purchasing it or through inheritance without any restriction. A PIO can acquire such a property through gift only from an India resident, NRI or PIO.

A PIO may transfer any immoveable property other than agricultural land/ Plantation property/ farmhouse in India:

• By way of sale to a person resident in India.
• By way of gift to a person resident in India or a Non resident Indian or a PIO.

A PIO may transfer agricultural land/ plantation property/ farmhouse in India by way of sale or gift to only person resident in India who is a citizen of India.

Agricultural Property

It may be noted that acquisition of agricultural land/ farmhouse/ plantation property by PIO is prohibited in all the above circumstances.

A PIO can acquire an agricultural property only through inheritance from a person resident in India or a person resident outside India who had acquired such property in accordance with the provisions of the foreign exchange law in force or FEMA regulations at the time of acquisition of the property. Further, transfer of agricultural property by an NRI, to another NRI or PIO or foreign citizen is prohibited.

Repatriation of sale proceeds

In the event of sale of immovable property other than agricultural land/farm house /plantation property in India by an NRI or PIO, the authorised dealer may allow repatriation of the sale proceeds outside India, provided the following conditions are satisfied, namely:

• the immovable property was acquired by the seller in accordance with the provisions of the foreign exchange law in force at the time of acquisition by him or the provisions of these Regulations;
• the amount to be repatriated does not exceed (a) the amount paid for acquisition of the immovable property in foreign exchange received through normal banking channels or out of funds held in Foreign Currency Non-Resident Account or (b) the foreign currency equivalent, as on the date of payment, of the amount paid where such payment was made from the funds held in Non-Resident External account for acquisition of the property; and (c) Loans repaid in for-ex repatriable upon sale·
• In the case of residential property, the repatriation of sale proceeds is restricted to not more than two such properties.
• Upto US$ 1 million per year, representing sale proceeds of immovable property, held by them subject to payment of applicable taxes.
• All other repatriations shall be only with the prior permission of the RBI.
  
  

DOING BUSINESS IN INDIA- REGULATION ON FOREIGN INVESTMENT

INTRODUCTION - REGULATION ON FOREIGN INVESTMENT

In recent years, the entry of non-India business to India has been considerably liberalized – this demonstrates a tremendous forward movement from a closed, protective, bureaucratic environment to a freer and more competitive environment with less bureaucratic controls.

Now there are fewer permissions and licences required to do business in India. All Foreign participation is regulated by the Foreign Direct Investment Policy (FDI Policy) as issued by the Ministry of Commerce and Industry, Department of Industrial Policy and Promotion. This policy stipulates the maximum percentages of foreign participation and the general policy matters. Foreign participation is permitted in all areas except in Gambling and betting, Lottery Business, Atomic Energy and Retail Trading (except Single Branded product retailing). The FDI Policy applies caps on certain sectors, in which investment is proposed.

Sectoral caps: Many sectors are open to 100% foreign participation. However, there are certain sectors, such as telecommunication (74%), print media (26%), Single Brand Retailing (51%), Insurance (49%), etc. , which restrict foreign participation to specified percentages.

Sectoral policies: Different sectors (manufacturing, energy, power, mining etc.) which are under the administrative jurisdiction of different ministries, have put in place relevant policy guidelines.

Foreign participation, depending on the sector/industry, may be either through:

• Automatic route (does not require prior approval either by the Government or Reserve Bank of India (RBI) - only post facto reporting to RBI is required)
• Approval route (require prior approval either by the Government or RBI)

CHOOSING A LEGAL STRUCTURE OF YOUR INDIAN ENTITY

The legal structure of the entity/vehicle should be chosen based upon the objectives and purposes for which you are entering into India. Is it for:

• Setting-up of manufacturing / service facility (Incorporated Entity)
• Execution of a project/contract (Project Office)
• Marketing/ servicing of your existing products (Branch Office)
• Liaison work- communication channel between the parent company and Indian companies (Liaison Office)

Entry Options:

If your objective is to set up a manufacturing or service facility – an incorporated entity - the following options are open:

• Incorporating a Wholly Owned Subsidiary (WOS); or
• Entering into a Joint Venture (JV) in an existing entity in India; or
• Acquiring an existing company in India.

If your objective is to execute a project or a contract, market or service existing products or open up a communication channel between the parent and Indian companies, then entry would be achieved by opening a branch office/ Liaison office/ Project Office without incorporating a company in India.

Incorporated Entities (Companies)

Depending on the sectoral caps, as per the FDI Policy, a foreign investor may:

• Establish a Wholly Owned Subsidiary;(WOS)
• Joint Venture company; or
• Acquire an existing company.

Companies can be set up as either public or private.

The Registrars of Companies (ROC) under the Ministry of Corporate Affairs (MCA) operates as a registration authority for the purposes of the Indian Companies Act (ICA).

The Memorandum of Association (MOA) and Articles of Association (AOA) are the charter documents on which a company shall function. The MOA and AOA are subordinate to the ICA.

A company incorporated in India is treated as a domestic company for tax purposes.

All the foreign companies which have set up a place of business in India, whether Liaison Office, Branch Office or Project Office have to comply with certain specific provisions of ICA, including filing of certain returns and documents. In general, there is no restriction on foreign nationals being directors of a company.

No prior approval is required for repatriation of dividends.

A subsidiary can be funded via equity, debt (both foreign borrowing subject to the External Commercial Borrowing Rules and local borrowing) and internal accrual.

WOS Company

Setting up a WOS Company is only permitted if, under the FDI Policy, foreign equity in a target sector is allowed up to 100%.

JV Company

Joint venture partner can be an Indian or foreigner depending upon sectoral caps in place. One or more foreign parties can jointly invest 100% in a JV, if foreign investment up to 100% is allowed. i.e there are no sectoral caps in place. (the foreign investors may opt for Indian partners as well) One or more Foreign Companies have to invest in a JV jointly with one or more Indian partners in the sectors, which permit less than 100% FDI. (here Indian participation is compulsory)

Acquiring an existing company

Wholly or partly - WOS or operating in collaboration with the existing shareholders. Acquiring a listed company can be done only in accordance with the Stock Exchange Board of India (SEBI) Takeover Code. Acquiring/purchasing the assets of an existing company without taking over the liabilities, either under a slump sale or only a particular unit only, depending upon the circumstances in each transaction.

Legal-tax, financial and technical due diligence necessary to avoid any unforeseen liability to either party is of critical importance.

Once the foreign investor has decided whether to set up a WOS, a JV or to acquire an existing company, it then needs to decide upon the type of company:

Types of companies

Private Company.

Private company is restricted from public offering of its shares. Transfer of shares is subject to consent of all shareholders or as stipulated in the AOA. Maximum number of shareholders is limited to fifty (50). No solicitation or acceptance of deposits from persons other than members, directors or relatives of such persons, is allowed. Required to have a minimum paid-up capital of INR 0.1 million (approximately US$ 2,500). Must have at least two directors and two shareholders, where the second shareholder can be a nominee of the first shareholder and can hold as low as one share. Unlike a Public Company, a private company is exempted from many of the requirements of obtaining permissions, approvals from the government and compliances under the ICA.

Public company

Public company should not restrict public offering and its shareholders should be free to transfer of shares.

