Islamic Financing

TA X
India Shariah Finance Summit 2010

New Delhi, 26-28 April 2010
KPMG IN INDIA
© 2010 KPMG, an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
Foreword
Globally, Shariah Finance has been drawing attention from industry practitioners
and regulators alike as an increasingly mainstream offering. India is one of the
largest Islamic geographical markets in the world as Muslims constitute about
13.40 percent of India’s total population. The demographic factors coupled with
the overall growth in the Indian financial services sector, present significant
opportunity for global players to build and participate in a potentially large market
for Islamic finance. However, the key to doing Shariah Finance in India is to marry
the existing Indian regulations with the Shariah law principles, without coming foul
of either of them.
Even while the interest in the field has been on the rise, much more needs to be
done to improve the knowledge of Shariah Finance. Given the same, KPMG in
India in association with Taqwaa Advisory and Shariah Investment Solutions Pvt.
Ltd (‘TASIS’), a leading Indian Shariah advisory firm, has prepared this knowledge
paper which gives a broad overview of Shariah Finance in India and the broad tax
and regulatory framework of doing business in India.
TASIS has provided the research and expertise in drafting the first section of this
paper which deals with Shariah Finance from an Indian perspective.
This knowledge paper strives to highlight new business avenues in the form of
Shariah Finance in India.
Table of Contents
I. Shariah Finance – Indian perspective 2
Introduction 2
What is Shariah Finance 4
Basic Contracts in Shariah Finance 6
Takaful (Shariah-compliant Insurance) 12
Shariah Guidelines for Insurance 12
Shariah Finance in India 16
Potential of Shariah Finance in India 17
Shariah Finance in Secular Countries 19
Existing Shariah Finance Products and Opportunities for Shariah Finance in India 20
Conclusion 22
2. Doing business in India 24

Foreign direct investment in India 24
Portfolio investment in India 25
Foreign Investment Policy on FII investment 26
Investment as Foreign Venture Capital Funds 27
Sectorwise regulation in foreign investment (illustrative) 28
Local Indian Subsidiary or Joint Venture Company 31
Limited Liability Partnership 32
Direct taxes 35
Transfer Pricing in India 47
Indirect taxes 50
New Visa Regulations 55
New Foreign Trade Policy 59
1
2
1 Shariah Finance – Indian perspective
Introduction
Financial arrangements constitute an integral part of the process of economic

development. A growing economy requires a progressively rising volume of
savings and adequate institutional arrangements for the mobilisation and
allocation of savings. These arrangements must not only extend and expand but
also adapt to the growing and varying financial needs of the economy. A well-
developed and efficient financial market is an indispensable prerequisite for the
effective allocation of savings in an economy. A financial system consisting of
financial institutions, instruments and markets provides an effective payment and
credit supply network and thereby assists in channeling of funds from savers to
investors in the economy. The task of the financial institutions or intermediaries is
to design ways and means to mobilise savings and help ensure its proper and
efficient allocation to meet the demands of the nation and facilitate broad-based
inclusive growth.
Shariah Finance or interest-free finance is one such novel mechanism which has
the potential to boost our economic growth. The Prime Minister’s Economic
Advisor Prof. Raghuram G. Rajan has already advocated (in the Report of the
committee on Financial Sector Reforms) inclusion of Interest-free finance in our
financial system. This according to the Committee Report, will help in financial
inclusion of a large number of our people who are not part of our financial system
because of their religious constraints. Another very important aspect highlighted
in this report is allaying the fear of instability with introduction of Interest-free
finance in the country. Successful functioning of this system in dozens of
countries (including those from Europe and North America) further underscores
that the system has more than just religious merit (as understood by some).
During the recent financial crisis the resilience shown by this system has not only
been noticed but also appreciated by regulators all over the world.
Shariah Finance (also called as Islamic Finance, Ethical Finance Interest-free

