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Doing Business in

Karnataka 2012

Doing Business in Karnataka

2012

Karnataka Udyog Mitra. 2012 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner.

Doing Business in Karnataka

2012

Preface
This book is prepared by Ernst & Young, India as per the mandate given by the Government of Karnataka. The book is prepared with the intention of giving busy executives a quick overview of the investment climate and taxation in Karnataka and India; forms of business organizations, business, and accounting practices in India. The complex decision making process involved in undertaking foreign operations requires an intimate knowledge of a regions commercial climate along with a realization that the climate is constantly evolving. Companies doing business in Karnataka or planning to do so are well advised to obtain current and detailed information from the Government of Karnataka and experienced professionals. This book reflects information current at 1 April 2011.

Exchange Rate for all INR to USD conversions has been taken as 1 USD = INR 49.34 as on 15 March 2012

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List of Abbreviations
AICTE AEE AMT ASB BBMP BDA BESCOM BIS BOD BPT All India Council for Technical Education Assistant Executive Engineers Alternate Minimum Tax Accounting Standards Board Bruhat Bangalore Mahanagar Palike Bangalore Development Authority Bangalore Electric Supply Company Ltd Bureau of Indian Standards Board of Directors Branch Profit Tax

BT Biotechnology BWSSB CAF CAGR CBDT CCI CCPS CDP CEDOK CEE CESC CETP CFC CFE CRZ CST CVD DA DDT DFB DIC DIPP DLSWCC DSERT DTC 4 Bangalore Water Supply and Sewerage Board Combined Application Form Compound Annual Growth Rate Central Board of Direct Taxes Competition Commision of India Compulsorily Convertible Preference Shares Comprehensive Development Plan Centre for Entrepreneurship Development of Karnataka Chief Engineers Electrical Chamundeshwari Electricity Supply Corporation Common Effluent Treatment Plant Controlled Foreign Company Consent for Establishment Coastal Regulation Zone Central Sales Tax Countervailing Duty Dearness Allowance Dividend Distribution Tax Department of Factories and Boilers District Industries Centre Department of Industrial Policy and Promotion District Level Single Window Clearance Committee Department of State Education Research and Training Direct Tax Code

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EAC EC ECB ECC ED EH EIA EMP EPF ESCOM ESIC ESOP FCD FCI FDI FEMA FII FIPB FTS GAAR GATT GDP GDR GESCOM GoI GoK GSDP HESCOM HT HT HUF ICAI ICT IHM IISc IPP IRDA

Expert Appraisal Committee Environmental Clearance External Commercial Borrowing Environment Clearance Certificate Executive Directors Extra High Tension Environmental Impact Assessment Environmental Management Plan Employee Providend Fund Electricity Supply Companies Employee State Insurance Corporation Employee Stock Ownership Plan Fully Convertible Debentures Food Craft Institute Foreign Direct Investment Foreign Exchange Management Act Foreign Institutional Investors Foreign Investment Promotion Board Fees for Technical Services General Anti-Avoidance Rule General Agreement on Tariffs and Trade Gross Domestic Product Global Depository Receipt Gulbarga Electric Supply Company Ltd Government of India Government of Karnataka Gross State Domestic Product Hubli Electric Supply Company Ltd High Tension High Transmission Hindu Undivided Family The Institute of Chartered Accountants of India Information and Communication Technology Institute of Hotel Management Indian Institute of Sciences Independent Power Producer Insurance Regulatory and Development Authority 5

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ISO IT IT Act ITI JNNURM KCTU KEONICS KIADB KPTCL KPTCL KSFC KSIC KSIIDC KSPCB KSSIDC KST KTCP KUM KVA LT LT MAT MESCOM MGD ML MoEF MoF MOU MRPL MSME MT MW N2P2 NBFI NOC NRI ODP 6

International Organization for Standardization Information Technology Income Tax Act Industrial Training Institutes Jawaharlal Nehru National Urban Renewal Mission Karnataka Council for Technological Up gradation Karnataka Electronics Industries Development Corporation Karnataka Industrial Area Development Board Karnataka Power Transmission Company Limited Karnataka Power Transmission Corporation Limited Karnataka State Finance Corporation Karnataka Silk Industries Corporation Karnataka State Industrial and Infrastructure Development Corporation Karnataka State Pollution Control Board Karnataka State Small Industries Development Corporation Karnataka Sales Tax Karnataka Town and Country Planning Karnataka Udyog Mitra Kilo Volt Amperes Low Tension Low Transmission Minimum Alternate Tax Mangalore Electric Supply Company Ltd Million Gallon Daily Mining Lease Ministry of Environment and Forests Ministry of Finance Memorandum of Understanding Mangalore Refinery and Petrochemicals Limited Micro, Small and Medium Enterprises Metric Tonnes Mega Watt Nutri / Nutraceutical and Phyto - Pharmaceutical Park Non Banking Financial Institution No Objection Certificate Non Residential Indian Outline Development Plan

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P&CP POEM POTR PPP RBI ROC ROI RRB SEAC SEBI SEE SEIAA SEZ SHLCC SIDBI SLSWCC SPV SSI STPI STT TECSOK TIN TRIPS UDA UNCITRAL UTI VAT VITC WIPO WTO

Prevention and Control of Pollution Place of Effective Management Point of Taxation Rules Public Private Partnership Reserve Bank of India Registrar of Companies Return on Income Regional Rural Banks State Expert Appraisal Committee Securities and Exchange Board of India Superintending Electrical Engineers State Environment Impact Assessment Authority Special Economic Zones State High Level Clearance Committee Small Industries Development Bank of India SIDBI State Level Single Window Clearance Committee Special Purpose Vehicle Small Scale Industries Software Technology Parks of India Securities Transaction Tax Technical Consultancy Services Organization of Karnataka Tax Information Network Trade Related Aspects of Intellectually Property Rights Urban Development Authority United Nations Commission on International Trade Law Unit Trust of India Value Added Tax Visveswaraya Industrial Trade Centre World Intellectual Property Organization World Trade Organization

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Table of Contents

Government Constitution and Economic Climate


Government Constitution in India......................................................................................................................10 A.1.1 Central Government ............................................................................................................................................. 10 A.1.2 State Government ................................................................................................................................................. 10 Financial System of India ....................................................................................................................................10 A.2.1 Reserve Bank of India (RBI) ............................................................................................................................... 10 A.2.2 Types of Institutions ............................................................................................................................................ 11 A.2.2.1 Scheduled commercial banks........................................................................................................................... 11 A.2.2.2 Urban and State Cooperative Banks............................................................................................................... 11 A.2.2.3 Regional Rural Banks (RRB)................................................................................................................................ 12 A.2.2.4 Non-Banking Financial Institutions (NBFI) ................................................................................................ 12 Overview of India Economy..................................................................................................................................12 A.3.1 Gross Domestic Product (GDP)2 ....................................................................................................................... 12 A.3.2 Agriculture3.............................................................................................................................................................. 12 A.3.3 Industry....................................................................................................................................................................... 12 A.3.4 Services....................................................................................................................................................................... 12 A.3.5 Inflation Rate........................................................................................................................................................... 13 A.3.6 Foreign Exchange Reserves............................................................................................................................... 13 A.3.7 Repo rate and reverse repo rate....................................................................................................................... 13 A.3.8 Foreign Direct Investment (FDI)....................................................................................................................... 13 A.3.9 Exports & Imports................................................................................................................................................. 13 Overview of Karnataka Economy11......................................................................................................................13 A.4.1 Gross State Domestic Product........................................................................................................................... 13 A.4.2 Agriculture................................................................................................................................................................. 14 A.4.3 Industry....................................................................................................................................................................... 14 A.4.4 Services....................................................................................................................................................................... 14 A.4.5 Social Infrastructure in Karnataka.................................................................................................................. 14 A.4.5.1 Education................................................................................................................................................................... 14 A.4.5.2 Health.......................................................................................................................................................................... 15 A.4.6 Economic infrastructure in Karnataka........................................................................................................... 15 A.4.6.1 Power........................................................................................................................................................................... 15 A.4.6.2 Road.............................................................................................................................................................................. 16 A.4.6.3 Ports............................................................................................................................................................................. 16 A.4.6.4 Airways........................................................................................................................................................................ 16 A.4.6.5 Telecommunication............................................................................................................................................... 16 A.4.6.6 Banking and Finance including Cooperatives............................................................................................ 17 Leading Sectors in Karnataka.............................................................................................................................. 17 A.5.1 Agro & Food Processing Industry ................................................................................................................... 17 A.5.2 Textiles and Apparel.............................................................................................................................................. 18 A.5.3 Energy.......................................................................................................................................................................... 19 A.5.4 Biotechnology and Pharmaceuticals............................................................................................................. 20 A.5.5 Chemical and Petrochemical............................................................................................................................. 21 A.5.6 Minerals...................................................................................................................................................................... 22 A.5.7 Tourism and Hospitality....................................................................................................................................... 23 A.5.8 Knowledge Economy............................................................................................................................................. 24 A.5.9 Information Technology...................................................................................................................................... 26 A.5.10 Engineering............................................................................................................................................................... 27 A.5.11 Transportation and Logistics............................................................................................................................. 27 A.5.12 Urban Infrastructure............................................................................................................................................. 28 A.5.13 Industrial Infrastructure...................................................................................................................................... 29

A.1 A.2.

A.3

A.4

A.5

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Investment Climate
Foreign Investment framework in India...........................................................................................................31 B.1.1 Features of the GoIs Consolidated FDI Policy and incentives offered............................................ 31 B.1.2 Foreign Investment Promotion Board........................................................................................................... 32 Foreign Investment in India................................................................................................................................32 B.2.1 Foreign Direct Investment................................................................................................................................. 32 B.2.2 Foreign Portfolio Investment............................................................................................................................ 32 B.2.2.1 Registration Eligibility.......................................................................................................................................... 32 B.2.2.2 Registration of sub-accounts............................................................................................................................ 32 B.2.3 Foreign venture Capital Investment Route................................................................................................. 32 B.2.4 Investment by NRIs............................................................................................................................................... 33 Economic Laws and Regulations in India..........................................................................................................33 B.3.1 Indian Contract Act, 1872 ................................................................................................................................... 33 B.3.2 Intellectual Property Rights Protection ....................................................................................................... 33 B.3.3 Copyrights ................................................................................................................................................................. 34 B.3.4 Trademarks ............................................................................................................................................................... 34 B.3.5 Geographical Indications of Goods ............................................................................................................... 34 B.3.6 Patents ....................................................................................................................................................................... 34 B.3.7 Industrial Designs.................................................................................................................................................. 34 B.3.8 Anti-Trust Regulations ........................................................................................................................................ 35 B.3.8.1 Competition Act, 2002 ......................................................................................................................................... 35 B.3.8.2 Consumer Protection Act, 1986 ........................................................................................................................ 35 B.3.8.3 Negotiable Instruments Act, 1881 ................................................................................................................. 35 B.3.9 Sale of Goods Act, 1930 ....................................................................................................................................... 35 B.3.10 Arbitration ................................................................................................................................................................ 36 Investment climate in Karnataka.......................................................................................................................36 B.4.1 Advantages for investment in Karnataka..................................................................................................... 36 B.4.2 Policy Support.......................................................................................................................................................... 37 B.4.2.1 Incentives and Concessions under Karnataka Industrial Policy 2009-14....................................... 37 B.4.3 Special Economic Zones .................................................................................................................................... 39 B.4.3.1 for SEZ Developers................................................................................................................................................. 39 B.4.3.2 Units in SEZ .............................................................................................................................................................. 40 B.4.4 Land.............................................................................................................................................................................. 40 B.4.5 Water............................................................................................................................................................................ 41 B.4.6 Power........................................................................................................................................................................... 41 B.4.7 Finance........................................................................................................................................................................ 41 B.4.8 Technology................................................................................................................................................................ 42 B.4.9 Human Resource..................................................................................................................................................... 42 B.4.10 International Trade................................................................................................................................................ 42 B.5 Investment Facilitation Mechanism.............................................................................................................. 42

B.1 B.2

B.3

B.4


C.1 C.2

Taxes

Administration........................................................................................................................................................44 Income Tax .............................................................................................................................................................44 C.2.1 Corporate Income Tax........................................................................................................................................... 44 C.2.1.1 Liability for Income Tax ...................................................................................................................................... 44 C.2.1.2 Scope of Income Liable to Tax ......................................................................................................................... 45 C.2.1.3 Income subject to Tax ......................................................................................................................................... 45 C.2.1.4 Corporate tax rate.................................................................................................................................................. 45 C.2.2 Determination of Taxable Income.................................................................................................................. 46 C.2.2.1 Income from House property............................................................................................................................ 46 C.2.2.2 Income from Business.......................................................................................................................................... 46 C.2.2.3 Capital gains and losses...................................................................................................................................... 48 C.2.2.4 Income from other Sources............................................................................................................................... 50 C.2.3 Minimum Alternate Tax........................................................................................................................................ 50 C.2.4 Alternate Minimum tax........................................................................................................................................ 50 C.2.5 Dividend Distribution Tax................................................................................................................................... 51 C.2.6 Wealth Tax................................................................................................................................................................. 51

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C.3

C.4 C.5

Income Tax Individuals.........................................................................................................................................51 C.3.1 Liability for Income Tax....................................................................................................................................... 51 C.3.2 Types of incomes subjected to tax in India................................................................................................ 52 C.3.2.1 Employment Income............................................................................................................................................. 52 C.3.2.2 Income from House Property............................................................................................................................ 53 C.3.2.3 Self Employment and business income........................................................................................................ 53 C.3.2.4 Capital gains on assets........................................................................................................................................ 53 C.3.2.5 Income from other sources (investments and lotteries)....................................................................... 54 C.3.3 Income Tax Rates (Individuals)........................................................................................................................ 55 C.3.4 Income tax filing and payment process....................................................................................................... 55 C.3.5 Other direct taxes (Individuals)........................................................................................................................ 56 C.3.5.1 Wealth Tax................................................................................................................................................................. 56 C.3.5.2 Social security.......................................................................................................................................................... 56 Direct Tax Code Bill, 2010 (DTC 2010)................................................................................................................. 57 Indirect Taxes..........................................................................................................................................................59 C.5.1 Excise Duty................................................................................................................................................................ 59 C.5.2 Service Tax................................................................................................................................................................. 60 C.5.3 VAT/CST....................................................................................................................................................................... 61 C.5.4 Octroi/ Entry Tax ..................................................................................................................................................... 62 C.5.5 Research and Development Cess..................................................................................................................... 62 C.5.6 Stamp Duty................................................................................................................................................................ 62 C.5.7 Professional tax....................................................................................................................................................... 62 C.5.8 Luxury Tax.................................................................................................................................................................. 63 C.5.9 Property tax............................................................................................................................................................... 63 C.5.10 Entertainment Tax.................................................................................................................................................. 63

D
D.1 D.2 D.3

Financial Reporting and Auditing in India


Statutes/bodies governing the Reporting Requirements ............................................................................64 Accounting Methodology ....................................................................................................................................64 Funding of Indian Businesses ............................................................................................................................64 D.3.1 Share Capital ........................................................................................................................................................... 64 D.3.2 Debentures and Borrowings ............................................................................................................................. 64 D.4 Disclosure Requirements ................................................................................................................................... 65 D.5 Audit Requirements .............................................................................................................................................. 65

E
E.1

Roadmap for setting up industry in Karnataka


Setting up an industrial unit in Karnataka ......................................................................................................66 E.1.1 Entry Level................................................................................................................................................................. 66 E.1.2 Implementation Level.......................................................................................................................................... 67 E.1.3 Operational level.................................................................................................................................................... 67 E.2 Department wise procedures to establish industrial units................................................................. 68 E.2.1 KIADB........................................................................................................................................................................... 68 E.2.2 DLSWCCS and SLSWCC.......................................................................................................................................... 69 E.2.3 Department of Factories and Boilers............................................................................................................. 69 E.2.3.1 Definition of Factory ............................................................................................................................................ 71 E.2.3.2 Establishments other than factories ........................................................................................................... 72 E.2.4 Karnataka State Pollution Control Board (KSPCB).................................................................................... 74 E.2.5 Department of Forests, Ecology and Environment.................................................................................. 78 E.2.5.1 Prior Environmental Clearance (EC) .............................................................................................................. 79 E.2.5.2 Categorization of projects and activities .................................................................................................... 79 E.2.5.3 Appraisal Committees ........................................................................................................................................ 79 E.2.5.4 Application for Prior Environmental Clearance (EC) ............................................................................ 79 E.2.5.5 Validity of Environmental Clearance ............................................................................................................. 81 E.2.5.6 Projects cover under CRZ Notification........................................................................................................... 81 E.2.6 Karnataka Power Transmission Corporation Limited (KPTCL/ESCOMs)............................................ 81 E.2.6.1 Electrical Inspectorate......................................................................................................................................... 82 E.2.7 Department of Legal Metrology....................................................................................................................... 84 E.2.8 Procedures related to purchase and conversion of land....................................................................... 85 E.2.9 Department of Mines & Geology..................................................................................................................... 85 E.2.9.1 Procedures for grant of Mining Lease (M.L)................................................................................................. 86

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A
Government Constitution and Economic Climate
A.1 Government Constitution in India
A.1.1 Central Government
India is a sovereign, socialist, secular, democratic republic. It follows a federal form of government. Each state is administered by a state government, while the central government is in charge of overall administration of the country. At the central level, India has a bicameral legislature. The Union Parliament comprises the Lok Sabha and the Rajya Sabha. The members of the Lok Sabha are directly elected by the people of the country, while majority of the members of Rajya Sabha are representatives of the states and union territories. The leader of the majority party in the Lok Sabha usually becomes the prime minister of the country. India has an independent judicial system. The Supreme Court is the apex judicial authority; below it are the High Courts which head the judicial system in each state. Under each High Court, there is a hierarchy of subordinate courts; district level and lower.

A.1.2 State Government


Each state has a legislative assembly. The members of the assembly are elected by the people of the state. The head of the state is the Governor, appointed by the president of the country. Each state also has a cabinet headed by the chief minister responsible to the elected State Legislature. The chief minister is responsible for the overall administration of the state.

A.2. Financial System of India


Indias financial system has kept pace with the growing needs of its corporate and retail borrowers. Interest rates are market-determined and have shown a downward trend over the last few years.

A.2.1 Reserve Bank of India (RBI)


Established in 1935, RBI is the central bank of the country. It regulates and supervises the Indian financial system. It formulates, implements, and monitors the monetary policy of the country, manages the countrys foreign exchange reserves, prescribes exchange control norms to facilitate external trade and payment, and acts as a banker to the Central and State Governments. A core function of the Reserve Bank in the last 75 years has been the formulation and implementation of monetary policy with the objectives of maintaining price stability and ensuring adequate flow of credit to productive sectors of the economy. To these was added, in more recent times, the goal of maintaining financial stability. The objective of maintaining financial stability has spanned its role from external account management to oversight of banks and non-banking financial institutions as also of money, government securities and foreign exchange markets. The Reserve Bank designs and implements the regulatory policy framework for banking and nonbanking financial institutions with the aim of providing people access to the banking system, protecting depositors interest, and maintaining the overall health of the financial system. Its function of regulating the commercial banking sector, which emerged with the enactment of the Banking Regulation Act, 1949, has over time, expanded to cover other entities. Thus, amendments to the Banking Regulation 11

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Act, 1949 brought cooperative banks and regional rural banks under the Reserve Banks jurisdiction, while amendments to the Reserve Bank of India Act saw development finance institutions, non-banking financial companies. Main functions of RBI includes Monetary policy Regulation and supervision of the banking and non-banking financial institutions, including credit information companies. Regulation of money, forex and government securities markets as also certain financial derivatives Debt and cash management for Central and State Governments. Management of foreign exchange reserves. Foreign exchange management - current and capital account management. Banker to banks. Banker to the Central and State Governments. Oversight of the payment and settlement systems. Currency management. Developmental role. Research and statistics.

A.2.2 Types of Institutions


The components of the Indian banking system are: Scheduled commercial banks. Urban State co-operative banks. Regional rural banks. Non Banking Financial Institutions (NBFI).

A.2.2.1 Scheduled commercial banks


As per the Reserve Bank of India Act, 1934, banks in India are classified into scheduled and non-scheduled banks. Scheduled banks are those which are entered into the second schedule of the RBI Act, 1934. It includes those banks which have a paid-up capital and reserves of an aggregate value of not less than Rs. 5 lakhs (USD 24.68 million) and which satisfy RBI that their affairs are being carried out in the interests of the depositors. While, non-scheduled banks are those which have not been included in the second schedule of the Act. The scheduled banks comprise scheduled commercial banks and scheduled cooperative banks. Scheduled commercial banks are of three types: Public sector banks. Private sector banks. Foreign banks.

A.2.2.2 Urban and State Cooperative Banks


State Cooperative Banks constitute the apex of the three tier co-operative credit structure, organized at the level of individual States. While, Urban Co-operative Banks (UCBs), refers to the primary cooperative banks located in urban and semi-urban areas. Initially, these banks were allowed to lend money only for non-agricultural purposes and essentially to small borrowers and businesses. Today, their scope of operations has widened considerably. The Urban Banks Department of the Reserve Bank of India is vested with the responsibility of regulating and supervising the urban cooperative banks. 12

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A.2.2.3 Regional Rural Banks (RRB)


RRBs have been set up in the country on the sponsorship of individual nationalized commercial banks. These banks aim at taking the banking facilities to the doorsteps of rural masses especially in the remote areas. The objective was to provide credit to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs so as to develop productive activities in the rural areas. They have been conceived as institutions that combine the features of both the co-operatives and commercial banks. Regional rural banks were established under an act of the Parliament to improve credit delivery in rural areas. They are sponsored by the Central and State Governments and other public sector banks, in the ratio of 50:15:35.

A.2.2.4 Non-Banking Financial Institutions (NBFI)


These institutions offer enhanced equity and risk-based products. They help in broadening access to financial services and enhancing competition and diversification of the financial sector. The NBFI segment comprises all India and state level financial institutions, NBFCs (Non Banking Financial Corporations) which are private sector entities providing niche financial services, and primary dealers.

A.3 Overview of India Economy


A.3.1 Gross Domestic Product (GDP)2
The GDP of India at factor cost in the year 2010-11 is INR 5,016,427.5 Crores (USD 1016.5 Billion). The real GDP growth rate has been 8.6% during the year 2010-11 as against the growth rate of 8% during the previous year. Per Capita Net national income (factor cost at current prices) showed an increase of 17.3 % over the previous year.

A.3.2 Agriculture3
For the year 2010-11, agriculture accounted for 14.2% of the countrys GDP with a growth rate of 3.8% over the previous year. India is among the leading producers of sugarcane, tea, cotton, and jute in the world. Cashews, coffee, and spices are important cash crops of India. The country is one of the worlds largest producers of fruits and vegetables.

A.3.3 Industry
India, as one of the largest industrialized nations, has a well diversified industrial base covering infrastructure, heavy machinery, machine tools, basic metals, mining, petroleum and petrochemicals, pharmaceuticals, chemicals, transport equipment, food processing, etc. As per the Index of Industrial Production, overall growth in the sector was 9.5%4 during April to November 2010-11, as against 7.4% for the same period in 2009-10.

A.3.4 Services
The service sector has played a dominant role in the Indian economy with a 57.3% share in the GDP. The sector grew at a rate of 10.1% during the year 2009-10. High growth service categories are financing, insurance, real estate and business services and transport, storage, and communication with the latter overtaking the former in 2009-10 with a high growth of 15%. Among the sub categories, in 2008-09, double digit growth was registered by communication (25.7%), public administration and defense (22.1%), banking and insurance (13.9%) and storage (11.6%). Hotels and restaurants registered a negative growth of -3.5%.

2Economic Survey, 2010-11, Ministry of Finance, Government of India website, http://indiabudget.nic.in/index.asp, accessed 1 March 2012. 3Ibid. 4Economic Survey, 2010-11, Ministry of Finance, Government of India website, http://indiabudget.nic.in/index.asp, accessed 1 March 2012.

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A.3.5 Inflation Rate


The inflation rate measured by change in Wholesale Price Index (WPI) averaged at 9.4% during 2010-11 as compared to 3.6% in 2009-10.

