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FAQ's
We have addressed Frequently Asked Questions by Foreign Companies and Non resident Indians (NRIs) on Taxation, Investment and FEMA. We hope this section would enable more informed decision-making by Foreign management and Non resident Indians (NRIs).

 
             

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FAQ's

We have addressed Frequently Asked Questions by Foreign Companies and Non resident Indians (NRIs) on Taxation, Investment and FEMA. We hope this section would enable more informed decision-making by Foreign management and Non resident Indians (NRIs). It should not however be viewed as a substitute for professional advice based on the latest legal position and facts and circumstances of each case.

 

Foreign companies

How do I decide what is appropriate structure for our operations in India?
Appropriate structure for your proposed activities in India are determined by various factors like –

  • Proposed Activity – The foreign direct investment (FDI) in India is governed by The Reserve Bank of India (RBI) directives imposing sectoral caps on various activities. For example, activities like agriculture, defense supplies etc are prohibited. Activities to the like of real estate development etc are permitted subject to restrictions. So one has to obtain clear advise on RBI directives to choose an appropriate structure for India.

  • Local Partner – If foreign company wishes to explore Indian market with the help of a local partner, it has no choice but to form a Joint venture company.

  • Nature of Transactions – If foreign company wishes to engage India only for representation purpose, it can opt for either a liaison office (no commercial operations allowed) and if it wishes to engage in commercial transactions of purchase and sale, maintenance contracts etc, it can opt for a branch office subject to obtaining prior RBI permission.

 
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As a foreign company, we are rendering services to customers in India, are we required to obtain Permanent Account Number (PAN) from Indian tax authorities?
As per section 206AA of The Indian Income Tax Act,if a foreign company does not have a PAN, the Indian company effecting remittance needs to deduct withholding taxes @ 20%. To avoid the same, it is advisable for the foreign company to obtain a PAN subject to specific conditions.

How long does it take to form a company in India?
The process involved takes approx 4 weeks for the Indian company to be formed.

Do we have to obtain registrations for the company in India? How long does that take?
An Indian company is obligated to obtain registrations like PAN / Tax account Number (TAN) / import export code (IEC) / Value added Tax (VAT) / Service Tax (ST). There are more industry specific registrations that a company may be required to obtain.

Are we required to submit loads of documents to form a company?
Yes. The company formation process involves submission of loads of document starting with parent company charter Documents, directors address proof and passport. Few of the post formation registrations also require the documents to be attested by Indian Embassy in parent jurisdiction. Most of these are one time requirement and not recurring.

Once the Indian company pays taxes in India, is the parent company liable to pay taxes in its jurisdiction?
Generally, this is applicable to capital gains tax, dividend tax and tax on business income etc. The taxability in parent jurisdiction is governed by taxation laws as prevailing there. However, this is also dependent upon the provisions of the Double Tax Avoidance Agreement (DTAA) of the parent company jurisdiction with India, if any. principally, India has good treaties with most countries and there is no loss of revenue to foreign companies since the treaties are designed on the OECD model and favor single point of taxation. It is advisable that management obtains expert advise narrating facts of the case.

What are the Transfer Pricing regulations in India?
India has transfer pricing (TP) regulations modeled on International standards. The guiding pole being ‘arms length transactions’. The regulations stipulate that all ‘related party transactions’ should be based on ‘arms length’ ; thereby making it mandatory that due income should be offered for taxation in India. Foreign companies therefore need to consult subject area experts and carry out a detailed TP study and frame up a TP method and fix all commercial transactions based on this advise.
It is important to note a company is obligated to file a separate TP Report with Revenue authorities in India and these companies would also be assessed by a designated TP Cell of The Indian revenue authorities

Do we need a resident Director in India?
As per the recently amended Indian Companies Act, it is now mandatory for all foreign companies to have a local resident Director.

Can the Indian company be a 100% subsidiary of the parent company?
Yes. Indian companies Act requires that there should be at least 2 shareholders and foreign companies therefore hold 99.99% of shares of Indian subsidiary and minority balance holding is nominated and held under The Indian companies Act in the name of an individual.

Are there any restrictions on the activities that an Indian subsidiary of a foreign company engage in?
RBI guidelines have defined activities for a foreign company under following broad categories-

  • Activities that a foreign company is freely allowed to engage in without obtaining any permission (Automatic Route)

  • Activities that a foreign company is allowed to participate subject to conditions / permission (Approval Route)

  • Activities that a foreign company is prohibited to engage in (Prohibited Activities)
    These activities are further elaborated under various circulars of RBI under FEMA.

