completely about FDI in economics

1. FDI

2. Definition
 Foreign direct investment (FDI) is an investment made by a company or individual in one country in
business interests in another country.
 Foreign direct investments are distinguished from foreign portfolio investments.
 It is a major monetary source for economic development in India.
 Foreign companies invest directly in fast growing private Indian businesses to take benefits of
cheaper wages and changing business environment of India.

3. FDI in India
 The Indian government’s favourable policy regime and robust business environment have ensured
that foreign capital keeps flowing into the country.
 The government has taken many initiatives in recent years such as relaxing FDI norms across
sectors such as
-defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among
others.

4. Market size
 According to Department of Industrial Policy and Promotion (DIPP), the total FDI investments India
received during April - September 2016 rose 30 per cent year-on-year to US$ 21.6 billion, indicating that
government's effort to improve ease of doing business and relaxation in FDI norms is yielding results.
 Data for April - September 2016 indicates that the services sector attracted the highest FDI equity inflow
of US$ 5.29 billion, followed by telecommunications – US$ 2.79 billion, and trading – US$ 1.48 billion.
Most recently, the total FDI equity inflows for the month of September 2016 touched US$ 5.15 billion.
 During April - September 2016, India received the maximum FDI equity inflows from Mauritius (US$ 5.85
billion), followed by Singapore (US$ 4.68 billion), Japan (US$ 2.79 billion), (US$ 1.62 billion), and USA
(US$ 1.44 billion).
 Impact investments in India is expected to grow at a compound annual growth rate (CAGR) of 20-24 per
cent to touch US$ 6-8 billion by 2025, from US$ 1 billion in 2015.1

5. Entry Structures
 Incorporating a company in India:
 It can be a private or public limited company. Both wholly owned & joint ventures are allowed. Private
limited company requires minimum of 2 shareholders.
 Limited liability partnerships:
 Allowed under the Government route in sectors which has 100% FDI allowed under the automatic route
and without any conditions.
 Sole proprietorship/partnership firm:
 Under RBI approval. RBI decides the application in consultation with Government of India.

6.  Extension of foreign entity:
 Liaison office, Branch office (BO) or Project Office (PO). These offices can undertake only the activities
specified by the RBI. Approvals are granted under the Government and RBI route. Automatic route is
available to BO/PO meeting certain conditions.
 Other structures:
 Foreign investment or contributions in other structures like not for profit companies etc. are also subject to
provisions of Foreign Contribution Regulation Act (FCRA).

7. Central Government Incentives:
 Investment allowance (additional depreciation) at the rate of 15 percent to manufacturing
companies that invest more than INR 1 billion in plant and machinery available till to 31.3.2015.
 Incentives available to unit’s set-up in Special Economic Zones (SEZ), National Investment &
Manufacturing Zones (NIMZ) etc. and Export Oriented Units (EOUs).
 Exports incentives like duty drawback, duty exemption/remission schemes, focus products &
market schemes etc.
 Areas based incentives like unit set-up in north east region, Jammu & Kashmir, Himachal Pradesh,
Uttarakhand.
 Sector specific incentives like Modified Special Incentive Package Scheme(M-SIPS) in electronics.

8. State Government Incentives:
 Each state government has its own incentive policy, which offers various types of incentives based
on the amount of investments, project location, employment generation, etc. The incentives differ
from state to state and are generally laid down in each state’s industrial policy.
 The broad categories of state incentives include: stamp duty exemption for land acquisition, refund
or exemption of value added tax, exemption from payment of electricity duty etc.

9. Taxation
 Direct Taxes:
 The investor is required to pay tax on net income earned in India. The rates of taxes differ among
structures.
 Company:
 The company incorporated in India is required to pay 30% tax+surcharge+education cess on net income
earned. It is also required to deduct tax on profits distributed @15.5%+surcharge+education cess.
 Branch office/ Project office/ Liaison office or permanent establishment:
 The fixed place of business in India is treated as a permanent establishment and is required to pay tax
@40%+surcharge+education cess. There is no tax on profits distributed.

10.  Limited Liability Partnerships (LLPs):
 LLPs are required to pay tax @30%+surcharge+education cess. There is no tax on profits distributed.
 Minimum Alternate Tax (MAT):
 18.5%+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 10 years for set-off against regular tax payable during the
subsequent years subject to certain conditions.

11. Recent Policy Measures
 49% FDI under automatic route permitted in Insurance and Pension sectorsForeign investment up
to 49% in defence sector permitted under automatic route.
 The foreign investment in access of 49% has been allowed on case to case basis with Government
approval in cases resulting in access to modern technology in the country or for other reasons to
be recorded.
 FDI limit of 100% (49% under automatic route, beyond 49% government route) for defence sector
made applicable to Manufacturing of Small Arms and Ammunitions covered under Arms Act 1959.
 FDI up to 100% under automatic route permitted in Teleports, Direct to Home, Cable Networks,
Mobile TV, Headend-in- the Sky Broadcasting ServiceFDI up to 100% under automatic route
permitted in Up-linking of Non-‘News & Current Affairs’ TV Channels, Down-linking of TV Channels

12.  In case of single brand retail trading of ‘state-of-art’ and ‘cutting-edge technology’ products, sourcing
norms can be relaxed up to three years and sourcing regime can be relaxed for another 5 years subject
to Government approval
 Foreign equity cap of activities of Non-Scheduled Air Transport Service, Ground Handling Services
increased from 74% to 100% under the automatic route100% FDI under automatic route permitted in
Brownfield Airport projects
 FDI limit for Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline and regional Air
Transport Service raised to 100%, with FDI upto 49% permitted under automatic route and FDI beyond
49% through Government approval
 Foreign airlines would continue to be allowed to invest in capital of Indian companies operating
scheduled and nonscheduled airtransport services up to the limit of 49% of their paid up capitalIn order
to provide clarity to the e-commerce sector, the Government has issued guidelines for foreign investment
in the sector.
 100% FDI under automatic route permitted in the marketplace model of e-commerce

13.  100% FDI under Government route for retail trading, including through e-commerce, has been permitted
in respect of food products manufactured and/or produced in India
 100% FDI allowed in Asset Reconstruction Companies under the automatic route
 74% FDI under automatic route permitted in brownfield pharmaceuticals. FDI beyond 74% will be
allowed through government approval route
 FDI limit for Private Security Agencies raised to 74% (49% under automatic route, beyond 49% and upto
74% under government route)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, 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
 Requirement of ‘controlled conditions’ for FDI in Animal Husbandry (including breeding of dogs),
Pisciculture, Aquaculture and Apiculture has been waived off

15. DTAA & Tax Haven
 The DTAA, or Double Taxation Avoidance Agreement is a tax treaty signed between India and
another country ( or any two/multiple countries) so that taxpayers can avoid paying double taxes on
their income earned from the source country as well as the residence country. At present, India has
double tax avoidance treaties with more than 80 countries around the world.
 A tax haven is a country that offers foreign individuals and businesses a minimal tax liability in a
politically and economically stable environment, with little or no financial information shared with
foreign tax authorities.

16. Thank You