Unincorporated Entities

• Branch Office (BO)
• Foreign Companies can open a BO subject to prior approval by the RBI.

Scope of activities of BO is limited to:

• Export/import of goods.
• Rendering professional or consultancy services.
• Carrying out research work, in which the parent company is engaged.
• Promoting technical or financial cooperation between Indian companies and the parent company/group.
• Representing the parent company in India and acting as a buying/selling agent.
• Providing technical support to the products/services supplied by parent/group companies.

A BO is not allowed to undertake manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. BOs established with the approval of RBI may remit the profits outside India, subject to applicable Indian taxes and RBI guidelines. For Income Tax (IT) purposes, a BO is treated as an extension of the foreign corporation in India and taxed at the rate applicable to Foreign Companies. Upon winding up, transfer of assets of BO to subsidiaries or other LO/BO is allowed with specific approval of the RBI. Remittance of Profits net of taxes is permitted.

BO on “Stand Alone Basis” in Special Economic Zone (SEZ)

SEZ-BOs may be set up in SEZs on the condition that no business activity is conducted outside of SEZ. SEZ-BO is allowed to undertake manufacturing activities within SEZ. No approval is necessary from RBI for a company to establish a branch in SEZs to undertake manufacturing and service activities provided that such BO is engaged in activities which permit 100% FDI under the FDI Policy. Other conditions are:

• Such units comply with part XI of the ICA (registration as a Foreign Company),
• Such units function on a stand-alone-basis,
• In the event of winding up of business and for remittance of winding-up proceeds, the SEZ-BO shall approach an authorized dealer in foreign exchange with the prescribed documents.
• Remittance of Profit net of taxes is permitted.

Liaison Office (LO)

Foreign Companies can open a LO subject to prior approval of RBI. LO acts as a representative of the parent company for promotional and communication purposes. LO is not allowed to do business with third parties in its own name therefore, cannot earn any income in India. Any violation can lead to serious complications with the RBI, other statutory authorities and the federal tax authorities.

Permitted activities for a Liaison office in India of a person resident outside India:

• Representing in India the parent company/ group companies.
• Promoting export import from / to India.
• Promoting technical/ financial collaborations between parent/ group companies and companies in India.
• Acting as a communication channel between the parent company and Indian companies.
• Partnership/ Proprietary concerns set up outside India are not allowed to establish BO/ LO.
• Upon winding up, transfer of assets of LO to subsidiaries or other LO/BO is allowed with specific approval of the RBI.
• No Remittance of profit is permitted since the permitted activities cannot generate profit.

Project office (PO)

A Foreign Company which has secured a contract from an Indian company to execute a project in India may establish a PO.

Other conditions:

• the project is funded directly by inward remittance from abroad; or
• the project is funded by a bilateral or multilateral International Financing Agency; (World Bank or the International Monetary Fund, etc.) or
• the project has been cleared by an appropriate authority; or
• a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.
• The Foreign Company shall furnish a report to the RBI giving details of itself and the project.
• Establishing a PO is not subject to any prior approval by the RBI, though, certain post facto filings are necessary.
• PO cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.
• PO may remit outside India the surplus profits of the project on its completion.

Partnerships

Ordinary partnerships under the Indian Partnership Act, 1932 are not a suitable form for FDI due to unlimited liability. Tax Rates for both the partnership and the company incorporated in India under ICA are same i.e.30%. There is a proposal pending for enacting legislation for limited liability partnerships which, if passed, may prove useful for FDI in services sectors.

CONCLUSION

The choice of an appropriate vehicle by a foreign entrant needs to be taken on the basis of the short term, medium term and long term perspectives and business plan.

A foreign entrant can start with a LO, which may help to ‘test the waters’. Of course, this has its own limitation because it cannot do business in India. However, any business generated through a LO can be contracted between the parent company/head office and the client and accordingly executed by the parent company/head office. If the foreign entrant is satisfied with the initial results, it can then proceed to set up a BO or an incorporated entity.

On the other hand, if the foreign entrant has an initial understanding of the Indian market, it can straightaway choose to have a BO at one or more places, subject to RBI approval. The main drawback of a BO is that it is not permitted to manufacture, although it can render after sales service. Further, retail trading is not permitted. However B-2-B trading is not considered as retail trading and is permitted.

If manufacturing (full or in part) in India is contemplated, a foreign entrant needs to have an incorporated entity in India. Among the incorporated entities, the ideal and most favoured incorporated vehicle for FDI is a private limited company. It can have a joint venture with an Indian partner or set up a wholly owned subsidiary, depending on the sectoral cap restrictions under the FDI policy. It can be a closely held company with appropriate restrictions on the right to transfer shares (unlike a listed/unlisted public company, where no such restriction is legally permitted) and less statutory restrictions and compliance requirements.

DOING BUSINESS IN INDIA - LAW OF CONTRACT

Introduction - The statutory framework

India has a codified contract law, which is principally dealt with in the Indian Contract Act, 1872.(ICA). ICA majorly deals with the general principles of contracting.It is not the entire law relating to contracts. If the ICA has a provision pertaining to an issue it has to be followed, ICA is exhaustive to that extent.ICA also deals with certain special contracts such as guarantee, indemnity, bailment, pledge and agency. There are separate enactments relating to:

• Sale of Goods Act
• Partnerships Act
• Negotiable Instruments Act

The basic principles of the ICA are applicable to all such contracts under these and other statutes, unless modified specifically by the relevent statute.

Common Law

Even though Law of Contracts in India is Common Law based, a substantial part of it is codified. There are also various associated legislations such as Sale of Goods, Guarantee and Agency etc. which need to be taken into consideration while formulating contracts. If ICA is silent on a particular issue, Common Law principles can be used. However, Common Law cannot be used to enlarge or limit the ICA provisions, unless a provision cannot be understood without the aid of Common law.

Freedom to Contract

The ICA recognises the freedom to contract. Such freedom is not absolute in the sense that the contracts should be consistent with the provisions of ICA and other laws.

If a stipulation is mandatory it has to be followed, however directory stipulation, including those stated to be applicable ‘in the absence of a contract to the contrary’, can be overridden by the parties through agreement.

A Contract should emanate from ‘free will’ and the parties should be “consensus ad idem” or there should be meeting of the minds, i.e. the parties should agree upon the same thing in the same sense.

Who can contract?

• All legal entities;
• Individual who has attained majority in age, i.e. aged 18 years;
• Individual who is of sound mind; and
• Individual or entities, who/which are not disqualified from contracting by any law.

All agreements are contracts if they are made:

• With the free consent of the parties;
• Parties are competent to contract, (age of majority and soundness of mind);
• There is a lawful consideration and lawful object; and
• Consideration and object are not expressly declared by the ICA to be void or voidable.

Government Contracts and Sovereign Immunity

There is no separate enactment applicable to Government contracts.The Government of India (“GOI”) and State Governments can carry on any trade or business, acquire, hold and dispose off property and enter into contracts (Articles 298 and 299 of the Constitution of India).

In the realm of contracting, no sovereign immunity is available to the GOI or State Governments, public bodies and public sector undertakings.

Any dispute arising in a contract with GOI or State Governments, has to be resolved in accordance with the general law.