What are the options for winding up a company in India?
Indian Companies Act has elaborate procedure for winding up of companies. Basically, The corporate law gives options for a Fast Track winding up subject to fulfillment of prescribed conditions and voluntary winding up under sec 391 / 394 of The companies Act. The process entails approaching Indian High Court and seeking assistance of official liquidator to wind up a company. In nutshell, if the Indian company has fulfilled all its contractual obligations and there are no open investigations, suits pending, it can be wound up within a period of 6 months.
 

 

Existing NRI
 

Mr. A is an existing Non resident Indian (NRI). He has queries on the following issues:
 
1.

Meaning of NRI

The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation in India (See Benefits associated with NRI status). The definition of a NRI under the Income Tax Act is different from that under FEMA.

Under Section 115C (e) of the Income Tax Act, a NRI is defined as ‘An individual being a citizen of India or a person of India origin (PIO) who is not a resident’. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.

The term NRI is defined under FEMA rules and regulations as ‘A person resident outside India who is either a citizen of India or is a person of Indian origin (PIO).’ However the term PIO is defined differently in different regulations & therefore the term NRI will have different meaning under different regulations i.e. the terms NRI & PIO are contextual. Under the Foreign Exchange Management (Deposit) Regulations, 2000, which deal with banking accounts in India by NRIs, the term PIO is defined as below:

A Person of Indian Origin (PIO) is a citizen of any country other than Bangladesh or Pakistan, if

a) he at any time held an Indian passport or
b) he or either of his parents or any of his grandparents was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955 or
c) he is spouse of an Indian citizen or a person referred to in ‘a’ or ‘b’.

This is the most common definition adopted under most regulations. Significantly, Foreign Exchange Management (Acquisition and Transfer of immoveable property in India) Regulations, 2000 exclude clause c) above and further restrict clause b) to paternal relationships i.e. father and grandfather only. In Foreign Exchange Management (Transfer or issue of security by a person resident in India) Regulations, 2000 that govern investments in companies, stock market and other instruments as also Foreign Exchange Management (Investment in firm or proprietary concern in India) Regulations, 2000 the term excludes a citizen of Sri Lanka.
 

   
2.

Income Tax implications

For the purposes of levy of tax, the Income-tax Act in India has classified the status of an individual assessee into three viz.,

Resident and ordinarily resident (ROR)
Resident but not ordinarily resident (R but NOR)
Non-resident (NR)

The residential status of an Individual is determined based on the number of days of stay in India. Financial year (FY) is April to March.

*Not applicable to a resident going outside India for employment, a resident who leaves India as a member of crew of an Indian ship, an Indian citizen or person of Indian origin who is abroad and comes to India for a visit i.e. if such a person stays in India for less than 182 days, he would be a non-resident.

In the case of a ROR, his global income is taxed in India. Normally a returning Indian would be assessed as RNOR on his return to India (See FAQs Returning Indians for more).

In the case of a Non-resident, only the income earned or received in India is taxed in India. Accordingly, income earned outside India by ‘A’ would not be taxable in India.

India has contracted Double Tax Avoidance Agreements (DTAAs) with various countries. Taxability of A’s Indian income would be decided as per the provisions of these DTAAs. Most of these DTAAs contain provisions for lower rates of tax in case of incomes like dividend, royalties, fees for technical services etc. Provisions of some DTAAs provide interesting opportunities for efficient tax planning. For instance, the DTAA with Mauritius. Structuring of likely income in India therefore requires a ‘case to case’ study depending on facts of each case.
 

   
3.

Basic concepts under FEMA

FEMA stands for Foreign Exchange Management Act. Residential status and nature of transaction i.e. capital account transaction (e.g. purchase/ sale of shares, property) or current account transaction (e.g. remittance of income on shares, property) are the cornerstones of FEMA. The golden rule of FEMA is, “All capital account transactions other than those permitted are prohibited while all current account transactions other than those prohibited are permitted”. Under FEMA, certain types of transactions do not require RBI permission while others either require prior approval of RBI/ Government or it is mandatory to inform RBI of the same. Although total capital account convertibility does not exist under FEMA, there is full convertibility to the extent of USD 1 million per calendar year for NRIs- See Repatriation for details.
 

   
4.