Finance or special finance in various countries) has its roots in the Islamic
religion. Concerns for equity and justice, lawful (halal) and prohibited (haram) and
a sense of responsibility towards the weaker sections of society are some of the
highlighted principles which guide and control the economic activity of the
believers in Islam.
3
The Banker in association with the Cambridge Consultancy Maris Strategies,

recently compiled a list of the top 500 Islamic Finance institutions from 47
countries. The following passage from the November 2007 issue is worth quoting
here.
“ Today’s Islamic finance industry is rapidly evolving from niche to

mainstream, with growth of Islamic banking assets now estimated at USD
750 bn and growing at a rate of 15 percent to 20 percent a year. The Gulf
Co-operation Council (GCC) proportion of total Islamic banking assets
has reached 30 percent and is projected to rise to 40 percent in the next
three years. In Malaysia, the Islamic share is currently 12 percent and the
government is committed to boosting this to 20 percent by 2010. In
Islamic countries such as the United Arab Emirates (UAE), where less
than 30 percent of the local population are Arabs, sharia-compliant banks
are gaining market share at the expense of conventional banks.The
spectacular acceptance and demand for Islamic finance means that within
the next decade, the industry is likely to capture half the savings of the
1.6 billion-strong Muslim world. It is tempting to assume that the growth
is being fuelled by an older generation of Muslims keen to take
advantage of an offering that complies with their traditional way of life.
Not so: the vast majority of the uptake comes from the under-30 segment
of the Islamic world, and it is this segment that holds the key to success
for the more than 250 Islamic banks that now operate in more than 75
countries worldwide. The popularity of Islamic finance among these
young Muslims is a response to a resurgence of interest in their cultural
and religious identity. This ‘baby boom’ of customers makes up the
”
backbone of the industry.
This document outlines the underlying principles of Shariah Finance from the
Indian commercial perspective and therefore it will not dwell much upon the
theoretical and religious arguments behind Shariah Finance. Rather the focus is
more on demystifying the basic characteristics of Shariah Finance to enable one
to appreciate major commonalities and departures from the current financial
system and also inform about the trends and strategic advantages that are
associated with this financial segment.
4
What is Shariah Finance?
Shariah is an understanding of Islamic Law. The codified form of Islamic law is

known as Islamic Fiqh (jurisprudence). In that sense, Shariah is a wider term
denoting an abstract form of law capable of adaptation, development and further
interpretation. The most important source of Shariah is Islam’s holy book (i.e.
Quran) and recorded traditions of the Prophet (Sunnah)1. There are some
secondary sources of the Shariah as well, which include analogical deduction
(reasoning), consensus of scholars, customs which are not contrary to Islamic
ethos and aim of public welfare. Of course, all these secondary sources derive
their authority from the primary sources. Contrary to public perception, Shariah
has the capacity of adapting and developing itself in the light of emerging
situations. However, there are a few fundamental aspects which are unalterable
and these includes those things which are prohibited in the Quran and Sunnah.
Basic guidelines of Shariah Finance are received from Islamic fiqh which enforces
a ban on certain types of economic activities. Major prohibitions under these
include:
• receipt and payment of interest (known as Riba)
• excessive ambiguity (known as Gharar)
• any kind of non-productive speculative activities such as gambling, wagering,

etc. (known as Maysir).
Also prohibited are the economic and business activities related to products or
services which are perceived to be harmful to human society, such as tobacco,
alcohol, armaments, drugs, pornography, etc. Believers are also strictly ordained
not to snatch each others’ wealth and property by wrongful or deceitful means.
Much emphasis is put on trade with mutual consent and sharing in risk. Money is
considered as a medium of exchange and store of value. It is considered only as
potential capital and hence entitled to a return only when risked along with labour
and effort (which includes management or entrepreneurship). In Shariah Finance
therefore money is not allowed to be bought and sold like a commodity. Any
charge on money lent for social causes, such as helping the poor in meeting their
consumption, medical or other dire needs is abhorred on account of the inherent
exploitation involved. At the same time any predetermined or fixed return for
partnering in business is also considered inequitable on account of the unknown
outcome of the business.
It is important to highlight here that it is not mandatory (from a Shariah point of