All contracts made in the exercise of the executive power of the GOI or of a State shall be expressed to be made by the President, or by the Governor of the State, as the case may be.

The period of limitation for filing suits by the Government is thirty years, as against three years for others.

Neither the President nor the Governor nor any person executing or making any such contract or assurance on behalf of any of them shall be personally liable in respect of any contract or assurance made or executed.

Contractor selection by Government, public bodies and Public sector

In selecting a contractor, the Government has to follow competitive bidding, should act impartially, without favouritism and should not act arbitrarily. The Government must abide by the conditions laid down in the tender notice and cannot act arbitrarily and capriciously or show favoritism.

Choice of Law
In international contracts, parties are free to expressly choose the:

• Substantive law applicable to contract.
• Substantive law applicable to arbitration (validity, effect and interpretation of the arbitration agreement)
• Procedural law applicable to arbitration.
• A limitation on this rule is that the choice must be bona fide and it should not be opposed to public policy.

In the absence of express choice, the contract is governed by the system of law with which the transaction has its closest and most real connection, for which the following aspects will be considered:

• The place where the contract was made;
• The form and object of the contract;
• The place of performance;
• The place of residence or business of the parties;
• Reference to the Courts having jurisdiction;
• Such other links are examined by the Courts to determine the system of law;
• The law governing arbitration proceedings; and
• The law of the country in which the arbitration is held.

If there is no express choice of law for arbitration, proper law of arbitration agreement is normally the same as the proper law of the contract.

Void Agreement
Void agreement is an agreement not legally binding - Void from inception. Broadly, and subject to certain exceptions, an agreement is void:

• Where both parties are under a mistake as to matter of fact.
• An agreement without consideration is void. Mere inadequacy of the consideration will not make an agreement void if free consent was given.
• An agreement in restraint of lawful trade, business, profession etc.
  An agreement by way of wager.
• An agreement, which restricts a party absolutely from enforcing its rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals.
• An agreement, which limits the time, prescribed by law for enforcement of a cause of action.
• Agreement is uncertain and ambiguous.
• Agreement is forbidden by law or if permitted would defeat the provisions of any law.
• An agreement which is fraudulent; or involves or implies, injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy.
• When consideration or objects of an agreement are unlawful in part.

Voidable Agreement

Voidable agreement is an agreement binding on the parties unless it is avoided at the instance of one of the parties who is entitled to do so under the provisions of law.

Broadly, when consent to an agreement is caused by coercion, undue influence, fraud or misrepresentation, the agreement is voidable at the option of the party whose consent was so caused.

Rescission

When a person rescinds a voidable contract the other party need not perform any promise contained within the contract in which he is the promisor. The party rescinding a voidable contract shall, if he has received any benefit thereunder from another party to such contract, restore such benefit, so far as may be, to the person from whom it was received. A person who rightfully rescinds a contract is entitled to consideration for any damage, which he has sustained through the non-fulfilment of the contract.

Novation

If the parties to a contract agree to substitute a new contract for it, or to rescind or alter it, the original contract need not be performed.

Time Essence for Performance

Merely by stating in the agreement that, time shall be of essence may not be material to decide the intention of the parties. If the contract contains clauses for extension of time and liquidated damages etc. i.e. stipulating for the consequences if the contract is not performed within the stipulated time, they will be indicative that time was not intended to be of essence of the contract. The contract has to be read as a whole to ascertain the intention. If time was not of essence of the contract at the time of executing it, a party may, through a notice, make time to be of essence by giving the other party reasonable time to perform. If the intention of the parties was, that time should be of essence of the contract then failure to perform at or before a specified time, the contract or so much of it as has not been performed, becomes voidable at the option of the promisee.

If, in case of a contract voidable on account of the promisor's failure to perform his promise at the time agreed, the promisee accepts performance of such promise at any time other than agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of acceptance, he gives notice to the promisor of his intention to do so.

If it was not the intention of the parties that time should be of essence of the contract, the contract does not become voidable by the failure to do such thing at or before the specified time; but the promisee is entitled to compensation from the promisor for any loss occasioned to him by such failure.

Impossibility to Perform or Frustration of Contract

An agreement to do an act impossible in itself is void. A contract to do an act, which, after the contract is made, becomes impossible or unlawful, by reason of some event, which the promisor could not prevent, becomes void when the act becomes impossible or unlawful.

Where one person has promised to do something which he knew or, with reasonable diligence, might have known, and which the promisee did not know to be impossible or unlawful, such promisor must compensate the promisee for any loss which such promisee sustains through the non-performance of the promise.The events of Force Majeure also come under the purview of Frustration of Contracts. However, Force Majeure being a contractual term, its implication will depend on the agreement between the parties.

Consequences of Non-performance /Breach

In case of a breach of a contract, the non-defaulting party who suffers by such breach is entitled to receive, from the defaulting party, compensation for any loss or damage caused to him:

• which naturally arose in the usual course of things from such breach, or
• which the parties knew, when they made the contract, to be likely to result from the breach of it.

No compensation for remote and indirect loss of damage sustained by reason of the breach. Compensation has to be at par with the financial injuries suffered by the non defaulting party due to the breach, so as to place the non defaulting party at the same position had there been no breach.

Mitigation

In estimating the loss or damage arising from a breach of contract, the means which existed for remedying the consequences caused by non-performance of the contract must be taken into account.

Liquidated Damages/Penalty

If a sum is stated in the contract as Liquidated Damages or penalty, the defaulting party will be liable to pay to the non-defaulting party reasonable compensation not exceeding the amount so stated, whether or not actual damage or loss is proved.

Conclusion

While entering into contracts in India or to which Indian law is applicable, especially contracts relating to activities to be carried out in India, areas like taxation, restrictive clauses, applicable law, jurisdiction etc. need special attention to avoid any subsequent problems and unforseen liabilities.

DOING BUSINESS IN INDIA - PERSONNEL - EMPLOYMENT & IMMIGRATION LAW AND PRACTICE

INTRODUCTION

Employment Laws largely remain untouched by the successive governments, despite the legal and regulatory changes in the other areas. This is mainly because of the socio-economic-political reasons.

There are strong trade unions which lobby against any radical changes in the existing labour laws.

There are around 154 labour laws meant to ensure welfare of workers. Majority of these laws affect the workers in the organized sector who constitute around thirty million, out of the total workforce of about 400 million.

Currently there is a lot of demand for high quality technicians, skilled and semi-skilled workers. The demand and supply position is gradually pushing the salaries and wages to higher levels, but it is still much below the international levels.

Our attempt herein is to give you a bird’s eye view on the laws relating to engagement of personnel.

HIRE & FIRE

Broadly, the Industrial Disputes Act, 1947 (“IDA”) categorizes private sector employees into:

• Workmen, and
• Non-workmen

Workmen - All employees who are employed to do any manual, unskilled, skilled, technical, operational, clerical or supervisory (supervisory personnel drawing less than INR 1600 per month (although some states have increased this limit)) work for hire or reward, whether the terms of employment be expressed or implied, are workmen.

Hire & Fire of workmen is regulated by the IDA and other labour legislations. Any violation of the provisions of IDA can lead to industrial disputes.