A.3.6 Foreign Exchange Reserves


The Foreign exchange reserves increased from INR 13, 61, 789 Crores (USD 302 Billion) in March 2011 to INR 14,54,630 Crores (USD 295 Billion) in March 2012.

A.3.7 Repo rate and reverse repo rate


The repo rate, and reverse repo rate as on March 14, 2012 are 6%, 8.5%, and 7.5% respectively.

A.3.8 Foreign Direct Investment (FDI)


Cumulative foreign direct inflows into India amounted to INR 11,84,676 (USD 240 billion) between April 2000 and December 2011. The foreign direct investment inflows experienced 13% decline to INR 162,361.5 Crores (USD 32.9 billion) in 2010-11 from INR 186,543 Crores (USD 37.7 billion) in 2009-10.6 Similarly outward FDI declined by 19.6 per cent from INR 88,336.5 Crores (USD 17.9 billion) in 2008-09 to INR 71,064 Crores (USD 14.4 billion) in 2009-107. Consequently, the net FDI (inward FDI minus outward FDI) was marginally lower at INR 92,778 Crores (USD18.8 billion) in 2009-10, as compared with INR 97,713 Crores (USD 19.8 billion) in 2008-09. The FDI was channeled mainly into manufacturing followed by construction, financial services and the real estate sector.8

A.3.9 Exports & Imports


Indias exports of INR 8,82,138 Crores (USD 179 billion) in 2009-10 increased by 40.5% to INR 12,39,355 Crores (USD 251 billion) in 2010-119. Similarly, import payments of INR 1,824,811 Crores (USD $370 billion) also increased by 28.2% in 2010-11 from INR 1,423,120.11 Crores (USD $288 billion) in 2009-101.

A.4 Overview of Karnataka Economy11


A.4.1 Gross State Domestic Product
The average annual growth rate of GSDP at constant prices (2004-05) prices, during the last 7 years i.e. from 2004-05 to 2010-11 is equal to 8.6%. The sectoral growth rates during this period for agriculture and allied activities, industry and service sector are 5%, 8.4% and 10% respectively. In general, the trends in the annual growth rate of GSDP correspond with the growth rates of industry and service sectors. The agricultural sectors are expected to grow by 5.9% in 2010-11 as against 4.3% during 2009-10. After a spectacular recovery from negative growth rate of 2.2% in 2008-09 to positive growth rate of 9.3% in 2009-10, the growth rate of secondary sector (comprising manufacturing, construction and electricity, gas and water supply) moved to 7% during 2010-11. A remarkable increase in tertiary sector from 3.7% in 2009-10 to 9.7% (especially in real estate, ownership of dwellings and business services from 2.1% to 8.9%) in 2010-11 is a key driver of 8.2% growth of GSDP in 2010-11, i.e. from INR 251,268 Crores (USD 50.9 billion) in 2009-10 to INR 271,956 crores (USD 55.1 billion) in 2010-11. At the same time, per capita GSDP is expected to increase from INR 42,914 (USD 869.6) in 2009-10 to INR 45,962 (USD 931.3) in 2010-11 or about 7%. The growth of GSDP is comparable with that of all India level.
Foreign Exchange Reserves, Reserve Bank of India website, http://www.rbi.org.in/scripts/wssviewdetail.aspx? type=section &param1=2, accessed 14 March 2012. 6Fact Sheet on Foreign Direct Investment (FDI): From April 2000 to December 2011, Department of Industrial Policy and Promotion website, http://dipp.nic.in/English/Publications/FDI_Statistics/2011/india_FDI_December2011.pdf, accessed 14 March 2012. 7Economic Survey, 2010-11, Ministry of Finance, Government of India website, http://indiabudget.nic.in/index.asp, accessed 1 March 2012. 8Economic Survey, 2010-11, Ministry of Finance, Government of India website, http://indiabudget.nic.in/index.asp, accessed 1 March 2012. 9Export: Region-wise all countries, Department of Commerce Export Import Bank website, http://commerce.nic.in/eidb/ergncnt.asp, accessed 14 March 2012. 10Import: Region-wise all countries, Department of Commerce Export Import Bank website, http://commerce.nic.in/eidb/irgncnt.asp, accessed 14 March 2012. 11 Economic Survey of Karnataka 2010-11, Planning Programme Monitoring & Statistics Department, Government of Karnataka website, http://www.planning.kar.nic.in/sites/planning.kar.nic.in/files/ ES_Final_Printing_English_13-3-11_5.30.pdf, 1 March 2012.
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A.4.2 Agriculture
Agriculture remains the primary activity and main livelihood source for the rural population in the state. It is characterized by wide crop diversification and remains highly dependent on the vagaries of southwest monsoon. During 2010-11 food grains production in the state increased at an enormous rate of more than 14% over the last years production and this increase was mainly led by increase in yield rate as the area increase during the year was only 2.9%. Agriculture contributed 15.3% (at constant prices) in the states GSDP in 2010-11. A novel mission mode Bhoo Chetna program started in 2009-10 for increasing the agriculture productivity in the rainfed agriculture has been extended to 16 districts in 2010-11 covering an area of about 12 lakh hectares to benefit about 8.7 lakh farmers.

A.4.3 Industry
Karnataka is considered pioneer in the field of industrialization in India. The state has been in the forefront of industrial growth of our country since independence. Since liberalization in 1991, the state has been spearheading the growth of Indian industry, particularly in terms of high technology industries such as Electrical and Electronics industries, Information and Communication Technology (ICT) industries, Biotechnology and more recent in terms of Nanotechnology industries. Industries contributed 29.6%, (at constant prices) in the states GSDP in 2010-11.

A.4.4 Services
The services sector contributed 55.17% (at constant prices) to the States GSDP in the year 2010-11. Services included trade, hotels, transport, communication, and financial services.

A.4.5 Social Infrastructure in Karnataka A.4.5.1 Education


The state is home to Indias leading education institutions like Indian Institute of Management, Bangalore, Indian Institute of Sciences and National Law School of India. Apart of leading institutes state are home to 291 polytechnics, 187 engineering colleges, 114 medical colleges, 69 pharmacy colleges and 18 institutions for general education. They have the largest number of medical colleges in India and 8 of the nations 75 top ranked engineering institutions. 15

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A.4.5.2 Health
Karnataka has made significant progress in improving the health status of the people in the last few decades. The state has a wide institutional network providing health services in both urban and rural areas. There are 17 district hospitals, 10 other hospitals and 29 autonomous and teaching hospitals in the state. There are 8,143 sub-centers, 2,193 primary health centers and 326 community health centers and taluka hospitals catering to the health need of the rural population.

A.4.6 Economic infrastructure in Karnataka A.4.6.1 Power


Power is an important economic infrastructure required for achieving accelerated economic development and industrialization. Karnataka generates power in four different forms - hydro, thermal, wind and solar. Of these, hydel and thermal power generations account for the considerable majority of installed capacity. Asias 1st major hydro electric generating station was set up in Karnataka in 1902. It ranks 2nd in installed hydro capacity at 3599.8 MW Karnataka has a total installed capacity of 11,853 MW in January 201212. State comprises of 57% of the total installed capacity whereas Private sector and Central Govt comprises of 32% and 11% respectively.

Sources of Power Generation in Karnataka

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Power generation, Department of Energy, Government of Karnataka website, www.gokenergy.gov.in./power_gen. html, accessed 14 March 2012.

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Electricity Generation and Power Consumption

A.4.6.2 Road
Karnataka is known for its efficient public transport, as its services satisfy different income groups across state and in neighboring states also. Number of motor vehicles has increased to 9.4 million in 2010-11 (up to Dec 2010) from 7.3 million in 2007-08 showing a growth of 28.7% in the last 3 years. Over the years, the National Highways length has increased by 12 % and major district roads length by 5% whereas there is reduction in the length of the State Highway due to up gradation to National Highway. Total road length in Karnataka has increased from 154,204Kms in 2000-01 to 231,032 in 200910 demonstrating a 42.6% increase.

A.4.6.3 Ports
The Karnataka State has a coastal line of 312 Kms consisting of one major port and 10 minor ports. Apart from the New Mangalore major port, which is under the control of the Government of India, the following 10 minor ports come under the control of the State Government. An investment of INR 2.83 crores (USD 0.57 million) is made in all the 10 minor ports by the end of Sept 2009-10 to improve the condition of the ports.

A.4.6.4 Airways
The countrys first Green Field International Airport has been developed at Devanahalli, Bangalore at a cost of INR 2,470 crores (USD 500.5 million) as a passenger and cargo hub under Public Private Partnership (PPP) model. This airport has considerable traffic movement both domestic as well as international. The existing airport at Mysore has started its operational this year by landing kingfisher airline during Dasar Festival. In Bellary, the Government is developing a new airport on PPP basis. Further, the existing Defense airport at Bidar and Karwar are also being developed for civil operations and the Government is pursuing the matter with Ministry of Defense for getting necessary clearances.

A.4.6.5 Telecommunication
Karnataka prides itself for the difficult feat of achieving full connectivity across the state despite a large part of the state falling under the Western Ghats that, owing to their terrain make the tower installation extremely difficult. 17

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The telecommunication system in the state is operated by both the private as well as the public undertakings. The number of telephone towers has increased over the years. In last six years 72 new towers were added, averaging close to 6 to 7 towers each year. In 2009-10 alone, 9,820 post Offices and 2,778 Telephone towers were present in the state.

A.4.6.6 Banking and Finance including Cooperatives


Karnataka is considered a pioneer in establishment of various commercial banks in the state. Presently there are 27 public sector commercial banks and 16 private commercial banks. In addition to it, 6 Regional Rural Banks are operating in the State. Of the total 27 public sector commercial banks, 7 of them play major role in the state, having more than 3/4th of business. The new generation banks such as IDBI Bank, Axis Bank, ICICI Bank, Indus Ind Bank, Kotak Mahindra Bank, YES Bank etc., are also making a good contribution in expansion of banking net work in the state in general, particularly in urban areas. The aggregate outstanding deposits of commercial Banks (including RRBs) stood at INR 228,935.89 crores (USD 46.4 billion) as at the end of March 2010 as against INR 206,376 crores (USD 41.8 billion) recorded a year ago. Growth in deposits during the year was 10.93 per cent, up to the end of March 2010. As on March 2010, the total outstanding advances of commercial Banks including RRBs in the state stood at INR 171,807.52 crores (USD 34.8 billion) as against the level of advances of INR 155,409 crores (USD 31.5 billion) recorded a year ago indicating a growth rate of 10.55 percent.

A.5 Leading Sectors in Karnataka


A.5.1 Agro & Food Processing Industry
Agriculture & allied activities contributed 17% to GSDP in FY09. There were 177,850 units engaged in the agro and food processing industry in Karnataka producing INR 35,872.5 crores (USD 7,269 million) in 2008-09 and employing 800,000 workers. The state is a leader in horticultural products and spices, and coffee production. The total area under irrigation in India is 76 million hectares in 2008-09 as per the 2011-12 Economic Survey of India statistics. Karnataka is one of the highest irrigated states in India and ranks third after Punjab and Andhra Pradesh in terms of the total area under irrigation. Key Initiatives In 2011-12, budget of INR 18,259.5 crores (USD 3.7 billion) allocated for the development of agriculture, allied and irrigation sectors. GoK is committed to tapping the states potential of inland fishing and aquaculture by making more resources available to the investors; building capacity to enhance efficiency, improve investors profitability by organizing value chain and the retail sector. Food parks and food processing special economic zones - one operational and one formally approved Food Processing SEZ in Hassan, Karnataka with a total investment of INR 81.43 crores (USD16.5 million). Agro investment regions are planned at Gadag & Haveri, Belgaum and Mysore with the aim of streamlining agricultural value chain, bringing state of art technology, encouraging best practices in agri-business and reducing transaction costs and improving realization for farmers. Single Window clearances for permitting production of agriculture raw material for captive consumption. Declare Agro-Food Processing Industry as a seasonal industry to make them eligible for relief from payment of minimum charges of electricity and water. Provide long term contractual agreement between industry and farmers for raw material supply.

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Prominent Agricultural & Horticultural Institutes, Research & Development Institutes and Tissue Culture Laboratory and Floriculture Park. Various policy initiatives such as the Integrated Agribusiness Development Policy 2011, Karnataka Livestock Development Policy 2010, Fisheries Policy of Karnataka 2010, Karnataka Grape Processing and Wine Policy, 2007, Karnataka State Policy on Organic Farming, 2004 have been undertaken by the state to support the growth of the sector.

Key Credentials of the Industry 64.60% of Karnatakas total geographical area is under agriculture cultivation, ranking 5th in India in terms of the total area under horticulture and production of vegetable crops, and 3rd in fruit crop production. Largest spices, aromatic, medicinal crops, and tropical fruits producing state. 2nd largest milk producing state after Gujarat. 3rd and 4th largest producer of sugar and sugarcane, respectively. 2nd largest producer of grapes in the country. Accounts for 12% of total fruits and 8% of total vegetables, and 70% of coffee produced in country. 320 km coastline yields annual marine production of 425,000 MT of 276 fishes. Karnataka is Indias leading producer in animal husbandry. Karnataka leads in the exports of silk in India with approximately 25% of total Indian export market. Karnataka ranks 5th in India in terms of total area under horticulture.

Key Players Nestle India Ltd. Nissan Coca Cola Britannia Industries Ltd. Ruchi Soya Industries Ltd. Nilgiris

Heinz Parley ITC Foods PepsiCo India Holdings Pvt. Ltd.

A.5.2 Textiles and Apparel


Karnataka is the capital for readymade garmentsl in India. Karnataka accounts for 20% of the national garment production valued at around INR 7,698.6 crores (USD 1.56 billion) and 8% of the national exports. Key Initiatives Dedicated Apparel zones planned in Bangalore Rural, Tumkur, Kolar, Mandya, Belgaum, Bidar and Dharwad along the Suvarna Karnataka Development Corridor. Textiles SEZ of 233.4 hectares proposed to be developed by KIADB at district Hassan. INR 51.3 crores (USD10.4 million) Silk City is proposed to be developed near Bangalore. 10 handloom clusters located in Bagalkote, Chitradurga, Dharwad, Udupi, Koppal, Tumkur, Mysore, Bangalore, Kolar, Gulbarga and Belgaum Districts. Karnataka State Government has targeted investments of INR 5,137.3 crores (USD 1,041 million) in apparel and textile sectors between 2011-12 and 2012-13. A dedicated State Textile Policy known as Suvarna Vastra Neethi 2008-13 to promote growth in the sector. Incentives offered under State Textile Policy are:

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o Capital investment and other special subsidies. o Entry tax and stamp duty reimbursements. o Power subsidies. o Subsidy for Land/Shed allotted through KIADB/KSSIDC. o Market development of new designs and products - Up to INR 25 lakhs (USD 50,658.6). o Strengthening of existing training centers and establishment of new skill development centers. o Cluster-based development strategy and funding support for development of Greenfield textile and garment industry parks. o Special incentives for Mega Projects, projects with investments over INR 102.8 crores (USD 20.83 million) that generate direct employment over 500 persons.

Key Credentials of the Industry Largest producer of raw silk & silk products in India. Contributes approximately 6% to the total cotton production of the country and approximately 12% of Indias total wool production. One of largest employment generating industries after agriculture with approximately 386,000 manufacturing units engaged at the organized and unorganized level. 105 Skill Development Centers and 240 private training centers funded by Department of Handloom and Textile have trained 66,000 workers. Over INR 513.24 (USD 104 million) investments in states technical textile sector in the last three years:

Key Players Karnataka Silk Industries Corporation (KSIC) Himatsingka Seide Ltd. Gokuldas Exports Ltd. Export Overseas Ltd. Reid & Taylor Raymond Ltd. Gokak Mills

A.5.3 Energy
Karnataka has always been on the forefront in power generation. The state has a total installed capacity of 11,853 MW in January 2012. The energy sector ownership share is divided between the State, Private and Central with 57%, 32% and 11% respectively. Key Initiatives INR 10,052 crores (USD 2036.9 million) plan outlay for energy in the Eleventh Five Year Plan (FY 2007-2012) constituting 9.89% of the total outlay for all sectors. Proposed & ongoing projects of 18183 MW. Increase in private participation in generation segment from 21.55% in 2008-09 to 30.44% in 2010-11. Additional 4200MW of energy planned by 2014 through renewable sources of energy. PPP projects of investment worth INR 11,894 crores (USD 2,410.1 million) under implementation stage. 38 MOUs with expected investments of INR 44,152 crores (USD 8.95 billion) signed during GIM 2010.

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Key Credentials of the Industry Asias 1st major hydro electric generating station was set up in Karnataka in 1902; Ranks 2nd in installed hydro capacity at 3599.8 MW. 3rd largest generator of energy through Renewable Energy Sources such as Wind and Solar in India with a gross potential of about 18,585 MW of Renewable Energy annually. Currently, the exploitable technical potential is limited to 13,000 MW only for Wind Energy alone.This signifies huge untapped potential for the sector in Karnataka. Karnataka is one of the only states in India to set up a power plant project in another state to meet the domestic power demand. The state government has signed an MoU with the Chhattisgarh state for 1,600 MW power station in the Champa district. Highest wind energy potential in India at 11531 MW. Reliance (Relogistics) to lay a 455 Km of gas pipeline through Chennai-Bangalore-Mangalore at an investment of INR 6,796 crores (USD 1377.1 million).

Key Players Karnataka Power Corporation Ltd. (KPCL). Karnataka Power Transmission Corporation Ltd (KPTCL). BESCOM, MESCOM, HESCOM, GESCOM, CHESCOM. Power Company of Karnataka Ltd. (SPV).

A.5.4 Biotechnology and Pharmaceuticals


Karnataka is leading the way in Indias biotechnology and pharmaceuticals sectors. It is the Biotech capital of India and contributes 50% to countrys industry, houses 60% of the countrys biotech units, and has the countrys largest biotechnology cluster. Karnataka also generates 8% of the countrys pharmaceutical revenue and exports 40% of its pharmaceutical produce. Prominent Institutions Centres of Excellence Pharmaceutical JSS College of Pharmacy Al-Ameen college of Pharmacy KLEU College of Pharmacy Govt. College of Pharmacy Acharya & B.M. Reddy College of Pharmacy Key Initiatives Govt. of Karnataka has set up a USD 10 million (INR 49.35 crores) Bio Venture Fund for incubating start-ups in high-technology areas. As a part of Millennium Biotech policy II, 10 BT finishing schools announced to meet the growing demand of the Biotech industries. 4 Proposed BT Parks/ Centers with a total investment of INR 394.8 crores (USD 80 million) - Nutri / Nutraceutical and Phyto -Pharmaceutical Park (N2P2), Marine Biotech Park, Agri Biotech Park, Vivarium (Animal House). BT and Pharmaceutical SEZ 1 formally approved in Bangalore for BT, and 1 notified in Hassan for Pharmaceuticals. Tax Exemption on payment of entry tax on machinery, equipment, capital goods and construction materials for Biotech park. 15% tax rebate for those who get land from state agencies. 21 Biotechnology Institute of Bioinformatics and Applied Biotechnology Indian Institute of Sciences (IISc) University of Agricultural Sciences Acharya Institute of Technology National Centre for Biological Sciences

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Under State Industrial Policy 2009-14 specific industrial zones for Biotechnology will be developed in of districts of Mysore, Mangalore, Hubli-Dharwad, Belgaum, Shimoga, Gulbarga, Kolar and Mandya. Pharmaceutical sector investments worth INR 725.4 crores (USD147 million) made in 2010-11 creating employment for 6,635 people.

Key Credentials of the Industry GIM 2010 attracted investment worth INR 59,081.8 crores (USD 11,972 million) through 15 projects in pharmaceutical sector and INR 650 crores (USD 131.7 million) through 2 projects in the Biotechnology sector. Bangalore Helix, with the 52-acre Alexandria Knowledge Park focused on promoting biotechnology is the countrys largest Biotech cluster. It covers an area of 100 acres and has investments of INR 6909 crores (USD 1.4 billion). State hosts 195 biotechnology companies, 60% of the countrys total biotechnology companies. State has witnessed a 10-fold increase in total revenues of biotech companies in Karnataka since 2001, amounting to INR 3084.4 crores (USD 625 million). 1 Operational SEZ for BT developed by Biocon in Bangalore with an investment of INR 1137 crores (USD 230.4 million). Karnataka ranks 10th in the number of pharma manufacturing units in the country. State constitutes 221 formulation units and 74 bulk drug units, contributing 3% to the total manufacturing units in the country. It has witnessed growth of CAGR 15% for pharmaceutical exports between 2006-07 and 2009-10.

Key Players Pharmaceutical Karnataka Antibiotics & Pharmaceuticals Limited Himalaya Medrich Sterilab Novo Nordisk GlaxoSmithKline Cipla Strides Arco Labs Micro Labs Biocon Astra Zeneca Avesthagen Biotechnology

A.5.5 Chemical and Petrochemical


Karnataka has a strong footprint in the chemicals and petrochemical sector with Bangalore being the hub for chemical and related factories. 500+ factories drive the chemical industry in the State. The state has a dedicated petrochemical SEZ in Mangalore. Mangalore Refinery and Petrochemicals Limited (MRPL) is the states leading player, and public sector refinery with a capacity to process 11.82 million metric tonnes per annum. Key Initiatives Gas Authority of India Ltd. (GAIL) is constructing 1,400-km Dabhol - Bangalore pipeline for supplying natural gas to Karnataka with design capacity of 16 MMSCMD at investment of INR 4673.45 crores (USD 947 million) in two phases. 100% FDI is permissible in the chemical & petrochemical industry (except for few sensitive industry segments).

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Single Point Clearance by Unit Approval Committee headed by the Development Commissioner, SEZ. All industrial units and other establishments in the SEZs will be declared Public Utility Service under the provisions of the Industrial Dispute Act, 1947.

Key Credentials of the Industry Mangalore Refinery and Petrochemicals Limited (MRPL) is the states leading player, and public sector refinery - capacity to process 11.82 million metric tonnes per annum. MRPL is the only refinery in India to have 2 Hydrocrackers producing Premium Diesel (High Cetane), and to have 2 CCRs producing Unleaded Petrol of High Octane. MRPL is also the single largest investment by the central government in a single location amongst all central PSUs. Dedicated Petrochemical SEZ in Mangalore. o Proposed total area: 3,985 acres in Dakshin Kannada, with 1,800 acres already under possession. o 1,453 acres dedicated to petroleum and petrochemicals industry development.

Key Players Mangalore Refinery & Petrochemicals Ltd. Somu Group United Phosphorous Ltd.

BASF AkzoNobel Mangalore Chemicals & Fertilizers Ltd.

NOCIL

A.5.6 Minerals
Karnataka is Indias leading producer in the metal and mining industries. With output of INR 28470 crores (USD 5,769 million), mining industry generates over 15% of states industrial output. It is the largest iron ore exporter in India, largest gold producer of the country, 2ndleading producer of iron ore, shale and dunite and 3rd largest producer of steel in India. It is also the sole producer of felsites, and the leading producer of limestone. Key Initiatives Karnataka is amongst the few states in the country to have a forward looking mineral policy. Government of Karnataka has planned expenditure of almost INR 4.44 crores (USD 900,000) during 2011-12 for six schemes targeted at increasing mineral exploration efforts, 208% increase over planned budget for 2010-11. Regional surveys and mapping. Optimization of states geological potential by scientific and detailed prospecting. Notification of mineral based area to avoid clash of interest between mineral exploitation and other development activities. Review mining areas granted to public/private companies to adhere to mining plan discourage unproductive holding. Providing transparency in granting mining concessions. Promote indigenous utilization of minerals.

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Key Credentials of the Industry Expansive mineral-rich areas: 40,000 sq.km of green stone belts of mineral resources like gold, silver, copper, iron, manganese, limestone, dolomite, chromite. 36,800 sq.km area exclusively available for exploration under Gold and Copper, 22,720 sq.km under PGE, Nickel, Titanium, Vanadium and 48,100 sq. km under Diamond. 30% of Indias total limestone reserves. 224 reporting mines generated mineral production of INR 5250.8 crores (USD 1,064 million) in 2008-09. 597 mining leases cover area of 51,241 ha, of which 25,751 ha generate revenue. Karnataka produces 99% of countrys Gold production of 2,464 kg. 106 steel plants product 54.87 million tonnes per annum.

