Doing Business in France

MGI International Tax and Business Guide
India. September 2002

Prepared by Chandabhoy and Jassoobhoy

CONTENTS

1. INTRODUCTION
A Geography
B Climate
C Population
D Language
E Transportation
F Communications
G Political set-up
H Judiciary
I Currency and banking
J Travel regulations for foreign personnel
K Quality of life

II BUSINESS AND INVESTMENT CLIMATE
A Economic factors
B India - an attractive investment location
C Special investment programmes
D Foreign direct investment
E Foreign institutional agreements
F Venture capital  investments
G Joint ventures and subsidiaries outside India
H Exchange control
I Business forms
J Monopolies and restrictive trade practices
K Intellectual property rights
L Finance
M Securities and Exchange Board of India (SEBI)
N Labour relations

III TAXATION
A Income tax
B Administrative systems
C Assessments
D Advance ruling
E Residence
F Scope of total income
G Taxable income
H Agricultural income
I Tax concessions
J Special provisions for computation of taxable income of non-residents engaged in specified business
K Taxation of Non-resident Indians
L Taxation of offshore funds/foreign institutional investors
M Business loss
N Capital gains
O Tax rates and advance tax for individual and non-corporate assesses
P Corporate tax rates and advance tax
Q Withholding taxes
R Double taxation relief
S Business connection
T Transfer pricing
U Wealth-tax
V Indirect taxes

IV ACCOUNTING AND AUDITING
A Accounting profession
B Auditing requirements
C Accounting standards and principles

V  APPENDICES
Appendix I - List of industries reserved for the public sector
Appendix II - List of industries for which industrial licensing is compulsory
Appendix III - List of cities with population of 1 million and abvove according to the provisional results of 1991 census.
Appendix IV - Sectoral cap on investments by persons resident outside India.
Appendix V - Details of activities or items for which automatic route of Reserve Bank of India for investment from person resident outside India is not available.
Appendix VI - Upper limits of withholding taxes in India's agreements for avoidance of double taxation.
Abbreviations

SECTION 1: INTRODUCTION

A GEOGRAPHY

In area, India is the largest country in South Asia and the seventh largest in the world. India is to the north of the equator between 8° 4' to 37° 6' north latitude and 68° 7' to 97° 25' east longitude with an area of 3.28 million sq. km (i.e 2.4% of the total world area) and is 3,214 km. from north to south and 2,933 km. from east to west. The neighbouring countries in the north are China, Nepal and Bhutan, in the east, Bangladesh and Burma, and in the west, Pakistan and Afghanistan. In the south the country tapers off into the Indian Ocean. The Palk Straits separates the island country of Sri Lanka, which is situated to the southeast of India.

India is a natural sub-continent flanked by the Himalayas in the north, the Arabian Sea in the west, the Bay of Bengal in the east and the Indian Ocean in the south. It has a land frontier of 15,200 km. and a coastline of 7,516 km. The Andaman and Nicobar Islands in the Bay of Bengal and Lakshadweep Islands in the Arabian Sea are parts of the territory of India.

B CLIMATE

The Indian climate can be described as the tropical monsoon type. Due to the vastness of the country and differences of altitude there are various climatic zones in the country. The great Himalayan mountain barrier stops the northern winter from blanketing India and thus keeps it pleasant in winter except for Kashmir and the hill stations in the Himalayas, where the temperature in winter touches - 15° C.

Rainfall in India is not evenly distributed. Areas like the west coast, Bengal and Assam in the east get the heaviest rainfall with more than 200 cm. each year. Rajasthan and the high Ladakh plateau of Kashmir receive only 10 cm. each year. At the other extreme Cherapunji in Meghalaya in the northeast gets as much as 1,062 cm. of rainfall, the highest in the world.

Seasons recognised by the Indian Meteorological Department are (1) Cold weather season (December to March); (2) Hot weather season (April to May); (3) Rainy season (June to September); and (4) Season of retreating south-west monsoons (October and November).

C POPULATION

India is the second most populous country in the world with 1027 million as on 1st March 2001 according to the provisional census report. The literacy rate is 62% with a great degree of regional variation. Nearly 30% of India's population lives in urban areas and 70% of he India's population lives in rural areas. The country has more than 20 cities with population more than 1 million. The details are given below:

Name of the city	Population (in millions)
Mumbai	14.5
Calcutta	12.0
Delhi	10.1
Madras	5.7
Hyderabad	4.7
Banglore	4.5
Ahmedabad	3.6
Pune	2.7
Kanpur	2.3
Lucknow, Nagpur	1.8
Jaipur	1.6
Surat	1.2
Bhopal, Coimbatore, Indore, Madurai, Patna, Vadodara, Varanasi, Ludhiana, Vishakapatnam	1.1

D LANGUAGE

Hindi is the official language of the republic. English the associate official language is widely used for business and is understood almost everywhere in India.

E TRANSPORTATION

India has an extensive network of roads. The Indian railway system is the largest in Asia and the fourth largest in the world, with a network of about 62,725-km comprising Broad Gauge, Meter Gauge and Narrow Gauge. The railways play a crucial role in India's development.

Among eleven major ports, Mumbai is the biggest port in India handling major amount of the total trade through Indian ports.

India is well served by air transport. The world's major airlines fly to and through India. Indian Airlines, Jet Airways and other private airlines also provide extensive inbound and outbound air services. 

F. COMMUNICATIONS

India has a well-developed modern system of communication. An excellent network of post offices, telegraph offices, telephone, telex, facsimile and e-mail facilities are available for internal and external communications.

G. POLITICAL SET-UP

India is the largest democracy in the world and has adopted a Parliamentary System of Government with two Legislative Houses. The country is a Union of states and Union Territories. The Central Government has exclusive jurisdiction over all matters of national interest such as defense, communication, banking and currency, international trade and foreign affairs. The State Governments have primary responsibility for matters like law and order, education, health and agriculture.

The Central Government comprises a council of ministers headed by a Prime Minister. The Prime Minister is usually the head of the party, which has the support of a majority in the Parliament. Parliamentary elections are generally held once in five years.

H. JUDICIARY

India has a well-established and independent judicial system. The Supreme Court of India is the highest court of appeal at New Delhi and High Courts in states, along with subsidiary district courts enforce the rule of law and ensure the fundamental rights of citizens, which are guaranteed by the Constitution.

I. CURRENCY AND BANKING

The Indian rupee is the country's currency.

The country's banking system is controlled and monitored by the Reserve Bank of India (Reserve bank). The functions of the Reserve Bank are divided into two distinct areas:

• Issue department which looks after issue of currency.
• Banking department, which regulates and supervises Indian banking

The commercial banking system in India is fully developed and the large Indian commercial banks are state owned. Of the scheduled commercial banks, 223 are in public sector and these account for about 82 per cent of the deposits of all scheduled commercial banks. In the public sector banking system, there are 196 regional rural banks specially set up to increase the flow of credit to small borrowers in the rural areas. These banks have specified areas of operations usually limited to two to three districts and have limited exposure to commercial banking business. The remaining 27 banks in the public sector are regular commercial banks and transact all types of commercial banking business.

J. TRAVEL REGULATIONS FOR FOREIGN PERSONNEL

Foreigners desirous of visiting India can do so after obtaining a visa from the Indian Mission in the country of their residence. They should posses a valid National passport - except in the case of nationals of Bhutan and Nepal, who may carry only suitable means of identification.

Indian Embassies and Consulates abroad issue visas upto 5 years with multiple entry option to foreign nationals for business purposes and for studies in India. For employment purpose visas are issued for 1 year, which can be extended for further stay. A foreign national staying in India for more than 180 days, must obtain a Registration Certificate / Residential Permit from the Foreigners Registration offices of the state where he would be stationed.

K. QUALITY OF LIFE

India has an ancient culture with a rich tradition and history dating back several thousand years. India has a secular society where all the religions of the world are practiced.

The educational system maintains fairly high standards and consists of public and private schools, universities and institutions of higher learning. These impart academic and vocational training besides encouraging participation in sports and extra-curricular activities.

A host of tourist attractions abound in India from historical monuments like the world famous Taj Mahal to the beach resorts in the south. The Himalayas offer a unique experience of scenic beauty and for sports. There are excellent facilities for accommodation and transport available at tourist centers.

SECTION II - BUSINESS AND INVESTMENT CLIMATE

A. ECONOMIC FACTORS

A foreign investor who wishes to undertake business in India will find tremendous opportunities. The industrial policy offers a great deal of freedom to business houses and entrepreneurs to make their own investment decisions.

India has gone through more than a decade of economic reforms. Continuity in the economic liberalisation process and the political consensus that economic change is imperative could place India on an industrial growth path that few countries in the world enjoy. Review of the key economic indicators for 2001-02 is given below.

• The rate of growth in GDP is expected to be 5.4% during 2001-02 compared to 4% during 2000-01. 
• Industrial production is expected to have a lower growth rate of 2.3% compared to a growth rate of 5.0% during 2000-01.
• Foreign Exchange assets were Rs. 2262 billion (USD 46,561 million) at the end of January 2002 as compared to Rs. 1845 billion (USD 39554 million) at the end of the fiscal year 2000-01. This represents of 22.6% in rupee terms and 17.7% in dollar terms.
• Foreign trade front, imports during the period April'01 to December'01 have reduced by 4.5% as compared to the fiscal year 2000-01 by Rs.491 billion.
• For 2001-02 the gross fiscal deficit and revenue deficit is estimated at 5.1% and 3.4% of Gross domestic product respectively.
• As per the provisional estimate food grains production has increased by 13.3 million tonnes as compared to the fiscal year 2000-01 having the total production of 195.9 million tonnes. 
• The average annual rate of inflation in terms of the Wholesale Price Index (WPI) increased significantly from 3.3 per cent in 1999-2000 to 7.1 per cent in 2000-01 due to a substantial rise in administered prices of petroleum products. During 2001-02, the inflation rate declined in terms of the WPI. The 52 weeks average inflation rate declined from 7 per cent at the beginning of 2001-02 to 4.7 percent for the week ended January 19, 2002. The point-to-point inflation rate reached a low of 1.3 per cent by the end of January 2002, which was the lowest in over two decades.