Residential status under FEMA

Residential status under FEMA is the basis of applicability of FEMA i.e. transactions of a resident even outside India are covered by FEMA. The determination of residential status under FEMA is substantially different as compared to that under the Income Tax Act. Under the Income Tax act, residential status is determined based only on the number of days of stay in India. Under FEMA, residential status is primarily determined based on the intention of the person.

‘A’ would be a non-resident under FEMA as soon as he goes out of India for employment/ business outside India irrespective of the duration of his stay in India. Accordingly, ‘A’ would be outside the ambit of FEMA as far his transactions outside India are concerned (e.g. he can freely invest or carry on business abroad out of his earnings abroad).
 

   
5.

Benefits associated with the NRI status

The definition of a NRI is significant from the perspective of FEMA, Investment and Taxation in India (See Benefits associated with NRI status). The definition of a NRI under the Income Tax Act is different from that under FEMA.

Under Section 115C (e) of the Income Tax Act, a NRI is defined as ‘An individual being a citizen of India or a person of India origin (PIO) who is not a resident’. A person is deemed to be a PIO if he or either of his parents or any of his grandparents, was born in undivided India.
Apart from various types of investments in India, which ‘A’ can make, there are several other advantages of the NRI status, which are outlined below:

  • ‘A’ can freely acquire immoveable properties abroad out of earnings abroad. He can invest anywhere in the world. He can start any business abroad. He can become trustee-beneficiary of a trust set up abroad. He can retain all these even on his return to India and need not even intimate RBI about his foreign assets.

  • ‘A’ can set up family trusts abroad for education of his children/ maintenance of his family members. Such trusts can also be Asset Protection Trusts where the assets held by the trust are free from attachment by the creditors.

  • ‘A’ can bring 10 kgs. of gold (on payment of duty of Rs. 250 per 10 gms.) & 100 kgs. of silver (on payment of duty of Rs. 500 per kg.) once in six months on his visit to India.

  • 'A’s foreign income is not liable to tax in India.

  • ‘A’ can enjoy several tax concessions in India on his assets in India.

  • ‘A’ can seek Advance ruling from Advance Ruling Authority on taxability (income tax) of transactions.

  • ‘A’ can avail the benefits of the Double Tax Avoidance Agreements (DTAAs) entered into by India with several countries which attempt to minimise double tax on the same income (i.e. if tax is payable in India by NRIs on their income in India, credit for tax payable is available against tax payable in foreign country on such income). Also tax on dividends, royalty, fees for technical services earned in India by NRIs are offered concessional tax treatment under most DTAAs. Further, in few cases, tax may not be payable at all on such income if the NRI is a tax resident of a treaty country.

  • There are special reserve seats for children of NRIs for Engineering/Medical/MBA courses in certain institutions in India provided the fees are paid in foreign exchange.

  • Even in case of Initial Public Offerings (IPO’s), there are special quotas for NRI
     

6.

Bank account in India

The table below analyses the key features of bank accounts that NRIs can operate in India.

 

Particulars

Foreign Currency Non- Resident Account (FCNR)

Non-Resident External Rupee Account (NRE)

Non-Resident Ordinary Account (NRO)

Who can open

NRI

NRI

Any person resident outside India i.e. even a non-NRI.

Type of account

Term deposit only

Savings, Current, Recurring/ Term deposit

Savings, Current, Recurring/ Term deposit

Period for deposits

For terms not less than 1 year and more than 3 years i.e. 1-3 years only

No restriction

No restriction

Joint account

In the name of two or more non-resident individuals

In the name of two or more non-resident individuals

May be held jointly with residents

Operation of account

Besides account holder, Power of Attorney holder

Besides account holder,Power of Attorney holder

NRI and Resident Indian Account holder jointly or severally. Also Power of Attorney holder.

Nomination

Permitted

Permitted

Permitted

Designated currency

USD, Pound Sterling, Japanese Yen, Euro

Rupees

Rupees

Rate of interest

Fixed or floating within the ceiling rate of LIBOR/ SWAP rates for the respective currency/corresponding term minus 25 basis points at present.

Savings: Ceiling rate of six month USD LIBOR
Term Deposit: Ceiling rate of USD LIBOR of corresponding maturity
Current: No interest is paid

Savings: As applicable to domestic savings account 
Term Deposit: Banks are free to determine interest rates. 
Current: No interest is paid.

Taxation of interest

Tax-free. Even on permanent return to India, tax-free till the time a person is “Not Ordinarily Resident” within the meaning of the Income Tax Act.

Tax-free. If a NRI permanently returns to India, interest accrued w.e.f the date of permanent return to India is taxable.