Industrial disputes are referred to and adjudicated by Conciliation Officers, Labour Courts and Tribunals.

IDA deals with various aspects of employment and the rights and liabilities of workmen, on retrenchment/ termination, layoff, strike, lockout, transfer of undertaking, unfair labour practice, change in service conditions etc.

Labour/industrial courts can order reinstatement, with back wages and compensation if the termination of service is illegal, unjustified or by way of excessive punishment for misconduct.

Non-workmen consist of managerial or administrative and supervisory personnel drawing more than INR 1600 per month (subject to higher limits in some States). Please note that the categorization on the basis of salary i.e. INR 1600 per month is only applicable to supervisory staff.

Despite a designation of an employee, the actual categorization (workman/non-workman) will be determined by the duties assigned to him/her.

Hire & Fire issues of Non-workmen are regulated purely by the contract of employment (which may include appointment letters and other general terms and conditions given in the general rules pertaining to HR/personnel adopted by the management).

Non-workmen can be fired as per contract of employment. They may be entitled to notice with compensation, if any, stipulated in the contract of employment. They may also be entitled to certain statutory terminal benefits like gratuity.

In the event of termination of employment of Non-workmen, courts cannot direct the employer to re-employ them, even if such termination is illegal.

In illegal termination, Non-workmen’s right is to claim reasonable compensation and if a notice period is stipulated and if the termination letter is not making any unsubstantiated allegations, the compensation may be limited to the pay during the notice period, if not already paid.

If any unsubstantiated unjustifiable allegation is made which affects the future prospects of the employee, the court may award compensation.

EMPLOYMENT LAWS

There are a plethora of “labour laws” applicable to industries in general, as well as certain industry/ sector specific laws.

Most of the private sector employment laws are federal/ central enactments.

Various States (India consists of 28 states and 7 union territories) have adopted these enactments with or without modifications, and in certain cases legislated separately.

The enforcement authorities are mostly at the State level, who act according to the rules and regulations framed under the respective legislations.

Applicability of these enactments is determined on the basis of various stipulations contained in each of them e.g. the number of employees employed during a specific period, the industrial sector in which the employer is engaged etc.

Also, in many enactments power is vested with the appropriate government to extend the enactment to any other establishment which is not original within the purview of a legislation. In some enactments an option may be available to the employer to opt for the applicability of the enactment.

A non exhaustive list of Labour enactments is given below:

• The Industrial Disputes Act, 1947.
• The Industrial Employment (Standing Orders) Act, 1946.
• The Trade Unions Act, 1926.
• The Contract Labour (Regulation and Abolition) Act, 1970.
  The Inter-State Migrant Workmen (Regulation of Employment and Conditions of Service) Act, 1979.
• The Child Labour (Prohibition and Regulation) Act, 1986.
• The Labour Laws (Exemption from Furnishing Returns and Maintaining Registers by Certain Establishments) Act, 1988.
• The Payment of Wages Act, 1936.
• The Minimum Wages Act, 1948.
• The Payment of Bonus Act, 1965.
• The Equal Remuneration Act, 1967.
• The Factories Act, 1948.
• The Workmen's Compensation Act, 1923.
• The Maternity Benefit Act, 1961.
• The Payment of Gratuity Act, 1979.
• The Employees Provident Fund and Miscellaneous Provisions Act, 1952.
• The Employees State Insurance Act, 1948.
• The Shops and Establishments Acts (State legislation).

A non exhaustive list of Industry/sector specific laws:

• The Coal Mines Provident Fund and Miscellaneous Provisions Act, 1948.
• The Mines Act, 1952.
• The Working Journalist (Fixation of Rates of Wages) Act, 1958.
• The Dock Workers (Regulation of Employment) Act, 1948.
• The Dock Workers (Safety, Health & Welfare) Act, 1986.
• The Plantation Labour Act, 1951.
• The Merchant Shipping Act, 1958.
• The Motor Transport Workers Act, 1961.
• The Sales Promotion Employees (Conditions of Service) Act, 1976.
• The Building & Other Construction Workers (Regulation of Employment & Conditions of Service) Act, 1996.
• The Dock Workers (Regulation of Employment) (inapplicability to Major Ports) Act, 1997.
• The Mica Mines Labour Welfare Fund Act, 1946.
• The Limestone & Dolomite Mines Labour Welfare Fund Act, 1972.
• The Iron Ore Mines, Manganese Ore Mines & Chrome Ore Mines Labour Welfare Fund Act, 1976.

Broadly, the purposes of these legislations include:

• Regulating hours of work, weekly holidays, annual leave, sick leave etc.
• Stipulating working conditions, protecting workers from unfair retrenchment.
• Ensuring payment of minimum stipulated wages, timely payment of wages, bonus and other employment benefits.
• Stipulating welfare measures, depending upon the industry.
• Medical benefits including maternity benefit, sickness benefit.
• Social Security - Injuries, death, disability compensation/ Insurance.
• Industrial Relations etc.

Employers Obligations

• Ascertain which of the laws are applicable to the establishment.
• Maintenance of records, filing of returns etc.
• Deposit of amounts payable to welfare funds and other statutory financial obligations.
• Registration of the establishment under various statutes, wherever stipulated.
• Provide stipulated working conditions.
• Timely disbursement of wages, bonus etc as per stipulation.
• Not to indulge in unfair labour practices.

Breach of employer’s obligations

Contravention of the obligations may expose the employer, its directors, senior officers, or nominated persons who are in charge of the company, to:

• prosecution, which can lead to imprisonment, fines and/or penalty. However, imprisonment is rarely awarded.
• Financial claims.
• Litigation with employees/ Trade Unions/concerned departments.
• Trade Union actions such as strike.

Contracting-out

Contracting out of a statutory obligation is not generally permitted. However, an employer can contract with an employee to give better terms and conditions than statutorily stipulated.

HIRING OF FOREIGN NATIONALS / TECHNICIANS

No permission is necessary for hiring of foreign technicians and no application needs to be made for this purpose.

Foreign exchange for the payment of remuneration will be released by the Authorised Dealers in accordance with the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and other Regulations issued by the Reserve Bank of India.

A private limited company is not subject to any restriction under the Companies Act on appointing foreign nationals in key managerial positions.

Appointment of foreign nationals as full time director or managing director in a public limited company is subject to the provisions of Section 269 of the Indian Companies Act read with Schedule XIII to that Act, which defines qualifications for appointment and ceiling limits of remuneration.

RESIDENTIAL STATUS OF FOREIGN NATIONALS

A foreign national could have different residential status under the Companies Act, Foreign Exchange Management Act and the Income Tax Act.

The varied residential status in these laws has different legal effects concerning employment, repatriation and taxation.

Determination of residential status is very important since certain benefits, privileges and obligations are attached to the residential status of a person. E.g under the income tax act, if a person who is “resident in India”, both foreign and Indian income will be taxed in India, subject to the Double Taxation Avoidance Agreements, if any, between India and the relevant country.

Residential Status under the Income Tax Act, 1961

The residential status of individual/taxable entity is very relevant and has to be checked for each year,

Individual- An individual can be a ‘resident and ordinarily resident’ or ‘resident but not ordinarily resident’ or ‘non-resident’. An Individual is said to be resident in India if:
he has been in India for a period of 182 days or more during the previous year, or
he has been in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

If he does not satisfy any of the conditions above, then he is treated as a non-resident for tax purpose.