The Finance Minister's Budget speech for 2002-03 has spelt the following broad strategy.

• Continue the emphasis on agriculture and food economy reforms.
• Enhance public and private investment in infrastructure.
• Strength the financial sector and capital markets
• Deepen structural reforms and regenerate industrial growth
• Provide social security to the poor
• Consolidate tax reforms and continue fiscal adjustment at both the central and state levels.

B. INDIA - AN ATTRACTIVE INVESTMENT LOCATION:

There are several good reasons for investing in India.

• Stable democratic environment over 50 years of independence;
• Large market size with middle class population of 250-350 million with increasing purchasing power reflected by remarkable increase in purchase of consumer durables in recent years;
• Access to regional international markets through membership of regional integration frameworks such as SAARC
• Foreign investment is welcome in almost all sectors barring those of strategic concern like defence and atomic energy. Large and diversified infrastructure spread across the country
• Thrust on technology, innovation and knowledge base
• Large manufacturing capability, spanning almost all areas of manufacturing activities
• Developed banking system, commercial banking network of over 63,000 branches, supported by a number of national and state level financial institutions
• Vibrant capital market comprising 23 stock exchanges with over 9000 listed companies;
• Legal protection for intellectual property rights;
• Import regime in conformity with WTO commitments – removal of remaining quantitative restrictions on imports of goods into India barring certain items on grounds of national security, defence and health
• Increased role of private and foreign investment in the Indian Economy;
• Rupee is fully convertible on current account and is being progressively liberalized on capital account;
• Availability of skilled manpower and professional managers;
• Well developed capital market, banking infrastructure, insurance and financial services sector;
• Well developed accountancy, legal, actuarial and consultancy profession;
• Well-established legal system with an independent judiciary.

C.SPECIAL INVESTMENT PROGRAMMES

(Free Trade Zones / Electronic Hardware and Software Technology Parks / Export Oriented Units and Export Processing Zones / Special Economic Zones)

1. Electronic Hardware and Software Technology parks

Salient features of investment in Electronic Hardware and Software Technology parks

• Licensing is required only for manufacturing electronic aerospace and defence equipment;
• 100 percent foreign investment under automatic route is allowed in electronics and software industries set up exclusively for exports;
• Bonded factories set up under these programs are eligible to import, free of duty, their entire requirement of capital goods, raw materials and components, spares and consumables, office equipment's etc.;
• Deemed export benefits are available to suppliers of these goods from the Domestic Tariff Area (DTA);
• Relaxation is there to sell a part of the production from such units in the Domestic Tariff Area depending upon the level of the value addition achieved;
• After 2 years of import of or indigenously procured items like computers and computer peripherals can be donated to recognised non-commercial educational institutions, registered charitable hospitals, public libraries, public funded research and development establishments, governmental organisation or to government of states or union territory without payment of any duties;
• Capital goods are allowed to be re-exported;

2. Export oriented units and Export processing zones

The Indian Government has established the following eight Export Processing Zones (EPZs) to promote exports. Export Oriented Units (EOUs) may be set up anywhere in India.

• Mumbai (Santacruz Electronics Export Processing Zone),
• Kandla in Gujarat,
• Cochin in Kerala,
• Madras in Tamil Nadu,
• Falta in West Bengal,
• Noida in Uttar Pradesh,
• Surat Export Processing Zone in Gujarat, and
• Vishakhapatnam in Andhra Pradesh

Salient features of investment in EOUs/EPZs

• In case where foreign technological skill and marketing capabilities are considered essential proposals for foreign ownership up to 100 per cent can be considered;
• Prescribed percentage of the output is required to be exported by industrial units set up under these zones in accordance with the industry in which they operate, and the balance can be sold in the domestic tariff area (DTA) against payment of certain taxes;
• One-half of the value of their products are permitted to be sold in the domestic market on payment of excise duty by Export Oriented Units /Export Processing Zone units engaged in electronic hardware;
• Full repatriation benefits in respect of capital and income earned thereon is available;
• Duty free import of capital equipment, raw materials and components;
• General exemption is available from excise duty, central taxes as well as reduction in certain local taxes;
• Tax holiday and benefits are available under the Indian Income tax Act.
• Industrial plots and standard design factories are available to Export Oriented Units/Export Processing Zones at concessional rates;
• Export Oriented Units /Export Processing Zone units have to achieve specified value addition norms, which are expressed in terms of the difference between the FOB value realised and the cost of all inputs;
• Exporters are eligible to obtain Advance licences exempting them from payment of customs duty on goods required for export production;

3. Special Economic Zones

The Government of India introduced the concept of Special Economic Zones in 2001-02. Some of the salient features of investment in special economic zones are as follows:

• Developers of Special Economic Zones are allowed duty free import/ procurement from Domestic Tariff Area for development of Special Economic Zones to give boost to development of integrated infrastructure for exports.
• For setting up of factory in the zone it is permitted to procure/import goods from Domestic Tariff Area without payment of duty.
• Units in Special Economic Zones are allowed to produce items without any license which are reserved for Small Scale Industries
• Facility to retain 100% foreign exchange receipts in Exchange Earners Foreign Currency account.
• Facility in respect of units in Special economic Zones to realise and repatriate export proceeds within twelve months
• Write-off of unrealised export bills upto 5%
• Permitted to sell goods in the Domestic Tariff Area in accordance with the import policy in force
• Subcontracting of part of production abroad permitted.
• Duty free goods to be utilised in five years.
• The developer of the Special Economic Zone is given infrastructure status under the Income tax Act and is entitled to tax benefit.
• Units established in Special Economic Zone which manufacture or produce articles or things or computer software are also entitled to the benefit of tax holiday under the Income tax Act.

D. FOREIGN DIRECT INVESTMENT

1. Industrial policy

The central government's liberalization and economic reforms program aims at rapid and substantial growth and integration with the global economy in a harmonized manner. The Industrial Policy reforms have reduced the industrial licensing requirements, removed restrictions on investments and expansion, and facilitated easy access to foreign technology and foreign direct investment.

All industrial undertakings are exempt from obtaining an industrial licence to manufacture, except for industries reserved for the Public Sector (Appendix I) and industries retained under compulsory licensing (Appendix II)

2. Foreign Direct Investment (FDI)

The declared objective of the current policy is to invite and facilitate foreign investment. The policy guidelines of the Government of India for Foreign Investment in India are reviewed on an ongoing basis. The regulations have been structured to identify the industrial sectors, with or without sectoral caps, for investments, to minimize the procedural formalities and finally to introduce an automatic route for foreign investors to bring in investment by merely informing Reserve Bank.

In view of the Government's commitment for liberalising the foreign direct investment regime, all items/ activities have been placed under the automatic route except the following:

a) All proposals that require an Industrial Licence under the Industries (Development and Regulation) Act, 1951, (Appendix II) and also items which require an Industrial Licence in terms of the locational policy notified by Government under the New Industrial Policy of 1991(Appendix III);

b) Foreign investment of more than 24% in the equity capital of units manufacturing items reserved for small scale industries;

c) All proposals in which the foreign collaborator has a previous venture/tie-up in India;

d) All proposals where the foreign investor proposes to acquire existing shares of any Indian company;

e) All proposals falling outside notified sectoral policy/caps as given in (Appendix IV) or under sectors in which 
foreign direct investment is not permitted without government approval i.e., *SIA/**FIPB (Appendix V).

*SIA – Secretariat of Industrial Assistance
**FIPB – Foreign Investment Promotion Board

All items/activities not covered above will be eligible for foreign investment under the Automatic Route of the Reserve Bank up to 100% of the capital, subject to compliance of the notified conditions.

3. Foreign Investment policy for trading activities

A trading company incorporated in India may issue shares or convertible debentures to the extent of 51% of its capital under the automatic route, to non-residents subject to the condition that remittance of dividend to the shareholders outside India is made only after the company has secured registration as an Export/Trading/Star Trading/Super Trading House from the Director General of Foreign Trade, Ministry of Commerce, Government of India. However, under the FIPB route:

i) 100% FDI is permitted in the case of trading companies for the following activities:

• Exports;
•  Bulk imports with export/expanded warehouse sales;
• Cash and carry wholesale trading; and
• Other imports of goods or services provided at least 75% is for procurement and the sale of goods and services among the companies of the same group, and for third party use or onward transfer/distribution/sales.

ii) The following kinds of trading are also permitted, subject to the provisions of prevalent EXIM Policy:

• Companies providing after sales services (that is, not trading per se);
• Domestic trading of products, permitted at the wholesale level for trading companies that wish to market manufactured products on behalf of joint ventures in which they have equity participation in India;
• Trading of hi-tech items/items requiring specialized after sales service;
• Trading of items sourced from the small scale sector in which, based on technology provided and established quality specifications, a company can market those items under its brand name;
• Domestic sourcing of products for export; and
• Test marketing of items for which a company has manufacturing approval, provided the test marketing facilities will be used for a period of two years, and investment in setting up manufacturing facilities commences simultaneously with test marketing.
• FDI upto 100% for e-commerce activities subject to the condition that such companies would divest 26% of their equity in favour of the Indian Public in 5 years, if these companies were listed in other parts of the world. Such companies would engage only in business to business (B2B) e-commerce and not in retail trading.