Key Players Tata Steel Ltd. JSW Steel Arcelor Mittal Hiedelberg Cement India Ltd. Aditya Birla Group (Ultratech Cement) Dalmia Cements Ltd. Aditya Birla Group (Rajshree Cements) Aditya Birla Group (Hindalco)

A.5.7 Tourism and Hospitality


Karnataka known as Mini Incredible India is the countrys fourth most popular tourist destination. Karnataka boasts of towering hills, bewitching white sand beaches, magnificent monuments, temples and palaces, exciting wild life, exquisite handicrafts, salubrious and eco- friendly climate, endless varieties of mouth-watering cuisines, hospitality of the people, rich heritage and a glorious culture. Key Initiatives Karnataka Tourism Policy 2009-14 aims to make Karnataka amongst the top two tourist destinations in India by 2016-17, generating INR 25,662 crores (USD 5.2 billion) in private investment. 100% tax exemptions for all new cinema theatres for 3 years. Concessions on registration charges for all loan documents and sale deeds for MSME, Large and Mega Projects. 50% and 75% exemptions on stamp duties for investments below and above INR 49.35 crores (USD 10 million), respectively. Investment subsidies for investors with fixed assets greater than INR 1,028,109 (USD 20,833). Establishment of additional institutes for hotel management, and involve Institutes of Hotel Management (IHM) and Food Craft Institutes (FCI). Improving road connectivity between heritage and tourist sites and developing wayside amenities. Global Investor Meet 2010: Out of 389 projects 29 projects are approved in Tourism sector with an investment of US$590million, 22 projects are under different stages of implementation.

Key Credentials of the Industry Karnataka has17 hotel management and catering technology institutes out of which 14 are AICTE (All India Council for Technical Education) approved with an approved student intake of 1395 for its deree programmes . Karnataka has the distinction of having both the highest number of hotel management institutes as well as AICTE accredited institutes in the country. Prominent amongst them are the Manipal University, Institute of Hotel Management and Christ University. (AICTE is the nodal agency in India for monitoring technical education. AICTE accredits institutes based on the student intake, course curriculum etc).

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State has the second-highest number of protected monuments in the country, 507 centrally and 750 additional protected by the State Government. Total revenue from tourism increased at a CAGR of 53% between 2005-06 and 2008-09 to reach INR 10338.8 crores (USD 2095 million). States tourist inflow has increased by 16% from INR 124.36 crores (USD 25.2 million) in 2005 to INR 163.84 (USD 33.2 million) in 2009. The Golden Chariot Pride of the South , the luxury train in Karnataka, South India which is being operated by The Karnataka State Tourism Development Corporation in collaboration with Indian Railways. o First luxury train of South India, introduced by Karnataka Tourism connecting popular tourist destinations in Karnataka, Kerala, Tamil Nadu, Puducherry and Goa. o Itinerary includes visits to heritage sites, cultural shows, golf, safaris and shopping. State hosts 15 golf courses, of which 11 are 18-hole courses, the third largest in the country. Karnataka gets 3,650,000 medical tourists annually and is Indias most preferred destination for advanced medical care for patients from Africa, Southeast Asia, Middle East, North America and Europe.

Key Players Hotels Taj West End The Leela Palace The Oberoi Le Meridien Resorts & Spas Soulya Holistic Health Centre Golden Palms Health & Spa Angsana Oasis Spa & Resort Ayurvedagram Health Resort

Royal Orchid Central Kireeti Royal Orchid Hotels Windflower Spa and Resort

A.5.8 Knowledge Economy


Karnataka is the Knowledge Hub of Asia. Education in Karnataka has not only emerged as strength for the state but also a sector of holistic, all-round and sustainable development. The state has embarked on significant reforms in the education sector with increased public investment to ensure access, equity and quality in education. Significant progress in both rural and urban literacy rate with the state having higher literacy rates than the All India average. Key Initiatives Information Technology Investment Region being developed under a joint initiative between central and state governments with a total expected investments by 2030 of INR 98,700 crores (USD 20 billion). Karnataka offers opportunities for industry, government and academia to partner and build a common platform to empower the States graduates with employable skills. To achieve the same, the government has undertaken the establishment of the following: o Establishment of Special Economic Zones, knowledge-based industries, and research and development centers. o Establishment of knowledge corridors, knowledge cities, university townships, and academic villages. o Establishment of institutions imparting vocational training and soft skills, including Industrial Training Centers, polytechnics, vocational training programs. Investment opportunities exists in both the establishment as well as assistance in implementation of the above.

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Introduction of new degree and technical colleges for new courses and research. Collaborations with foreign universities. Introducing technology into classrooms. Expanding access of basic education network programs like EDUSAT in schools through PPPs. Establishment of industry-focused education centers and finishing schools. Karnataka New Industrial Policy 2009-14 emphasizes the promotion , upgrade and development of industry-relevant skills in the state through private sector investments. Incentives for skill development through ITIs and ITCs. o 25% backend investment subsidy with ceiling of INR 2,566,200 (USD 52,000) for establishing new ITI. o Additional 10% limited to INR 1,026,480 (USD 20,800) for establishing new ITI in backward taluks identified by HPCFRRI.

Key Credentials of the Industry IIM-Bangalore is a premier national institute, and the 27th best management school in the world. Karnataka produces the third highest number (~60,000) of engineering and diploma graduates in India each year. Largest number of medical colleges and ITIs in the country and 8 of the nations 75 top ranked engineering institutions. Professional colleges: 291 polytechnics, 187 engineering colleges, 114 medical colleges, 69 pharmacy colleges, and 18 institutions for general education. Leading hub for research and development institutes in India. Besides academic institutions, R&D centers of large MNCs are also located Microsoft, IBM, Intel and Alergan. in Karnataka

7th highest pupil-to-teacher ratio in India, with CAGR of 18.3% in school teachers, reflect favorably on education system. 52:48 enrolment ratio between boys and girls in primary and upper primary schools (Class 1-7) indicates near unity gender parity and gender equity. 22% of primary schools and 64% of secondary schools are privately-owned, providing significant opportunities for private sector growth. EDUSAT: Result of collaboration between Indian Space Research Organization (ISRO) and Department of State Education Research and Training (DSERT). EDUSAT is a virtual classroom education system for primary schools to universities that has benefited over 12,000 students. Bangalore Helix - One of the biggest biotech clusters in India; Structured into 3 components Institutional and Research and Development Block. Alexandria Knowledge Park- Owned by Alexandria Inc, the Rs 500 crore life sciences knowledge park in Bangalore Helix, is expected to spur the growth of the biotechnology sector in the state. The park will provide a world class infrastructure for the biotech industry, R & D institutions and organisations engaged in BT-related activities. With the Phase 1 of the parks construction already completed with phase 2 currently underway, the park is expected to be operational soon. The park will focus on scientific research and development cluster for the life sciences industry in Karnataka.

Key Players Indian Institute of Management, Bangalore (Premier management institute, ranked 1st in India). National Law School of India (Premier law school exclusively in Karnataka, ranked 2nd amongst Indias law colleges).

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Christ university/ Christ College of Law (An integrated university campus offering muti speciality courses such as engineering, law programmes, and medicine). St. Johns Medical College (A leading research institute in India). University Visvesvaraya College of Engineering. Visvesvaraya Technological University. Mysore University (Ranked amongst one of Indias first 5 universities). Leading Research Institutions: o Indian Institute of Science (Worlds leading research institution in post-graduate education in science and engineering, exclusively in Karnataka). o Central Food Technological Research Institute. o Central Sericulture Research & Training Institute. o Indian Space Research Organization. o Central Silk Technological Research Institute. o National Aerospace Laboratory. o Jawaharlal Nehru Centre for Advanced Scientific Research.

A.5.9 Information Technology


Karnataka is the leading IT hub of the country with Bangalore as the 4th largest technological cluster in the world after Silicon Valley, Boston and London. It is countrys largest software exporter with exports contributing to 21.4% to states GSDP. Key Highlights Leading state in IT/ITES industry in India. It contains a third of Indias software technology park units, and has the countrys largest software technology hub. 2100 IT companies constitute over 20% of the IT companies in the country. 50% of worlds SEI CMM Level 5 certified companies located in Bangalore. Leading Global IT companies like Microsoft, Intel, Oracle and IBM have set up their R&D centers in Karnataka. State contributes 500,000 IT professionals from leading engineering institutes to the nations IT workforce of 2.5 million.

Key initiatives Information Technology Investment Region being developed under a joint initiative between central and state governments with a total expected investments by 2030 of INR 98,700 crores (USD 20 billion). One of Indias largest electronic industrial parks, Electronics City, spread over 332 acres is situated in Bangalore. EPIP Whitefield, integrated township developed with 3 IT SEZ. State has a dedicated IT policy, Karnataka Millennium IT Policy, 2000 providing fiscal incentives for IT companies, tax exemptions, and simplified clearances procedures.

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Key Players Infosys Wipro IBM HP CISCO Intel Microsoft Accenture

A.5.10 Engineering
Karnataka is a manufacturing hub for major automotive majors like, Toyota Kirloskar, Volvo, TVS Motors, Tata Marcopolo, Honda Motorcycles & Scooters India, L&T Komatsu, Mahindra Reva, BOSCH, Siemens, JK Tyres, and BEML Ltd. and also for Indias bus and motorcycles segment. Key highlights Karnataka is the fourth-largest state in automotive production in India. It has dedicated auto clusters at Ramanagara, Shimoga, Dharwad and Kolar Districts. It produces more than a quarter of Indias aircraft and spacecraft and it is the base for all global players in this industry. Indias first aircraft factory, , Hindustan Aircraft Ltd, was established here in 1940. State has Indias first and best R&D centers in aerospace engineering, including 5 of Defense Research and Development Organizations aeronautic centers. It houses more than 50% of the countrys machine tools industry.

Key Players Tata motors Toyota Kirloskar Motor ltd. Bosch India Ltd Hindustan Aeronautics Ltd QuEST Global Wipro Ltd Mahindra Aerospace Genser Aerospace

Volvo JK Tyres

A.5.11 Transportation and Logistics


Karnataka spends 10% of their expenditure INR 3183 crores (USD 645 million) on the transport sector and the Budgetary Allocations for Infrastructure Sector, especially for improving Air, Rail and Marine connectivity has increased at 63% from INR 436.75 crores (USD 88.5 million) in 2009-10 to INR 705.7 crores (USD 143 million) in 2010-11. The state boasts of having the first private airport (Bangalore International Airport) in the country. Key Initiatives Expansion of Bangalore International Airport: Terminal I with investment of INR 1539.7 crores (USD 312 million) and a capacity for 17.2-million passengers; Terminal II: in planning stage with capacity for 55-million passengers; 2nd Runway in planning stage. Airports Authority of India expanding airports in Hubli and Belgaum with investments of INR 152.98 crores (USD 31 million), each. The government is currently undertaking the development of Shimoga (674-acres) and Gulbarga (670-acres) airports that will be operational on PPP basis by December 2012.

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The Government of Karnataka will be developing 8 low-cost regional airports in key industrial areas and 4 airstrips with total investments of INR 2674.77 crores (USD 542 million) in PPP mode. 2 ports are currently under development as follows: o Tadadi Port: Development of a port with capacity of 34-million MT with gross investments of INR 3034.1 crores (USD 614 million). o Haldipur: Development of a port with capacity of 19-million MT using Swiss Challenge Route with investments of INR 1949.3 crores (USD 395 million). Government of India has provided INR 169.8 crores (USD 34.4 million) in Viability Gap Funding grant and Government of Karnataka INR 94.75 crores (USD 19.2 million) for PPP-based projects on development of roads. National Highway connectivity: INR 195.4 crores (USD 39.6 million) for 83-km road from NH-63 near Ginigere Gangavathi to Sindhanoor. Projects entrusted with Karnataka Rail Infrastructure Development Corporation (K-RIDE): GoK will provide land free of cost and will share 50% of the project cost.

Key Credentials of the Industry Bangalore is the third city in India to have metro rail: Phase I is operational and 42.3 km long; Proposed 134 km of metro length by 2017. 9th major port in India: New Mangalore Port has the deepest inner harbor on the west coast; Handled traffic of 36.69 MTA, and the most LPG, 1.91-million MT, of all major ports in India in 2010-11. Ports can handle 62-million MT of cargo annually. Road length in Karnataka increased by 43% in the last 10 years: Roads carry approximately 70% of the freight in the state. As part of States expansion of railway network by over 2,500 km, 394 km of new lines constructed in PPP mode with investments of INR 4160.2 crores (USD 843 million). Rail freight industry earned revenue of INR 35976.15 crores (USD 7.29 billion), growing annually at 10%. Road freight industry in India is growing at annual rate of 6-8% per year. Logistics Park in Bangalore.

A.5.12 Urban Infrastructure


Karnatakas 39% urban population is significantly above the national urban population of 31%. The states urban population of 23.5 million represents a growth of 31.3% since 2001. About 53% of the urban population lives in eight urban cities of Bangalore, Hubli-Dharwad, Mysore, Gulbarga, Belgaum, Mangalore, Davangere and Bellary. Key Initiatives CAGR 28.8% increase in government expense on housing and urban development between 200809 & 2010-11. Increasing central government support: Central governments Jawaharlal Nehru National Urban Renewal Mission sanctioned 46 projects costing INR 3983 crores (USD 807.1 million) for Bangalore and Mysore with roads, water supply, storm-water drainage, and sewerage as development areas. Accelerated Urban Water Supply Scheme: INR 804.4 crores (USD 163 million) drinking water project for providing 24/7 supply to entire city corporations of Hubli-Dharwad, Belgaum, and Gulbarga by strengthening institutions of service delivery. Bangalore Megacity Scheme: 54 projects amounting to INR 824.15 crores (USD 167 million) for development of infrastructure facilities, modernized transport, slum upgrade, flyovers, pedestrian walkways, etc. 29

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Expanding housing infrastructure for urban poor: GoK spent INR 5754.2 crores (USD 1,166 million) on housing schemes for the economically weaker sections of society between 2000-01 and 2010-11. GoK has increased expenditure on housing and urban development by nearly 7% in 2010-11 over 2009-10 to INR 3197.9 crores (USD 648 million). Of a total of 105 PPP projects, state is planning 5 urban and municipal development projects for INR 398.75 crores (USD 80.8 million), implementing 3 projects for INR 146 crores (USD 29.6 million), and has completed 5 projects for INR 116.9 crores (USD 23.7 million).

Key Credentials of the Industry 6.25% of Indias total urban population reside in Karnataka cities. Bangalore is the fastest growing urban agglomeration, following by Hubli-Dharward, Mangalore and Mysore and a mega city under JNNURM. Rapid Urbanization: From 1951 the total population of Karnataka had increased at a CAGR of 1.9% whereas the Urban Population increased at a CAGR of 2.8%. This called for high intervention from the Government. Strong growth prospects: States urban population expected to grow 35% in the next 20 years to 28-million by 2026. With 31% budgeted expenditure on water supply, housing, and urban development, Karnataka leads growth in the nations cities and urban agglomerates. High water supply coverage of 85% to 90% in core city areas, with average per capita supply of 108 liters per day in major cities.

Key Players Renaissance Township Pvt. Ltd. Prestige Estates Project Ltd. J.M Baxi & Co Chandra Developers Pvt. Ltd. Zuari Developers Limited.

A.5.13 Industrial Infrastructure


Infrastructure development for the industries including Industrial parks, Industrial zones and SEZ, Investment regions and development zones constitute what is termed as Industrial Infrastructure in India. Thrust on industrial infrastructure development in the form of Suvarna Karnataka Development Corridor (SKDC) and sector friendly policies such as the New Industrial Policy of 2009-14 have given Karnataka one of the most robust industrial infrastructures to support holistic growth of the state. The SKDC programme in fact connects most of the Tier II cities through a network of highways. It also emphasizes on cluster development in designated zones along the corridors. As a result of the above, the state has a strong industry focus with 26 MSME product clusters, 132 Industrial estates and 8 growth centers. 394,850 MSME units, employing 75,120 people, in 2009-10. Key Initiatives New Industrial Policy, 2009-14 directed development of 5 major corridors in Karnataka, proposing to cover 11 district headquarters and 20 major towns along highways, major roads, and rail links. 5 major industrial corridors: 1)Tumkur - Honnavar via Shimoga 2) Chitradurga Mangalore via Shimoga Udipi 3) Bidar Gulbarga Bellary Hiriyur 4)Chitradurga Hospet Koppal Raichur 5) Chitradurga Hospet Bagalkot - Bijapur. 105 projects worth INR 75012 crores (USD 15.2 Billion) in various stages of implementation under private sector partnership.

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Key Credentials of the Industry The overall organized industrial sector of Karnataka registered an impressive double-digit growth of 11.34% in 2009-10 compared to 7.35% in 2007-08 and 4.72% in 2008-09. Mining sector registered the highest growth of 37.95% followed by electricity (15.78%) and manufacturing (8.47%). 58 Special Economic Zones provide duty free enclave for driving FDI and exports: 20 SEZ are fully operational, 15 have been notified, 4 submitted to GoI for notification, and 17 formally approved. INR 15,792 crores (USD 3.2 Billion) invested in 20 operational SEZ creating employments for. 125,411 people. SKDC program connects most of the Tier II cities through a network of highways. Under the SKDC program 25 Km on both sides is to be dedicated for development of industrial clusters, satellite towns and sector specific industrial zones. Electronics City, Bangalore is one of Indias largest electronic industrial parks spread over 332 acres, housing more than 300 companies and employing more than 100,000 employees. Bangalore Helix One of the biggest biotech clusters in India comprising 8 biotech incubators covering a total area of 10,000 sq ft with a total investment of INR 98.7 crores (USD 20 million). IT Parks at Mysore, Mangalore, Gulbarga, Shimoga. Bangalore Biotech Park, Agri Biotech park at Dharwad, Marine Biotech Park in Mangalore.

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B
Investment Climate
B.1 Foreign Investment framework in India
The Foreign Direct Investment (FDI) regime has been progressively liberalized during the course of the 1990s and continuing into the 2000s, with most restrictions on foreign investment being removed and procedures simplified. With limited exceptions, foreigners can invest directly in India, either on their own or as a joint venture. Today, there are very few industries where foreign investment is prohibited. Moreover, investment ceilings, which are applicable in certain cases, are gradually being removed/ phased out. With the intent and objective to promote foreign direct investment through a policy framework, which is transparent, predictable, simple and reduces regulatory burden, the GoI has formulated on a biannual basis consolidated FDI Policy.

B.1.1 Features of the GoIs Consolidated FDI Policy and incentives offered
With the issue of consolidated FDI policy on 1 Oct 2011, all earlier press notes/ press release/ clarifications on FDI issued by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry (DIPP) stand rescinded and subsumed in the consolidated FDI policy. Policy pronouncement on FDI by press notes/press releases take effect from the date of issue of press notes/press releases regardless of the procedural instructions, which shall be issued by the RBI vide relevant A.P. DIR series circulars for amending Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000. Indian companies are permitted to issue equity shares, fully, compulsorily and mandatorily convertible debentures (FCDs) and compulsorily and mandatorily convertible preference shares (CCPS) to the non residents subject to pricing guidelines/valuation norms prescribed under FEMA. Issues of warrants, partly paid shares etc. require prior approval of Foreign Investment Promotion Board (FIPB). Issue of non-convertible, optionally convertible or partially convertible preference shares/debentures needs to comply with the external commercial borrowing (ECB) guidelines of RBI. Foreign Investment is calculated on the basis of ownership and control of the Indian company. No government approval is required for FDI in virtually all the sectors/activities, except for a small negative list formulated by the GoI. FIPB considers proposals for foreign participation that do not qualify for automatic approval. Decisions on all foreign investment proposals are usually taken within four to six weeks of submitting an application. Free repatriation of capital investment is permitted, provided the original investment (on a repatriable basis) was made in convertible foreign exchange. Further, free repatriation of profits on capital investment is permitted, subject to payment of taxes and other specified conditions. Use of foreign brand names/trademarks is permitted for the sale of goods in India. All royalty payments, lump sum fee for transfer of technology and for use of trademark/brand name are permitted under the automatic route without any monetary/duration limits. Single window clearance facilities and investor escort services are available in various states to simplify the approval process for new ventures.

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B.1.2 Foreign Investment Promotion Board


The FIPB is specially empowered and chaired by the Secretary of the Ministry of Finance (MoF). It has been specifically set up to expedite the approval process for foreign investment proposals. Proposals for FDI may be sent to the FIPB, the Department of Economic Affairs, MoF or through any of Indias diplomatic missions abroad. The FIPB has the flexibility to examine all the proposals in their totality, free from predetermined parameters or procedures. The recommendations of the FIPB with respect to proposals under the ambit of the non-automatic route, involving an investment of USD 266.67million (equivalent to INR 1,316 crores) or less are considered and approved by the Finance Minister. Projects with an investment that is greater than this value are submitted by the FIPB to the Cabinet Committee on Economic Affairs for further approval.

B.2 Foreign Investment in India


B.2.1 Foreign Direct Investment
The GoI permits FDI on an automatic basis, except with respect to a small negative list, which includes the following: Proposals falling under list of activities/sectors prohibited for FDI by the GoI. Proposals falling outside the ambit of notified sectoral policy.

B.2.2 Foreign Portfolio Investment


Foreign Institutional Investments (FIIs) must register themselves with SEBI and comply with RBIs exchange control regulations. Foreign pension funds, mutual funds, investment trusts, asset management companies, insurance or reinsurance companies, nominee companies and incorporated/ institutional portfolio managers (or their power of attorney holders) are allowed to register as FIIs. FIIs can invest in securities traded in primary and secondary capital markets in India under the portfolio investment scheme. These securities include shares, debentures, warrants, units of mutual funds, government securities, treasury bills and derivative instruments. Certain investment limits are prescribed in FII guidelines and RBIs regulations to regulate investments made by FIIs. However, these restrictions do not apply to the investments made by an FII through offshore funds, GDRs or Euro-convertible bonds.

B.2.2.1 Registration Eligibility


FII guidelines require FIIs to meet certain qualifying conditions for registration. SEBI also examines whether the grant of registration is in the interest of the development of the Indian securities market.

B.2.2.2 Registration of sub-accounts


Apart from entities that are entitled to be FIIs, other foreign investors are also eligible for registration as sub-accounts. The sub-accounts can be categorized as (i) collective investment funds and institutions, (ii) proprietary funds or (iii) foreign corporations and nationals.

B.2.3 Foreign venture Capital Investment Route


A SEBI-registered Foreign Venture Capital Investor (FVCI) with specific approval from RBI under FEMA regulations can invest in Indian Venture Capital Undertaking (IVCU) or Indian Venture Capital Fund (IVCF) or in a scheme floated by such IVCFs, subject to the condition that the VCF should also be registered with SEBI. 33

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FVCIs can purchase equity/equity-linked instruments, debt/debt instruments, the debentures of an IVCU, or of a VCF, through an IPO or private placement in units of schemes/funds set up by a VCF.

B.2.4 Investment by NRIs


NRIs can invest in the shares or convertible debentures of an Indian company on a non-repatriable basis apart from investment in the form of FDI. These investments do not require FIPB approval and are not construed as FDI. NRIs cannot invest in companies that are engaged in certain financial service or agricultural/plantation activities. While the capital is non-repatriable, the dividends and interest income from such investments can be remitted as current account transactions.

B.3 Economic Laws and Regulations in India


B.3.1 Indian Contract Act, 1872
The Indian law of contract is based on the common law principles of contract and is codified as the Indian Contract Act. The Act has borrowed extensively from the provisions of other codes governing the law of contracts in other countries. Certain specific forms of contract including contract of partnership, contract for sale of goods, and contract for carriage are enacted into separate legislations. The Act includes the following general principles of contract: Formation of contract. Competence of contracting parties. Validity of contract. Performance of contracts vis--vis liability/obligation of contracting parties. Breach of contract and damages. Proposal and acceptance of proposal for formation of a contract. The contract may be written, oral, or implicit by conduct. The consideration may flow from the either of the contracting parties to each other or from a third party. A breach of contract may give rise to two remedies: damages or specific performance. Damages may be either liquidated or un-liquidated. However, penalties and exemplary damages are not enforceable. Specific performance may be sought in certain cases of breach under the Specific Relief Act, 1963. The Act also provides for the rights and obligations governing the parties in relation to the contract of indemnity, guarantee, and bailment. The Act lays down general principles governing the law of agency including the agent-principal relationship, rights and liability of agent inter se principal and third party, revocation/termination of agency etc.