Resident and Ordinarily Resident – If the individual has been in India for at least two years out of ten previous years immediately preceding the relevant previous year; and he has been in India for a period of 730 days or more during the seven years immediately preceding the relevant previous year. If either of the conditions is not satisfied then the individual is a ‘resident but not ordinarily resident’.

Residential Status under the Companies Act

`Resident', for the purposes of Part I of Schedule XIII (Companies Act) (Conditions to be fulfilled for the appointment of a Managing or whole-time director or manager without the approval of the Central Government, which is applicable to Public Company and subsidiary of public company) includes a person who has been staying in India for a continuous period of not less than 12 months preceding the date of appointment as a managerial person and who has come to India ( 1) for taking up employment in India, or (2) for carrying on a business or vocation in India. Appointment of any person who is not a resident in India requires the approval of Central Government. Most often, appointment of a foreign national as a managerial person may require the Central Government’s approval either because he is not a resident or his remuneration exceeds the limits prescribed under the Schedule XIII.

Residential Status under the Foreign Exchange Maintenance Act

In terms of Section 2(v) of FEMA, a person will be a resident in India only if he resides in India for more than 182 days during the course of the preceding financial year. However, an exception to this general rule is made for any person who comes to India for employment or business or other reasons indicating his intention to stay in India for an uncertain period. Such persons become resident immediately for the purposes of FEMA, no matter they have not stayed in India for 182 days. Thus, a foreign national seeking employment in India becomes a resident under exchange control law.

Deputation of Indian Personnel for Training Abroad

For deputing Indian personnel for training and other purposes abroad, the employer should approach the Authorized Dealers for release of foreign exchange as per the Foreign Exchange Management (Current Account Transactions) Rules, 2000 and other Regulations issued by the Reserve Bank of India.

IMMIGRATION LAW

Visas and permits

Visitors to India need visas to enter the country. Foreign nationals can secure the following types of visas depending on their purpose of visit to India. There may be restrictions on citizens of certain countries.

Persons of Indian Origin holding the citizenship of another country are also required to obtain visas before arriving in India unless they hold a Person of Indian Origin (PIO) card /Overseas Citizenship of India (OCI) issued by the GOI.

Visas must be obtained from the Indian embassy or consulate in the applicant's home country.

Type of visa include employment visa (Spouses and children will get coterminous visas), business visa, tourist visa, student visa. The period can vary depending on the purpose for which visa is issued.

Registration of Foreign Nationals

All foreign nationals are required to register with the local immigration authorities of the Foreign Regional Registration Office (FRRO) within 14 days from their date of arrival, if their visas are valid for longer than six months.

To register with the local registration office, certain prescribed documents must be presented.

The original passport and visa required at the time of filing the application with FRRO.

Registration is valid for the term of the visa and may be extended on application.

Failure to register may result in the immigration authority's refusal to allow the foreign national to leave the country.

Entry visas are issued to accompanying family members of individuals visiting India on business or for employment.

Spouses or dependents of working expatriates must obtain separate work permits to be employed in India.

Family members intending to reside with a working expatriate must register separately at the local registration office.

Children of working expatriates must obtain student visas to attend schools in India.

Bank Accounts & Tax

An expatriate employee employed by a Foreign Company and is resident in India may open and maintain a foreign currency account with a foreign bank.

The salary received for services performed in India may be paid into that account, subject to the following conditions:

• The amount paid into the foreign bank account not to exceed 75% of the salary. Should an employee wish to receive more than this percentage outside India, he must file a request with RBI.
• The remainder of the salary must be paid in rupees in India.
• Indian income tax must be paid on the entire salary.
• Foreign nationals receiving salary in India from Indian firms or companies allowed to remit their salaries to their home countries; or Open an Indian bank account. Proceeds from such account can be repatriated on retirement.

Drivers Permit

Foreign nationals are not allowed to drive in India using their home country driving licenses.
Must obtain an international driving license in their home countries, which are generally valid for a period of six months.

Alternatively, foreign nationals can go through the necessary procedures to obtain an Indian driving license.

CONCLUSION

Since, the law relating to personnel is largely compliance driven and employment laws are generally interpreted more in favour of the employees, appropriate attention in this area is required. Depending on the nature and size of the organisation competent legal support together with a strong but subtle HR management will be appropriate.

DOING BUSINESS IN INDIA – DISPUTE RESOLUTION

THE FRAMEWORK

India has a complex legal system and technicality-driven formal courts of law co-exist with litigant friendly tribunals and dispute redressal forums. There are civil and criminal courts to deal with civil and criminal matters. Special tribunals also exist to deal with specialised areas and enactment issues. Alternate Dispute Resolution (ADR) methods are also being used extensively and effectively.

JUDICIAL HIERARCHY – CIVIL COURTS

• The Supreme Court of India – the Highest Court in the country.
• The High Courts in the various States - the Highest Court in the respective State.
• District Courts, and Subordinate Courts.
• Special tribunals, like Competition Commission, Company Law Board, Income Tax Appellate Tribunals, three levels of Consumer Disputes Redressal Commissions, Debt Recovery Tribunals, Securities Appellate Tribunal, to name a few, also coexist with the regular courts to deal with specialised areas and enactment issues.

There is judicial supervision of the Supreme Court/High Courts on these Tribunals, by way of appeals or writ jurisdiction.

Delay in the Courts is a major concern, therefore, it is important to resort to Alternate Disputes Resolution systems.

Civil litigation has three cost components (i) court fee; (ii) miscellaneous expenses such as for serving the summons on the defendant, witnesses etc. and (iii) lawyer’s fee.

Court fee is payable for suits for recovery of money and other suits, appeals, and applications. Court fee will be payable on the amount sought to be recovered, value of property etc. as per the schedule of court fee applicable in each State in India. The court fee varies between 1% to 10% of the amount claimed/ value of the property, depending on the court fee applicable in the State in which suit is instituted.

Generally, a case has to be instituted at the place where the cause of action has arisen or where the defendant is residing and/or working.

Lawyers are not permitted to charge on success basis or on “no win no fee” basis.
The counsel’s fee is dependent on his seniority and demand.

Courts in India have a very conservative approach while awarding the litigation costs and may not match the actual expenses incurred.

ADJUDICATION

“Lok Adalat”, which broadly means ‘people’s court’ are used for adjudication under the provision of the Legal Services Authorities Act, 1987. A matter which is pending before a court can be referred to Lok Adalat by the court or on the application of a party/parties. This is a mode of dispute settlement forum shorn of rigorous technicalities of Code of Civil Procedure (CPC) and Law of Evidence. Lok Adalats are held intermittently and are not a permanent forum for adjudication of disputes. Lok Adalats try to bring about amicable settlement between the parties, pass orders with the consent of parties, which become final. If any party to dispute does not consent to the order, Lok Adalat cannot pass any order as to the issue.