4. Other modes of Foreign Direct Investment

a. Global Depository Receipts/American Depository Receipts/Foreign Currency Convertible Bonds

Foreign investment by way of Global Depository Receipts (GDRs), American Depository Receipts (ADRs) and Foreign Currency Convertible Bonds (FCCBs) is treated as FDI. Indian companies are allowed to raise equity capital in the international market by issuing rupee denominated shares to a non-resident depository for the purpose of issuing of GDRs/ADRs subject to the following conditions:

The Indian company issuing such shares:

i) has an approval from the Ministry of Finance, Government of India to issue such ADRs and GDRs or is eligible to issue ADRs/GDRs in terms of the relevant scheme in force or notification issued by the Ministry of Finance, and

ii) is not otherwise ineligible to issue shares to non-resident persons in terms of Foreign Exchange Management Act.

iii) issues ADRs/GDRs in accordance with the scheme for issue of Foreign currency Convertible Bonds and ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993 and guidelines issued by the Central Government thereunder from time to time.

iv) furnish to the Reserve Bank, full details of such issue in the prescribed form within 30 days from the date of closingof the issue.

v) shall furnish a quarterly return in the prescribed form to Reserve Bank within 15 days of the close of the calendar quarter.

vi) repatriate or utilize foreign exchange resources raised for specified purpose the Indian company may invest the foreign currency funds in:

• Deposits with or Certificate of Deposits or other instruments of banks who have been rated not less than A1+ by Standard and Poor or P1 by Moody's for short term obligations,
• Deposits with branch outside India of an authorised dealer in India, and
• Treasury bill and other monetary instruments with a maturity or unexpired maturity of the instrument of one year or less.

An applicant company seeking the central government's approval in this regard should have a consistent track record of good performance (financial and otherwise) for a minimum period of three years. This condition can be relaxed for infrastructure projects such as power generation, telecommunications, petroleum exploration and refining, ports, airports, and roads.

There is no restriction on the number of GDRs/ADRs/FCCBs that can be floated by a company or a group of companies in a financial year. A company engaged in the manufacture of items covered under the automatic route the FDI of which, after a proposed issue of GDRs/ADRs/FCCBs, is likely to exceed the sectoral caps would need to obtain prior government clearance through the FIPB before seeking final approval from the Ministry of Finance.

There are no end-use restrictions on GDR/ADR issue proceeds, except for an express ban on investment in real property and on the stock markets. The FCCB issue proceeds need to conform to external commercial borrowing end use requirements; in addition, 25% of the FCCB proceeds can be used for general corporate restructuring.

b. Preference Shares

Foreign investment by way of preference shares is treated as part of FDI. Proposals are processed either through the automatic route or the FIPB, as the case may be. The following guidelines apply to issues of such shares:

i) Foreign investment in preference shares is considered to be part of share capital and falls outside the External Commercial Borrowing (ECB) guidelines/cap;

ii) Preference shares that carry a conversion option are to be treated as foreign direct equity for purposes of sectoral caps on foreign equity, where such caps are prescribed. Preference shares structured without such a conversion option fall outside the foreign direct equity cap;

iii) The conversion duration is to be in accordance with the maximum limit prescribed under the Companies Act or the maximum limit agreed to in the shareholders' agreement, whichever is less;

iv) The dividend rate should not exceed the limit prescribed by the Ministry of Finance; and

v) Issues of preference shares should conform to guidelines prescribed by the SEBI and the RBI, and other statutory requirements.

c. Investment through rights issue

A non-resident may purchase equity or preference shares or convertible debentures on right basis by an Indian company subject to the conditions given below:

i) The offer of rights by the Indian company should not result in the increase in the percentage of foreign equity already approved, or permissible Under the FDI scheme;

ii) The existing shares or debentures against which shares or debentures are issued by the company on right basis had been acquired and are held by non-resident in accordance with the regulations;

iii) The offer price on right basis to non-resident is at a price, which is not lower than that at which the offer is made to resident shareholder.

The right shares or debentures purchased by a non-resident shall be subject to the same conditions including restrictions in regard to repatriability as are applicable to the original shares.

The amount of consideration for purchase of right shares or debentures is paid by way of inward remittance in foreign exchange through normal banking channels or by debit to NRE/FCNR account, when the shares or debentures are issued on repatriation basis. In case of shares or debentures issued on non-repatriation basis, the amount of consideration may also be paid by debit to NRO/NRSR/NRNR account.

d. Acquisition of shares on merger or demerger or amalgamation of Indian companies

Where the scheme of merger or amalgamation or reconstruction by way of demerger has been approved by a court in India, the acquiring company or the new company as the case may be issue shares to the non-resident shareholders of the transferor company subject to the following conditions:

i) The percentage of shareholding of non-resident in the transferee or new company does not exceed the percentage specified in the approval granted by the central government or Reserve Bank,

ii) Where the percentage is likely to exceed the percentage specified in the approval or the regulations, the transferor, the transferee company or the new company may, after obtaining the approval from the Central Government, apply to the Reserve Bank for its approval under Foreign Exchange Management Act.

iii) The transferor company or the transferee or the new company shall not engage in agriculture, plantation or real estate business or trading in transfer of development rights; and

iv) The transferee company or the new company files a report within 30 days with the Reserve bank giving full details of the shares held by non-residents in the transferor and the transferee or the new company, before or after the merger/amalgamation/reconstruction, and also furnishes a confirmation that all the terms and conditions stipulated in the scheme approved by the court have been complied with.

e. Issue of shares under Employee Stock Option Scheme (ESOP)

An Indian company may issue shares under ESOP Scheme to its non-resident employees or non-resident employees of its joint venture or wholly owned subsidiary abroad directly or through a trust subject to the following conditions:

i) The scheme has been drawn in terms of regulations issued under the Securities and Exchange Board of India Act, 1992 and;

ii) Face value of the shares to be allotted under the scheme to the non-resident employees does not exceed 5% of the paid up capital of the issuing company.

The issuing company shall furnish to the Reserve Bank, within 30 days from the date of issue of shares under the scheme, a report giving the following information:

i) Names of persons to whom shares are issued under the scheme and number of shares issued to each of them;

ii) A certificate from the company secretary of the issuing company that the value of shares issued under the scheme does not exceed 5% of the paid up capital of the issuing company and that the shares are issued in compliance with the SEBI regulation.

5. Investments by Non-resident Indians / Overseas Corporate Body

Non-resident Indians (NRIs): The Government of India actively encourages investment in India by Indians and persons of Indian origin resident abroad.
Non-resident Indians are those who come under any of the following categories:

• Indian citizens who stay abroad for employment or for carrying on business or vocation or any other purpose in circumstances indicating an indefinite period of stay outside india.
• Government servants deputed abroad on assignments with foreign governments or regional/international agencies like World Bank, IBRD, IMF and WHO.
• Officials of state government and public sector undertakings deputed abroad on temporary assignments or posted to their branches or offices abroad.

Non-resident Indians become residents of India only when they return to India for employment or for carrying on any business or vocation or for any other purpose indicating an indefinite stay in India, and not when they come back on short visits for holidays or business.

Facilities available to non-resident Indians are also made available to non-resident foreign citizens of Indian origin.

A person is deemed to be of Indian origin (PIO) if he at any time held an Indian passport or he or either of his parents or any of his grandparents was an Indian and a permanent resident in India at any time. A spouse of a citizen of India or of a person of Indian origin is deemed to be of Indian origin though of non-Indian origin.

Overseas Corporate Body (OCB):

The term Overseas Corporate Body 'OCB' means any overseas company, partnership firm, society and other corporate body predominantly owned directly or indirectly to the extent of at least 60% by Non-resident Indians (NRIs). It also includes overseas trust in which atleast 60% beneficial interest is irrevocably held by NRIs.

a. Portfolio investment scheme for NRI

Purchase/sale of shares and/or convertible debentures by an NRI on a stock exchange in India on repatriation and/or non-repatriation basis is permissible subject to the following conditions;

i) A non-resident Indian (NRI) may purchase/sell shares and or convertible debentures of an Indian company through a registered broker on a recognised broker on a recognised stock exchange subject to the following conditions:

ii) NRIs have to designate a branch of an authorised dealer for routing of all transactions.

iii) The paid up value of shares/each series of convertible debentures of an Indian company, purchased by each NRIs on repatriation and on non-repatriation basis does not exceed 5% of the paid-up value of shares/each series of convertible debentures issued by the company concerned.

iv) The aggregate value of shares of any company purchased by all NRIs does not exceed 10% of the paid up capital of the company and in the case of purchase of convertible debentures the aggregate paid-up value of each series of debentures purchased by all NRIs does not exceed 10% of the paid-up value of each series of convertible debentures

v) Provided that the aggregate ceiling of 10% referred to in this clause may be raised to 24% if the general body of the Indian company concerned to that effect passes a special resolution.

b. Purchase and sale of shares /convertible debentures by NRI/OCB on non-repatriation basis:

i) No purchase of shares and debentures of Indian companies shall be made if the company engaged in the following business

• Chit fund or a Nidhi
•  Agricultural / Plantation activities;
• Real estate business (does not include development of township, construction of residential/commercial premises, roads, bridges, etc);
• Construction of farm houses;
• Dealing in Transfer of Development Rights or is engaged in print media sector

ii) NRIs/OCBs can make investment on non-repatriation basis in shares or debentures of Indian company whether by public issue or private placement, without any limit subject to the restrictions mentioned above.

iii) The amount of consideration for purchase of shares or convertible debentures shall be paid by way of inward remittance through normal banking channels from abroad or out of funds held in NRE/FCNR/NRO/NRSR/NRNR account maintained with an authorised dealer.

c. Purchase by NRI/OCB of other securities on repatriation/non-repatriation basis:

i) A Non-resident Indian or an Overseas Corporate Body may, without limit, purchase on repatriation basis;

• Government dated securities (other than bearer securities) or treasury bills or units of domestic mutual funds;
• Bonds issued by a public sector undertaking in India;
• Shares in Public Sector Enterprises being disinvested by the Government of India, provided the purchase is in accordance with the terms and conditions in the notice inviting bids.

ii) A non-resident Indian or an Overseas Corporate Body may, without limit, purchase on non-repatriation basis, dated Government securities (other than bearer securities), treasury bills, units of domestic mutual funds, units of Money Market Mutual funds in India, or National Plan/Savings certificates.

iii) Payment to purchase shares on repatriation basis should be either by inward remittance through normal banking channels or out of funds held in his/its NRE/FCNR account.

iv) Payment to purchase shares on non-repatriation basis should be either by inward remittance through normal banking channels or out of funds held in his/its NRE/FCNR/NRO/NRSR account.

d. Investment in non-corporate business by Non-resident Indians (NRIs)

Non-resident Indians are permitted to invest in firm/association of persons/proprietorship concerns subject to the conditions given below:

• Amount invested is received either by inward remittance through normal banking channels or out of account maintained with an authorised dealer/authorised bank in accordance with relevant regulations;
• The firm or the proprietary concern is not engaged in any agricultural/plantation activity or real estate business ie., dealing in land and immovable property;
• The amount invested would not be eligible for repatriation outside India.

