FEMA AND EXCHANGE CONTROL
Reserve Bank of India is the monitoring authority for all cross border transactions and has prescribed regulations to govern these transactions. RBI has prescribed (i) transactions that could be done under automatic route alongwith prescribed filings; (ii) transactions that could be done under automatic route upto a prescribed limit; (iii) transactions that require RBI approval; (iv) transactions that require Government approval.
RBI constantly updates its policy in light of needs of the economy and globalization. Ascertainment of implications under FEMA and exchange control matters requires thorough understanding of the Regulations prescribed by RBI, experience and discussions with RBI officials.
Doing business in India
A foreign enterprise wishing to do business in India has following options:
This provides an indirect presence in India to the foreign entity. An Indian entity can be appointed as agent of the foreign business. Depending upon the scope of the agency agreement, the agent can buy or sell or provide any other service. The taxation of the foreign entity in India depends on the nature of the agent and the terms of contract with the agent.
These are owned and controlled by the foreign enterprises. However the liaison offices are not allowed to earn any income and are primarily opened by foreign companies to liaise with their customers in India and for promoting export & import. No manufacturing, trading or any other commercial activity is allowed in liaison offices. The RBI approval needs to be secured before opening a liaison office in India. Typically, liaison offices are not liable in tax in India, since they do not conduct any operations, or activities in India, and they act only as a communication channel. However, there are tax litigations on taxability of Liaison offices in India under Indian laws.
The branches are basically an extended arm of the foreign company and can undertake export/import of goods, consultancy, research, coordination with local buyers and sellers, provide technical support for products sold in India, development of software and airline/shipping business. However branches are not allowed to undertake manufacturing activities except research work in which parent company is engaged. These branches are treated as foreign company in India and are liable for higher Income tax compared to companies incorporated in India. The foreign parent company is liable for all activities of the Indian branch: in an Indian subsidary, parent company is insulated from the liabilities arising from Indian operations due to presence of corporate entity in India. Due to restrictions in day-to-day operations and higher taxation, it is not a popular route.
100% Subsidiary or Joint Venture
This is the most preferred route for foreign companies wishing to establish a base in India. Typically, foreign company teams with an Indian counterpart and co-own an Indian company through which Indian operations are conducted. Depending upon the business sector, the investments on repatriation basis are allowed under automatic route or through a prior approval by FIPB (Foreign Investment Promotion Board).
Foreign Investment in India is subject to policy guidelines framed by the Government of India from time to time in accordance with its Industrial Policy. In terms of the Industrial Policy and Procedure announced by the Government of India foreign equity, with or without sectoral caps, is permitted by Reserve Bank under the Automatic Route in specified industries/services sector. Applications that do not conform to the parameters of the Automatic Route, are required to be made to the Secretariat for Industrial Assistance (SIA), Ministry of Commerce and Industry, Government of India, New Delhi. Foreign Institutional Investors are permitted to invest in securities in primary and secondary markets in India as per guidelines issued by Reserve Bank in this regard from time to time.
We have illustrated certain services that we provide in field of FEMA and exchange control matters:
- Advice on all FEMA and exchange control matters
- Assistance in obtaining informal clarifications from RBI officials on the proposed transaction
- Assistance in securing RBI or Government approvals wherever necessary
- Assistance in complying with filing and other procedural requirements prescribed by RBI
- Assistance with various registration requirements including import-export code