“Permanent Lok Adalat” is specially constituted for the purpose of adjudicating disputes relating to public utilities. This Forum is also created under the provisions of the Legal Services Authorities Act, 1987. Unlike Lok Adalat, Permanent Lok Adalat has power to adjudicate the issue on merits if parties are not agreeing to an amicable consent order. In such an event, the adjudicating order passed by the Permanent Lok Adalat becomes final and binding on the parties to the dispute.

ALTERNATE DISPUTE RESOLUTION (ADR)

ADR consists of Conciliation and Arbitration. There is now a move towards institutionalised Conciliation andarbitration. Federation of Indian Chambers of Commerce and Industry Arbitration and Conciliation Tribunal (FACT), Indian Council of Arbitration (ICA), International Centre for Alternative Dispute Resolution (ICADR) are recognised institutions with a lot of credibility. ICC's international Court of Arbitration and other International Arbitral Tribunals are also used extensively.

CONCILIATION

The Arbitration and Conciliation Act, 1996 (ACA) has given statutory recognition to dispute resolution through Conciliation. The parties may agree to refer a dispute to Conciliator, who can bring the parties to the negotiating table and try to reach a negotiated settlement of disputes. Conciliation process can be used in a pending litigation or arbitration. Notwithstanding anything contained in any other law for the time being in force, the conciliator and the parties shall keep confidential all matter relating to the conciliation proceedings. To encourage the Parties to approach Conciliation process with an open mind, it is stipulated that the parties shall not rely on or introduce as evidence in arbitral or judicial proceedings, whether or not such proceedings relate to the dispute that is the subject of the conciliation proceedings:

• the views expressed or suggestions made by the other party in respect of a possible settlement of the dispute.
• admissions made by the other party in the course of the conciliation proceedings.
• proposals made by the conciliator.
• the fact that the other party had indicated to accept a proposal for settlement made by the conciliator.

The salient features of conciliation are that:

• A conciliator does not give a decision. His main function is to encourage the parties themselves to come to settlement.
• A conciliator is required to be guided by the principles of "objectivity, fairness and justice" and the conciliator, with the consent of the parties devise the procedure or follow the procedure, if any, of an institution selected by the parties.
• A conciliator does not engage in any formal hearing, though a conciliator may informally consult the parties separately or together.
• A conciliator may, at any stage, propose a settlement, even orally, and without stating the reasons for the proposal.
• A conciliator may invite the parties (for discussion) or communicate with them jointly or separately.
• Parties themselves must, in good faith, co-operate with the conciliator and supply the needed written material, provide evidence and attend meetings.
• A party may submit to the conciliator its own suggestions for the settlement of a dispute.
• A settlement agreement signed by the parties and authenticated by the conciliator will be final and binding.
• The settlement agreement has the same status and effect of an arbitral award/decree of court.
• During the conciliation proceedings, a party is debarred from initiating arbitral or judicial proceedings on the same dispute, except such proceedings as are necessary for preserving its rights.
• Unless otherwise agreed by the parties, the conciliator cannot act as arbitrator, representative or counsel in any arbitral or judicial proceedings in respect of the conciliated dispute. Nor can the conciliator be "presented" by any party as a witness in such proceedings.
• The cost of the conciliation is fixed by the conciliator and then a written notice is given to each of the party.
• The parties bear the cost equally unless the parties have signed a settlement agreement and it provides for a different payment option.

ARBITRATION

The Arbitration and Conciliation Act, 1996 (ACA) based on UNCITRAL Model Law on International Commercial Arbitration in 1985 is the statute which governs arbitration.

ACA is a consolidated single enactment relating to arbitration, conciliation and enforcement of foreign awards. Arbitrations can be based on an ‘arbitration agreement’ between the parties or a statutory arbitration. “Statutory Arbitrations” are arbitrations in respect of disputes arising on matters covered by certain Acts, which Acts stipulate arbitration as remedy for such disputes. There are about 24 such Central Acts including the Indian Electricity Act, 2003, the Indian Telegraph Act, 1885, The Land Acquisition Act, 1894, the Railways Act, 1890 and the Forward Contracts Regulation Act, 1956. Many State Acts also provide for arbitration in respect of disputes covered by those Acts, including Acts relating to co-operative societies.

Distinctive features are:

• Minimum or no interference from courts.
• Provides for Domestic and international arbitration.
• Provisions for enforcement of foreign awards, recognises the Geneva Convention of 1927 and the New York Convention of 1958.
• The arbitrator can decide on his own jurisdiction. This has reduced interference by courts.
• An award can now be set aside if it is in conflict with “the public policy of India”, a ground which covers "inter-alia" fraud and corruption.
• The importance of transnational commercial arbitration has been recognized and it has been specifically provided that even where the arbitration is held in India, the parties to the contract would be free to designate the law applicable to the substance of the dispute.
• ACA confers the status of a decree on the arbitral award shall be final and binding on the parties and persons claiming under them respectively.
  The grounds on which the award of an arbitrator could be challenged is limited and is in line with UNCITRAL Model Law on International Commercial Arbitration in 1985.
• If one of the parties is non-Indian the arbitration shall be considered as international commercial arbitration.
• International Commercial arbitration can take place either within India or outside India in cases where there are ingredients of foreign origin relating to the parties or the subject matter of the dispute.
• In International Commercial Arbitration the sole arbitrator/ third arbitrator can be from a neutral country.
• The law applicable to the conduct of arbitration and the merits of the dispute may be Indian law or foreign law, depending on the contract in this regard, and the rules of conflict of laws.

ENFORCEMENT OF FOREIGN AWARDS – CONVENTION COUNTRIES

A foreign award can be enforced in India under the multilateral international conventions to which India is a party, namely, the Geneva Convention of 1927 or the New York Convention of 1958, if the said Convention applies to the relevant arbitration. The foreign award must have been made in a country which has ratified the Geneva Convention of 1927 or the New York Convention of 1958.

ENFORCEMENT OF AWARDS - NON-CONVENTION COUNTRIES

Foreign awards which are made in countries which are not parties to either the Geneva Convention or the New York Convention can be enforced through the provisions of ACA. This position has been clarified by the Supreme Court of India.

CONCLUSION

Considering the Indian scenario, especially delays in courts, it is advisable to have a proper ADR provisions in all contracts. The applicable law, jurisdiction and place where the ADR proceedings will take place etc. can be agreed to between the Parties. Even if you elect to have Indian law as applicable law it is possible to choose international forums and/or arbitrators from neutral countries, which can ensure satisfactory results to all the parties.

Doing Business in India - Taxation & Exchange Controls

INTRODUCTION - THE FRAMEWORK

India has a complex tax system and a well-developed tax structure. The tax structure is also largely compliance driven. Taxes have to be considered while preparing budgets by companies /individuals. Companies/ individuals planning/proposing to do business in India need to plan every step of their transaction meticulously to avoid any unpleasant surprises, which directly affect their profitability.

India has a three-tier structure, comprising of-

• The Union Government,
• The State Governments and
• The Local Bodies.

The power to impose direct and indirect taxes and collect taxes, duties, cesses etc. is distributed among the Union Government, the State Governments and the Local Bodies, as per the Constitution of India. Since the onset of liberalization in the country, tax structure of the country has been rationalised and is an on going process.