6. Foreign Technology agreements

Automatic permission is granted for foreign technology where -

a. In case of foreign technical collaboration wherein technology has been transferred.

• Lump sum payment for technical know-how fees is up to US$2 million and;
• Royalty payment does not exceed five percent for domestic sales and eight per cent for exports for 7 years from the date of commencement of commercial production or 10 years from the date of agreement whichever is earlier.

b. In case of transfer of rights to use trademarks and brand:

• Royalty up to 2% of export sales and 1% for local sales is allowed to be paid to the foreign collaborator under the automatic route for use of his trademarks and brand name even if there is no transfer of technology.
• In case of technology transfer payment of royalty subsumes the payment of royalty for use of trademark and brand name of the foreign collaborator.

E. FOREIGN INSTITUTIONAL INVESTMENTS

Registered Foreign Institutional Investors such as:

• Pension Funds;
• Investment Trusts
•  Nominee companies;
• Asset Management Companies.

who have obtained registration from SEBI, are permitted to invest on full repatriation basis under the portfolio investment scheme in the Indian Primary and Secondary Stock Markets (including OTCEI) as well as in unlisted, dated Government Securities, Treasury Bills and Units of Domestic Mutual Funds without any lock-in period.

Limits on Investment in the primary and secondary markets are:

• The total holdings of all foreign institutional investors in any company will be subject to a ceiling of 24% of its total issued capital. The limit of 24% may be increased up to the sectoral cap / statutory ceiling, as applicable, by the Indian company concerned by passing a resolution by its Board of Directors followed by passing of a special resolution to that effect by its general body.
• A single foreign institutional investor cannot hold more than 10% of the issued capital of any company.
• The consideration for the purchase must be remitted by inward remittance from abroad or through normal banking channels or out of funds held in an account maintained in accordance with the regulation.
• An FII is permitted to purchase shares or convertible debentures of an Indian company through private placement/arrangement subject to the ceiling specified above.

F. VENTURE CAPITAL INVESTMENT

1. Foreign Venture Capital Investor (FVCI)

The requirements for the Foreign Venture Capital Investor to operate in India is as follows:

a) A registered Foreign Venture Capital Investor (FVCI) may, through the Securities and Exchange Board of India (SEBI), apply to the RBI for permission to invest in Indian Venture Capital Undertaking (IVCU) or in Venture Capital Funds (VCF) or in a scheme floated by such Venture Capital Funds.

b) The registered FVCI may purchase equity/equity linked instruments/debt instruments, debentures of a IVCU or of a VCF through Initial Public Offer or Private Placement or in units of schemes/funds set up by a VCF.

2. Venture Capital Fund (VCF) and Venture Capital Company (VCC)

a) An offshore venture capital company may contribute up to 100% of the capital of a domestic venture capital fund and may also set up a domestic asset management company to manage the fund.

b) Venture Capital Funds and Venture Capital Companies are permitted to invest only in unlisted companies and their investment shall be limited to 40% of the paid-up capital of the domestic unlisted companies.

c) However investment in a single company by a Venture Capital Funds and Venture Capital Companies shall not exceed 5% of the paid-up capital of a Venture Capital Funds and Venture Capital Companies.

G. JOINT VENTURES AND SUBSIDIARIES OUTSIDE INDIA

Reserve Bank has given general permission to Indian companies to invest abroad in Joint Ventures (JV) and Wholly Owned Subsidiaries (WOS) subject to compliance of the following conditions.

1. Extent of Investment in one financial year

i. An Indian party cannot make total financial commitment for investment in Myanmar and SAARC countries in excess of US$ 75 million.

ii. In respect of investment in countries other than Myanmar, SAARC countries, Nepal, Bhutan and Pakistan the limit is US$ 100 million.

iii. In respect of investment in Nepal and Bhutan the limit is Rs.350 crores.

iv. No investment is permitted under the automatic route in Pakistan.

The term 'financial commitment' has been defined to mean the amount of direct investment by way of contribution to equity and loan and 50% of the amount of guarantees issued by the Indian party to or on behalf of JV/WOS abroad.

However, the Indian party can extend loan or guarantee only if the Indian party has made investment by way of contribution to the equity capital.

2. Other conditions

i. The investee foreign entity should be engaged in the same core activity as carried on by the Indian party.

ii. The Indian party should not have been on RBI's caution list or under investigation by Enforcement directorate.

iii. The Indian party has to designate a branch of an authorised dealer and all transactions relating to JV/WOS should be routed through the said branch only. The Indian party may designate different branches for different JV/WOS.

iv. The Indian party should submit report in prescribed form.

3. Funding of Investments

The above investments can be funded out of one or more of the following sources.

i. By utilising the balances held in Exchange Earners Foreign Currency (EEFC) Account of the Indian party. When the investment is funded through EEFC account, the Indian party has the liberty to invest in a foreign entity, even if it is not engaged in the same core activity as the Indian Party.

ii. By remittance to the extent of 50% of the networth of the Indian Party as on the date of last audited balance sheet. (For the purpose of calculating the net worth of an Indian Party, net worth of its Holding Company or Subsidiary Company [where the stake held is at least 51%] may be taken into account if the said holding or subsidiary company has not availed of the facility of Direct Investment Abroad and has furnished a disclaimer in favour of the Indian party)

iii. By utilisation of proceeds of ADR/GDR offerings by the Indian party. Investment through this mode is permitted without any monetary limit.

iv. By way of capitalisation of payments due to the Indian party from the foreign entity towards exports or for any fees, royalties, commissions, or consideration for any services. However, the amount outstanding for more than 6 months is not permitted to be capitalised.

4. Investment in foreign security by swap or exchange of shares of an Indian company

An Indian party engaged in any of the sectors ie., Information Technology and Entertainment Software, Pharmaceutical Sector, and Biotechnology is permitted to acquire shares of a foreign company engaged in the same core activity in exchange of ADRs/GDRs issued to the latter provided:

a) The investment does not exceed US$ 100 million or its equivalent or an amount equivalent to 10 times the export earnings of Indian party during preceding financial year which ever is higher.

b) The Indian party has already made an ADR/GDR issue and that such ADRs/GDRs are currently listed on any stock exchange outside India.

c) The ADR/GDR issue for the purpose of acquisition is backed by underlying fresh equity shares issued by the Indian Party.

d) The total holding of the person resident outside India in the Indian party after the new issue of ADR/GDR in the expanded capital base should be in accordance and within the limits of the sectoral cap prescribed under the relevant regulations for such investment.

e) The shares of the foreign company has to be valued;

• as per the recommendations of the investments banker if the shares are not listed on any stock exchange or
• on the basis of monthly average price of the shares on any stock exchange abroad in the preceding 3 months in which the acquisition is committed. The premium recommended over and above the said price by the investment banker may also be considered while valuing the shares.

5. Investment by partnership firm

Outbound investment is permitted by partnership firms, registered under Indian Partnership Act, 1932 and providing the following professional services:

i. Chartered Accountancy
ii. Legal practice and related services
iii. Information technology and entertainment software related services
iv. Medical and health care services.

No permission is necessary for such investment subject to complying with prescribed conditions, failing which specific permission from the Reserve Bank is required.

H. EXCHANGE CONTROL

The Foreign Exchange Management Act, 1999 (FEMA) has been enacted to consolidate and amend the law relating to foreign exchange with the objective of facilitating external trade and payments and for promoting the orderly development and maintenance of foreign exchange market.

It extends to the whole of India. It also applies to all branches, offices and agencies outside India owned or controlled by a person resident in India and also to any contravention thereunder committed outside India by any person resident in India to whom this act applies.

The following authorities govern FEMA:

• Central Government has been empowered to prescribe rules;
•  Reserve Bank has been empowered to prescribe regulations and to issue directions to authorised persons.

Important features of FEMA are:

• Primarily there are no restrictions on current account transactions related to foreign exchange and a person may sell or draw foreign exchange freely for his current account transactions, subject to certain exceptions, conditions and monetary ceiling
• Capital account transactions, though freed to some extent, continue to be regulated by Reserve Bank.

I. BUSINESS FORMS

Foreign investors may establish a business presence in India through:

• Joint Venture companies in collaboration with an Indian partner and/or by making a public offering.
• Incorporating a wholly owned company with 100% foreign equity.
• Liaison office for carrying on liaison work for normal business activities of overseas parent companies.
• Project office for execution of approved project/contracts.
• Foreign companies engaged in manufacturing and trading activities can open Branch offices to -- represent the foreign company in India in various matters such as acting as buying/selling agents;
  - undertake export and import trading activities;
  - render professional or consultancy services;
  - render services in information technology and development of software in India
  - render technical support to the products supplied by the parent/group companies
  - promote possible technical and financial collaborations between Indian and foreign companies

Foreign shipping companies, airlines and banks are permitted to open branches in India on a reciprocal basis.

