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Overview:

The advent of globalization manifested the ushering of Foreign Direct Investment (FDI) inflows during the past decade in developing countries, particularly in the Asian continent. Foreign direct investment (FDI) refers to “an investment made by a company or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such as ownership or controlling interest in a foreign company”.[1] In other words, FDI refers to “capital inflows from abroad that are invested in or to enhance the production capacity of the economy”.

Since the launch of Make in India, FDI Equity Inflows witnessed a growth of 63% while FDI Inflow saw the 55% mark. FDI inflow from April 2014 to December 2017 (USD 208.99 billion) is 39.24% of the overall FDI received in the country since April 2000 (USD 532.552 billion).[2] India crossed the USD 50 Billion mark for the first time in FY 2015 – 16 with USD 55.45 Billion in FDI, due to the investment-friendly policies and opening up of FDI allowance in various sectors. The highest FDI inflow of USD 60.8 Billion in 2016 – 17, was also witnessed during this period.[3]

Recent policy measures

  • FDI limit of 100% (49% under automatic route, beyond 49% government route)
    1. Defense sector made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959
    2. Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air Transport Service
  • FDI limit for Private Security Agencies raised to 74% (49% under automatic route, beyond 49% and up to 74% under government route)

Under automatic route

  • 49% FDI :

i. in Insurance and Pension sectors

ii. in the defence sector on the case to case basis.

  • FDI up to 100% in

i. Teleports, Direct to Home, Cable Networks, Mobile TV, Headend-in- the Sky Broadcasting Service

ii. Asset Reconstruction Companies

iii. Up-linking of Non-‘News & Current Affairs’ TV Channels, Down-linking of TV Channels

iv. Brownfield Airport projects

v. the marketplace model of e-commerce

  • 74% FDI in brownfield pharmaceuticals
  • Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling Services increased from 74% to 100%

Under Government route for

  1. 100% FDI in retail trading, including through e-commerce, has been permitted in respect of food products manufactured and/or produced in India
  2. sourcing norms can be relaxed up to three years, and sourcing regime can be relaxed for another five years subject to Government approval for single-brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products
  • Foreign airlines operation allowed up to the limit of 49% of their paid-up capital
  • Approval of Reserve Bank of India would not be required in cases where FIPB approval or license/permission by the concerned Ministry/Regulator has already been granted for establishment of branch office, liaison office or project office or any other place of business in India if the principal business of the applicant is Defence, Telecom, Private Security or Information and Broadcasting.[4]
  • The requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding of dogs), Pisciculture, Aquaculture, and Apiculture has been waived off

Types of Investors

  • Individual:

a. FVCI (Foreign Venture Capital Investors)

b. Pension/Provident Fund

c. Financial Institutions

  • Company:

a. Foreign Trust

b. Sovereign Wealth Funds

c. NRIs (Non-Resident Indians)/ PIOs (Persons of Indian Origin)

  • Foreign Institutional Investors:

a. Private Equity Funds

b. Partnership / Proprietorship Firm

c. Others

Aspects of Taxation:

Direct Taxes:

  • tax on net income earned in India according to the structure of investment.

Company:

  • 30% tax+surcharge+education cess on net income earned.
  • deduct tax on profits distributed @15.5%+surcharge+education cess.

No tax on profits distributed:

i. Branch office/ Project office/ Liaison office or permanent establishment:

  • @40%+surcharge+education cess

ii. Limited Liability Partnerships (LLPs):

  • @30%+surcharge+education cess.

Minimum Alternate Tax (MAT):

  • 5%+SC+EC-
  • Indian tax law requires MAT to be paid by corporations in cases where the tax payable according to the regular tax provisions is less than 18.5% of their book profits. However, MAT credit (MAT-actual tax) can be carried forward in next ten years for set-off against regular tax payable during the subsequent years subject to certain conditions

References:

[1] Foreign Direct Investment – FDI Definition, Investopedia, http://www.investopedia.com/terms/f/fdi.asp#ixzz4pvnawxfh

[2] Foreign Direct Investment – Make In India. (n.d.). Retrieved from http://www.makeinindia.com/foreign-direct-investment

[3] Id.

[4] Id.

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