The Finance Minister of India has presented the Annual Budget for the Financial Year 2008-09 on February 29, 2008. “Financial Year” for taxation is the period of 12 months commencing from 1st Aril to March 31st of the next calendar year.

Taxes/Duties levied by the Union Government

Corporate and Personal Income Tax (IT)

Tax on income is levied under the Income Tax Act, 1961 (ITA).

Corporate IT Rates

IT rates applicable to entities having taxable income* of more than INR 10 million for the previous year** commencing from April 01, 2008:

• Domestic Companies (Company registered in India) - 33.99% [30% basic tax plus surcharge of 10% on IT and Education Cess (EC) of 3% of the basic tax and surcharge]
• Foreign Companies (including Branch/Project office) - 42.23% [40% basic tax plus surcharge of 2.5% and EC -3% of the basic tax and surcharge]
• Partnership Firms – 33.99% [30% basic tax plus surcharge of 10% and EC -3% of the basic tax and surcharge]

* “Taxable income” is broadly the Gross income less admissible business expenditure and depreciation. For individuals certain additional deductions are permitted towards certain specified expenses such as premium paid on medical insurance and investments etc.

**“Previous year” is the Financial Year prior to the Assessment year. The tax assessment of a previous year is carried out in the assessment year.

Tax rates applicable to entities having taxable income of LESS than INR 10 million for the year commencing from April 01, 2008:

• Domestic Companies - 30.9% [30% basic tax and EC -3% of the basic tax]
• Foreign Companies (including Branch / Project office) - 41.2% [40% basic tax and EC -3% of the basic tax]
• Partnership Firms – 30.9% [30% basic tax and EC -3% of the basic tax]

Personal IT Rates

In case of Individuals, the 1st INR 150,000 is exempt from taxation.

The income beyond INR 150,000 is taxed as follows:

• INR 150,000 to INR 300,000 - 10%.
• INR 300,000 to INR 500,000 - 20%.
• INR 500,000> - 30%.
• Surcharge of 10% on tax is added if the Taxable income exceeds INR 1 million.
• EC @3% on tax (and surcharge, if any).

Residential Status

The residential status of individual/taxable entity is very relevant and has to be checked for each year.

The broad parameters for deciding the residential status are:

Individual- An individual can be a ‘resident and ordinarily resident’ or ‘resident but not ordinarily resident’ or ‘non-resident’.

An Individual is said to be resident in India if either of the following conditions is satisfied:

• he has been in India for a period of 182 days or more during the previous year, or
• he has been in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.

If he does not satisfy any of the above conditions then he is treated as a non-resident.

Resident and Ordinarily Resident – If an individual has been in India for atleast two years out of ten previous years immediately preceding the relevant previous year; and he has been in India for a period of 730 days or more during the seven years immediately preceding the relevant previous year.

If either of the above conditions for Resident and Ordinarily Resident is not satisfied then the individual is a ‘resident but not ordinarily resident’.

Company- In case of Company:

• An Indian company is always resident in India.
• A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India.
  

Implication of residential status on IT

Resident and Ordinarily Resident- In case of a person ‘resident in India’ both Indian income and foreign income are taxable.

Resident but not ordinarily resident- In case of a person ‘resident but not ordinarily resident’ income generated in India from business whether partly or fully controlled from India is taxable but income from business set up and controlled wholly outside India is not taxable.

Non-resident- In case of ‘non-resident’ Indian income is taxable but the foreign income is not taxable. Therefore, generally, if the control and management of a foreign company is situated wholly out side India the foreign Income is not taxable. For non-resident, Indian Income would mean income accrued or received in India.

IT on Presumptive Profit Basis [Presumptive Profit is generally understood as notional profit in a business/industry without refering to the books of account.]

Certain identified business activities, listed below, carried on by non- residents in India may be taxed on presumptive basis:

• Activities connected with the Exploration of Mineral Oil -10% of the total turnover will be taken as profit and taxed without deductions and depreciations.
• Shipping profits - 7.5% of the total turnover will be taken as profit and taxed without deductions and depreciations.
• Business of Civil Construction - 10% of the total turnover will be taken as profit and taxed without deductions and depreciations.
• Royalties and Technical Services Fees -10% of the total turnover will be taken as profit and taxed without deductions and depreciations.

Sectoral Tax Holidays & Other Benefits

Considering the importance of various industries for the economy, like mining, E&P of Mineral Oils, Power, Information Technology, infrastructure etc., various special provisions are incorporated in the ITA giving special concessions, benefits and tax holidays. Therefore, any person proposing to do business in India in any sector, should seek competent legal advise to properly structure their strategies.

Fringe Benefit Tax (FBT)

FBT is payable by the companies/firms. It is a tax on certain facilities provided/enjoyed by the employees of the companies/ firms.

The rate of FBT is 30% on the value of fringe benefits and surcharge (10% in case of domestic companies or 2.5% in case of Foreign Companies, as the case may be) and 3% EC on FBT and surcharge thereon.

Minimum Alternative Tax (MAT)

MAT is applicable to companies which are making profits however not liable to pay IT because income computed after adjusting the depreciation/ amortization of expenditure etc. is either nil or negative or insignificant.

The calculation of MAT plus surcharge and EC is given below:

• Domestic company (taxable income more than INR 10 million): 11.33% including Surcharge & EC.
• Domestic company (taxable income less than INR 10 million): 10.30% including EC (Surcharge not applicable)
• Foreign Company (taxable income more than INR 10 million): 10.5575% including Surcharge & EC
• Foreign Company (taxable income less than INR 10 million): 10.30%. including EC (Surcharge not applicable)

Tax on Capital Gains (CGT)

CG is the profit arising out of the disposal of a ‘capital asset’ – the difference between the cost of acquisition and sale consideration.

Long term CGT (transfer beyond 3 years from the date of acquisition/ for shares and securities more than 1 year) is 20% and short term CGT (transfer within 3 years from the date of acquisition/ for shares and securities within 1 year) is 15% subject to certain conditions and the nature of the asset.

Withholding Tax obligation/Tax Deductable at Source (TDS)

When payments are made on account of contracts, salaries, rent, interest, royalty, commission etc., the companies/ Association of Persons/ partnerships certain percentages are to be deducted from the amounts so paid.

The deducted amount has to be deposited with the tax authorities in the manner prescribed. There are other obligations like issue of certificate for TDS and filing of quarterly returns.

Dividend Distribution Tax (DDT)

Dividend declared by an Indian company is taxable in the hands of that company.
Total DDT is 16.995% [including tax @ 15%, surcharge on tax @ 10% and EC @3% (on tax and surcharge)].

Wealth Tax

Net wealth on the valuation date is chargeable to wealth tax and only Individual and company is chargeable to wealth tax.

Net wealth in excess of INR 1.5 million is chargeable to wealth tax @1% and surcharge and EC thereon.

Valuation date is 31st March immediately proceeding the assessment year.
Productive assets like shares, debentures, bank deposits and investments in mutual funds are exempt from wealth tax.

The non-productive assets include jewellery, residential house (in case the person has more than one house) bullion, motor cars, aircraft, urban land, etc. are liable for WT.

Foreign nationals are exempt from wealth tax on non-Indian assets.