Company-Appropriate Entity

The most appropriate form of business enterprise for foreign investor is a limited liability company.

Sole proprietary and partnership are the other business forms prevalent in India but due to unlimited liability they are not normally found suitable by overseas investors.

Under the present policy of the Government, all companies have to be incorporated in India under the Companies Act to carry on in India any business/service activities.

Indian companies are classified into two categories - 'Public' and 'Private' companies. A company having a minimum paid up capital of Rs. 1 lakh restricting the right to transfer its shares, limiting the number of its members to 50, prohibiting invitation or acceptance of deposits from persons other than its members, directors or their relatives and prohibiting public subscription to its share capital, is a private company.

A Company is a public company provided it has a minimum paid up capital of Rs.5 lakhs, or is a private company, which is a subsidiary of a public company and is a company other than a private company as defined above.

The Companies Act has wider regulations for public companies in respect of management, borrowings and dealing with members and creditors due to greater public participation.

Company Formation

The formation of a company requires

•  selection of a name (which has to be approved by the Registrar of Companies);
• determination of the state in which the registered office will be situated;
• drafting a Memorandum of Association which mention the objects for which the company is formed and its capital and the Articles of Association which sets out the regulations for its internal management.
• preparation of documents for submission to the Registrar of Companies for registration along with the requisite fees.

The Registrar's office verifies the documents submitted and ascertains that all the formalities necessary for formation of the company have been complied with. The Registrar then certifies under his hand that the company is formed. The company then emerges as a legal entity with limited liability.

Memorandum and Articles of Association

The Memorandum of Association of a company defines the objects for which the company is in existence. The company cannot operate beyond the scope of business activities in the Memorandum. The Memorandum of Association of a public company is signed by a minimum of seven promoters and by a minimum of two in the case of private company.

The Articles of Association are the internal regulations for the conduct of the affairs of the company. The Articles of Association cannot go beyond the scope of the Memorandum of Association.

Issue of Shares

Issue of shares requires compliance of various provisions of the Companies Act. A prospectus is a document, which offers to the public the shares of a company, requires detailed disclosure with regard to the company, its directors, its past working and future projections, contracts which it has entered into, and other details. A company can issue shares to the public only after a copy of the prospectus has been filed with the Registrar. Atleast 90% subscription of the public issue must be collected prior to allotment.

An Indian company may issue "sweat equity shares" i.e. shares issued by a company to employees or directors at a discount or for consideration other than cash for providing know-how or making available rights in the nature of intellectual property rights or value additions, if approved by its shareholders, subject to certain conditions.

An Indian company may buy-back its own shares if authorised by its Articles of Association and approved by its shareholders, subject to certain conditions.

Directors and Management

Companies Act, which governs the functioning of the company, requires to have atleast two directors in the case of private companies and three directors in the case of public company.

Non-resident directors, other than a non-resident Managing Director, can serve on the Board of an Indian company. Under the Companies Act, one-third of the directors need not retire by rotation and, therefore, it is not unusual for the foreign investor to have the right to nominate directors who need not retire by rotation.

Provisions also exist in the Companies Act for the appointment of alternate directors to act in place of the original director. It is common practice for the foreign investor to have Indian legal and accounting professionals to act as alternate directors as their nominees to protect the foreign investor's interest in Indian companies.

J. MONOPOLIES AND RESTRICTIVE TRADE PRACTICES

The Monopolies and Restrictive Trade Practices Act, 1969, is an important piece of economic legislation, which in certain respect is similar to anti-trust legislation in other countries and is meant to control unfair and/or restrictive business practice.

K. INTELLECTUAL PROPERTY RIGHTS

Intellectual property rights covers the following:

a. Trademarks
b. Copyrights
c. Patents
d. Industrial design

Trademarks

The Trade and Merchandise Marks Act, 1958, provides for registration and protection of trademarks and protection of trademarks and prevents the use of fraudulent trademarks on merchandise. Registration of a trademark is optional.

A trademark is a visual symbol. It can be in the form of a work, or a device or a label applied to commercial articles such as goods/products with a view to indicate to the purchasing public that they are the goods manufactured or dealt in by a particular person as distinguished from similar goods. Trademark is essentially a product of competitive economy where competition is involved between the manufacturers of the similar products.

Registration of a trademark, which resembles to the existing well-known trademarks, is not permissible. A registered trademark can be protected in perpetuity subject only to the condition that it is used or renewed periodically and action is taken against the person infringing.

• Foreign owned trademarks may be used for the sale of goods in India
• Trademarks are registered for maximum of 7 years from the date of application at one time
• Subsequent registration may be renewed for a 7-year period
• Passing -off actions may protect unregistered trademark
• Registered trademarks may be protected under statute or by passing off actions.

Patents

Patent is granted for the period of 7 years in respect of invention relating to food, medicine or drug and 14 years for the rest of the products.

The act provides that the following cannot be patented:

• Inventions contrary to law, morality and public health
• Any claim which is frivolous or claims which is obviously contrary to well established natural laws
• Mere new use or mere discovery of new property or new use of known substance or property
• Mere admixture resulting only in aggregation of properties
• Mere arrangement and rearrangement of known integers functioning independently;
• Method for agriculture/horticulture
• Process for treatment on human beings, plants or animals

The Patents Act provides for grant of exclusive rights to sell or distribute an article or substance in respect of the following:

• Any new invention, which is not obvious:
• Any new and useful;
  a) art, process, or method of manufacture;
  b) Machine apparatus or other article;
  c) Substance produced by manufacture.

The Patents Act provides for International Applications under Patents Co-operation Treaty.

Copyright

Copyrights in India is governed and protected by Copyrights Act, 1957. India is a member of the Universal Copyrights conventions and the Berne conventions. Indian copyright owners can protect their copyright in any country since India is the member of both these conventions. The Act provides for the registration of works. However, non-registration does not generally affect the rights of the owners of copyright. Copyright means the exclusive right to do or authorise others to do certain acts in relation to the following:

 Original work involving skill, labour and judgement in respect of literary works such as books, publications including computer software;

• Artistic works whether usable as trademarks or not;
• Engineering drawings, industrial drawings;
• Sound recording;
• Musical work;
• Cinematograph film;
• Broadcasting Reproduction Rights.

The object of copyright law is to encourage authors, composers, artists and designers to create original works by rewarding them with the exclusive right for a limited period to exploit the work for monetary gain.

Industrial designs

The object of design registration is to ensure that the persons other than the originator are not using the design without the permission of the originator.

The right conferred by registration of a design is called 'Copyright'. Copyright in an industrial design or product design is governed by the Designs Act 1911. If a design is registered under the Act it is not eligible for protection under the Copyright Act even though it may be original artistic work.

L. FINANCE

Industrial units are financed primarily through two main sources:

• internal sources i.e. capital and reserves or internal accruals;
• external sources i.e., raising capital by way of debentures or bonds or term borrowings,
• borrowings for working capital and
• government subsidies.

Capital issue

Capital issues by companies are supervised by the Securities and Exchange Board of India which is empowered to regulate the financial structure of joint stock companies and may be a safeguard for the investing public. Minimum limits for promoter's contribution are laid down for all issues of capital to the public.

Stock Market and Listing Requirements

India has a vibrant capital market comprising of 23 stock exchanges with over 9,000 companies listed on the stock exchanges. Securities and Exchange Board of India (SEBI) monitors the stock market in India. The market capitalisation of India represented by the Bombay Stock exchange (BSE) as a percentage of Gross Domestic Product in December 2001 was 21%. The market capitalisation of the Bombay Stock Exchange has grown by 55% in 10 years, from around US$ 67 billion in end 1991 to US$ 104 billion end-December'01.

An Over the Counter Exchange of India (OTCEI) operates as an alternative to the stock market. OTCEI allows listing of companies with share capital between Rs.0.30 million and Rs.2.50 million.

National Stock Exchange has been set up in Mumbai to provide on-line nation wide trading facilities for shares and for the wholesale debt and capital markets.

Term Borrowings

India has a well-organised capital market with several financial agencies, which provide term borrowings, guarantees and underwriting facilities to the industrial sector. The principal agencies for term borrowings are the All India Financial Institutions, the Commercial Banks and State Financial Corporations.

Commercial banks provide term loans and specialise in providing working capital for the industrial sector.

State Financial Corporations are state -level financial institutions, operating as regional development banks playing crucial role in the development of small and medium enterprises in their respective states with the main objectives of financing and promoting these enterprises for achieving balanced regional growth, catalyse investment, generate employment and widen the ownership base of industry.

There are 18 State Financial Corporations in the country, of which 17 were set up under the State Finance Corporations Act 1951. State financial corporations provide financial assistance by way of term loans, direct subscription to equity/debentures, guarantees, discounting of bills of exchange and seed/special capital.

The State financial corporations operate a number of schemes of refinance and equity type assistance on behalf of IDBI/SIDBI in addition to special schemes for artisans and special target groups such as SC/ST, women, ex-servicemen, physically handicapped, etc.

Venture Capital

Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.

Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally:

• Finance new and rapidly growing companies
• Purchase equity securities
• Assist in the development of new products or services
• Add value to the company through active participation
• Take higher risks with the expectation of higher rewards
• Have a long-term orientation

Venture capitalists mitigate the risk of investing by developing a portfolio of young companies in a single venture fund. Many times they co-invest with other professional venture capital firms. In addition, many venture partnerships manage multiple funds simultaneously.