B.3.2 Intellectual Property Rights Protection


As a signatory to the General Agreement on Tariffs and Trade (GATT) and trade related aspects of intellectual property rights (TRIPS) agreements and in the capacity of being a member of the World Trade Organization (WTO), India has initiated laying down minimum norms and standards with respect to the following areas of intellectual property: Copyrights and other related rights.

Trademarks. 34

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Geographical indications. Industrial designs.

Patents.

B.3.3 Copyrights
Indian copyright law is laid down in the Indian Copyright Act, 1957 as amended by Copyright (Amendment) Act, 1999. The Act reflects the Berne Convention on Copyrights to which India is a party. India is also a party to the Geneva Convention for the Protection of Rights of Producers of Phonograms and to the Universal Copyright Convention. India is also an active member of the World Intellectual Property Organization (WIPO), Geneva.

B.3.4 Trademarks
The Trademark Act, 1999 provides for the registration of trademarks for services and goods including collective marks and for the assignment and transmission of trademarks. There is a provision for an appellate board for speedy disposal of appeals, rectification of applications, simplification of procedures, for the registration of registered user, and for enlarging the scope of the permitted use of trademarks and prohibition on the use of someone elses trademarks as part of the corporate names or names of business concerns.

B.3.5 Geographical Indications of Goods


The Geographical Indications of Goods (Registration and Protection) Act, 1999 was introduced to conform to the TRIPS regime. It seeks to provide for the registration and better protection of geographical indication, relating to goods in India. It is also designed to protect the use of such geographical indication from infringements by others and to protect the consumers from confusion and deception. To receive applications for geographical indications of goods as provided in the Geographical Indications Act, 1998, the Government of India has set up a Geographical Indications Registry at Chennai.

B.3.6 Patents
The Indian Patents Act, 1970 provides for the grant, revocation, registration, license, assignment and infringement of patents in India. The Patents (Amendment) Act and Rules, 1999 was introduced to grant product patents for inventions relating to drugs and medicines and to outline the procedure to deal with the claims made in the applications filed on or after January 1, 1995. The applications for claims were granted exclusive rights to sell or distribute the products in India, provided the prescribed procedure was adhered to. To harmonize the law pertaining to patents and other forms of intellectual property and to fulfill its obligations under the WTO agreement, India has become an active party to the International Convention for the Protection of Industrial Property (Paris Convention), GATT and TRIPS agreements.

B.3.7 Industrial Designs


The Designs Act, 2000, passed to give recognition to the obligations under the WTO agreements, encourages and protects those who produce new and original designs and thus seeks to enhance industrial development. Any person claiming to be the author of a new and original design not previously published in any country and not contrary to public order can file an application for the registration of the design under the Act. On registration, the author of the design is assured of exclusive rights to sell, distribute, manufacture and import such design and such registered articles to which the design is applied for a period of 10 years from the date of registration. The Act also provides for the infringement of the design.

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If a design is registered under this Act, it does not qualify for protection under the Copyright Act. However, designs which cannot be registered under the Designs Act shall get protection under the Copyright Act provided they are original artistic works.

B.3.8 Anti-Trust Regulations


Anti-trust laws are designed to preserve free enterprise of the open market by making illegal certain private conspiracies and combinations formed to minimize competition. Most violations of anti-trust laws involve either price fixing or unfair allocation of customers or markets. The government of India has evolved an anti-trust regulatory framework that revolves around the following legislations: Competition Act, 2002. Certain provisions of the Companies Act, 1956. Consumer Protection Act, 1986.

B.3.8.1 Competition Act, 2002


The Act seeks to promote and sustain competition in markets, protect the interest of consumers, ensure freedom of trade, and provide for establishment of Competition Commission of India (CCI). The Act provides for prohibition of anti-competitive agreements, prohibition of abuse of dominant position, regulations of combinations and powers, and functions and duties of CCI.

B.3.8.2 Consumer Protection Act, 1986


The Act has been enacted for the protection of consumer interest. It provides for the establishment of consumer councils and other authorities to settle consumer disputes. It aims to regulate the activities of a manufacturer or service provider to ensure that the consumer does not suffer defective goods and/ or deficiency of goods.

B.3.8.3 Negotiable Instruments Act, 1881


The Act was introduced to legalize the system by which instruments contemplated by it could pass from hand to hand by negotiations like any other goods. The law relating to promissory notes, bills of exchange, cheques and other negotiable instruments is codified under the Act. Detailed provisions have been made in the Act concerning presentment, payment, interest, discharge from liability, notice of dishonor, noting and protest, reasonable time for payment, acceptance and payment for honor and reference in case of need, compensation, special rules of evidence, providing for certain presumptions and estoppels, cross cheques, bills in sets etc.

B.3.9 Sale of Goods Act, 1930


The Act is complementary to the Contract Act. The basic provisions of Contract Act apply to contract of sale of goods also. The following are the essentials of the contract of sale: It is a contract. It is of goods. There is a transfer of property. Contract is between buyer and seller. Sale is for a consideration.

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The Sale of Goods Act casts duties and grants rights on both the buyer and the seller including duty to deliver goods to the buyer, the buyers duty to accept goods and pay for them etc. The Act also lays down penalties/prosecution for the buyer and the seller for breach of contract.

B.3.10 Arbitration
The various aspects of arbitration are dealt with under the Arbitration and Conciliation Act, 1996. The Act is essentially based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985. The UNCITRAL laws and rules have harmonized concepts on arbitration and conciliation, of different legal systems of the world. The Arbitration and Conciliation Act, 1996 has been enacted to meet the following objectives: Comprehensively cover domestic arbitration, international commercial arbitration and enforcement of awards under the New York and Geneva Awards and Conciliation. Make provisions for an arbitral procedure and provide for that arbitral tribunal to give reasons for its arbitral award and minimize the role of courts in the arbitral process. Provide the manner of settlement of the conciliation proceedings, with respect to disputes arising out of legal relationships and provide for the establishment of the new Arbitration Division within each High Court where awards can be challenged under provisions of the existing Act. Resolve conflicts among some judgments of the High Court under the Act and provide for fast track arbitration following a special procedure.

B.4 Investment climate in Karnataka


Karnataka is among the leading industrialized states in the country. The State is known for its capabilities in high-tech industries in key sectors like telecommunication, electronics, information technology, precision engineering, machine tools, automobiles, readymade garments, bio-technology and food processing. The strong base of large and medium scale industries in Karnataka has given a wide scope for promotion of a vibrant small scale sector providing considerable employment opportunities.

B.4.1 Advantages for investment in Karnataka


Education, Innovation, Cosmopolitan Outlook and a Cultured Populace is in the very DNA of Karnataka. Karnataka is not only the knowledge Hub of Asia, but also the Innovation Gateway of India. The state has been termed as the friendliest state in India with an unparallel cosmopolitan outlook due to the integration of various princely states from across the country. Karnataka offers an unparallel quality lifestyle to its Investors with high quality infrastructure, schools and hospitals. The Leisure and Entertainment industry in Karnataka is the favored destination for both leisure and business travelers alike. Karnataka has many inherent advantages for investors - both domestic and overseas and offers ample opportunities for investment. The key factors that make Karnataka a unique destination for Investors are: Industry Friendly policies. Pro Active Governance. Highly Skilled Technical Manpower. Cordial Labour Relations. Sectoral Ecosystems.

The State is the leader in knowledge based, technology driven industries like information technology, bio-technology, electronics, telecommunication, aerospace and allied areas. Karnatakas capital city Bangalore is recognized the world over as the Knowledge capital of India. 37

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Karnatakas pre-eminent position on the industrial and business map of India is based on several factors. The State is rich in natural resources and is known for its salubrious climate. It has a strong resource base of highly educated and skilled people, backed by extensive educational infrastructure, comprising world-renowned schools, colleges, institutes of higher learning and research and development centers. Its labor force is highly skilled, disciplined and hardworking. Above all, it has a far-sighted, developmentoriented, investor-friendly governance that firmly believes in, and actively encourages, public - private partnerships The State is widely recognized as a centre of learning with 16 universities, 141 engineering colleges, 39 medical colleges, 43 dental colleges, 648 general / law colleges and 189 polytechnics. The State has 103 R&D centers, with over 700 MNCs and over 80 Fortune 500 companies. The State is linked by air with international centers and also has a wide network of roads and railways. Bangalore has well established institutions offering a wide gamut of educational services. The Indian Institute of Science, Indian Institute of Management, Indian Institute of Information Technology and National Centre for Biological Sciences are the most admired and sought-after institutions in India.

B.4.2 Policy Support


Karnataka was the first State to announce its Industrial Policy way back in 1983. The State Government has also announced exclusive policies for promotion of tourism, agro food processing industries, infrastructure facilities, export promotion, information technology and biotechnology industries etc... In order to provide a level playing field to the investors, the State Government has formulated an Industrial Policy 2009-14.

B.4.2.1 Incentives and Concessions under Karnataka Industrial Policy 2009-14


Special package of incentives over and above the standard package will be offered for Mega projects based on the recommendations of SHLCC depending on the merits and advantages of such projects to the State. Investment Promotion Subsidy. Enterprise Micro Mfg. Enterprises Small Mfg. Enterprises Med. Mfg. Enterprises (employing min. 25 workers) Zone 1 25% VFA (max. INR 10 lakhs) (USD 20,263.4) 20% VFA (max. INR 20 lakhs) (USD 40,526.8) INR 30 lakhs (USD 60,790.3) Zone 2 20% VFA (max. INR 7.5 lakhs) (USD 15,197.6) 15% VFA (max. INR 15 lakhs) (USD 30,395.1) INR 20 lakhs (USD 40,526.8) Zone 3 15% VFA (max. INR 5.00 lakhs) (USD 10,131.7) 10% VFA (max. INR 10 lakhs) (USD 20,263.4) NIL Zone 4 NIL

NIL NIL

Industrial Policy offers exemptions in various taxes, duties across the 4 zones as defined in the industrial policy.

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Exemptions Stamp Duty Conversion Fine Concessional Registration Charges

Zone 1 100% 100%

Zone 2 100% 100%

Zone 3 75% 75%

Zone 4 NIL NIL

for all loan documents and sale deeds as specified in the Policy, the registration charges shall be at a concessional rate of INR 1 (USD 0.02) per INR 1000 (USD 20.26) 100% 100% 100% NIL

Entry Tax 3 Years for Plant & Machinery and Capital Goods 5 years raw materials Export Tax (for 100% EOUs) for 3 years Export Tax (for other EOUs) for 3 years (Minimum Export obligation of 25%of their total turnover) Refund of Certification Charges

100% 100%

100% 100%

100% 100%

100% 50%

50% of expenses subject to a maximum of INR 2.00 lakhs (USD 4,052.7) per unit for both 100% and other EOUs in all zones 5 Years 5 Years 4 Years 4 Years 3 Years 3 Years NIL NIL

Interest Subsidy @ 5% Electricity Duty

Karnataka Industrial Policy 2009-14 also offers interest free loans on VAT for setting up their industrial units. Minimum Direct Employment (in Nos.) Minimum 100 employment and additional 20 employment for every INR 10 crores (USD 2.03 million) investment Quantum of interest free loan 50 % of accessed gross VAT for initial 5 years subjected to the maximum of 100% of total value of fixed assets. Repayment of the loan shall be in 3 annual installments after 5 years.

Investment range in fixed assets (Rs crore) 10 (value of plant and machinery) 50

51-250

Minimum 200 employment and additional 20 employment for every INR 50 crores (USD 10.13 million) investment

50 % of accessed gross VAT for initial 6 years subjected to the maximum of 75% of total value of fixed assets. Repayment of the loan shall be in 3 annual installments after 6 years.

251-1000

Minimum 400 up to INR 300 crores (USD 60.79 million) and 50 additional employment for every INR 100 crores additional investment

25 % of accessed gross VAT for initial 7 years subjected to the maximum of 50% of total value of fixed assets. Repayment of the loan shall be in 3 annual installments after 7 years.

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1001-3000

Minimum 750 for INR 1,000 crores (USD 202.63 million) and additional 25 for every INR 100 crores additional investment.

25 % of accessed gross VAT for initial 10 years subjected to the maximum of 50% of total value of fixed assets. Repayment of the loan shall be in 4 annual installments after 10 years.

More than 3000

1250

25 % of accessed gross VAT for initial 15 years subjected to the maximum of 50% of total value of fixed assets. Repayment of the loan shall be in 5 annual installments after 12 years.

Policy also provides subsidies for Technology Up gradation, Quality Certification and Patent Registration. o Interest Subsidy on Technology Up gradation Loan: Zone 1, 2 & 3: 5 % on loans availed from KSFC, KSIIDC & Scheduled commercial banks, which are not covered under CLCSS of GOI. o ISO series certification: Zone 1, 2, 3 & 4: 75% of cost (Max. INR 75,000 (USD 1,519.76). o BIS Certification: 50% of fees payable to BIS. (Max. INR 20,000 (USD 405.27)) and 25% of cost (Max. INR 50,000 (USD 1,013.17)) for purchase of testing equipments as approved by BIS. 35. o Patent registration: 75% of cost of fees payable to Patent Office (Max. INR 1.25 lakhs (USD 2,532.93)) and 50% of cost (Max. INR 75,000 ((USD 1,519.76)) towards attorney fees, patent search etc. o Technology Adoption: 25% of cost (Max. INR 50,000 ((USD 1,013.17)) for adopting technology from recognized national laboratories.

B.4.3 Special Economic Zones


Government of India, in order to boost exports from the country formulated a new scheme viz Special Economic Zone (SEZ) during 2001. Accordingly, Karnataka State Government has formulated a State Policy for SEZ to support and encourage healthy proliferation of SEZs in the state. Following are the incentives and facilities:

B.4.3.1 for SEZ Developers


All purchases excluding purchase of petroleum products from domestic tariff area for authorized operations of entire area in SEZs shall be exempted from State and local body taxes or levies or cess such as Sales Tax, VAT, Entry Tax, Special Entry Tax. This exemption will not be available for the goods sold in the domestic tariff area with or without value addition. Exemption from stamp duty and Registration fees for Registration of Land and Loan/Credit documents. Exemption of Electricity Duty or Taxes on sales, of self generated or purchased electric power for use in the processing area of SEZ. Exemption of 1% Labor Welfare Cess on construction cost incurred by the developer and codeveloper. One time capital subsidy up to 50% of the cost incurred for setting up Common Effluent Treatment Plant subject to a ceiling of INR 100 Lakhs (USD 202,634.25) per CETP/SEZ. Exemption from any other State taxes, cess, duties or levies as may be notified by the State Government, from time to time for SEZs.

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B.4.3.2 Units in SEZ


All purchases excluding purchase of petroleum products by SEZ units located in the processing areas from domestic tariff area or SEZ area for its set up, operation or maintenance or for use in manufacture, trading, production, processing, assembling, repairing, reconditioning, reengineering or packing shall be exempted from State and local body taxes or levies or cuss such as Sales Tax, VAT, Entry Tax, Special Entry Tax. This exemption will not be available for the goods sold in the domestic tariff area with or without value addition. If sold, applicable State taxes are levied. 50% exemption of Stamp duty and Registration fees for Registration of lease deeds or sub-lease deeds in respect of industrial land, built up space and Loan documents in the processing area. Exemption of Electricity Duty or Taxes on sales, of self generated or purchased electric power for use in the processing area of SEZ. Exemption of 1% Labor Welfare CASs on construction cost incurred by the unit. Exemption from any other State taxes, cuss, duties or levies as may be notified by the State Government, from time to time.

B.4.4 Land
Consequent to the enactment of Karnataka Industrial Areas Development Act, 1966, Karnataka Industrial Area Development Board (KIADB) came into being in the same year. It is a specialized exclusive agency of the Government of Karnataka not only to acquire private land and form industrial areas but also to provide land to stand alone industries. From its inception the KIADB has acquired about 31,000 acres of land and formed 108 industrial areas spread all over Karnataka and has also made available land to 350 stand-alone industries. KIADB has played a very important supportive role in the establishment of almost all major industries in public and private sectors in the State. In the industrial areas developed by it, the KIADB basically provides good roads, water and electricity. To ensure adequate and uninterrupted supply, water is pumped to all the major industrial areas from river sources and to smaller industrial area, water is supplied from bore or tube wells. Karnataka Power Transmission Corporation Limited and five regional Energy Supply Companies provide electricity to all the industrial areas. KIADB so far has developed major industrial areas at Peenya, Bommasandra, Electronic City, and EPIP - Whitefield in Bangalore. Further, the Board has also developed industrial area at Baikampady in Mangalore, Kanabargi & Honaga in Belgaum, Hebbal in Mysore and Growth Centres at Dharwad, Hassan and Raichur. Water Supply Schemes have been implemented at Dharwad, Hassan, Thandya (Mysore) of capacity 5 MGD each, from perennial river sources. In addition, a number of smaller industrial areas have been developed in other parts of the State. KIADB is involved developing SEZ at Hassan, Sector specific SEZs, Food and Agro Technology Parks, Apparel Parks, Textile Parks and such other specialized infrastructural facilities. (for more details visit: www.kiadb.kar.nic.in). Karnataka State Small Industries Development Corporation (KSSIDC) is another organization of the Government, providing ready-built industrial sheds for the use of investors. The Corporation has so far developed about 3976 plots and constructed about 5,750 sheds of different dimensions in 159 industrial estates throughout the State. (for more details visit: www.kssidc.kar.nic.in). Karnataka Electronics Industries Development Corporation (KEONICS) has developed Electronic City near Bangalore. Software Technology Parks of India (STPI), the Nodal Agency of GoI for Software Industries, functions in Electronics City, Bangalore and similar STPIs are in functioning in Hubli, Mangalore, Manipal and Mysore. KEONICS has also established IT Park at Hubli, Mangalore and Mysore. The ITPL at Whitefield and many other similar Software Technology Parks created through private 41

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initiatives are in operation wherein ready work place of world standards are available for IT industries (for more details visit www.keonics.com and www.stpi.soft.net). The investors may also locate their industries in private land. For this purpose, land is required to be converted for industrial use. Procedures prescribed under Karnataka Land Revenue Act / Rules and Karnataka Land Reforms Act and local area planning regulations need to be adhered to.

B.4.5 Water
In the industrial areas developed by KIADB, Industrial Estates of KSSIDC and similar specified areas developed by Government agencies, water supply is made available by the agency itself. In areas other than these, Bangalore Water Supply and Sewerage Board (BWSSB) arranges water supply in and around Bangalore. In other districts, Karnataka Urban Water Supply and Drainage Board will provide water supply depending upon its service area. Investors are also free to have their own water supply arrangements from surface / ground sources, wherever possible (for more details visit http://www.bwssb.org and http://www.kuwsdb.org/ ).

B.4.6 Power
In the entire State, the transmission of electrical power is looked after by the Karnataka Power Transmission Company Limited (KPTCL). Since 1 May 2002, five independent power distribution companies are in existence in Bangalore, Gulbarga, Hubli, Mangalore and Mysore distributing power to consumers. The investors are required to apply to the jurisdictional executive engineers of these companies. Power supply will be of three types - Low Tension (LT), High Tension (HT) and Extra High Tension (EH). The safety aspects of power connection in case HT and EHT are taken care of by the Electrical Inspectorate. The safety regulations in the Electrical installation are required to be cleared by the Department of Electrical Inspectorate before execution of the electrical installations. Installation like HT & LT lines and cables, transformers, generators, lifts, Multi-storied Buildings, etc., requires the statutory clearances in the drawing before execution of the same by the Licensed Electrical Contractors Licensed from the State of Karnataka. Investors are also permitted to have their own captive power generation arrangement of any fuel source like Bio-mass, Cogeneration, Windmill, Diesel etc. Currently, the electricity tariff for industries are INR 1.80 (USD 0.04)/ KVA of billing demand + energy charges @ INR 3.80 (USD 0.07) /unit up to one lakh units and INR 4.30 (USD 0.08)/- above one lakh units consumed in a month + 5% Electricity Tax on above. The tax on such captive generation is governed by the provisions of Karnataka Electricity (Taxation on Consumption) Act, 1959. D.G. sets up to 12.5 KVA capacities, are exempted from payment of electricity tax only under self-consumption, but the installation of the same has to be informed to the Electrical Inspectorate. (for more details visit www.kptcl.com ).

B.4.7 Finance
Karnataka State Financial Corporation (KSFC) and Karnataka State Industrial Investment and Development Corporation (KSIIDC) extend financial assistance to the industrial and such other ventures in Karnataka. KSFC provides term loans to new and existing units up to INR 200 lakh (USD 405,268) in case of proprietary, partnership and joint Hindu family concerns and up to INR 500 lakhs (USD 1.01 million) for corporate bodies and registered cooperative societies. KSFC has a number of schemes, suitable for different kinds of entrepreneurs and projects. KSFC has fully decentralized its operations and the corporation has 7 Zonal offices, 3 Super A grade branch offices, 12 A grade branch offices and 14 B grade branch offices.

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KSIIDC extends finance to the bigger projects solely or jointly with KSFC, commercial banks or any other financial institutions. KSIIDC is also acting as the Nodal Agency of the State Government to plan and promote industrial infrastructural development project and monitor specified mega projects during its implementation. KSIIDC also participates in joint stock companies by way of equity contribution. The Corporation has 4 zonal offices in the State (for more details visit www.ksfc.kar.nic.in and www.ksiidc.com). National level financial institutions like Small Industries Development Bank of India SIDBI), Industrial Development Bank of India (IDBI), Commercial Banks and private sector financial institutions extend the required financial / loan assistance to the investors. In addition to the above, financial intermediaries such as commercial banks also extend support to Investors for funding of their projects. Karnataka is known as the Cradle of Banking and is home to the maximum number of commercial banks in the country. Many prominent nationalized banks such as Canara bank, Syndicate bank, Corporation bank etc have been founded in Karnataka. KUIDFC or Karnataka Urban Infrastructure Development and Finance Corporation has been nominated as the State Level Nodal Agency for the Pooled Finance Development Facility (PFDF) patterned on the US Model by Government of India.

B.4.8 Technology
The State has over 100 reputed national / state level research and development institutions. These R & D institutions are engaged in developing new technologies and offering the same to entrepreneurs. The State Government has promoted Karnataka Council for Technological Up gradation (KCTU) to help entrepreneurs to resource required technologies available, the world over. The details of R & D institutions and their area of specialization may be obtained from CSIR Poly Technology Transfer Centre, Bangalore (for more details visit www.kctuindia.org).

B.4.9 Human Resource


The major advantage of the State is its human resource. The State has a reservoir of semi skilled and highly skilled manpower suitable for a variety of industrial assignments. The Centre for Entrepreneurship Development of Karnataka (CEDOK), a Government of Karnataka undertaking is involved in development of entrepreneurship among educated youth throughout Karnataka. The State also has large number of engineering colleges, medical colleges, polytechnics, ITIs, and other vocational training institutes. These institutes produce human resource of high caliber who can be gainfully employed in diverse types of projects. Investors may get the right candidates through annual campus interview at these institutions (for more details visit: www. cedok.kar.nic.in).

B.4.10 International Trade


Karnataka has a specialized agency viz., Visveswaraya Industrial Trade Centre (VITC) for promotion of international trade. VITC is providing institutional support to exporters and regularly monitors the needs of exporters. The centre encourages and coordinates participation of industries in international exhibitions and trade fairs and also supports visits of trade delegation through financial assistance. VITC has also developed a credible data base of exports from Karnataka (for more details visit: www. vitcblr.org ).

B.5 Investment Facilitation Mechanism


The principle objective of the policy frame work for the industrial sector in Karnataka is to provide an enabling environment for the growth of industry. One of the key reform measures is to simplify the regulatory frame work so as to enable ease of doing business in the State.