view) that the business of Shariah Finance be conducted only by certain groups
or adherents of a certain faith. Anybody who adheres to the Shariah prescriptions
irrespective of his/her faith, would be considered Shariah-compliant. However, it
1 Research by TASIS, 2010
5
is desired that a Board of reputed scholars of Shariah is appointed to oversee and

guide the operations of the enterprise (in respect of adherence to the Shariah.
This also helps in assuring the investors that the operations concerned are really
in consonance with Shariah principles.
6
Basic Contracts in Shariah Finance2
In principle any contract which does not flout Shariah law is considered permitted
and acceptable. However, the following major contracts used in Shariah Finance
are explained in some detail to underscore the basic characteristics of Shariah-
compliant contracts.
Keeping in view the Shariah considerations, financial institutions around the world
use many financial structures that can broadly be categorised as under:
• contracts of partnership
• contracts of exchange
• contract of loans.
It is to be noted here that these are the basic techniques. A certain degree of
variance in their practices may be observed from one country and region to
another. Sometimes the same techniques are pronounced and spelt differently in
different markets.
The section below gives a brief account of Shariah-compliant financing

techniques practiced by financial institutions across the world.
A) Contracts of Partnership
Mudarabah (Capital Financing):
This type of partnership may be called trust financing or sleeping partnership.

Mudaraba is an agreement between two parties where one party (known as
Rabbul Maal), provides the capital and the other known as 'Mudarib' brings his
entrepreneurial capabilities in managing the fund and the project. The profit
arising from the project is shared according to a predetermined formula. Losses if
any are borne by the provider of capital. In this structure, the provider of capital
has no right to participate in the management of the project.
Capital Provider
Entrepreneur (Mudarib)
(Rabbul Maal)
Joint Venture
(Mudaraba)
Source: Research by TASIS, 2010
7
Salient Features:
a. One partner brings capital and the other partner brings labour
b. Profits are shared between the parties in a pre-agreed ratio
c. Entrepreneur’s return is only through profit
d. Losses are borne by capital provider (in the case of liquidation all assets
belong to capital provider).
e. Mudaraba could be “restricted” or “unrestricted”
i. In “restricted Mudaraba” the managing partner (mudarib) is given

instructions not to invest the money except in a specified business and
manner.
ii. In “unrestricted Mudaraba” the managing partner has freedom to chose his
/her investments in the manner he/she deems fit.
Musharakah (Partnership):
This technique involves a partnership between two or more parties where all
partners bring capital towards financing the project. They share profit in a pre-
agreed ratio, but losses are borne on the basis of equity participation. All parties
in this case can participate in the management but it is not obligatory for them to
do so.
Partner 1
Partner 2 Musharakah (Joint Venture)
Partner 3
8
Salient Features:
a. All partners bring capital towards the project
b. Profits are shared among the parties in a pre-agreed ratio
c. Losses are borne by the parties in accordance with their capital contribution
d. All partners have a right to share in the management and decision making
process but this is not obligatory - If a partner wants to remain a sleeping
partner then that too is permitted
e. Partnership could be equal (Mufawada) or unequal (inan). In the former case

each partner is equal in rank with the others in terms of capital contribution,
profit and privileges. In the latter case, these rights are not same.
f. Partnership could also be perpetual or diminishing. In the latter case, the

existing partner slowly buys out the share of the other enabling him or her to
eventually exit from the project.
g.There are two variants of partnership in Musharakah:
i Partnership of ownership (Shirkat al-Milk). This is a partnership based on

joint ownership of properties or assets. This could further be of two types
i.e. voluntary such as partners buying some asset together, or involuntary
such as brothers and sisters becoming partners after inheriting a property.
ii Partnership through contract (Shirkat al-Aqd). This partnership is effected

through mutual contract among the partners.
9
B) Contracts of Exchange
Murabahah (Cost plus financing):
This is a sale contract mostly used for financing activities. A customer needing
finance requests the financing agency (say an Islamic Bank) to buy a certain item
for him and then sell it to him at cost plus a certain mark-up agreed between the
customer and the financing agency. Since interest is prohibited in Shariah and
trading is not, therefore, instead of giving the customer money to buy the item
he needs and charging interest on it the financing agency first buys the asset
needed by the customer on its own account and then sells it to the customer
with a certain profit margin. The customer repays the financing agency over a
period, usually in installments.
Payment made in installments