Customs Duty & Countervailing Duty

These duties are levied on the import of goods according to the Customs Act, 1962 and the rates prescribed under the Customs Tariff Act, 1975.

The Tariff is aligned with the internationally recognized Harmonized System of Nomenclature. The Central Government has the power to lower the rate of duty prescribed in the Tariff for any item by issuing a notification in the Official Gazette.

The taxable event occurs the moment the goods enter the territorial waters of India.

Project Imports

Certain duty benefits/concessions are available for the import of certain capital goods, spare & consumables, in relation to:

• Industrial Plant;
• Irrigation Project;
• Power Project;
• Mining Project;
• Project for the exploration for oil or other minerals; and
• Such other projects as the Central Government may, notify.

In the recent Budget it is proposed to reduce the customs duty on project imports from 7.5% to 5%.

Excise Duty (ED)

ED (also, Special Excise Duty and Additional Excise Duty in some cases) is payable on the goods manufactured in India.

The rates depend on the product manufactured or produced. ED on most commodities ranges between 0 to 14% proposed Central Value-added Tax (CENVAT) benefits are also available on the goods manufactured or produced in India. CENVAT is applicable to practically all manufactured goods, so as to avoid cascading effect on duty.

Service Tax (ST)

ST is levied on most of the services availed by a recipient of any service. The lists of assessable services are notified by the GOI from time of time. A service Provider with receipts above INR 1 million is liable to collect and deposit ST. Services received from outside India are also taxable from the recipient of services in India.

The rate applicable is 12% and along with EC the effective rate becomes 12.36%.

Central Sales Tax (CST)

CST is applicable in inter-state sale of goods. The new budget proposed to reduce the CST from 3% to 2%.

There is a proposal to substitute CST with Goods and Services Tax by April 1, 2010.

Research and Development Cess (R&D Cess)

R&D Cess is levied under the Research and Development Cess Act, 1986, at the rate of 5% on the import of technology into India. R&D Cess is payable by the importer on payments made for such imports.

Technology means any special or technical knowledge or any special service required for any purpose by an Industrial concern under any foreign collaboration including designs, drawings, publications and technical personnel.

Education Cess (EC)

EC is levied on all the taxes and duties imposed by the GOI as a surcharge on all taxes and duties @ 3%.

Taxes/Duties levied by the State Governments

Local Sales Tax (LST) / Value Added Tax (VAT)

LST/ VAT is levied by States in which the sale of goods take place, which may vary from 1% to 20%.

Every state has its own LST/ VAT laws, rates and classification of goods. Also the transaction involving application of labour and material to be used is taxed under VAT/LST as ‘works contract’, although the same may be chargeable to Service Tax also.

Stamp Duty

The stamp duty is payable on specified transactions under the Indian Stamp Act, 1899 (ISA) as amended/ modified by the State governments. The stamp duty is payable when a deed/ document/ instrument, like bill of exchange, bill of lading, letter of credit, transfer of shares, mortgage, lease, agreements, conveyance deed and many more, as specified in the ISA, is executed. The amount of duty largely depends on the amount involved in a transaction, the document executed and the State in which it is executed or operated.

Local Area Development Tax / Octroi / Entry Tax

These taxes are levied by certain States for the development of the local areas where the business is taking place or carried on. These taxes are levied and collected on the entry of specified goods, into any local area for consumption, use or sale therein.

Different rates are applicable for different areas, classes of goods and categories of persons.


OTHER State Government TAXES/ Local Bodies Taxes

• IT on agricultural income,
• State Excise (mainly duty on manufacture of alcohol),
• Land Revenue (levy on land used for agricultural/non-agricultural purposes),
• Duty on Entertainment like movies and performances.
• Tax on Professions & Callings.
• Property Tax - levy tax on properties (buildings, etc.),
• User Charges for utilities like water supply, drainage, etc.and
• Tax on local Markets.

Obligations under Various Tax Laws

There are time bound/periodical obligations under various tax laws, which include:

• Obtaining permanent account numbers and similar registrations.
• Deposit of tax in advance.
• Withholding tax, issuing certificate of withholding and deposit obligations.
• Filing of monthly/ quarterly/ annual returns as prescribed by the relevant law.

Double Taxation Avoidance Agreement (DTAA)

There are DTAAs between India and many foreign countries, which will have a role to play in the ultimate tax liability.

Foreign income of a person generally becomes liable to tax in two countries – the country in which the income is earned and the country in which the person is resident.

Double taxation of such income is avoided by means of DTAA.

Where the income accrues or arises in a country with which no agreement exists, unilateral tax relief is provided on the doubly taxed income under the provisions of ITA.

Transfer Pricing

Transfer pricing regulations were introduced to battle the tendency of multinationals to park profits in low tax regimes. The regulations allow the IT authorities to determine at arm’s length price in respect of international transactions between related enterprises.

These regulations are the current hot favourite of the tax administration in India and the adjustments made in respect of the value of international transactions have assumed significant importance in tax administration in India.

Transfer Pricing issues are dealt with in cases of Customs Duty and IT under separate rules.

Advance Rulings

For non-residents, there are special provisions under ITA, Central Excise Act and Customs Act, to apply for advance ruling by the ‘Authority for Advance Ruling’.

This will help, in advance, in the determination of certain tax issues, in relation to any transaction which such non-resident has undertaken or proposes to undertake.

EXCHANGE RATES AND CONTROLS

Reserve Bank of India (RBI) is regulator for financial and banking system, formulates monetary policy and prescribes exchange control norms.

RBI regulates foreign exchange under the Foreign Exchange Management Act (FEMA) and the Regulations made there under. Under FEMA nothing is permitted unless specifically permitted. There are various general and special permissions issued by the RBI which are investor friendly and especially facilitate repatriation of business profits, salaries etc.

All the foreign exchange transactions have to be done only through the normal banking channels/authorized dealers (AD).

Except with the general or special permission of the RBI no person can:

• deal in or transfer any foreign exchange or foreign security by any person not being an authorized person;
• make any payment to or for the credit of any person resident outside India in any manner;
• receive otherwise through an authorized person, any payment by order or on behalf of any person resident outside India in any manner;
• reasonable restrictions for current account transactions as may be prescribed.

Repatriation of Investment Capital and Profits Earned in India

All foreign investments made under the permitted FDI routes are freely repatriable except for the cases where Non-resident Indians choose to invest specifically under non-repatriable schemes.

Dividends declared on foreign investments can be remitted freely through an AD.
Non-residents can sell shares on stock exchange without prior approval of RBI and repatriate through an AD if they have necessary NOC/tax clearance certificate issued by IT authorities.

Profits, dividends, etc. (which are remittances classified as current account transactions) can be freely repatriated.

Remittance of the winding-up proceeds of a BO/PO/LO of a Foreign Company is permitted, subject to RBI approval.

Generally Indian companies are allowed to retain and remit payments for the services of foreign nationals/companies.


CONCLUSION

In view of the complex tax and foreign exchange laws, it is always necessary and advisable to ensure that a foreign entrant has the required guidance from competent professionals from the very first stage. Our experience shows that certain companies who did not care to take appropriate guidance on taxation clauses in the agreements, tax planning & compliance have ended up with unfavourable contract conditions, avoidable tax burdens and arbitrations eating up their profit margins.