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In order to simplify the regulatory frame work and to remove procedural impediments at the entry and implementation level and also to reduce maintenance and submission of repetitive documents during the operational level, several reform measures have been introduced by the State Government. To provide a legal frame work for the deregulation measures, Karnataka has enacted a facilitating Act, namely, the Karnataka Industries (Facilitation) Act, 2002 and the relevant Rules called the Karnataka Industries (Facilitation) Rules, 2003. Following are the salient features of this Act: Constitution of single point clearance committees for facilitating new investments, viz: o State High Level Clearance Committee, under the Chairmanship of the Chief Minister to consider and clear projects with an investment of INR 50 crores (USD 10.13 million) and above. o State Level Single Window Clearance Committee under the Chairmanship of the Principal Secretary to Government, C&I Department to consider and clear the projects with investment of more than INR 3 crores (USD 607,902) and less than INR 50 crores (USD 10.13 million). o District Level Single Window Clearance Committees under the Chairmanship of respective Deputy Commissioners to consider projects with investment up to INR 3 crores (USD 607,902). Karnataka Udyog Mitra has been appointed the Nodal Agency at State level and District Industries Centres at the District level to undertake investment promotional activities. Introduction of Combined Application Form (CAF) in order to reduce the number and duplication of application forms required to be filed at entry level. Introduction of Self Certification by the entrepreneurs, which shall be accepted by the departments and authorities for purpose of issuing clearance and granting benefits to the entrepreneurs. Rationalization of inspections to be undertaken by different levels of authorities under the provisions of applicable Acts to reduce the Inspector Raj. Further, inspections from the office of the Labor Commissioner, Directorate of Factories & Boilers, KSPCB, ESIC and EPF are to be conducted jointly, based on random selection of units. Provision of deemed approval, in case any department / authority fails to issue clearance, within the stipulated time limit, enabling the entrepreneurs to go ahead with their project as envisaged.

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C
Taxes
India has a well developed tax structure with the authority to levy taxes divided between the Central Government and the State Governments. The main taxes (or duties) that the Union Government can levy are: Income Tax, Customs duties, Central Excise, Sales Tax, and Service Tax. The main taxes (or duties) that the State Governments can levy are: Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions and Callings. Tax rates and duties are reviewed annually when budgets are presented. Amendments to the statutes are made through the annual Finance Acts or specific Amendment Acts.

C.1 Administration
Administration, supervision and control in the area of direct taxes lie with the Central Board of Direct Taxes (CBDT). The CBDT works under the MoF, exercises significant influence over the working of the countrys direct tax laws and also ensures effective discharge of executive and administrative functions. The Indian tax year extends from 1 April of a year to 31 March of the subsequent year. A corporation tax year also ends on the same date. All corporations (except those who are required to submit transfer pricing certificate in Form 3CEB in respect of international transactions) are required to file a return of income (ROI) by 30 September, even in the event of loss. However, corporations who are required to submit transfer pricing certificate in Form 3CEB in respect of international transactions are required to file a ROI by 30 November. Non-resident corporations must file a ROI in India if they earn income in India, or they have a physical presence/economic nexus in India. Corporate tax liability needs to be estimated and discharged by way of advance tax in four installments on 15 June, 15 September, 15 December and 15 March every year. Filing of late ROI and delay in payment/shortfall in taxes are liable to attract penal interest at prescribed rates. Interest is generally imposed on the balance of the unpaid tax due and on underpayment of the advance tax due.

C.2 Income Tax


The levy, assessment and procedure for payment of income tax in India are governed by the Income Tax Act, 1961.

C.2.1 Corporate Income Tax C.2.1.1 Liability for Income Tax


The liability for income tax is determined by the residential status of the company during the fiscal year. A company is considered as resident if they meet either of the following criteria: It is an Indian company. The control and management of the companys affairs is situated wholly in India during the fiscal year. 45

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A company is treated as non resident in India in any fiscal year if it does not meet any of the above mentioned criteria.

C.2.1.2 Scope of Income Liable to Tax


Companies resident in India are taxed on income received/accrued/arising in India and outside India. Non-resident companies are taxed on the income received/accrued/arising from a business connection in India or from other sources in India.

C.2.1.3 Income subject to Tax


Income received/accrued/arising from business/profession (after deducting expenses thereof), house property rent, investment income, capital gains arising from transfer of companys capital assets, and any other residual income arising from non-business activities is subject to tax. For Indian income tax purposes, a corporations income comprises: Income from house property. Income from business. Capital gains on disposition of capital assets. Residual income arising from non-business activities.

India has Double Taxation Avoidance Agreement (DTAA) with 82 partner countries which enables offsetting tax paid in one of the two countries against the tax payable in the other, in this way preventing double taxation. Another important factor is the grant of an exemption or tax at a reduced rate on certain receipts such as interest, royalties, dividends, capital gains and others that are connected with a transaction carried out between parties associated with the Double Taxation Prevention Treaty. When certain income is taxable under the Indian Income Tax Ordinance but there is an exemption (reduced tax) under any Taxation Treaty, the income is taxed, if at all, but only according to the provisions of the Taxation Treaty. Implications of DTAA for taxpayers: If there is a tax treaty between India and the country of residence of the taxpayer, the provisions of the IT Act or the tax treaty, whichever is more beneficial, will apply. Accordingly, the taxability of a non-resident in India may be restricted or modified and lower rates may apply. In general, Indias tax treaties provide that corporation residents of other countries are subject to Indian tax on business profits derived from a business in India, only if the non-resident has a permanent establishment in India.

C.2.1.4 Corporate tax rate


Normal Rate Domestic corporations are subject to tax at a basic tax rate of 30%, as well as a 5% surcharge. Foreign corporations are subject to a basic tax rate of 40%, as well as a 2% surcharge. The surcharge is only applicable in cases where the total income of the taxpayer (domestic or foreign corporation) exceeds INR10 million (USD 202,634.2). Further, the tax payable by all companies is enhanced by an education cess at the rate of 3% on the tax payable, inclusive of surcharge. The effective tax rate for domestic corporations is 32.4% (including surcharge and education cess) and for foreign corporations 42.0% (including surcharge and education cess). Special rates for non resident corporations Royalty or fees for technical services: Foreign corporations are taxed with respect to royalty or fees 46

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for technical services (FTS), which are received from the Government, from Indian organizations under agreements that are approved by the GoI or which are in accordance with the countrys industrial policy (refer to notes 1 and 2).

In pursuance of agreements made on or after 1 June 2005

Taxable at 10% on a grass basis (plus surcharge at 2% and education cess at 3%

Notes 1. Royalties and FTS which are effectively connected with the foreign corporations permanent establishment in India, are taxed on a net income basis at the normal rates applicable to foreign corporations. Royalties and FTS, which are not received from the GoI or Indian organizations, are taxed on a net income basis at the normal rates applicable to foreign corporations. So also are royalties and FTS payable under agreements that are not approved by the GoI or under arrangements that are not in accordance with Indias industrial policy. These are taxed on a net basis at the normal rates applicable to foreign corporations.

2.

C.2.2 Determination of Taxable Income C.2.2.1 Income from House property


Income earned by renting out of house property is taxable in the hands of the owner. Valuation of income from house property is prescribed under various scenarios of occupancy ranging from rented, vacant to self-occupied. The owner is entitled to a deduction on account of municipal taxes actually paid. Further, a standard deduction for repairs from such income at 30% of the prescribed value is permitted. Interest on borrowed capital, up to specified limits and on fulfillment of prescribed conditions, is also allowed as a deduction while computing the net income liable to tax.

C.2.2.2 Income from Business


Taxable profits are computed in accordance with common business or accounting principles, modified by statutory tax provisions. Business Deductions Taxpayers may deduct all business-related expenses from their gross income. Personal expenses and capital expenditure, other than expenditure on scientific research, are not deductible. Inventories Inventories should be valued in accordance with the accounting policy regularly complied with by the tax payer at cost or net realizable value (whichever is lower). Provisions In general, ad hoc provisions for expenses or losses are not tax-deductible. Provisions for duties, taxes (apart from income tax and wealth tax), bonuses, leave salary and interest on specified loans are deductible on an accrual basis, provided corresponding payments are discharged before the due date for filing the ROI. Otherwise, the deduction is allowed in the year of actual payment. 47

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General provisions for doubtful debts are not deductible unless the bad debt is actually written off in the accounts. However, relief is available to banks and financial institutions with respect to nonperforming assets. Retirement Payments Tax deductions have to be made to payments made to employees under Voluntary Retirement Schemes over a period of five years commencing from the year in which the first payment installment was paid. Any Contributions to retirement benefits and/ or other similar welfare funds are also deductible for tax, provided the corresponding payments have been released before the due date for filing the ROI. Otherwise, deduction is allowed in the year of actual payment only. Depreciation and Amortization allowances Depreciation or amortization included in financial statements is not deductible. Except in the case of undertakings engaged in the generation or the generation and distribution of power, depreciation for tax purposes must be calculated on a block of assets according to the declining balance method at prescribed rates. Block of assets is a group of assets falling within a class of assets, comprising tangible and intangible assets, in respect of which specific tax depreciation rates are prescribed. Allowance for depreciation is only available after the asset is ready for use for its business purpose. In the event assets are acquired during the year and put to use for a period of less than 180 days, only half of the admissible depreciation is allowable during that year. Depreciation is computed on the amount arrived at after adding to the declining balance value at the beginning of the year for a particular block of assets the actual cost of the assets acquired during the year, reduced by the sale proceeds arising from the disposition of any asset in that block. Tax depreciation rates (declining balance method): Assets Plant and Machinery Cars other than those that are hired out Computers (including software) Buildings other than residential ones Furniture and fittings, including electrical fittings % 15 15 60 10 10 Intangible assets such as know-how, patents, copyrights trademarks, licenses, franchises or any other business or commercial right of Ships Residential Buildings Assets % 20 5

similar nature Buses, lorries and taxies that are hired out Restrictions on interest deductions

25 30

India does not currently have mandatory thin capitalization rules. However, banks and financial corporations are required to comply with prescribed capital adequacy norms. Interest is allowed as a deduction, provided it is with respect to capital borrowed for the purpose of business.

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Disallowance of payments to residents and non-residents To enforce tax-withholding provisions, certain payments on which tax has not been withheld or withheld taxes are not deposited according to the law are not allowed as a tax deduction. These are however allowed as deductions in the subsequent tax year in which the appropriate taxes withheld are deposited. Foreign Exchange Losses Foreign exchange fluctuations are considered while computing taxable income provided they are on revenue account. Realized exchange fluctuations on a liability, with respect to assets acquired outside India, can be adjusted with their declining balance value. Relief for losses Business losses, other than unabsorbed depreciation, may be carried forward to be set off against taxable business income derived during the next eight years, provided the ROI for the year of loss is filed by the due date. However, closely held corporations are required to satisfy a 51% continuity of ownership test to carry forward business losses. Unabsorbed depreciation may be carried forward indefinitely, to be set off against the taxable income of subsequent years.

C.2.2.3 Capital gains and losses


Proceeds in excess of cost from the disposition of capital assets are generally taxed as capital gains. Capital assets include all kinds of property except stock-in-trade, raw materials and consumables used in businesses or professions, personal effects (except jewellery), agricultural land and notified gold bonds. General provisions Long-term capital gains: Profits earned from the transfer of long-term capital assets are referred to as long-term capital gains. Generally, assets that have been held for more than three years are treated as long-term capital assets for the purpose of capital gains. However, the following assets are treated as long-term capital assets if held for more than one year: Shares (both listed and unlisted) or any other listed security. Units of Unit Trust of India (UTI). Units of specified mutual funds. Specified zero coupon bonds.

In general, long-term capital gains are taxed at a basic rate of 20%. The cost of a capital asset is adjusted for inflation (indexation) to arrive at the indexed cost, which is allowed as a deduction while computing such long-term capital gains. Gains derived from the transfer of UTI units, specified mutual fund units, listed securities or zero coupon bonds could be taxed at the rate of 10% (plus applicable surcharge and education cess), without allowing indexation adjustments, or at the rate of 20% (plus applicable surcharge and education cess) with the benefits of indexation, at the option of the taxpayer. Long-term capital gains arising on the transfer of equity shares or the units of an equity-oriented fund (> 65% equity) on any recognized stock exchange in India is exempt from tax and STT has been paid on the transaction. 49

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For assets acquired on or before 1 April 1981, the fair market value, as of 1 April 1981, or the actual cost of acquisition at the option of the taxpayer, will be treated as the cost of the asset. To compute capital gains arising from the transfer of bonus shares acquired after 1 April1981, its cost is considered to be nil. Long-term capital losses are allowed to be carried forward for eight consecutive years (subject to ROI filed on or before the due date), but may only be offset against taxable long-term capital gains. Long-term capital gains are exempted from tax if an investment has been made as prescribed by the law in certain specified modes, including investment in residential property and specified bonds of institutions. Short-term capital gains: Capital gains arising from the transfer of short-term capital assets (assets that do not qualify as long-term capital assets) are referred to as short-term capital gains and are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares, the units of an equity-oriented fund on any recognized stock exchange in India (on or after the date on which STT came into force), on which STT has been paid, are taxed at the lower rate of 15% (plus applicable surcharge and education cess). Short-term capital losses are allowed to be carried forward for eight consecutive years (subject to filing of ROI on or before the due date) and may only be offset against taxable capital gains (both long term and short term). Capital gains on depreciable assets: To compute capital gains arising from the sale of assets on which depreciation has been allowed, the sale proceeds of the assets are deducted from the declining balance value of the block of assets (including additions made during the year) of which the former form a part. If the sales proceeds exceed the declining balance value of the entire block, the excess is treated as short-term capital gain. Otherwise, there is no capital gain from the sale of such assets, even if the sales proceeds of a particular asset is greater than the cost of such an asset. If all the assets that form a part of a block are sold, the excess/deficit of the declining balance (including additions made during the year) over the sale proceeds is treated as a short-term capital gain/capital loss. Special provisions relating to capital gains Domestic tax law has a special provision for the taxation of capital gains earned by non-residents by the transfer of the shares and debentures of an Indian corporation acquired by utilizing foreign currency. Any gain (short or long term) is reconverted into Indian rupees at the exchange rate prevailing on the date of the transfer, to calculate taxable capital gains. Domestic tax law has a special provision for the taxation of capital gains earned by non-residents by the transfer of the shares and debentures of an Indian corporation acquired by utilizing foreign currency. Any gain (short or long term) is reconverted into Indian rupees at the exchange rate prevailing on the date of the transfer, to calculate taxable capital gains. This special provision is a measure that is aimed at mitigating the effect of any fluctuation in the exchange rates of foreign currency on the capital gains earned by non-residents. No indexation benefits are offered in the calculation of capital gains in such cases. Amalgamation, demergers and slump sales Amalgamations: Amalgamations are tax-neutral, subject to the satisfaction of prescribed conditions. In the case of non-compliance with any of the prescribed conditions, any brought forward business loss and unabsorbed depreciation, which has been set off by the amalgamated corporation, is treated as its income for the year in which it failed to fulfill any of the prescribed conditions. 50

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Demergers: The demerger of businesses by existing corporations is tax-neutral, subject to the fulfillment of prescribed conditions. The accumulated losses and depreciation of the demerged corporation, attributable to the resulting corporation, can be carried forward and set off by the latter, subject to its compliance with prescribed conditions. Slump sale: Profits derived from a slump sale are taxed as long-term capital gains if the transferred undertaking has been held for more than 36 months. Taxable capital gain arising from a slump sale is the excess of the consideration received over the net worth of the undertaking. The net worth is the difference between the value of the undertakings total assets (the sum of the tax-depreciated value of assets that are depreciable for income tax purposes and the book value of the other assets) and the book value of its liabilities.

C.2.2.4 Income from other Sources


Income that does not specifically fall under any of the types above is liable to tax as income from other sources, including investment income and winnings from lotteries. Investment Income Dividends are taxed in the following manner: Domestic corporations are required to pay Dividend Distribution Tax (DDT) on profits distributed as dividends at the rate of 16.2225%, including the applicable surcharge at the rate of 5% and education cess at the rate of 3% with effect from 1 April 2011. The amounts declared, distributed or paid as dividends by Indian corporations are not taxable in the hands of the shareholders.

The dividends paid by foreign corporations are subject to tax in the hands of the shareholders. Dividend received by a domestic corporation after 1 April 2011 from a specified foreign company is taxable at the rate of 15% (plus surcharge and education cess). A specified foreign company is a foreign company in which an Indian company holds 26% or more in nominal value of the equity share capital of the company.

C.2.3 Minimum Alternate Tax


Indian tax law requires MAT to be paid by corporations on the basis of profits disclosed in their financial statements. In cases where the tax payable according to regular tax provisions is less than 18.5% of their book profits, corporations must pay 18.5% (plus surcharge and cess as applicable) of their book profits as tax. For domestic corporations, the effective tax rate works out to a little more than 20%. Book profits (for this purpose) are computed by making the prescribed adjustments to the net profit disclosed by corporations in their financial statements. The tax credit (i.e. difference between tax paid under MAT provisions and the amount payable under normal provisions of the IT Act) may be carried forward for 10 years and set off against income tax payable under the normal provisions of the IT Act. A report from a Chartered Accountant, certifying the quantum of book profits, must be filed along with the ROI.

C.2.4 Alternate Minimum tax


Indian tax law requires AMT to be paid by limited liability partnerships. Where the regular income tax payable for a previous year by a limited liability partnership is less than the AMT payable for such previous year, the adjusted total income shall be deemed to be the total income of the limited liability partnership for such previous year and it shall be liable to pay income tax on such total income at the rate of 18.5% (plus applicable cess). Since surcharge is not levied on firms, the effective tax rate works out to 19.05%. Adjusted total income for computation of AMT shall be the total income before giving effect to specified deductions. 51

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The tax credit, carry forward and set off provisions are similar to provisions under MAT.

C.2.5 Dividend Distribution Tax


Dividends paid by domestic corporations are exempt from tax in the hands of the recipients. However, resident corporations must pay DDT at the rate of 16.2225% (including a 5% surcharge and a 3% education cess) on dividends declared, distributed or paid by them. Such tax is a non-deductible expense. Further, credit for dividend so received by a company is available for computation of dividend on which dividend distribution tax is to be paid (where it further declares dividend) provided: The dividend was received from the subsidiary. The subsidiary has paid dividend distribution tax on such dividend. Holding company is not a subsidiary of any other company.

Under the said provisions, a company is deemed to be a subsidiary of another company where the other company, holds more than half in nominal value of the equity share capital of the company.

C.2.6 Wealth Tax


In India, wealth tax is payable at the rate of 1% if the taxable value of a corporations net wealth exceeds INR 3 million (USD 60,790.3). Assets subject to tax include residential houses, cars, yachts, boats, aircraft, urban land, jewellery, bullion, precious metals, any amount of cash not recorded in books of account and commercial property not used as business, office or factory premises. However, a residential house or houses owned by an employer and provided to an employee earning less than INR 500,000 (USD 10131.7) a year are exempt from tax. Assets such as a house for residential or commercial purposes or a residential property are exempt from tax if they are owned as stock-in-trade or used for hire. Productive assets such as shares, debentures and bank deposits etc. are not subject to wealth tax. A deduction is allowed for debts owed that have been incurred in relation to taxable assets. Tax is levied on net wealth, as of 31 March of the financial year.

C.3 Income Tax Individuals


C.3.1 Liability for Income Tax
Liability for income tax is governed by the residential status of individuals during the tax year. Individuals are considered to be residents if they meet either of the following criteria: They were present in India for 182 days or more during the tax year, which extends from 1 April to 31 March. They were present in India for 60 days or more during the tax year and for at least 365 days in total during the preceding four tax years (The period of 60 days may be extended to 182 days in certain cases).

Individuals who do not meet either of the criteria mentioned above are considered to be non-residents. Individuals are considered to be not ordinarily resident if, in addition to meeting one of the criteria mentioned above, they satisfy either of the following conditions: Non-resident in India for 9 of the preceding 10 tax years; or Present in India for 729 days or less during the previous 7 tax years.

All individuals are subject to tax, unless they are exempt under the Income- tax Act or applicable tax treaties. Income liable to be taxed in India depends on the residential status of the taxpayer. Categories of income liable to be taxed, according to residential status, have been depicted in the table below: 52

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Residential Status Resident and ordinary resident Resident and not ordinarily resident Worldwide income

Taxability Income received in India or deemed to be received in India Income accruing or arising in India or deemed to accrue or arise in India Income accruing or arising outside India, either from a business controlled from India or a profession setup in India

Non-resident

Income received in India or deemed to be received in India Income accruing or arising in India or deemed to accrue or arise in India

C.3.2 Types of incomes subjected to tax in India C.3.2.1 Employment Income


All salary income related to services rendered in India is deemed to accrue or arise in India, regardless of where it is received or the residential status of the recipient. Employees of foreign enterprises, who are citizens of foreign jurisdictions, are not subject to tax if all of the following conditions are satisfied: The enterprise is not engaged in trade or business in India. The employee does not stay in India for an aggregate period of more than 90 days in the tax year. The compensation paid is not claimed by the employer as deduction from taxable income in India.

Similar exemptions are available under tax treaties if an individuals stay is less than 183 days, but conditions vary. Non-resident foreign citizens employed on foreign ships, who do not stay in India for longer than 90 days in a tax year, are also exempt from tax on their earnings. In general, most elements of compensation are taxable in India. However, certain benefits (listed below) may receive preferential tax treatment, subject to certain requirements. Corporation housing: The benefits of corporation housing (owned by the employer) is generally taxed at 15% of an individuals salary (10% of salary in cities with a population of less than 2,500,000 and 7.5% of salary in cities with a population of less than 1,000,000, according to the 2001 census. In the event accommodation is taken on lease by the employer, the employee is taxed at either 15% of his or her salary or the actual lease rental paid by the employer, whichever is lower. However, where the rent paid by the employer for the accommodation is recovered from the employee, the perquisite value is reduced by this amount. Furniture and appliances provided by the employer are taxed at the rate of 10% of their cost if the employer owns the items or the rent paid if the employer hires these. Hotel accommodation: If an employee is provided with hotel accommodation, tax is imposed on either the hotel charges paid by the employer or 24% of the employees salary, whichever is lower, reduced by the amount recovered from the employee, unless such accommodation is provided free of cost to the individual for up to 15 days on relocation. Such accommodation, provided for 15 days in aggregate, is exempt from tax. Superannuation fund: Contributions made by an employer (in excess of INR 0.1 million (USD 2026.3) to a superannuation fund are taxable in the hands of the employee.

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Interest-free or low-interest loans: The benefit of interest-free loans or low-interest loans exceeding INR 20,000 (USD 405.3) to an employee or a member of an employees household is taxable, based on the purpose of availing the loan. The rate of interest is notified by the State Bank of India. Employer-paid taxes on non-monetary benefits: In general, the tax paid by an employer on behalf of an employee is grossed and taxed in the hands of the employee. However, any tax paid by an employer, on behalf of the employee, on non-monetary benefits is exempt in the hands of the employee. The following employer-paid items are not included in an employees taxable compensation or included in his or her taxable income at a value lower than the actual cost incurred by employer (to the extent that they do not exceed specified limits and satisfy the prescribed conditions): Reimbursable medical expenses Contributions to retirement benefit funds, including provident and gratuity funds, in India. Certain allowances, including house rent and leave travel.

There is tax exemption of up to INR 100 (USD 2.03) per month per child for up to two children on an education allowance provided by the employer to an employee for meeting the cost of his or her childrens education. An allowance granted to an employee to meet the hostel expenses (boarding expenses in residential schools and colleges) of his or her children is exempt up to INR 300 (USD 6.08) per month per child for up to two children. Taxation of Employer-provided stock options (ESOPs) ESOPs allotted/transferred by an employer, free of cost or at a concessional rate, are taxable in the hands of the employee. ESOPs are taxed at the fair market rate on the date they are exercised by an employee, reduced by the amount actually paid by or recovered from the employee.

C.3.2.2 Income from House Property


As per the provisions of the IT Act, taxability of income from house property in the case of corporations and individuals is the same.

C.3.2.3 Self Employment and business income


All self-employed individuals or those doing business in India are subject to tax. The general principles of taxation in respect of business income in the case of individuals are similar to those of a corporation. Deemed basis of taxation With the objective of increasing compliance with taxation provisions for small businesses, and reducing the administrative burden on the tax machinery, the GoI has introduced a presumptive taxation scheme, which is applicable to individuals, any Hindu undivided family (HUF) and partnership firms (excluding LLPs) for all businesses (except the business of plying, hiring or leasing goods and carriages) with a turnover of INR 6 million (USD121, 580.1) or less. Under the scheme, the taxpayer has the option to declare total income on a deemed basis at 8% of the gross receipts.