In India, these funds are regulated by the SEBI Regulations. According to the SEBI Regulations venture capital fund means a fund established in the form of a company or trust, which raises monies through loans, donations, issue of securities or units as the case may be, and makes or proposes to make investments in accordance with these regulations.

Credit Rating

Credit rating is a requirement for debenture issue, fixed deposits and commercial paper programmes. Credit rating is presently done by three agencies.

External Commercial Borrowing (ECB)

Indian companies/entities can raise money abroad through the External Commercial Borrowing (ECB) route as follows:

1. Automatic route

Fresh ECB or refinancing of existing ECB with average maturity of not less than 3 years for an amount upto US$ 50 million.

2. Approval by Reserve Bank

ECB in excess of US$ 50 million but upto US$ 100 million requires permission from Reserve Bank.

3. Approval by Government

The government of India will consider ECB in excess of US$ 100 million.

Mutual Funds

Unit Trust of India, India's first mutual fund was established in 1964. Banks, Financial Institutions, Insurance Companies, companies in the private sector including foreign companies have established mutual funds in India. Currently there are 35 Mutual Funds in India managing funds over US$ 20.4 billion.

M. SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board of India (SEBI) regulates and promotes an orderly development of the capital market in India.

SEBI has primarily three functions:

• to deal with all matters relating to the development and regulation of the securities market and investor protection, and advise government on these matters.
• to prepare comprehensive legislation for the regulation and development of the securities market
• to carry out such functions as may be delegated by the Central Government for the development and regulation of the securities market.

Mutual Funds, merchant bankers, FIIs, portfolio managers, stock brokers, sub-brokers, share transfer agents, bankers and registrars to the issue, underwriters, investment advisors and any other intermediaries who may be associated with the securities market in any manner have been brought under the purview of the regulatory powers of SEBI.

Some of the important rules, regulations and guidelines issued by SEBI are:

a.   SEBI (Insider Trading) Regulations 1992;
b.   SEBI (Merchant Bankers) Rules/Regulations 1992;
c.   SEBI (Mutual Fund) Regulations 1996;
d.   SEBI (Portfolio Managers) Rules/Regulations 1993;
e.   Disclosure and Investor Protection Guidelines;
f.   SEBI( Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Markets) Regulations 1995;
g.   SEBI( Depositories and Participants)Regulations 1996;
h.   SEBI (Substantial Acquisition of Shares and Takeovers)Regulations 1997;
i.   SEBI (Buy Back of Securities)Regulations 1998;
j.   SEBI (Stock Brokers and Sub-brokers) Rules/Regulations 1992;
k.   SEBI (Underwriters) Rules/Regulation 1993;
l.   SEBI (Debentures Trustees) Rules/Regulation 1993;
m.   SEBI (Bankers to an Issue) Rules/Regulation 1994;
n.   SEBI (Registrars to an Issue and Share Transfer Agents) Rules/Regulation 1993;
o.   SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme) Guidelines 1999;
p.   SEBI (Credit Rating Agencies) Regulations 1999;
q.   SEBI (Collective Investment Schemes) Regulations 1999;
r.   Private Limited Company and Unlisted Public Limited Company (Buy-Back of Securities) Rules 1999;
s.   SEBI (Custodian of Securities) Regulations 1996;
t.   SEBI (Venture Capital Funds) Regulations 1996;
u.   SEBI (Foreign Institutional Investors) Regulations 1995.

N. LABOUR RELATIONS

India has a pool of trained English speaking, technical and managerial personnel. Comprehensive legislation to protect staff from arbitrary dismissal, regulate working conditions, terms of employment, provision for employee benefits, collective bargaining and settlement of disputes through agencies constituted by law. There is no requirement for employee's representation on the Board of directors.

Preferential allotment to permanent employees in respect of public issue of shares or debentures can be made to the extent of 5% of public issue of shares and debentures by companies or 200 shares of Rs.10/- each per employee, of shares and debentures, which ever is higher.

SECTION III - TAXATION

A. INCOME-TAX

India has a single Income-tax law, which is the Income-tax Act, 1961 (IT Act) and rules framed there under. The Indian Constitution prohibits states from imposing tax on income other than income derived from agriculture.

B. ADMINISTRATIVE SYSTEM

At the apex of the Income-tax department is the Central Board of Direct Taxes (CBDT). The CBDT is part of the Finance Ministry in the Government of India and administers direct tax laws. Under the CBDT is a large organisation with commissioners in charge of specified areas assisted by deputy commissioners and officers, who issue assessment orders and collect taxes.

C. ASSESSMENTS

All taxpayers are required to file a Return of Income on or before specified dates each year.

Assessments of more than 90% non-corporate taxpayers are completed in a summary manner by accepting the returns furnished by them. Assessments in the remaining cases are made after requisite scrutiny and after investigation.

Assessment of a non-resident can be made either directly or through his agent. In some cases, an Income-tax officer can treat a person in India as an agent of a non-resident and collect taxes of the non-resident through such agent.

D. ADVANCE RULING 

A person can seek an advance ruling on questions of law or of fact that relate to a transaction undertaken or proposed to be undertaken by a non-resident or a transaction undertaken by a resident with a non-resident.

An advance ruling would be binding for the specific transaction on the tax authorities and the applicant who has sought it. The advance ruling would be binding unless there is a change in the law or in the facts. Advance rulings are communicated within six months from the date of application.

E. RESIDENCE

The liability to tax under the 'IT Act' depends upon residential status of the taxpayer, irrespective of his nationality or domicile.

An individual is said to be resident in India in any tax year if he is

• in India for a period or periods amounting to 182 days or more in a tax year; or
• in India for an aggregate period of 60 days or more (182 days in certain cases) in the tax year and has been in India for an aggregate period of 365 days or more in the four tax years preceding that tax year.

A person is said to be "resident but not ordinary resident" (NOR) in India in any tax year if such person is

a) an individual
i) who has not been resident in India in nine out of ten tax years preceding that tax year; or
ii) who has not during the seven tax years preceding that tax year, been in India for a period or periods aggregating to 730 days or more.

b) a manager of Hindu undivided family
i) who has not been resident in India in nine out of ten tax years preceding that tax year; or
ii) who has not during the seven tax years preceding that tax year, been in India for a period or periods aggregating to 730 days or more.

A non-resident is a person who is not resident in India.

A company, whether Indian or foreign, is said to be resident in India if the control and management of its affairs is situated wholly in India.

A foreign company will have generally a part of its management and control outside India and hence, will be a 'non-resident'.

F. SCOPE OF TOTAL INCOME

A resident pays tax in India on his global income.

A non-resident is taxable on its income received in India and also on income sourced in India. There are certain provisions in the IT Act which deems the income to accrue or arise in India (ie., sourced in India).

A 'resident but not ordinary resident' is not liable to tax in respect of income which accrues or arise to him outside India unless that income is derived from a business controlled in or a profession set up in India.

G. TAXABLE INCOME

The income of the taxpayer is determined under five heads - Salaries, Income from house property, Profits and gains of business or profession, Capital gains and Income from other sources. Specific deductions are available under each source and there are specific rules as to what constitute income from each source. Tax charge is at the rates in force for the relevant tax year.

Income under each head is computed after adjusting any loss against any income from sources under the same head. The income for an assessment year is determined after adjusting income computed under each head against loss under any other head in the same assessment year and unabsorbed depreciation of earlier years. The only exceptions are capital losses and losses sustained in speculation business which may be set off only against capital gains or income from any other speculation business respectively. Such adjusted income is the gross total income. Gross total income less certain specified deductions and tax incentives provided under the 'IT Act' is the total taxable income of a taxpayer.

Certain types of income and receipts are fully exempt from tax and do not form part of gross total income.

H. AGRICULTURAL INCOME

Agriculture is a state subject and there is no central income tax on agricultural income. However, agricultural income is aggregated with other income for the purpose of determining the rate of tax applicable to other income.

I. TAX CONCESSIONS

The IT Act offers several tax incentives to industrial units in the country in computing taxable income from business and profession. These incentives reduce the tax incidence substantially.

Depreciation Allowance

Depreciation is available on tangible and intangible capital assets used in business, except land.

Tangible assets are classified into four blocks, i.e., buildings, furniture and fixtures, plant and machinery and ships. Intangible assets include know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of a similar nature.

Depreciation is restricted to 50% of the rates in the year of acquisition if the asset is used for less than 180 days. Depreciation can also be claimed on fractional ownership of assets.

It is mandatory to claim depreciation allowance. Unabsorbed depreciation can be carried forward and set off against income of subsequent years without any time limit.

The IT Act permits depreciation allowance on written down value method. However, in respect of assets acquired on or after 1st April 1997 by undertakings engaged in the business of generation or generation and distribution of power depreciation is allowed under straight line method on individual asset instead of block of assets.

Deduction for assessee engaged in tea business

Deduction will be allowed to the assessee engaged in the business of growing and manufacturing tea to the extent of 40% of the profits computed under the head profits and gains of business and profession or amount deposited with the NABARD whichever is less. The amount is required to be deposited within 6 months from the end of the previous year/before the filing of the return of income.

Deduction for assessee engaged in business of prospecting for, or extracting or production of petroleum or natural gas or both in India

Deduction will be allowed to an assessee who has entered into an agreement with Central Government and is engaged in the business of prospecting for, or extracting or production of, petroleum or natural gas or both in India. Amount eligible for deduction will be to the extent of 20% of the profits computed under the head profits and gains of business or profession or amount deposited in an account called 'Site restoration account' which ever is less.

Deduction for shipping companies

A company being a Government company or public company registered in India with the main object of carrying on the business of operation of ships can claim deduction up to 100% of the profits derived from the business of operation of ships computed under the head "Profits and Gains of business or profession" for that year or to the extent of amount transferred to the special reserve account which ever is less.

In case where the amount transferred to reserve from time to time exceeds twice the aggregate of the amounts of the paid-up share capital, the general reserves and amount credited to the share premium account of the assessee, no allowance shall be made in respect of excess.