Financing Agency Client
Credit sale
Cash purchase
Car
Salient Features:
a. Financing agency (upon request of the client) will buy the car with cash and
sell it to the client on credit with a mark-up.
b. This structure is tax inefficient and cannot be adopted by banks in countries

where banks are not permitted to trade in goods.
c. In many of the secular countries this mechanism is accommodated through

change in regulation.
d. Countries looking at forms have accepted this as equivalent to interest-based

financing.
e. In case of any delay in payment of installments, the finance agency cannot

increase the amount due from the client.
10
Ijarah (Leasing):
Ijarah is a simple lease or a sale of usufruct. In its true sense, this contract is
purely an operating lease. Through some modifications this contract is converted
into a financial lease. There is Shariah requirement that two contracts cannot be
intermingled in one contract. To meet this obligation the financing agency will
have one contract of lease with the client. Separate from this, the financing
agency will also take a commitment from the client to buy the asset leased to
him at a pre-agreed price after the end of the lease.
Payment of lease rentals

Financing Agency Client
Lease out
Cash purchase
Car
Salient Features:
a. This contract is almost similar to Murabaha except that in this case the asset
instead of being sold to the customer is leased out to him.
b. This mode is adopted mostly in case of corporate financing where the client
is a corporate and requires heavy machinery such as cranes, aircraft, ship, etc.
c. In this case unlike in Murabaha, the asset remains on the books of the
financing agency.
d. This method of financing cannot be adopted by banks where banks are not
permitted to participate in leasing activities.
e. A significant difference between an Islamic lease and a conventional lease is

that in an Islamic lease all capital related costs (such as insurance and major
repairs) as well as risks (such as damage due to accidents and unforeseen
events) have to be borne by the lessor and not the lessee.
11
Bay al-Salam (Forward Purchase):
This is a contract for sale of goods where the price of the item is paid in advance.
In this system a buyer pays in advance for a specified quantity and quality of a
commodity, deliverable on a specific date, at an agreed price. This financing
technique is similar to a future or forward-purchase contract and is particularly
applicable to seasonal agricultural purchases. Under Islamic banking this
technique is generally used to buy goods, particularly raw materials, in cases
where the seller needs working capital before he can deliver the item.
Istisna (Manufacturing contract):
This is a contract of acquisition of goods by specification or order, where the

price is paid progressively in accordance with the progress of the work. This is
practiced for purchasing an item that is yet to be completed or produced, for
example, a house. Payments are made to the developer or builder according to
the stage of work completion.
Salient Features:
Istisna and Salam are both forward contracts with slight differences between
them:
Characteristics Istisna Salam
The subject matter of the contract Not necessary. It can happen with
Subject matter
is always a made-to-order item existing goods as well.
The delivery date need not be fixed

Delivery date It needs to be fixed in advance
in advance
Payment Schedule Flexible Full in advance
12
Takaful (Shariah-compliant Insurance)3
The word Takaful comes from the Arabic word (kafala) which means guarantee.
Takaful works on the principle of cooperation and mutual help among the
members of a defined group. In other words Takaful is a method of joint
guarantee among a group of members or participants against loss or damage that
may befall any of them. The members of the group pool their contributions and
agree to jointly guarantee each other. Should any of them suffer a catastrophe or
disaster, he would receive a certain sum of money to meet the loss or damage.
Currently there are about 150 Takaful companies operating in about 40 countries.
Business of Takaful is growing at 20 percent per annum. Currently, Takaful
premiums are estimated at USD 3 billion of which 60 percent is in General Takaful
and the remaining 40 percent in Family Takaful. The largest market for Takaful is in
South-East Asia, followed by the Middle East, Africa, Europe and others.
Actually Takaful or Islamic (i.e., Shariah-compliant) insurance is a form of

insurance which works in compliance with Shariah. It is important to note that
Shariah laws are not against the concept of insurance but some of the activities
undertaken by insurance companies make the insurance activities non-compliant
under Shariah and therefore Shariah scholars have come up with the concept of
takaful that meets the objective of insurance within the parameters set by
Shariah. Some of the world’s top insurance companies are also actively engaged
in takaful.
Shariah Guidelines for Insurance3
Prohibition of interest (Riba) is a crucial aspect that makes conventional insurance