C.3.2.4 Capital gains on assets


The provisions in respect of taxability of capital gains in the case of individuals are similar to those in respect of corporations.

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However, the following provisions are applicable only in respect of individuals and HUF: Long-term capital gains are exempt from tax in certain cases if such gains are reinvested within six months in certain specified long-term assets. This exemption can be claimed for investments up to INR 5 million (USD101, 317.1). If, within three years of such reinvestment, the new assets are sold or, in certain cases, used as security for a loan or an advance, the capital gains derived from the sale of the original asset are subject to tax in the year the new assets are sold or used as security. Exemptions are available for long-term gains derived from the sale of a residential house and other capital assets if such gains are used to acquire a residential house or specified bonds within the prescribed time. Further, capital gains arising from the transfer of land is exempt if such land has been used by a tax payer or a tax payers parents for agricultural purposes for at least two years immediately preceding the date of transfer, and if the taxpayer uses the gains to purchase other land for agricultural purposes within two years from the date of the transfer. If gains from the sale of agricultural land are not reinvested, they are taxed as short-term gains if this land is held for less than three years, and as long-term gains if it is held for more than three years.

C.3.2.5 Income from other sources (investments and lotteries)


The general principles of taxation in respect of income from other sources in the case of individuals are similar to those of a corporation as discussed in Para L.2.2.iv. However, certain transactions are taxable only in the case of individuals or HUFs. These are discussed below. NRIs (including persons of Indian origin) may exercise an option to be taxed at the flat rate of 20% on their gross investment income and a flat rate of 10% on their long-term capital gains on certain specified assets (without any deductions) arising from their foreign currency assets, acquired in India through remittances in convertible foreign exchange. Interest payable on savings banks or fixed deposits in India is taxable and taxes are withheld at source by the banks if the interest exceeds INR 10,000 (USD 202.6) in the tax year. The interest payable by scheduled banks (on approved foreign currency deposits) to non-residents, and not ordinary residents, is exempt from tax. Taxability of certain transactions Any sum of money received (in excess of INR 50,000 ((USD1013.2)) without consideration is taxable in the hands of the recipient. Where immovable property or any other property is received without consideration and the stamp/ fair value of such property exceeds INR 50,000 (USD 1013.2), the stamp/fair value of such property is taxable as income from other sources. Where immovable property or any other property is received for a consideration and such consideration is less than the fair value of the property by an amount exceeding INR 50,000 (USD 1013.2), the fair value reduced by the consideration received is taxable as income from other sources. The provisions given above are not applicable where the sum of money or property is received from a relative, on the occasion of the individuals marriage, under a will or inheritance, in contemplation of the death of the payer or donor or from a local authority, approved fund or trust.

Deductions For individuals, a deduction of up to INR 100,000 (USD 2026.3) can be claimed from their gross total income for prescribed contributions to savings instruments and pension funds. Further, deduction may be claimed 55

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from gross total income for payment of tuition fees for the education of specified family members. In addition, interest paid on loans obtained to pursue higher education (senior secondary education or above) is fully deductible. However, no deduction is available for repayment of the principal amount. In addition to the above mentioned deduction, an individual can also claim an additional deduction amounting to INR 20,000 (USD 405.3) for subscription to long- term infrastructure bonds notified by the GoI. Health insurance premiums for recognized policies in India paid for insurance of the health of an individual or his/her family may be deducted, up to a maximum of INR15,000 (USD 303.9) (INR 20,000 (USD 405.3)) if insured person is more than 65 years) from their gross total income.

C.3.3 Income Tax Rates (Individuals)


The following tax rates have been proposed that will apply to resident and non-resident individual tax payers for the year ending 31 March 2012. Income Slabs INR 0-180,000 (USD: 0-3647.4) 180,001500,000 (USD: 3647.4 10,131.7) 500,001800,000 (USD: 10,131.7 16,210.7) INR 500,000 (USD 10,131.7) 800,001 upwards (USD: 16,210.7 upwards) INR 800,000 (USD 16,210.7) The tax calculated at the above mentioned rates is further increased by education cess at 3% for individuals. * Resident individuals with income of up to INR180, 000 (USD 3647.4) do not need to pay income tax and education cess. The exemption limit is INR 190, 000 (USD 3850) for resident women below 60 years and INR 250,000 (USD 5065.8) for resident individuals above 60 years and below 80 years of age. In case of very senior citizens (defined as individuals above the age of 80 years), the exemption limit is INR 500,000 (USD 10,131.7). INR 92,000 (USD 1864.2) plus 30% of income in excess of INR 32,000 (USD 648.4) plus 20% of income in excess of 10% of income in excess of INR 180,000 (USD 3647.4) Nil Income tax

C.3.4 Income tax filing and payment process


All income is taxed on the basis of the financial year from 1 April to 31 March. All taxpayers, including non-residents, must file ROI if their income exceeds the maximum amount that is not liable to taxation. Recently the government of India has, by way of a notification, exempted certain classes of persons from the requirement of filing a return of income, subject to certain conditions. Broadly these are individuals whose total income for the relevant year does not exceed INR 0.5 million (USD 10,131.7) and consists of only income under the head salaries and other sources. ROI for salary income need to be filed by 31 July, ROI for self- employment or business income must also be filed by 31 July, or, if accounts are subject to a tax audit, by 30 September every year. Wealth tax returns for individuals need to be filed by the same deadline applicable to them in the case of income tax returns.

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India does not have the concept of joint filing. As a result, married persons are taxed separately. The passive income of minor children is aggregated with that of the parent with the higher income. Taxpayers with income earned from employment pay tax through tax withheld by employer from their monthly salaries each pay period. Taxpayers with tax liability exceeding INR 10,000 (USD 202.6) need to make advance tax payments, after deducting credit for tax withheld, in three installments on 15 September, 15 December and 15 March every year. Non-residents are subject to the same filing requirements as residents. However, non-residents and NRI nationals (including persons of Indian origin), who only have investment income or long-term capital gains (on foreign exchange assets), need not file ROI if the required tax is withheld at source. Non-residents are subject to the same assessment procedures as residents. Before leaving India, any individual who is not domiciled in the country is required to furnish an undertaking to the prescribed authority and obtain a no objection certificate (NOC) if the person has been in India to engage in business, professional or employment activities and has derived income from the said activities. Such undertakings must be obtained from the individuals employer or the payer of the income, and these undertakings must state that the employer or the payer of income will pay the tax payable by the individual. An exemption to obtain an NOC is granted to foreign tourists or individuals visiting India for purposes other than business or employment, regardless of the number of days spent by them in the country. At the time Indian nationals domiciled in India depart from the country; they need to provide their Permanent Account Number (PAN), the purpose of their visit and the estimated period of their stay outside India to the prescribed authority. However, a person domiciled in India may also be required to obtain an NOC in certain specified circumstances.

C.3.5 Other direct taxes (Individuals) C.3.5.1 Wealth Tax


In India, wealth tax is payable at the rate of 1% if the taxable value of an individuals net wealth exceeds INR 3 million (USD 60,790.3). Assets subject to tax include residential houses, cars, yachts, boats, aircrafts, urban land, jewellery, bullion, precious metals, cash in excess of INR 50,000 (USD 1013.17)and commercial property not used as business, office or factory premises. However, a residential house or houses owned by an employer and provided to an employee earning less than INR 500,000 (USD 10,131.7) a year are exempt from tax. The assets mentioned above, other than urban land, are exempt from tax if they are owned as stock-in-trade or used for hire. Productive assets, including shares, debentures and bank deposits, are not subject to wealth tax. A deduction is allowed for debts owed that have been incurred with relation to taxable assets. Tax is levied on net wealth, as of 31 March, preceding the year of assessment.

C.3.5.2 Social security


Social security in India is governed by the Employees Provident Funds and Miscellaneous Provisions Act, 1952 (EPF Act). The EPF Act contains the following two principal schemes: Employees Provident Funds Scheme, 1952. Employees Pension Scheme, 1995.

Coverage The Ministry of Labor and Employment has issued notifications extending the applicability of the Provident Fund and Pension Scheme rules to a new class of employees called International Workers. Under the EPF Act, the following employees are considered to be International Workers: An Indian employee (an Indian passport holder) who has worked or is going to work in a foreign country with which India has entered a social security agreement and who is or will be eligible 57

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to avail of the benefits under a social security program of that country, in accordance with such agreement. A foreign national who works for an establishment in India to which the EPF Act applies.

The EPF Act applies to the following establishments: An establishment employing 20 or more persons engaged in a specified industry or an establishment or class of establishments notified by the central Government. An establishment employing less than 20 persons that opts voluntarily to be covered by the EPF Act Covered employers must make a contribution toward the Provident and Pension Fund for their employees who are international workers. An excluded employee is not covered by the EPF Act. An employee is considered to be an excluded employee if the following conditions are satisfied: The employee is an international worker who is contributing to a social security program of his or her country of origin, either as citizen or resident. The employees home country has entered a social security agreement with India on a reciprocity basis and the employee is considered to be a detached worker under the social security agreement.

India has entered social security agreements with Belgium, Germany, Switzerland, Luxembourg and France. It has also signed social security agreements with Denmark, Czech Republic, Korea, Norway, Hungary and the Netherlands, but these agreements have not yet entered into force. Contribution Every covered employer is required to contribute 24% (12% each for the employers and the employees share) of the employees monthly pay (as defined) toward the Provident Fund and Pension Fund. The employer has the option to recover the employees share from the employee. Out of the employers 12% share of the contribution, 8.33% of monthly pay is allocated to the Employees Pension Fund. The balance of the contributions is deposited into the Employees Provident Fund. Local employees drawing a monthly salary of INR 6,500 (USD 131.7) or more are excluded from the legislation, but this exclusion does not apply to International Workers. Consequently contributions are required for International Workers even if the monthly pay of the employee exceeds INR 6,500 (USD 131.7). Refunds of Provident Fund contributions are possible, subject to the satisfaction of certain conditions. The employer contributions are exempt from tax up to 12% of monthly pay. Withdrawal An international worker can withdraw from Provident Fund only in the following cases On retirement or on reaching the age of 58 years, whichever is later, or On account of permanent and total incapacitation.

However, in respect of members covered under a Social Security Agreement (SSA), withdrawal may be made on such terms as may be specified in such SSA.

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C.4 Direct Tax Code Bill, 2010 (DTC 2010)


DTC 2010 marks a new era in the Indian tax scenario after more than 50 years of operation of the current Income Tax Act, 1961 (IT Act). DTC 2010 appears to broadly retain the scheme of the existing IT Act, but, under a modified structure. DTC 2010 intends to lend simplicity, flexibility and stability to the taxation system and also to reduce the scope for ambiguity and litigation. With regard to taxability of income, DTC 2010 classifies the total income into ordinary source (includes income from employment, income from house property, business income, capital gains and income from residuary sources) and special source (such as winnings from lottery, in case of non-residents). Further, with regard to the rate of taxes there has not been much change under DTC 2010 as compared to IT Act. The key tax rates proposed under DTC 2010 is enumerated below along with comparative figures contained under existing IT Act: Particulars Domestic company Foreign company Branch Profit Tax DDT MAT Wealth Tax Current tax rates under IT act 30% 40% Not Applicable 15% 18.5% of adjusted book profits 1% on net wealth exceeding INR 3 million (USD 60,790.3) 30% 30% 15% (New Tax) 15% 20% of adjusted book profits 1% on net wealth exceeding INR 10 million (USD 202,634.2) Tax rates under DTC 2010

With regard to taxation of income from letting of house property, DTC 2010 provides that such income should be taxed under the head of income from house property notwithstanding that letting is in the nature of trade, commerce or business subject to exception in respect of Special Economic Zones, hotels, hospitals, convention centre, and cold storage. Further, standard deduction on account of repairs and maintenance reduced from existing 30% of net annual value under the IT Act to 20% of the gross rent under DTC 2010. However, DTC 2010 does not contemplate taxing vacant or self occupied property on a deemed basis as provided under existing IT Act, which is a welcome move. With regard to the taxability of business income, DTC 2010 provides for a similar regime as contained under the current IT Act. However, DTC 2010 proposes a wide scope for taxing business as compared to the IT Act. Further, an important change proposed by the DTC 2010 is that every business will constitute a separate source of income, necessitating separate computation of income for each business separately. Deduction of business expenditure is allowed under 3 broad categories operating expenditure, permitted financial charges and capital allowance. No deduction for any expenditure is allowed from special source income. Further, DTC 2010 does not provide for inter se set off of losses between ordinary source and special source. Under DTC 2010 it is also proposed that, all assets will be classified into business assets and investment assets. The business assets will be further classified into business trading assets and business capital assets. The income from transactions in all business assets will be taxed under the head business income. Income from transactions in all investment assets, i.e., other than business assets, will be taxed under the head capital gains. The present distinction between short-term investment asset and long-term investment asset under the IT Act, on the basis of length of holding of the asset, will be eliminated except that, for assets transferred after a year of holding, the indexation benefit will be available in the computation of capital gains. However, an exception in this regard has been provided in the case of equity shares or unit of an equity-oriented fund (listed securities) on which Securities Transaction Tax (STT) has been paid. In this regard, where the aforesaid listed securities is held by the taxpayer for a period of more than one year (i.e., long-term securities), 100% deduction will be available from capital gains arising on transfer of such securities and in case where the aforesaid listed securities are held for a 59

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period of up to one year (i.e. short-term securities), deduction will be restricted to 50%. Further, the base date to determine cost of acquisition under the IT Act, i.e., 1 April 1981 will be shifted to 1 April 2000. As a result, appreciation in value of the asset till 1 April 2000 will not be liable to tax under DTC 2010. DTC 2010 also seeks to replace profit-based tax holiday incentives (as provided under IT Act) with investment-based incentives. Under the investment-based tax incentive scheme, the taxpayer will be allowed to recover all capital and revenue expenditure (except land, goodwill and financial instrument) and will be liable to tax on profits made thereafter. The period consumed in recovering all capital and revenue expenditure will be the period of tax holiday. With regard to levy of Minimum Alternate Tax (MAT), DTC 2010 has adopted the same approach as provided under the existing IT Act for levying MAT with reference to book profits but with an enhanced tax rate of 20% (18.5% under IT Act). DTC 2010 has further proposed some of the significant changes in the international tax regime as well. Some of the key proposals in this regard are as under: Introduction of GAAR to serve as a deterrent against tax evasion and avoidance and to dissuade taxpayers from entering an arrangement to obtain tax benefit. Foreign company to be considered as Indian tax resident if its place of effective management (POEM) is situated in India. In this regard, POEM is defined to mean: o Place where the board of directors (BOD)/executive directors (ED) make their decisions. o Where BOD routinely approve commercial and strategic decisions made by ED/officers, the place where ED/officers make such decisions. Taxation of capital gains arising from indirect transfer of capital assets located in India. Introduction of Controlled Foreign Company (CFC) regime as an anti-avoidance measure aimed to provide for taxation of passive income earned by a foreign company that is directly or indirectly controlled by a resident in India. Levy of Branch Profit Tax (BPT) on branch office of foreign companies in India, etc.

Further, the current IT Act enables a taxpayer to choose between a tax treaty and the IT Act, whichever is more beneficial to it. DTC 2010 adopts the same principle in this regard. However, provisions of DTC 2010 will continue to apply irrespective of beneficial tax treaty provisions if GAAR is invoked or in cases where provisions of CFC are attracted or on levy of BPT. Overall, DTC 2010 proposes some key changes in the direct tax legislation in India aimed at eliminating distortions in the tax structure, introduce moderate levels of taxation, expand the tax base, improve tax compliance, and simplify the language and lower tax litigations. However, DTC 2010 is presently in the draft stage, which has not reached its finality. One has to wait and watch on how the final DTC Bill is enacted. Once the final DTC Bill is passed by the Parliament, it will be possible to assess the actual impact on the business community.

C.5 Indirect Taxes


C.5.1 Excise Duty
Excise duty is applicable on the manufacture of goods within India and is payable by the manufacturer. Most products attract a uniform rate of 10% plus education cess at 3% of the excise duty, making the effective duty exposure 10.30%, i.e., excise duty of 10% and education cess of 0.30%. Excise duty is generally levied on an ad valorem basis, either expressed as a percentage of the transaction value or maximum retail price (for certain specified goods). Goods manufactured in India can be exported without payment of excise duty, subject to specified conditions. Similarly, input used

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in the manufacture of these goods can be procured without payment of excise duty. The GoI has prescribed certain rules that allow manufacturers to take credit for specified duties, including excise duty, CVD, SAD paid on varied input and capital goods, as well as service tax paid on input services used in the manufacture of taxable goods. The manufacturer can utilize such credit to pay the excise duty applicable on the final goods manufactured. A lower Excise duty of 1% has been introduced with effect from 1st March 2011 on 130 specified goods without Cenvat credit, which were hitherto fully exempt or chargeable to zero excise duty. Alternatively, an option to avail Cenvat credit by charging duty of 5% on specified 76 items is also available. A. Central Excise Duty rates as per Union Budget 2012-13 0% Excise Duty on branded silver jewelry, gold coins and silver coins. 2% Excise Duty on 130 products as specified (except for coal, mobile handsets and cellular phones), parts, components and specified accessories (viz battery charges, PC connectivity cables, memory cards, hands free headphones). 6% Excise Duty on non petroleum products (standard rate of duty). 10% Excise Duty on gold jewellary, cigarettes exceeding length of 65 mm. 12% Excise Duty on non petroleum products (standard rate of duty), medicinal and toilet preparations, branded readymade garments and made up articles of textiles.

B. State Excise Duty rates as per the Karnataka State Budget 2012-13 7.5-10% increase in Excise Duty on Indian made Liquor on the 17 slabs. 7.5% increase in Excise Duty on beer and low alcoholic beverages on the 17 slabs. 50% decrease in Excise Duty on Fruit Wine.

C.5.2 Service Tax


Service tax is applicable on the provision of specified services in India. It is also applicable on import of services. In this regard, import rules have been issued by the GoI, which prescribe the criteria based on which a service qualifies as an import. Service tax is applicable on more than 114 services, and is levied at a uniform rate of 10% of the value of service plus education cess at 3% of service tax, making the effective tax exposure 10.30%, i.e., service tax of 10% and education cess of 0.30%. The Government has prescribed rules to determine the value of taxable service. The individual providing the service collects service tax from the receiver and is responsible for depositing it with the Government. However, when a service is imported, as mentioned above, the importer of the service is responsible for depositing it with the GoI. No service tax is applicable, subject to fulfillment of export conditions, on export of a service. The GoI has issued rules that include specific criteria, based on which a particular service qualifies as an export. In the case of export of a specified service, a mechanism has been provided, which prescribes the option to claim rebate/refund of excise duty/CVD/service tax paid on input/input services used to export the service. Alternatively, the provider of a specified service can also avail credit for duties, including excise duty, CVD paid on input and capital goods and service tax paid on input services used to provide such export services. The credit can thereafter be utilized to pay the output service tax liability arising from services that are not exported. The balance, if any, can be claimed as refund from the GoI.

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Credit of SAD paid on import of goods is not available to offset output service tax liability. There is no credit of duty/tax paid on input/output services that are used exclusively to provide non-taxable or exempt services. .Point of Taxation Rules, 2011 (POTR), have been introduced with effect from 1 April 2011. However an option has been provided to the assessor to comply with provisions under POTR with effect from 1 July 2011. Under POTR, the liability to deposit service tax will arise on earliest of issue of invoice or receipt of payment for service. However, where the invoice is not raised within 14 days of completion of provision of service, the point of taxation shall be date of completion of service.

C.5.3 VAT/CST
VAT is an intra-state multi-point tax system and is levied on value added products at each stage. Presently, all the states have replaced their erstwhile sales tax regime with VAT. Interstate sales continue to be liable to Central Sales Tax (CST), which is imposed by the Central Government and administered by the state Governments. The rate of CST is 2%, subject to the provision of prescribed declaration forms. The applicable VAT rate in the relevant state applies in the event the prescribed declaration has not been provided. Declaration forms are only issued when the goods are procured for (i) resale, (ii) for use in manufacture or processing of goods for sale, (iii) a telecommunications network, (iv) for use in mining or (v) for use in generation or distribution of electricity or any other form of power. Further, a sale involving import of goods from outside India is not liable to CST, subject to the prescribed conditions. Moreover, sale of goods (including penultimate sale) involving export of goods from India is also not liable to CST. However, no input credit is available in respect of CST paid on procurements. It is proposed that CST will be phased out over the next one or two years. Input tax credit is available with respect to VAT paid on locally procured goods, including capital goods (other than the negative list of goods provided under respective state VAT laws). The credit can be set off against output tax liability, including CST. However, no input credit is available in respect of CST paid on procurements. The basic rate slabs under VAT/ CST are as follows: A. VAT rates as per Union Budget 2012-13 Standard rate of VAT has increased from 21% to 23% effective from 1 January 2012. Effective service tax rate has increased from 10.3% to 12.36%. CST rate is 2%.

B. State VAT rates as per the Karnataka State Budget 2012-13 0% VAT on paddy, rice, wheat, pulses and their products, Braille watches. 1% VAT on furnace oil sold to foreign-going vessels, jewellery and articles of gold and other noble metals, precious and semi-precious stones. 1% Sales Tax on high flash high speed diesel sold to foreign-going vessels. 1% CST on dry chillies. 2% VAT on un-ginned raw cotton, dry chillies. 5% VAT on Beedies, ready-to-cook chapathi and parantha, surgical footwear and black boards, works contract of manufacture of readymade garments and embroidery work, naptha, plastic woven fabrics. 16.75% sales tax on Diesel and other Transport Fuels. 17% VAT on Cigarettes and other Tobacco products.

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23% for Drinks and Cigarettes, Vehicles, Consumer Goods, Hiring/ Leasing, Certain services(Accountancy services, advertising, haulage, telecommunications, professional services (legal), toll roads) and Confectionery items. This rate is also applicable to all other goods that do not fall under any of the categories mentioned above .

C.5.4 Octroi/ Entry Tax


Entry tax/ Octroi is levied by state/local authorities on the entry of goods within its jurisdiction, for use, consumption or sale on the purchase value of the goods. For this purpose, the state is divided into different local areas. The value of the entry tax levied on different products may vary from state to state. It is relevant to note that the constitutional validity of entry tax laws is presently a subject of dispute. The applicability and status of the dispute needs to be examined on a state to state basis.

C.5.5 Research and Development Cess


The Research and Development Cess is levied by the GoI at 5% on import of technology into India through a foreign collaboration. This cess is required to be paid by the importer of technology on payments made for such imports.

C.5.6 Stamp Duty


Stamp duty is paid for a transaction executed by way of a document or instrument under the provisions of the Indian Stamp Act or the State Acts. Stamp duty is applicable on purchase of land and various other transactions, e.g., lease, conveyance, mortgage, partitions, transfers, etc. Levy of stamp duty is generally dependent on the state where the agreement is executed. Typically, for immovable property, this duty is payable in the state where the property is located. Payment of accurate stamp duty on instruments gives them legality. Such instruments have evidentiary value and can be admitted as evidence in a court of law. Instruments that are not properly stamped are not admitted as evidence in a court of law. The rates of stamp duty on instruments related to the transfer of immovable property vary from state to state. Stamp duty can be paid by using stamp paper, adhesive stamps or by franking. The rate of duty is generally calculated on an ad valorem basis, depending on the nature of the instrument and the state where it is executed. Further, stamp duty can be levied at a flat rate on a certain document, irrespective of the amount involved. The basic rate slabs are as follows: 0.5% on Bonds. 1% stamp duty on market value of property (subject to a maximum of INR 15 lakhs) in case of registration of property. 5% stamp duty on conveyance/ sale deeds.

C.5.7 Professional tax


Profession tax is a state levy on professions, trades, a calling or employment in a state. Thus, every person who is engaged in any of the activities mentioned above is liable to pay profession tax. Not all the state governments levy profession tax currently. In states where such a levy exists, every enterprise with employees earning salaries may be required to register itself and withhold profession tax from the salary paid to its employees at specified rates and deposit it into the Government treasury. The employer is liable to pay the requisite amount of profession tax on such salaries or wages, irrespective of whether it has deducted an equivalent amount from the salaries paid.

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Further, employers are also required to pay profession tax at specified rates in their own capacity.