Expenditure on scientific research

Any expenditure incurred on scientific research, which is related to business, shall be allowed as a deduction from the taxable income. Contributions made to National laboratory or scientific research association for the object of undertaking research will be allowed at a weighted rate of 125%. Weighted deduction of 150% will be allowed to companies engaged in the business of biotechnology.

Expenditure on eligible projects/schemes

Any expenditure incurred by a taxpayer by way of payment to a public sector company or a local authority for carrying out eligible project or scheme such as social and economic welfare of, or the uplift of, the public as specified by the national committee.

Expenditure incurred in case of amalgamation or demerger

Any Indian company which has incurred expenditure on or after 1st April 1999, wholly for the purpose of amalgamation or demerger of an undertaking, deduction will be allowed over a period of 5 years in equal installments from the previous yea in which the amalgamation or demerger takes place.

Expenditure for obtaining license to operate telecommunication services

Payments made to acquire a license for operating telecommunication services can be amortised over the duration for which the license in force.

Voluntary retirement expenses

Deduction in respect of payments made to employees on voluntary retirement in accordance with prescribed guidelines shall be allowed as deduction in 5 equal installments commencing from the year in which expenditure is incurred.

Expenditure by way of payment to association and institution for carrying out rural development

Any amount paid to any association or institution which has the object of rural development, or training of persons for implementing programmes of rural development, or any contribution made to a rural development fund set up by the central government or to the National Urban Poverty Eradication Fund.

Expenditure by way of payment to associations and institutions for carrying out programmes of conservation of natural resources

Any amount paid to any association or institution, which undertakes programme of conservation of natural resources or to funds for afforestation.

Expenditure on prospecting for certain minerals

An Indian company and non-resident can claim deduction in respect of expenditure incurred on prospecting for development of certain minerals listed in Schedule VII of the 'IT Act'. The deduction can be claimed in respect of expenditure incurred during the period of 5 years till the year in which commercial production is commenced. It can be claimed over a period of 10 years in equal instalments.

Concession for Hotel and Foreign Tourist Business

Specified percentage of the profits derived from the business of an approved hotel, tour operator or travel agency for providing services to foreign tourists are exempt subject to certain conditions. The receipts in relation to the services should be received within six months or such further period as may be permitted by Reserve Bank from the end of the previous year. The deduction is proposed to be withdrawn in a phased manner by tax year 2004-05.

Concession for newly established Industrial Undertakings in Free Trade

Profits and gains derived by an undertaking from the export of articles or things or computer software are exempt from tax for a period of 10 consecutive years from the year in which production commences. Deduction for tax year 2002-03 is restricted to 90% of such profits and gains.

Deduction will not be allowed to any undertaking for the tax year beginning on the 1st April 2009 and subsequent years.

Undertaking in Special Economic Zone which begins to manufacture or produce articles or things or computer software during the previous year relevant to the assessment year beginning from 1st April 2003 or thereafter, the deduction will be allowed at 100% of the profits derived from the export of such articles or things or computer software for a period of five consecutive assessment year beginning with the year in which the undertaking begins to manufacture or produce. Thereafter the deduction will be allowed at 50% of such profits and gains for further two assessment years.

Concession for newly established 100% export oriented undertakings

Profits and gains derived by an undertaking from the export of articles or things or computer software are exempt from tax for a period of 10 consecutive years from the year in which production commences. Deduction for tax year 2002-03 is restricted to 90% of such profits and gains.

Deduction will not be allowed to any undertaking for the tax year beginning on the 1st April 2009 and subsequent years.

Concession in respect of industrial undertaking in North-Eastern region

Profits and gains derived by an industrial undertaking, which begins to manufacture or produce any article or thing on or after 1st April 1998 in any Infrastructure Development Centre or Industrial Growth Centre located in the North Eastern Region shall not be included in the total income for ten consecutive assessment years from the tax year in which the undertaking begins to manufacture or produce articles or things.

Concession for Profits derived from Export Business

Specified percentage of the profit derived from manufacture or trading of goods and merchandise for export, subject to exceptions, are eligible for deduction from the total income. The deduction is proposed to be withdrawn in a phased manner by tax year 2004-05.

Concession to World Bank aided Housing projects

Profits and gains derived by a resident from execution of housing projects awarded on the basis of a global tender and aided by the World Bank are exempt to the extent of 50%, subject to certain conditions. The amount of deduction is 40% for the tax year 2000-01 and for subsequent assessment years it is reduced by 10% for every year.

Concession for export of Computer Software

Profits and gains derived from providing technical services outside India in connection with the development of software or export of computer software from India are exempt from tax, subject to certain conditions. The deduction is proposed to be withdrawn in a phased manner by tax year 2004-05.

Concession for export of film, music, and television software

Profits and gains from export or transfer of film software, television software, music software, television news software, including telecast rights, are exempt from tax, subject to conditions. The deduction is proposed to be withdrawn in a phased manner by tax year 2004-05.

Concessions for royalties received from foreign enterprises

Income derived by way of royalty for use of patents, invention, design or registered trademark outside India are exempt to the extent of such income received in or brought into India. The deduction is proposed to be withdrawn in a phased manner by tax year 2004-05.

Tax Holidays

Business profits of an enterprise engaged in developing, maintaining and operating any infrastructure facility are eligible for a deduction of 100% of the profits for the initial five years as specified by the assessee and 30% of the profits for a further period of five years, in the ten year period falling within a block of fifteen years from the year in which the operations commence. The activity should have commenced on or after 1st April 1995. The block period of fifteen years is extended to twenty years for certain specified infrastructure facility

Business profits of an undertaking which begins providing telecommunication services, whether basic or cellular, including radio paging, domestic satellite service, or network of trunking and electronic data interchange services between April 1, 1995 and March 31, 2003 are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years, in the ten year period falling within a block of 15 years from the year in which the enterprise starts providing telecommunication services.

Business profits of an undertaking which develops or develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government between 1 April 1997 and 31 March 2006 are eligible for a deduction of 100% of profits for the initial 5 years and 30% of the profits for a further period of five years, during the ten years falling within the block of fifteen years from the year in which the undertaking operates the industrial park or special economic zone.

Business profits of an undertaking which begins generation and distribution of power between April 1, 1993 and March 31, 2003 and an undertaking which starts transmission or distribution of power by laying a network of new transmission or distribution lines between April 1, 1999 and March 31, 2003 are eligible for a deduction of 100% of profits for the initial five years and 30% of the profits for a further period of five years, during the ten years falling within a block of 15 years from the year in which the undertaking generates power or commences distribution or transmission of power.

Business profits of a small scale undertaking which begins operations between April 1, 1995 and March 31, 2004 are eligible for a deduction of 30% of the profits for a period of 10 years from the year in which the business commenced.

Business profits of a industrial undertaking situated in a specified industrially backward state and engaged in the manufacture or production of articles or things or operation of cold storage plant or plants between April 1, 1993 and March 31, 2004, are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years.

Business profits of an industrial undertaking situated in a specified industrially backward district and engaged in the manufacture or production of articles or things or operation of cold storage plant or plants between October 1, 1994 and March 31, 2004 are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years.

Business profits of a hotel located in a hilly area or a rural area or a place of pilgrimage or such other place as the Central Government may having regard to the need for development of infrastructure for tourism which begins to function between April 1, 1997 and March 31, 2001 are eligible for a deduction of 50% of the profits for a period of ten years.

The deduction in respect business profits of other hotels is allowed at 30% for a period of 10 years beginning with the year in which it starts functioning any time between 1st April 1997 and before 31st March 2001.

Business profits of an undertaking engaged in developing and building housing projects which commence development and construction on or after September 30, 1998 and completes the same before March 31, 2003 are eligible for a deduction of 100% of profits.

Business profits of an industrial undertaking operating, a cold chain facility for agriculture produce between April 1, 1999 and March 31, 2003 are eligible for a deduction of 100% of the profits for the initial five years and 30% of the profits for a further period of five years.

The amount of deduction in the case of the business of ship is 30% of the profits and gains derived from such ship for a period of 10 consecutive assessment years provided that the ship is wholly used for the purpose of business carried on by it and is brought into use between 1st April 1991 and 31st March 1995.

Business profits of an undertaking engaged in a business of scientific and industrial research and development approved by the prescribed authority after 31st March 2000 but before 1st April 2003 are eligible for a deduction of 100% of the profits for a period of ten years.

Business profits of an undertaking which begins commercial production of mineral oil in North Eastern Region before 1st April 1997 and in other regions on or after 1st April 1997 will be eligible for a deduction of 100% of the profits for the first 7 years.

Business profits of an undertaking, which begins refining of mineral oil on or after 1st October 1998 will be eligible for a deduction of 100% of the profits for the first 7 years.

Business profits of an undertaking, which is engaged in integrated business of handling, storage and transportation of foodgrains on or after 1st April, 2001 will be eligible for a deduction of 100% of the profits for the first five years and 30% of the profits for a further period of next five years.

In case of any multiplex theatre 50% of the profits and gains derived from the business of building, owning and operating a multiplex theatre will be allowed as deduction for a period of five consecutive years from the year in which the theatre starts operation on commercial basis. The deduction is allowable only if such multiplex theatre is constructed at any time during the period beginning on 1st day of April 2002 and ending on 31st day of March 2005.

In case of any convention centre 50% of the profits and gains derived from the business of building, owning and operating a convention center will be allowed as deduction for a period of five consecutive years from the year in which the convention center starts operation on commercial basis. The deduction is allowable only if such convention center is constructed at any time during the period beginning on 1st day of April 2002 and ending on 31st day of March 2005.