Taxable and Tax deducted at source at the applicable rate

Repatriation

Both principal and interest freely repatriable

Both principal and interest freely repatriable

Interest and other current income freely repatriable. Principal repatriable up to USD 1 million per calendar year.

Change in residential status

Can be continued till due date on which option for conversion to Rupees/ RFC (See FAQs onReturning NRIs) account to be exercised

Can be continued till maturity, but to be designated as resident account or converted to RFC (See FAQs onReturning NRIs) account

Account to be designated as a Resident account

Loans and Overdrafts (against security of funds in the account)

A) IN INDIA

 

In Rupees

i) to the account holder

Permitted

Permitted

Permitted

ii) to third parties

Permitted

Permitted

Permitted

In Foreign currency

i) to the account holder

Permitted

Not Permitted

Not Permitted

ii) to third parties

Not Permitted

Not Permitted

Not Permitted

B) OUTSIDE INDIA

 

i) to the account holder

Permitted

Permitted

Not permitted

ii) to third parties

Permitted

Permitted

Not permitted


 
7.

Residential/ Commercial property in India

In general, ‘A’ can freely invest in residential/ commercial property (subject to certain restrictions like investment in agricultural land, plantation and farm house). Besides the sale proceeds can be freely repatriated outside India to the extent of the amount originally brought in from abroad. Also sale proceeds of only two residential properties can be repatriated.

Besides, housing loan can be availed in India against the security of the immoveable property. Now loan for any bonafide purpose may be obtained against the security of immoveable property.

See Investment opportunities for more on investment in real estate.
Profit on sale of property acquired out of forex resources as above or even the sale proceeds of property acquired out of Rupee resources can be repatriated in certain cases. To know more about the same, read Investing in real estate in India.
 

   
8.

Business in India

'A’ can make investments or operate his business in India in the following ways:

Branch/ Liaison office with prior permission of RBI (profits of the branch can be freely repatriated).
Indian company- 100% wholly owned subsidiary/ Joint Venture on repatriation and non-repatriation basis without permission of RBI in most of the sectors. For investments on repatriation basis, the prohibited sectors include retail trading, domestic wholesale trading and print media besides a few others.
Partnership firm/ Proprietorship concern on non-repatriation basis (income freely repatriable) in any activity except agriculture, plantation and real estate (other than real estate development) without permission of RBI.
It is significant to note here that now even sale proceeds of investments held on non-repatriation basis can be repatriated up to USD 1 million per calendar year. See Investment opportunities for more on investment through Indian companies.
 

   
9.

Shares of listed companies in India

‘A’ can freely invest in the shares (equity and preference) and convertible debentures of listed Indian companies on repatriation (i.e. from NRE account/ remittance from abroad) and non-repatriation basis (i.e. from NRO account/ NRE account/ remittance from abroad) subject to the following conditions:

  • One bank branch to be designated by the investor and all transactions to be routed through that branch.

  • Transactions to be carried out through a registered broker on a recognised stock exchange. Online trading has made it easy for NRIs to transact on their own from anywhere in the world.

  • All transactions must be delivery based i.e. speculative transactions are not allowed.

  • Ceiling on investment in one company by one NRI and all NRIs taken together at 5% and 10% respectively

  • Investment can be made in almost all sectors except companies engaged in print media, chit fund/ nidhi, agriculture, plantation, real estate (other than real estate development) and trading of Transferable Development Rights (TDRs).

See Investment opportunities for more on investment in stock market.
 

   
10.

Mutual funds

NRIs can freely invest on repatriation and non-repatriation basis in mutual funds in India. See Investment Opportunities for analysis of mutual funds as an investment option. See also FAQs on Mutual Funds, Performance Updates, Schemes.
 

   
11.

Jewellery and other movable assets in India

In our view, permission from or declaration to RBI is not required to acquire or continue to hold jewellery and other movable assets in India. Permission should be taken while taking jewellery abroad so that there is no duty while returning back. For repatriation of sale proceeds, see Repatriation.
 

   
12.

Insurance policies in India

‘A’ can hold insurance policies in India and pay premium thereon without any permission. Settlement of claims in foreign currency by insurance companies is permitted in certain cases where the premium has been paid in foreign currency or remittance from abroad. See also Repatriation.
 

   
13.

Credit cards in India

'A' can acquire and continue to hold both domestic and international credit cards issued by banks in India. He can pay for the same from his NRE/ NRO account or by way of remittance from abroad.
 

   
14.