C.5.8 Luxury Tax


Luxury tax is a state levy on certain specified luxuries and certain facilities, services, enjoyments, utilities, etc. Generally, luxury tax is levied on specific accommodation and services provided in hotels and clubs of a specific kind and on certain commodities. The basic rate slabs are as follows: 10% luxury tax on luxuries provided on structures (decorations) in marriage halls, seminar halls, conventional halls and others.

C.5.9 Property tax


The owner of a property (usually real estate) is liable to pay property tax. The amount of tax is estimated on the value of the property being taxed (ad valorem tax) at applicable rates. Property tax is levied on residents by local municipal authorities in India, to sustain basic civic services in the city.

C.5.10 Entertainment Tax


State and local governments levy entertainment tax on various entertainment and amusement activities. Traditionally, film exhibition, cable/DTH subscriptions, video games, amusement parks, and events have been subject to entertainment tax. Some of the states are considering entertainment provided through telecom and the internet to be subject to entertainment tax. Entertainment tax rates are fairly high as compared to taxes levied on other luxury goods and services. For example, the entertainment tax rate for movie exhibition in Mumbai is as high as 45% while the same movie sold on a DVD is liable to a 20% tax rate. Most of the states offer entertainment tax exemptions to new multiplexes, sports events and certain films subject to specific conditions.

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D
D. Financial Reporting and Auditing in India
Companies in India follow fundamental accounting principles and practices. The Institute of Chartered Accountants of India (ICAI) issues accounting standards to be followed by enterprises. While formulating the accounting standards, the Accounting Standards Board (ASB) gives due consideration to International Accounting Standards issued by the International Accounting Standards Committee. All accounting standards issued are mandatory and companies are required to comply with these standards and disclose significant accounting policies in the preparation of the financial statements. ICAI also issues guidance notes and auditing and assurance standards which are designed to guide auditors on matters that may result during the course of audit.

D.1 Statutes/bodies governing the Reporting Requirements


The ICAI, SEBI, the Companies Act, 1956 and the Income Tax Act, 1961 govern the financial reporting requirements of companies in India. RBI, Insurance Regulatory and Development Authority (IRDA) have regulatory powers for banking and financial companies, and for insurance companies, respectively.

D.2 Accounting Methodology


The fundamental accounting assumptions of going concern, consistency and accrual of income and expenses need not be disclosed in the financial statements. Departure from these basic concepts, however, must be disclosed. All significant accounting policies should be disclosed in one place in a separate statement or schedule to the financial statements. Inflation accounting is not used in India; accounts are prepared using the traditional cost accounting convention.

D.3 Funding of Indian Businesses


D.3.1 Share Capital
The Companies Act, 1956 permits companies to issue only the following two kinds of share capitals: Preference share capital (preferred stock). Equity share capital (common stock) with/without voting rights.

The restriction is not applicable to private companies which are not subsidiaries of a public company. These companies are free to issue other kinds of share capital. The nominal value of shares is not prescribed by the Companies Act, 1956, but is normally INR 11.8 (USD 0.24) per share for equity share and INR 120.4 (USD 2.44) per share for preference shares. The pricing of new issues of capital is governed by guidelines issued by SEBI, the body that regulates and oversees the functioning of the Indian stock markets.

D.3.2 Debentures and Borrowings


Companies can raise funds by issuing debentures, bonds and other debt securities. They can also raise funds by accepting deposits from public. The Companies Act, 1956 forbids debentures from carrying any voting rights.

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D.4 Disclosure Requirements


Financial statements should consist of the following items: Balance sheet. Profit and loss assessment. o Notes to the financial statement. o Auditors report. Cash-flow statement.

The directors report must accompany each set of the financial statements and must include the following information: The state of companys affairs and any change in the nature of its business or subsidiaries. The amount of proposed additions to any reserve account. The recommended dividend amount. Foreign exchange received and expended. Directors responsibility statement indicating that proper accounting statements have been followed in preparing the annual accounts; accounting policies have been applied consistently; and adequate accounting records have been maintained etc. Full information and explanation on every reservation, qualifications or adverse remark contained in the auditors report.

D.5 Audit Requirements


All companies, banks and financial institutions must have their accounts audited by an auditor who is a practicing member of the ICAI. The branch of a company is also required to be audited. Such audit can be conducted by the companys auditor or the branch auditor qualified to be appointed as such by the company. Every company with gross revenues in excess of INR 49.35 lakhs (USD 0.10 million) has also to get accounts audited under the Income Tax Act, 1961. According to the Companies Act, 1956, every listed company or company with a paid-up capital and reserves exceeding INR 59.22 lakhs (USD 0.12 million) as at the commencement of the financial year or average annual sales above INR 5.92 crores (USD1.2 million) for three consecutive financial years, immediately preceding the financial year concerned is required to have an appropriate internal audit system.

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E
E. Roadmap for setting up industry in Karnataka
Karnataka Udyog Mitra (KUM) which is a nodal agency for all investments in Karnataka has been established to help entrepreneurs to identify, short list and decide the location, depending on the products and other parameters. It is a Government of Karnataka organization. Constituted under the aegis of the Commerce &Industries Department, KARNATAKA UDYOG MITRA is an initiative by the State to promote and facilitate investments and assist investors. KUM has been instrumental in providing the crucial direction and guidance to scores of investors since the last 15 years. KUM is a single contact point for all investors who are looking at setting up businesses in Karnataka. As the nodal agency, our role is to facilitate investments and execute initiatives to enable a smooth transition, from receiving an investment proposal to the eventual implementation of the project. As the investment promotion and facilitation agency of the State Government, KARNATAKA UDYOG MITRA is the Secretariat for grant of approvals and sanction of infrastructure facilities for approved projects. KUMs main set of functions include Disseminate information through print and electronic media. Create and accelerate industrial tempo. Identify and encourage prospective investors. Provide information to investors and entrepreneurs on the opportunities available in Karnataka for industry, trade and commerce. Function as the Secretariat for the State Level Single Window Clearance Committee. Publish data in the form of papers, case studies, reports, brochures, pamphlets, periodicals, digests, journals, project reports, profiles and magazines. Organize, sponsor, associate and participate in trade fairs, exhibitions and events to promote investments in Karnataka.

E.1 Setting up an industrial unit in Karnataka


E.1.1 Entry Level
Contact Karnataka Udyog Mitra / District Industries Centres. Understand the salient features of Karnataka, its unique advantages and discuss about project identification, suitable location, human resources, approvals required, procedures involved etc., In case of project proposals with investment more than INR 3 crores (USD 607,902), obtain Application Form from KUM for clearance from the State Level Single Window Clearance Committee(SLSWCC) for projects with investment below INR 50 crores (USD 10.13 million) or The State High Level Clearance Committee (SHLCC) for projects with investment above INR 50 crores (USD 10.13 million). File the filled-in SLSWCC / SHLCC Application Form with KUM. KUM will process / scrutinize this Application Form and place the same either before the SLSWCC or SHLCC depending on the scale of investment of the project. Investors will be invited to attend the SLSWCC meeting, (to be convened generally on 3rd Monday of every month) and are required to make a presentation on the salient features of the project. 67

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In case of SHLCC, investors will have to present the project details initially before the Screening Committee and thereafter, before the SHLCC. Once the project proposal is cleared by the SLSWCC / SHLCC, KUM will issue a Combined Application Form (CAF) to facilitate investors to obtain required clearances / approvals from KIADB / Directorate of Factories and Boilers, Commercial Tax, KPTCL, BWSSB, KSPCB, local authorities etc., KUM will scrutinize the CAF and forward the relevant portion to the respective departments / agencies. In case of any discrepancies / short comings, KUM / DIC will intimate the investors to comply with the same. KUM will follow up with the respective departments / agencies on behalf of the investors and coordinate the required clearances / approvals.

E.1.2 Implementation Level


Make necessary arrangements for taking possession of land allotted by KIADB after making payment. Execute lease agreement for the land. Obtain Consent for Establishment (CFE) from KSPCB and / or Environment Clearance Certificate (ECC) from State Environment Clearance Committee / MoEF, GOI. Prepare the building plan and obtain the approval of KIADB for the same in case of non factories. In case of factories, whether located in KIADB land or outside, the building plan and layout of plant and machinery has to be approved by the Department of factories and Boilers (DFB). Place order for plant and machineries. Apply for term loan. Get registered in the Dept. of Commercial Tax, especially to avail entry tax exemptions for procurement of plant and machinery and other inputs during the construction period if eligible. Apply for temporary power connection for construction and permanent power connection at a later stage. For permanent power connection, prepare the overall electrical scheme of the project with location of various equipments and obtain clearance of the drawings from the Department of Electrical Inspectorate, Government of Karnataka. Apply for water connection. Obtain PAN from Income Tax department. Make payment of taxes as assessed by the local authority like Village Panchayat, Municipal Corporation and local bodies.

E.1.3 Operational level


Pay every year the lease rent to KIADB within the due date. Take an insurance policy and pay the premium for a value equivalent to the cost of the building / plant and machinery. Obtain absolute sale deed for the land after completion of lease period in case of KIADB land. Obtain Factory License from DFB before commencement of trial production. Renew the Factory License every year. In case of non-factories, coming under Karnataka Shops and Commercial Establishments Act, renew the registration once in 5 years or as the case may be. Obtain ECC from State Environment Clearance Committee / MoEF, GOI before implementation. Obtain Consent for Operation from KSPCB before commencement of commercial production. Submit environmental statement report for each financial year ending 31st March to KSPCB within 30th September.

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Submit application for renewal of Consent to operate every year along with the fees. File quarterly and Bi-annual Returns to local Employment Exchange. Register the establishment with Employees State Insurance Corporation. Obtain PF code number from the Regional PF Commissioner. Register with Dept. of Commercial Tax with respect to various state level taxes. File monthly returns to Commercial Tax department. File monthly returns of generated units from captive generators in B & D form to the Department of Electrical Inspectorate. Register with Department of Legal Metrology and obtain certificate as Registered User.

E.2 Department wise procedures to establish industrial units


In order to process and accord the required clearances / approvals by the respective departments and agencies, it is necessary that investors furnish the required information and provide necessary documents. Making available all the requirements at a stretch as far as possible to the concerned departments / authorities through KUM helps in speedy processing by the departments / authorities and also ensures obtaining the required clearances in time. To facilitate investors for arranging documents required by the respective departments / agencies well in time, the basic procedures and particulars of requirement are given below:

E.2.1 KIADB
Karnataka Industrial Areas Development Board (KIADB) is engaged in acquiring and developing industrial lands in different industrial areas. In case the investor desires, KIADB acquires land in specific location of investors choice and develops the land if required, at entrepreneurs cost. KIADB industrial lands are generally of ready to occupy condition with all basic infrastructure facilities. For allotment of land, investor may apply to KIADB through CAF. The KIADB allots the land on lease cum - sale basis and the period of lease is ten years. The allottees are required to set up the industry within a specified time frame. Further, allottees are required to construct the factory and other buildings as per the plan approved by the Directorate of Factories & Boilers (DFB). The stipulations on coverage, set back, floor area are to be followed as spelt out in the agreement to be executed between the KIADB and allottee at the time of allotment. Along with the application following documents / enclosures are to be provided: i. ii. PRC/PMT/IEM/LoI/IL whichever is applicable - in duplicate. Memorandum and Articles of Association / Partnership Deed and Certification of incorporation issued by the ROC / Certificate of registration issued by Registrar of Firms / Registration Certificate issued by the Registrar of Co-op. Societies / Societies / others, if any - in duplicate. Project Profile - in duplicate. Bio-Data of the Promoters in duplicate. Plan drawn to scale indicating utilization of land and list of machineries - in duplicate. DD No. __________________ Dtd. ____________ for Rs. _________ issued by ______________ Bank ______________ Branch in favor of Executive Member, KIADB toward the EMD.

iii. iv. v. vi.

vii. DD No. __________________ Dtd. ____________ for Rs. _________ issued by ______________ Bank ______________ Branch in favor of Executive Member, KIADB towards ___________ % cost of land (for more details visit: www.kiadb.com).

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E.2.2 DLSWCCS and SLSWCC


The District Level Single Window Clearance Committees generally known as DLSWCC were constituted as per Sec.9 of The Karnataka Industries (Facilitation) Act, 2002 and are functioning under the Chairmanship of the respective Deputy Commissioners and this DLSWCC is monitoring the approval and implementation of industrial projects with investment of less than Rs.3 crore each at the district level. The State Level Single Window Clearance Committee (SLSWCC) was constituted as per Sec. 6 of The Karnataka Industries (Facilitation) Act, 2002 to consider and accord approval for the projects with investment more than Rs.3.00 crores and upto Rs.50.00 crores each. The approval given by the committee shall be binding on other concerned departments / authorities and such departments / authorities will issue required clearances within the prescribed time limit. Heads of major departments and agencies concerned with industries are represented in this committee. The Principal Secretary to Government, C&I department is the Chairman of SLSWCC and KUM is providing the secretarial services to the Committee. Managing Director, Karnataka Udyog Mitra, is the Member Convenor of SLSWCC. KUM will circulate the filled-in Application Form received from the investors, well in advance to the members of SLSWCC. Investors will be invited for the meeting in order to seek any clarifications, if required. Once the project proposal is approved by the SLSWCC, the investor will be intimated accordingly. The meeting of SLSWCC takes place generally once in a month (on the third Monday) and the application submitted to KUM before 15 days of the meeting will be placed in the ensuing meeting. At this stage, KUM will give a Combined Application Form (CAF) enabling the investors to obtain required clearances/ approvals and coordinate such clearances from various departments/authorities.

E.2.3 Department of Factories and Boilers

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Factory

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DFB mainly deals with health, safety, welfare of the workmen employed in factories, regulation of working hours, wages, leave etc, to ensure conducive working environment in the factories. Any establishment defined as factory under The Factories Act, 1948 is required to register and obtain approval of plans for factory building and layout of plant and machineries from the Director of Factories & Boilers (DFB). Further, as per the act, in order to approve potentially hazardous industries, a State level Site Appraisal Committee has been constituted by the Government of Karnataka in 2007. The committee will be headed by the Director of the department of Factories and Boilers and will be responsible for granting clearance for the siting (initial location) or expansion of a factory involving a hazardous process and for monitoring the industrial safety and occupation hazardous in such factories to prevent industrial disasters. All entrepreneurs who intend to install and use boiler which comes under the definition of the Indian Boilers Act, 1923 are also required to register under the said Act.

E.2.3.1 Definition of Factory


Factory means any premises where 10 or more workers are working and manufacturing process is being carried on with the aid of power or where 20 or more workers are working and manufacturing process is being carried on without the aid of power. The State Government has notified certain activities as factories under Sec.85 (i) of the Act even though the employment is less than 10 persons with the aid of power or without the aid of power. To obtain the plan approvals following documents are required to be submitted along with CAF: Plans of factory building drawn to the scale (in triplicate) showing o Site of the factory. o Immediate surrounding building. Roads, drains etc. o Elevation and necessary cross sections of various buildings, natural lighting, ventilation and means of escape in case of fire. o Position of the Plant & Machineries, aisles and passage ways. A flow chart of manufacturing process with details of o Chemicals used at various stages. o Stages of manufacturing activities. o Removal of dust, fumes, gases, trade wastes and effluents. Consent from the KSPCB indicating the conditions stipulated for disposal of wastes and effluents. In case of existing building, certificate of stability in Form 1A issued by a person possessing a Degree in Civil or Structural Engineering. Questionnaire requiring information by the DOF&B dully completed. Entrepreneur has to submit Possession Certificate / Lease Agreement / Sale Deed / Rent Agreement Certificate pertaining to land document. DD / Cheque / Challan No. ______________ Dtd _______________ for INR 250/- (USD 5.07/-) (in respect of factories employing less than 500 employees and INR 500/- (USD 10.13/-) in respect of others) drawn in favor of Director of Factories and Boilers, Bangalore towards the plan approval fee.

The Department of F&B will scrutinize all the documents. If the same is in order, permission will be granted within 30 days from the date of submission of Application. Once the construction activity of the factory building is completed, entrepreneurs are required to obtain factory registration and license.

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For factory registration and obtaining license, application to be made in Form 2 along with following documents: No Objection Certificate from Fire Department in case Factory is situated in multistoried building for effective fire and emergency management. Partnership deed in case of firm, Memorandum and Articles of Association in case of company, KST& CST certificate in case of proprietorship firms. List of partners / directors with their residential addresses. Prescribed registration fees. On site emergency preparedness plan for approval by DFB, in respect of Hazardous manufacturing process factories as defined under schedule -I of the Factories Act, 1948.

The occupier has to submit the application, 15 days in advance before the factory commences production. The factory license is required to be renewed every year, with the payment of prescribed fees. Application made with all necessary documents will be scrutinized by visiting the factory and license will be granted after due verification within 30 days.

E.2.3.2 Establishments other than factories

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Commercial establishments and trade activities which are not covered under the Factories Act, 1948, are required to get themselves registered under Karnataka Shops & Commercial Establishments Act,1961 which is being administered by the Labor Department. Such establishments / activities are required to register with the jurisdictional Labor Inspector/ Senior Labor Inspector after filling up Form A , available free of cost with the respective authorities. The registration fee is as under: Without any worker 1 to 9 workers 10 to 19 workers 20 to 49 workers 50 to 99 workers more than 100 workers - - - - - - INR 125/- (USD 2.53) INR 250/- (USD 5.01) INR 2,500/- (USD 50.66) INR 6,250/- (USD 126.65) INR 12,500/- (USD 253.29) INR 25,000/- (USD 506.59)

The registration is valid for five years and is to be renewed for further, period through Form AA along with fees prescribed as above (for more details visit: http://labour.kar.nic.in).

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E.2.4 Karnataka State Pollution Control Board (KSPCB)

Start Investor contacts KSPCB for clearance under 3 acts

Water Prevention and Control of pollution Act 1974

Air Prevention and Control of pollution Act 1981

Hazardous Waste Management & Handling Rules under EP Act

Submission of Separate Application Forms for all 3 clearances by the investor

Submission of Application Form by the investor Scrutiny of Application Form by the board Site Inspection and preparation of inspection report by the board Forwarded to Board Office

No

Does project require Environmental Impact Analysis?

Yes

Submission of Application Form by the investor Scrutiny of Application Form by the board Site Inspection and preparation of inspection report by the board Forwarded to Board Office with recommendations Scrutiny of EIA report by CFE cell Public Hearing Review of proceedings of public hearing by TAC and recommendations to Board Place before consent clearance committee Issue/refusal by CFE cell

Place before consent clearance committee Placed before TAC based on Consent Committee decision Issue/refusal by CFE cell

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The Karnataka State Pollution Control Board is a constitutional authority vested with responsibility of control of pollution. The Board implements the provisions under the Water (Prevention and Control of Pollution) Act 1974, the Air (Prevention & control of Pollution) Act, 1981, the Water (Prevention & control of Pollution) Cess Act 1977, Hazardous Waste (Management and Handling) Rules under the EP Act and other Rules stipulated by GoK under EP Act from time to time. For the purpose of enforcement industries are categorized broadly as Red, Orange and Green category depending on the nature of activity and pollution potential. Any industry before taking steps for establishment after selection of site shall obtain the Consent for Establishment from the Board under Water (P&CP) and Air (P&CP) Acts and if necessary Hazardous Waste (M&H) Rules. Besides obtaining Consent for Establishment, industry after establishment and before going for production (trial or regular) has to obtain Consent for operation under the Water Act and Air Act and if required, authorization under Hazardous Waste (Management and Handling) Rules. Separate applications are prescribed to obtain consent / authorization under the relevant Acts / Rules. The consent applications can be downloaded from Boards website or the applications can be obtained free of cost from any of the Regional Offices. The type of application form and the time limits for issue / refusal of the consent which is completed in all respect are as follows: Applicable Act & Application Form Purpose If the application is complete in all manner, it will be processed in 120 days

Water Act Form XIII

Air Act - Form I

CFE for RED category EIA projects CFE for RED category non EIA projects with o Investment more than INR 5 crores (USD 1.01 million) o Investment less than INR 5 crores (USD 1.01 million) CFO for Red category under Water Act with o Investment more than INR 5 crores (USD 1.01 million) o Investment less than INR 5 crores (USD 1.01 million)

60 days 45 days

60 days 45 days

Water Act Form OG Water Act Form XIII

Air Act- Form OG Air Act - Form I

CFE for Orange & Green Category CFE for Orange & Green Category

21 days 21 days

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The completed applications are to be submitted to the concerned regional offices (except seven Bangalore - based Regional Offices for which Help Desk is established at Parisara Bhavan, No. 49, Church Street, Bangalore-01) of the Board with the prescribed consent fee which is as under: Consent fee Red 1 lakh & below (USD 2026.34 & Less) Exceeding 1 lakh and not exceeding 5 lakh (Exceeding USD 2026.34 and not exceeding USD 10,131.71) Exceeding 5 lakh and not exceeding 10 lakh (Exceeding USD 10,131.71 and not exceeding USD 20,263.42) Exceeding 10 lakh and not exceeding 25 lakh (Exceeding USD 20,263.42 and not exceeding USD 50,658.56) Exceeding 25 lakh and not exceeding 50 lakh (Exceeding USD 50,658.56 and not exceeding USD 101,317.12) Exceeding 50 lakh and not exceeding 1 crore (Exceeding USD 101,317.12 and not exceeding USD 202,634.25) Exceeding 1 crore and not exceeding 5 crore (Exceeding USD 202,634.25 and not exceeding USD 1.01 million) Exceeding 5 crore and not exceeding 10 crore (Exceeding USD 1.01 million and not exceeding USD 2.03 million) Exceeding 10 crore and not exceeding 25 crore (Exceeding USD 2.03 million and not exceeding USD 5.07 million) Exceeding 25 crore and not exceeding 50 crore (Exceeding USD 5.07 million and not exceeding USD 10.13 million) Exceeding 50 crore and not exceeding 250 crore (Exceeding USD 10.13 million and not exceeding USD 50.66 million) Exceeding 250 crore and not exceeding 500 crore (Exceeding USD 50.66 million and not exceeding USD 101.32 million) Exceeding 500 crore and not exceeding 1000 crore (Exceeding USD 101.32 million and not exceeding USD 202.63 million) Above 1,000 crore (Above USD 202.63 million) INR200 (USD4.05) INR500 (USD10.13) INR 1,500 (USD30.40) INR 2,000 (USD40.53) INR 3,000 (USD60.79) INR 6,000 (USD121.58) INR15,000 (USD303.95) INR20,000 (USD405.27) INR30,000 (USD607.90) INR50,000 (USD 1,013.17 INR75,000 (USD 1,519.76) INR100,000 (USD 2,026.34) INR150,000 (USD 3,039.51) INR200,000 (USD 4,052.68) Orange INR150 (USD3.04) INR250 (USD5.07) INR 1,250 (USD25.33) INR 1,750 (USD35.46) INR 2,500 (USD50.66) INR 5,000 (USD101.32) INR12,500 (USD253.29) INR17,500 (USD354.61) INR25,000 (USD506.59) INR40,000 (USD810.54) INR60,000 (USD 1,215.81) INR90,000 (USD 1,823.71) INR125,000 (USD 2,532.93) INR175,000 (USD 3,546.10) Green INR100 (USD2.03) INR200 (USD4.05) INR 1,000 (USD20.26) INR 1,500 (USD30.40) INR 2,000 (USD40.53) INR 4,000 (USD81.05) INR10,000 (USD202.63) INR15,000 (USD303.95) INR20,000 (USD405.27) INR30,000 (USD607.90) INR50,000 ((USD 1,013.17) INR75,000 (USD 1,519.76) INR100,000 (USD 2,026.34) INR150,000 (USD 3,039.51)

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Board has also evolved periodicity of consent renewal/ authorization. The details are as below: Consent / authorization CFE Category of units Red - EIA category Red - Non EIA category Orange, Green CFO Red - Large, Medium Orange - Large Orange - Medium Red, Orange - Small Green Small, Medium & Large Validity period 5 years from the date of issue 3 years from the date of issue 2 years from the date of issue Once in 2 years Once in 2 years Once in 2 years with an option for annual renewal Once in 3 years with an option for annual renewal If the Capital investment is less than INR100 lakhs (USD 0.20 milliion) - 10 year valid consent is issued by collecting one year consent fee If the Capital investment is more than INR100 lakhs (USD 0.20 million) - 10 year valid consent is issued by collecting five years consent fee. Authorization under MBW rules Authorization under HMW rules Registration under plastic rules All category All category All category 3 years 5 years 3 years

For more information visit: http://kspcb.kar.nic.in)

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E.2.5 Department of Forests, Ecology and Environment

Start

Check whether project is Cat A or Cat B

Prior Environmental Clearance from Union Ministry of Environment

Prior Environmental Clearance from SEIAA (State Environment Impact Assessment Authority_

Goes through 4 stages of Clearance

Screening

To check whether project requires further environmental studies for preparation

Scoping

Determining detailed and comprehensive Terms of reference (TOR) addressing all relevant environmental concerns.