Dividend and Income distribution

Till tax year 2001-02 companies were liable to pay tax at 10.2 % (including surcharge of 2%) of the dividend declared, distributed and paid. Such dividend was not taxed in the hands of the recipient.

From tax year 2002-03 companies are not required to pay any such tax. Dividend/income received from domestic companies/UTI and mutual funds will now be taxable in the hands of the recipient at normal rates. Dividends from an Indian company and income from mutual funds and UTI will be eligible for deduction within the overall limit of rupees twelve thousand. Additional deduction of an amount equal to rupees three thousand is allowable in respect of income from any securities of central government or state government. Thus the aggregate deduction shall not exceed to rupees fifteen thousand.

Income of open-ended equity oriented funds of UTI and other such mutual funds will be taxed at the concessional rate of 10% for one year i.e., tax year 2002-03

Inter corporate dividend

A domestic company is eligible to claim deduction in respect of dividend income to the extent of the amount of dividend distributed by it before the due date of filing the its tax return.

J. SPECIAL PROVISIONS FOR COMPUTATION OF TAXABLE INCOME OF NON-RESIDENTS ENGAGED IN SPECIFIED BUSINESS

Taxable income of non-resident individuals and foreign companies is computed at a flat rate varying from 5% to 10% of the amount paid or payable (whether in or outside India) or an amount received or deemed to be received in India by or on behalf of the tax payer on account of the following:

• Business of operation of aircraft
• Shipping business
• Business of civil construction for turnkey power projects
• Business of providing services or facilities in connection with or supplying plant and machinery on hire used in the prospecting for or extraction or production of mineral oils.
• Income from prospecting for mineral oil.

K. TAXATION OF NON-RESIDENT INDIANS

1. Non-resident Indians having only "Investment income" and/or income by way of "Long term capital gains" may opt to be charged at 20% on Investment income and at 10% on long term capital gains.

2. Income other than the above earned by the Non-resident Indian will be treated as a separate block and charged to tax in accordance with other provisions of the IT Act.

3. A Non-resident Indian may opt that the special provisions relating to taxation of the investment income and long term capital gains at a flat rate should not apply to him. The option is exercisable by a taxpayer by making a declaration to that effect in his return of income for the relevant assessment year. In case the option is exercised then the whole of his total income would be chargeable to tax under the general provisions of the IT Act.

4. Overseas corporate bodies are charged to Income tax at the following rates in respect of the following incomes

• Capital gains at 20%
• Interest income at 20%
• Other income at 40%

5. Capital gains arising in respect of transfer of specified bonds or Global Depository Receipt by one non-resident to another non-resident made outside India shall not be liable to any capital gains tax.

6. Exemption from Wealth Tax is available to the returning Indians in respect of moneys brought into India or value of asset brought by him, or assets purchased by him out of moneys brought into India within a period of one year prior to the date of return and at anytime thereafter for seven successive assessment year from the date of return.

7. Tax on the following incomes of non-resident individuals and foreign companies/Overseas financial organisation is applied at a flat rate varying from 10% to 30% as given below:

• Dividend, Interest on foreign currency loans and income received from mutual fund units purchased in foreign currency by Non-residents and foreign company are taxed at 20%.
• Income by way of dividend, received by a resident employee from investment made in foreign currency of an Indian company engaged in IT Software and IT Services from GDR issued in accordance with employee's stock options under notified scheme and income by way of long term capital gain arising from transfer of such GDR are taxed at 10%.
• Winnings from lottery or crossword puzzles or race including horse race or card games and other games of any sort of gambling or betting are taxed at 30%
• Income received by foreign national non-resident sportsman from participation in any game or sport or advertisement or contribution of articles relating to any game or sport in India in Journals, Newspapers etc are taxed at 10%;
• Income received by Non-resident sports association or institution by way of amount guaranteed to be paid or payable in relation to any game or sport played in India are taxed at 10%.

L. TAXATION OF OFFSHORE FUNDS/FOREIGN INSTITUTIONAL INVESTORS

Income derived by approved offshore funds from units of specified mutual funds and capital gains on the transfer of these units are taxed at a rate of 10% if the units are purchased in foreign currency.

Income from interest on bonds or income in the nature of long-term capital gains from transfer of shares or bonds by non-resident which are issued in accordance with notified scheme or shares or bonds of a public sector company sold by the Government, are taxed at 10% if the shares/bonds are purchased in foreign currency.

Income of notified Foreign Institutional Investors from securities listed on an Indian Stock Exchange and capital gains on their transfer are charged to tax as under:

• Income from Securities 20%
• Short Term Capital Gains 30%
• Long Term Capital Gains 10%

M. BUSINESS LOSS

Business loss incurred in a tax year and not adjusted against other income can be carried forward for eight years, and set off against future business profit. Unabsorbed depreciation of any previous year which is unabsorbed can be carried forward indefinitely and can be set off against income under any head of income.

N. CAPITAL GAINS

Profits and gains from transfer of capital assets other than those held for business purposes are charged to tax as 'capital gains' in the year in which the transfer takes place.

Capital gains are classified as long-term capital gains if they arise from the transfer of capital assets held:
1. In the case of shares held in a company or other securities listed on a recognised stock exchange in India, or units of specified mutual funds, for a period of 12 months or more; and
2. In the case of other assets, for a period of 36 months or more.

Long-term capital gains are computed after deducting from sale proceeds the indexed cost of acquisition, indexed cost of improvement and expenditure incurred in connection with the transfer. The indexed cost of acquisition and indexed cost of improvement refers to costs duly indexed and adjusted for inflation as prescribed in the Act. Bonds and debentures (other than capital indexed bonds issued by the government) are not eligible for cost indexation.

For the purpose of computation of capital gains the assessee has the option to take either the actual cost or the fair market value of the asset (other than depreciable asset), as on April 1, 1981 as cost of acquisition where the capital asset became the property of the assessee by any modes as specified in the IT Act.

In the case of an assessee who is a non-resident capital gains arising from transfer of capital assets being the shares or debentures of an Indian company shall be computed by converting cost of acquisition, expenses incurred for the transfer and sale consideration into the same foreign currency as was utilised for the purchase of shares or debentures. The capital gains so computed in such foreign currency shall be reconverted into Indian currency on the date of transfer.

Profits arising on transfer of intangible assets such as goodwill of a business, the right to manufacture, produce or process any article or thing, right to carry on any business, tenancy rights, stage carriage permits or loom hours, trade mark or brand name associated with a business are chargeable to tax as capital gains.

Incase of land and building where consideration declared as a result of transfer of land or building or both, is less than the value adopted by any State Government Authority, for the purpose of payment of stamp duty in respect of such transfer, the value so adopted, is deemed to be the consideration for the transfer and capital gains is required to be computed accordingly. The IT Act provides for reference of disputed value to a valuation officer.

Gains arising in the following transactions, among others, are chargeable to tax as capital gains:

a.  Gains arising on buy-back of shares;
b.  Gains arising on transfer of securities acquired under stock option scheme or as"sweat equity";
c.  Insurance compensation on account of destruction or damage of a capital asset;
d. Profits or gains arising on sale of one or more undertakings as a "slump sale".
e. Gains arising to shareholders on distribution of assets by companies in liquidation.
f. Gains arising on conversion of capital asset into stock in trade.
g.  Gains arising on transfer of a capital asset by a partner to the firm by way of capital contribution or otherwise.
h.  Gains arising on transfer of a capital asset by way of distribution on dissolution or otherwise of a firm or association of persons.
i. Gains arising out of transfer of a capital asset by way of compulsory acquisition under any law.

Long-term capital gains are charged to tax at the rate of 20% in the case of all resident taxpayers. However, in the case of capital gains on transfer of listed securities or units of UTI or mutual fund, capital gain tax is restricted to either at 10% of such capital gain computed without the benefit of indexation or at the rate of 20% of such gain after the benefit of indexation, whichever is beneficial to the tax payer.

Business reorganization

Under the It Act, demergers and amalgamations are recognised as a means of business reorganisation under the IT Act. Tax benefits and concessions available to an undertaking continues upon its transfer to a resulting company under a scheme of demerger.

Transfer of capital asset, by the demerged company to the resulting Indian company, in a demerger is not chargeable to capital gains tax.

Consideration received by way of issue of shares by the resulting company, in a scheme of demerger, to the shareholders of the demerged company, on demerger of an undertaking, is not chargeable to capital gains tax.

Benefits of unabsorbed business loss and/or unabsorbed depreciation of the amalgamating company/undertaking can be availed by the amalgamated company/resulting company, subject to certain conditions.

O. TAX RATES AND ADVANCE TAX FOR INDIVIDUALS AND NON-CORPORATE ASSESSEES

Income tax rates for individuals irrespective of residential status are as follows:

Taxable Income	Taxable Income Rates of Income-tax for Assessment Year 2003-2004
Rs.	Rs.	Rs.
0 - 50,000	NIL
50,001 - 60,000	10% of excess over	50,000
60,001 - 150,000	1,000 + 20% of excess over	60,000
Above 150,000	19,000 + 30% of excess over	150,000

All taxpayers are required to pay surcharge at 5% on income tax. The above surcharge is not payable by an Individual, Hindu Undivided Family, Association of Persons having income less than Rs. 60,000

Advance tax by Non-Corporate Assessees

Non – corporate tax payers are required to estimate their net tax and make advance payments in three installments as given below:

Due date of installments on or before	Amount payable as a % of net tax liability
On or before 15th September	At least 30%
On or before 15th December	At least 60%
On or before 15th March	Balance amount

P. CORPORATE TAX RATES AND ADVANCE TAX

The corporate tax year is the year ended March 31 and is taxed at the rates applicable in the assessment year commencing on the succeeding April 1. The current corporate tax rates are

Type of company	Rates of Income-tax for the Assessment year 2003-2004 % of total taxable income
Domestic Company	35%
Foreign company with income from