Lending to resident Indians

NRIs can lend to residents as follows:

  • To close relatives on repatriation basis for their personal/ business purpose (agriculture and few other businesses prohibited) in foreign exchange up to USD 2,50,000 provided the loan is interest free and the minimum maturity period of loan is one year.

  • By way of non-convertible debentures denominated in Rupees and issued by public companies in India on repatriation and non-repatriation basis with a minimum maturity of three years. The interest rate cap is Prime-lending rate of SBI plus 300 basis points.

  • By way of loan/ deposits in Rupees on non-repatriation basis to residents with a maximum maturity of three years. The interest rate cap is Bank rate plus 200 basis points.

Significantly, even loans/ deposits on non-repatriation basis can now be repatriated under the USD 1 million per calendar year route.
 

   
15.

Borrowings in India

Banks in India can lend to NRIs for any bonafide purpose (other than investment in capital market and for prohibited business activities viz. agriculture, plantation. chit fund/ nidhi, trading in TDR) against any acceptable security based on their commercial judgement. Banks can even lend outside India to NRIs trough their overseas branches/ correspondents against securities provided in India. Other residents cannot lend to NRIs in general.
 

   
16.

Security/ Guarantee in India

Loan given to another person against the collateral security of shares/ immoveable property of ‘A’ is permitted. ‘A’ can also provide a guarantee in relation to loan to a resident in general provided no direct or indirect outgo from India is involved by way of guarantee commission or otherwise.

A resident other than a bank can provide guarantee in favour of a NRI only with prior RBI permission.
 

   
17.

Directorship of a company in India

To act/ continue as a director of an Indian company, no permission from RBI is required. The Indian company can make payment in Rupees to its non-wholetime director towards travel expenses to n fro and within India, sitting fees, commission or remuneration as agreed which can be repatriated abroad by ‘A’ after payment of taxes.
 

   
18.

Trusteeship of a trust in India

No permission from RBI is needed to act/ continue as a trustee of a trust in India in general.
 

   
19.

Inheritance in India

NRIs can acquire assets by way of inheritance and continue to hold them without RBI permission. Further sale proceeds of assets can be repatriated abroad up to USD 1 million per calendar year without RBI permission. Repatriation in excess of the abovementioned limit requires prior RBI approval. Tax will be payable by the legal heirs on the income accruing from such asset after the date of death as also on gains from the sale of assets.
 

   
20.

Gifts

There is no restriction on gifts by NRIs to resident Indians in foreign exchange or Indian Rupees or in the form of assets. All sorts of gifts from relatives (as defines under Income Tax Act) are tax free. All that is required is an offer by the donor and acceptance thereof by the in black and white. To safeguard against any hassles, the donee should request the donor for a gift and then the donor should remit the amount to the donee. Alternatively, the donor can offer the gift. In either case, it is necessary for the done to accept the gift in writing (maybe through a thank you note).
 

   
21.

Repatriation

There are no restrictions on repatriation of current income i.e. rent, dividend, interest etc. net of Indian taxes. Only an undertaking by the remitter and CA certificate as to the payment/ deduction of tax is required.

Repatriation of sale proceeds of investments acquired out of forex resources/ NRE funds has been discussed in Investment opportunities.

Now full capital account convertibility is available to NRIs to the extent of USD 1 million per calendar year for any bonafide purpose out of:

  • Balances held in NRO account;

  • Sale proceeds of assets like shares and securities, deposits, PF, immoveable property* etc. which are otherwise held on non-repatriation basis;

  • Sale proceeds of assets acquired by way of inheritance or legacy.

*However in case of immoveable property acquired out of Rupee funds, the sale proceeds can be repatriated only if the 'property/ sale proceeds' were 'held/ retained in NRO account' cumulatively for a minimum period of 10 years.

‘A’ has to produce the requisite documentary evidence in support of the acquisition/ inheritance/ legacy of funds/ assets proposed to be remitted besides the undertaking and CA certificate for tax compliance to avail of this facility.
 

   
22.

Power of Attorney

It is recommended that ‘A’ should execute a power of Attorney (general or special) in favour of a trusted friend/ relative/ professional to undertake certain transactions on his behalf. The power of attorney holder can operate bank account for local disbursement (for expenses) but can not make remittance outside India nor can make a gift or extend a loan to any person Resident in India / Resident outside India. In case of NRO account, joint account with a resident is permitted. Accordingly, in such a case, a power of Attorney need not be executed for operation of bank account if there is a joint account holder.

 
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