Public Consultation

To determine material environmental concerns expressed by the public.

Appraisal

Grant or rejection of prior environmental clearance.

End

The Ministry of Environment and Forests, Government of India issued a Notification No. SO 1533 on 14th September 2006 imposing certain restrictions and prohibitions on new projects or activities, or on the expansion or modernization of existing projects or activities based on their potential environmental impacts. This Notification supersedes the of earlier Notification No. SO 60 (E), dated, 27-1-1994.

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E.2.5.1 Prior Environmental Clearance (EC)


Following projects or activities shall require prior environmental clearance from the concerned regulatory authority Ministry of Environment and Forests, GoI for the matters falling under Category A in the Schedule to the Notification No. SO 1533 and State Environment Impact Assessment Authority (SEIAA) at State level for matters falling under Category B in the Schedule to the said Notification : All new projects or activities listed in the Schedule to this notification; Expansion and modernization of existing projects or activities listed in the Schedule to this notification with addition of capacity beyond the limits specified for the concerned sector, that is, projects or activities which cross the threshold limits given in the Schedule, after expansion or modernization; Any change in product - mix in an existing manufacturing unit included in Schedule beyond the specified range.

E.2.5.2 Categorization of projects and activities


All projects and activities are broadly categorized in to two categories - Category A and Category B, based on the spatial extent of potential impacts and potential impacts on human health and natural and manmade resources. All projects or activities included as Category A, shall require prior environmental clearance from the Union Ministry of Environment and Forests (MoEF) on the recommendations of an Expert Appraisal Committee (EAC) constituted by the Central Government for the purposes of this notification. All projects or activities included as Category B in the Schedule will require prior environmental clearance from the SEIAA. The SEIAA shall base its decision on the recommendations of a State Expert Appraisal Committee (SEAC) constituted. In the absence of a duly constituted SEIAA or SEAC, a Category B project shall be treated as a Category A project.

E.2.5.3 Appraisal Committees


The same EACs at the Central Government and SEACs at the State Level shall screen, scope and appraise projects or activities in Category A and Category B respectively.

E.2.5.4 Application for Prior Environmental Clearance (EC)


An application seeking prior environmental clearance in all cases shall be made in the prescribed Form 1 and Supplementary Form 1A, if applicable. The applicant shall furnish, along with the application, a copy of the pre-feasibility project report except that, in case of construction projects or activities in addition to Form 1 and the Supplementary Form 1A, a copy of the conceptual plan shall be provided, instead of the pre-feasibility report. Stages in the Prior Environmental Clearance (EC) Process for New Projects The environmental clearance process for new projects will comprise of a maximum of four stages, all of which may not apply to particular cases. These four stages in sequential order are: Stage 1 - Screening Stage 2 - Scoping Stage 3 - Public Consultation Stage 4 - Appraisal

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Stage 1- Screening In case of Category B projects or activities, this stage will entail the scrutiny of an application seeking prior environmental clearance made in Form 1 by the concerned SEAC for determining whether or not the project or activity requires further environmental studies for preparation of an EIA for its appraisal prior to the grant of environmental clearance. The projects requiring an Environmental Impact Assessment report shall be termed Category B1 and remaining projects shall be termed Category B2 Stage 2 - Scoping Scoping refers to the process by which the Expert Appraisal Committee in the case of Category A projects or activities, and State level Expert Appraisal Committee in the case of Category B1 projects or activities, determine detailed and comprehensive Terms Of Reference (TOR) addressing all relevant environmental concerns for the preparation of an EIA Report in respect of the project or activity for which prior environmental clearance is sought. The TOR shall be conveyed to the applicant by the EAC or SEAC within sixty days of the receipt of Form-1. If the Terms of Reference are not finalized and conveyed to the applicant within sixty days of the receipt of Form-1, the Terms of Reference suggested by the applicant shall be deemed as the final Terms of Reference approved for the EIA studies. Applications for prior environmental clearance may be rejected by the regulatory authority concerned on the recommendation of the EAC or SEAC concerned at this stage itself. Stage 3 - Public Consultation All Category A and Category B1 projects or activities shall undertake Public Consultation, except certain cases. After completion of the public consultation, the applicant shall address all the material environmental concerns expressed during this process, and make appropriate changes in the draft EIA and EMP. The final EIA report, so prepared, shall be submitted by the applicant to the concerned regulatory authority for appraisal. The applicant may alternatively submit a supplementary report to draft EIA and EMP addressing all the concerns expressed during the public consultation. Stage 4 - Appraisal Appraisal means the detailed scrutiny by the EAC or SEAC of the application and other documents like the Final EIA report, outcome of the public consultations including public hearing proceedings, submitted by the applicant to the regulatory authority concerned for grant of environmental clearance. Then EAC or SEAC shall make categorical recommendations to the regulatory authority concerned either for grant of prior environmental clearance on stipulated terms and conditions, or rejection of the application for prior environmental clearance, together with reasons for the same. The appraisal of all projects or activities which are not required to undergo public consultation, or submit an EIA report, shall be carried out on the basis of the prescribed application Form-1 and Form1A as applicable, any other relevant validated information available and the site visit wherever the same is considered as necessary by the EAC or SEAC concerned. The appraisal of an application shall be completed by the EAC or SEAC concerned within sixty days of the receipt of the final EIA report and other documents or the receipt of Form-1 and Form-1A, where public consultation is not necessary. The recommendations of the EAC or SEAC shall be placed before the competent authority for a final decision within the next fifteen days.

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E.2.5.5 Validity of Environmental Clearance


The validity of Environmental Clearance is meant the period from which a prior environmental clearance is granted to the start of production operations by the project or activity, or completion of all construction operations in case of construction projects. The validity of EC shall be ten years in the case of River Valley projects, thirty years for mining projects and five years in the case of all other projects and activities. The entrepreneur will have to apply for environment clearance from EAC or SEAC after obtaining CFE from KSPCB. Till environment clearance is received, no construction work relating to setting up of industry shall be undertaken.

E.2.5.6 Projects cover under CRZ Notification


Projects coming in the coastal areas of the State shall adhere to the provisions of Coastal Regulation Zone (CRZ) notification No. S.O. (E) 114 (E) dated. 19.2.1991, (Thereafter amended from time to time). Govt. of Karnataka has appointed designated officers for the purpose of examining requests for grant of building licenses in the CRZ areas of coastal districts vide G O No. FEE/21/EAA/2000 dated. 14/12/2001. For any project coming in the restricted areas of coastal districts, No Objection Certificate from the designated officer is essential. Applications form for CRZ Clearance is enclosed as annexure (for more information you can visit http://parisara.kar.nic.in ). Village Panchayats / Town Panchayats / Local Authorities Projects coming in the jurisdiction of Village Panchayat / Town Panchayats are required to obtain permission for construction of factory building and installation of machineries from the respective Village Panchayat as per Karnataka Panchayat Raj Act, 1993. For this permission, CAF may be used. As per the Karnataka Town and Country Planning (KTCP) Act, 1961 an entrepreneur is required to apply to BDA / UDA / Planning Authority / BBMP / Urban Local Body in the prescribed application form to erect / re-erect / make alterations of an industrial building. As per the Act, it is necessary to obtain Commencement Certificate and Building License from the local authorities. The fees to be paid for permission for industrial buildings are linked to the area of the building and its location. In case the land is designated for use other than the industrial use as per the Outline Development Plan (ODP)/ Comprehensive Development Plan (CDP), approval for change of land use for industrial purpose has to be obtained from the Government as per Section 14 (A) of the KTCP Act, 1961. The investor is also required to get Trade License from the concerned Village Panchayats in case of storing certain dangerous materials as prescribed in the Karnataka GP Act. For obtaining this trade license, CAF may be used. (for more information visit http://rdpr. kar.nic.in and http://municipaladmn. kar.nic.in).

E.2.6 Karnataka Power Transmission Corporation Limited (KPTCL/ESCOMs)


KPTCL/ Regional Electricity Supply Companies (BESCOM, MESCOM, HESCOM, GESCOM & CESCL) are engaged in transmission and distribution of electrical power to the consumers in the State. The procedures related to supply and connections are governed by Karnataka Electricity Regulatory Commission (electricity supply & distribution) Code, 2000-01. For power connection, consumers are required to apply to the concerned Executive Engineers in the respective subdivision in a prescribed application form and with a registration-cum-processing fee of INR100/- (USD 2.03) for LT connections and INR 250/- (USD 5.07) for HT connections (For this CAF may be used).

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The applications for LT power supply shall be filed at least 30 days before the expected date of supply in case where the service lines have been laid and power supply is readily available. The power sanction will be communicated within 15 days of receiving the application. In case of HT service, power sanction shall be communicated within 30 days of application and in case of EHT, within 45 days. Along with the application form, attested copies of the following documents are to be furnished: Site plan with proposed location of the metering cubicle / meter board. Latest Tax paid receipt. License / permit / NOC from local body. Route Map to locate the premises. MOU / Articles of Association / Partnership Deed. Proof of ownership of the premises or proof of occupancy. Lease Agreement in case of leased building. Sanctioned plan (in case of multi - storied buildings). Architects plan with location of the transformer marked (in case of Multi storied buildings). Receipt for having paid the required Registration Fees.

The authority to sanction power is delegated to the field level officers as indicated below: i. ii. iii. iv. v. LT installations up to 67 HP 501 KVA -1000 KVA 1001 KVA - 2000 KVA 2001 KVA & Above - AEEs at Sub-divisional level - SEEs at Circle level - CEEs at Zonal level - Corporate Office, Board

HT installations up to 500 KVA - EEs at Divisional level

KPTCL has nine zonal offices viz. Bangalore Metropolitan, Bangalore Rural, Chitradurga, Mangalore, Mysore, Hubli, Belgaum, Gulbarga and Bellary, headed by Chief Engineers Electrical (CEE). There are 17 Circles, headed by Superintending Electrical Engineers (SEE), 57 Divisional Offices headed by Executive Engineers (EE) and over 270 Sub-divisional offices headed by Assistant Executive Engineers (AEE). * For temporary power supply, the consumer will have to apply in the prescribed form to the O&M section / Subdivision office of KPTCL. No registration fee is payable, but service charges of INR 50/- is to be paid per installation along with advance estimated power consumption charges.

E.2.6.1 Electrical Inspectorate


The Department of Electrical Inspectorate accords statutory approval for the electrical installations such as transformer installation under Rule 63, Generator installations under Rule 47 A, M.S. Building installations under Rule 50 A, Neon Sign installation under Rule 71 and X rays installation under Rule 73 as required under Indian Electricity Rules, 1956. That apart, the lift installations will be sanctioned under the Karnataka Lift Act, 1974 and Rules 1976, the Cinematography installations under Karnataka Cinematography Act, 1964 and Rules 1976, Video installation under Karnataka Video Rules, 1984. The drawings indicating the overall electrical scheme showing the protective scheme, cable cross sections, switchgear details, earthing details, equipment locations and clearances shall be cleared for all the electrical installations of transformer, DG sets, etc., The Head Office of the Department of Electrical Inspectorate is located presently at Mysugar Building, J.C. Road, Bangalore - 560 002 headed by Chief Electrical Inspector To Government. Whereas, each district is headed by a Deputy Electrical Inspector, each division is headed by an Electrical Inspector

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located in the important industrial district. This apart, six Deputy Chief Electrical Inspectors are located at Bangalore (South), Bangalore (North), Tumkur, Mangalore, Bellary and Dharwad. The individual delegated powers to the officers of this department to clear the electrical installations are briefly detailed below: Designation Chief Electrical Inspector to Govt. Dy. Chief Electrical Inspectors Electrical Inspectors Dy. Electrical Inspectors H.T. installation (KVA) > 2000 >1000 <2000 > 300 <1000 up to 300 D. G. set installation (KVA) > 2000 >1000 <2000 >350 <1000 Up to 350 M. S. Building installation > 24 meters Upto 24 meters Building with LT load up to 24 mtrs -

The Department also monitors the collection of electrical tax on consumption for consumed units from grid power as well as generated power from captive generation / IPP generation as required under Karnataka Electricity (Taxation on consumption) Act, 1959. Any exemption of electricity tax on the consumed units for self shall be availed at the specific instance of the Energy Department under the exclusive provisions contained under Section 8 of Karnataka Electricity (Taxation on consumption) Act, 1959. However, all such exemptions are subject to compulsory filing of returns of such generation and utilization in form B & D to the Department of Electrical Inspectorate. All units supplied to others whether free or at a cost is taxable under Section 4 of the Karnataka Electricity (Taxation on Consumption) Act, 1959 at the prevailing rates notified from time to time. In case of LT connections where the height of the building is less than 15 meters, drawings etc will be approved by ESCOMs. In case the building height is more than 15 meters, the drawing etc., are required to be approved by the Electrical Inspectorate, even in case of LT connections. The Deputy Electrical Inspector located at 20 district head quarters (old districts) are empowered to approve the drawing and issue the fitness certificate where the installed capacity of the transformer is less than 300 KVA. In case the transformer capacity is more than 300 KVA and up to 1000 KVA, the approvals are to be obtained at divisional level offices, headed by concerned Deputy Chief Electrical Inspector, located at Bangalore (N), Bangalore (S), Tumkur, Mangalore, Bellary and Dharwad. Where the installed capacity exceeds 1000 KVA, approval granted by the Chief Electric Inspector after inspection and recommendation by Deputy Chief Electrical Inspector. In case the installed transformer capacity is more than 2000 KVA, the required approvals are to be obtained from the Chief Electrical Inspector at headquarters in Bangalore. The Electrical Inspectorate is also authorised to witness the disputed meter while rating of the same. Commercial Tax From 1st April, 2005, Value Added Tax (VAT) has been introduced in Karnataka. If the taxable turnover of any dealer (not just the profit) within Karnataka is more than INR 2 lakhs (USD 4,052.68), in any 12 month period, he becomes a taxable dealer and must register for VAT, if all or part of the business is in Karnataka. Taxable turnover is the total value of all sales which are taxed at 12.5%, 4%, 1% & 20%. Any dealer with a total turnover of less than INR 15.00 lakhs (USD 30,395.14) will also be required to register but may opt to pay VAT or pay tax under a composition scheme. Under composition, tax is to be paid on total turnover of their sales at a composite rate without input tax rebate. Quarterly payments are to be made to Commercial Tax Department and they will not be allowed to charge VAT on their sales, except dealers executing works contract.

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Registration would require filled-in application FormVAT1, passport size photograph and fee of INR 500/- (USD 10.13). Fee is not charged for renewal. Individual companies and businesses should be registered separately. Branches or divisions of the same company or business should register only in the name of the main organizations. Branches or units of corporate bodies have the option to register separately. Once registered for VAT, the investor can reclaim VAT that he has been charged on goods that are used to set up business, subject to certain conditions. The claim can be made in the first VAT return. Normally, this will include VAT on goods bought for business that are not yet sold and also VAT on certain capital equipments, purchased not more than 3 months before date of registration. Records of all sales including that bought, produced and disposed should be maintained. An account of all the VAT that has been charged and paid by the investor, showing the values of goods subject to each rate of tax, for each period, covered by his VAT returns - called VAT account shall be kept. VAT returns are required to be made every month using Form VAT 100 (every three months, using Form VAT 120, under the composition scheme). The period covered by this return is called a tax period. Details of what has been bought and sold in that period are to be filled. Investor must pay any tax due or claim a repayment of excess tax paid or adjust the same for future liability. As tax periods end on fixed dates throughout the year, first tax return may not cover a period of exactly one or three months. After registration, any changes in business that may affect registration details, has to be recorded on Form VAT 3, wherein VAT registration No. (TIN) and address have to be included. If the investor fails to register, he will be liable for the VAT on all the goods he has sold from the date on which he should have registered. Investor can apply for cancellation of registration on the grounds of closure of business or because the level of his taxable sales has fallen below threshold for registration and must re-register, if it exceeds the threshold, in any 12 month period ( for more information visit : http://ctax.kar.nic.in).

E.2.7 Department of Legal Metrology


The Dept. of Legal Metrology (formerly known as Dept. of Weights and Measures) is engaged in maintenance of accuracy in all weights and measures used in trade, commerce and industry. The department also ensures correct quantities for the price paid and protects consumer interest. Every person who intends to commence or carry on the use of any weight or measure in any transaction or for industrial production is required to get Registration from the Dept. of Legal Metrology. Application for Registration is to be made in Form I accompanied by a fee of INR 5/- (USD 0.10) .Within 90 days from commencement of using weights & measures. The Controller of Legal Metrology will include the name of the applicant in a register to be known as register of users and issue a certificate in Form III to the applicant. An application for renewal shall be made in Form IV, 30 days before the expiry of validity of the Registration Certificate. The certificate will be renewed on payment of a fee of INR 5/- and the validity of the certificate is for five years. Every weight or measure used or intended to be used in transactions or for industrial production is required to be verified or re-verified and stamped at least once in a year. Such verification will be done in the offices of the Dept. or at the place of its location. On completion of verification and stamping, the authorities will issue a certificate of verification. Separate Application Forms are to be used for the license as below; Manufacturer of weights and measures ( Form LM-1). Dealers in weights, measures, weighing instruments and measuring instruments ( Form LD -1 ) and Repairers of weights, measures, weighing instruments and measuring instruments. (LR-1).

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E.2.8 Procedures related to purchase and conversion of land


Conversion As per the provisions of Karnataka Town and Country Planning Act, 1961 and Karnataka Land Revenue Act 1964, no industry can come up in the areas earmarked for use other than industrial purposes. In case of agriculture and other lands, land is required to be converted to industrial purposes. For this, investors are required to apply as prescribed under Para 95 of Rule 106(A) of Karnataka Land Revenue Act 1964 to the respective Tahsildar, who in turn will send the application to the respective Deputy Commissioners. As per the Circular issued by the Revenue Department vide No. RD: 13: LGP: 2005 dt.2.7.2005, a Single Window System is to be followed for clearance of the application received for land conversion. The process of granting / rejecting conversion shall be completed within 120 days of receipt of the application. Before grant of conversion, the applicant has to pay the conversion fine as indicated in the notice issued by the Single Window Committee constituted for this purpose, vide above said Circular dt.2.7.2005.In case the entrepreneur purchases land from KIADB, the necessity of conversion does not arise. Permission to purchase agricultural land The Govt. of Karnataka has amended Section 109 of Karnataka Land Reforms Act 1961, w.e.f. 20.10.1995. This amendment enables the Government to permit non-agriculturists to purchase agricultural land for industrial purposes. Accordingly permission would be given by the govt. as detailed below, based on the approval given by DLSWCC in case of tiny & SSI and by SLSWCC / SHLCC in case of medium / large industries: Industry Tiny Industry SSI Permission given by the Govt. Up to one quarter unit of agriculture land Up to one unit of agriculture land

Medium / Large Industry having a total investment Up to 5 units of agriculture land up to Rs. 50 crore Medium / Large industry having a total investment Up to 20 units of agriculture land of more than Rs. 50 crore For horticulture including floriculture and agro based industries: up to two units of land based on recommendation of DLSWCC. up to ten units of land based on recommendation of SLSWCC. more than ten units of land based on recommendation of SHLCC.

The application for permission to purchase agricultural land by the non agriculturist has to be made in Form 15-A as prescribed under Rule 38 D of the Karnataka Land Reforms Rules 1974 (Specimen given in CAF) to the respective Deputy Commissioners. On receiving the above permission the land shall be utilized for the purpose for which it is proposed within two years from the date of issue of the notification.

E.2.9 Department of Mines & Geology


Karnataka is one of the mineral rich states of the country, with more than 40,000 sq. kms of greenstone belts, known to contain vast mineral deposits such as Gold, Silver, Platinum, Copper, Diamond, Iron Ore, Manganese, Chromite, Limestone, Dolomite, etc. It has significant deposits of iron ore, bauxite, chromite and manganese. There are evidences of occurrence of gold and associated minerals in Tumkur, Chitradurga, Davanagere, Bellary, Shimoga, Gadag, Dharwad, Raichur, Gulbarga, Kolar and 86

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Koppal districts. Further, Karnataka is known to have Diamond and other semi precious stones, such as Corundum, Garnet, etc. Diamondiferous Kimberlite pipes have been reported from Bellary, Gulbarga and Dharwad districts. Detailed exploration needs to be carried out to locate the diamondiferous kimberlite pipes in the greenstone belts in parts of Tumkur, Raichur and Gulbarga districts. The State is also endowed with vast reserves of Iron ore deposits, which include both hematite and magnetite varieties. Karnatakas total known iron ore deposits are estimated to be about 4,000 million tons. The total reserves of Limestone and Dolomite are of the order of 20,000 million tons and are available primarily in Gulbarga, Bijapur, Bagalkot, Belgaum and Tumkur districts. Large varieties of granite deposits are also available in most parts of the State. Some of the varieties of Granites available in Karnataka are: Ilkal pink, multicolour granite, black granite, grey granite, juparano, Hassan green, cats-eye, pink porphyry etc. The total estimated reserves of granite in Karnataka is said to be more than 220 million cubic meters.

E.2.9.1 Procedures for grant of Mining Lease (M.L)


Grant of Prospecting License or Mining Lease over virgin area: If two or more persons or companies have applied for Mining Lease (ML) over fresh free area, the applicant whose application is received earlier shall have the preferential right to be considered for grant over those whose applications are received later, as per Sec 11(2) of Mines & Minerals (Development & Regulation) Act, 1957. Notifications for grant will be issued after submission of the following documents by the applicant. Mining plan duly approved by Indian Bureau of Mines. C.F.E from K.S.P.C.B. N.O.C. from the concerned Deputy Commissioner, if the area is revenue land or forest clearance as per section -2 of Forest Conservation Act, 1980, if the area falls under forest. Consent of the pattadhar, if the land is a patta land. Technical report of the department regarding the occurrence of the mineral. In case of major minerals, where the mining area is more than five hectares, environmental clearance from Ministry of Environment & Forests, GOI and where the mining area is less than five hectares, clearance from the State Dept. of Ecology & Environment.

Grant of ML over the notified area for re-grant in respect of held area or de-reserved area : Any area available for regrant (surrendered, lapsed and determined areas) and de-reserved area for grant under Rule 59(1) of Miner Concession Rules, 1960 would be notified in the official Gazette for mining public. If the State Government invites the applications for grant of mining lease by notifying the area in the official Gazette, all the applications received on a particular day specified (after 30 days of the date of publication) shall be considered as first day applications and subsequently received applications shall be treated as subsequent applications. The applications received prior to the date of notifications shall also be treated as deemed to have been received on first day applications for the purpose of assigning priority. Preference will be given as per Section 11(3) of MMR (R & D) Act 1957 and read with Rule - 35 of MCR 1960. Government will take decision for grant of mining lease after according opportunity as per Rule-26(1) of MCR 1960 and recommendation will be sent to Government of India to accord prior approval as per section 5(1) of MM (R & D) Act, 1957. The following documents are to be furnished by the applicant, before issue of notification by the State Government; Mining plan duly approved by Indian Bureau of Mines. CFE from K.S.P.C.B. NOC from Forest Dept. as per Act-2 and Forest Conservation Act 1980 (If the area falls under forest). In case of major minerals, where the mining area is more than five hectares, environmental clearance from Ministry of Environment & Forests, GOI and where the mining area is less than five hectares, clearance from the State Dept. of Ecology & Environment.

On receipt of the prior approval from the Government of India, the State Government will issue notification and in turn the Directorate will take action for execution after conducting survey and demarcation. 87

For more information contact:

Karnataka Udyog Mitra


3rd Floor, Khanija Bhavan (East Wing), No. 49, Race Course Road, Bangalore - 560 001. Ph: 91-80-2228 2392, 2228 5659 Fax: 91-80-2226 6063 Email: md@kumbangalore.com www.advantagekarnataka.com
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