Shariah non-compliant. Contributions (premia) collected from the policyholders
are invested in interest bearing/earning instruments. The second important
prohibition is contractual ambiguity which is classified as Gharar. Gharar implies
the unavailability or non-specification of certain key aspects or information of a
contract For example, in an insurance contract (say life) the policyholder (who is
the subject matter of the contract) pays a premium for an event (his own death)
the timing of which is uncertain. In other words, the policyholder is paying a
definite price for a benefit which is contingent on an event which he cannot be
sure will occur. On the other side the insurance company is receiving a price for
something which it is not sure it will be called upon to deliver. Often the
relationship between the insurer and the insured becomes fraught with moral
hazards as one’s loss becomes another’s gain (and vice versa), thus leading to a
conflict of interest situation. This in Shariah falls under the category of gambling
(Maysir) which is also prohibited.
13
Takaful aims at meeting the underlying socially and economically desired

objective of financial protection and wellbeing of the deceased’s family (which is
likely to suffer due to his unexpected death), while complying with all the above
prohibitions.
Another consequential result of a conventional insurance policy that directly

violates another Shariah law is the nominee clause. A nominee in an insurance
policy is the sole beneficiary in the event of death of the policyholder whereas
under Shariah law anything left behind by the deceased would be required to be
distributed in accordance with the Islamic law of inheritance. Thus a nominee in a
takaful policy is a trustee designated to receive the benefits on behalf of all the
inheritors of the deceased.
How Takaful Works
A F
PARTICIPANTS (Policyholders) INSURANCE (Takaful) OPERATOR
B C E
10% Donation
Contributions Total Fund (100%)
90% Investment
D
Life Insurance (Family Takaful)

• A are the policyholders contributing premium B
• B (the total contributions), is bifurcated into two parts C & D
• C is the amount contributed (as donation) by each participant towards the pool
for securing them against the designated eventuality. Claims in the event of
occurrence of the designated eventualities are met from C. Policyholders
forfeit their claim on their contributions to C except to the residual part of it
which remains till the maturity of their policy
• D, the amount which goes into the investment account of each policyholder.
Any net return earned on this account is also added to the policyholder’s
investment account
• B, the total amount (of investable funds) comprising C&D is to be managed

by the insurance operator
• F, the insurance operator, who for managing the fund (B) will charge a fee (in
case of the Wakala Model) or take a share in the profits (in case of the
Mudaraba model). Losses (pro rata) in both the models are borne by the
insurance pool C.
14
General (non-life) Insurance

• In the case of General (non-life) insurance the whole contribution (B), without
being bifurcated goes into a common pool from which the risks are met
• Claims are met by disinvesting B to the extent of the requirement
• Here too operator F manages the fund either on Wakala or Mudaraba basis for
which it is remunerated in accordance with the respective agreement.
15
General Observations
• Cost of managing the operations is met from the contributions (B) in case of
Wakala model whereas in Mudaraba model it is borne by the operator (F). This
is the reason why the Mudaraba model is not so popular
• Based on the actuarial calculation, operator (F) aims at keeping some surplus
amount over and above the expected requirement of claims (C) in the case of
life policy and (B) in case of general
• Surplus over and above that expectation is either distributed back to the
policyholders or they are rewarded in the form of lower contributions in the
future
• Any shortfall in (C, Life) and (B, General) is met through interest-free loan
from the operator (F) which is recoverable in future years.
16
Shariah Finance in India
Shariah Finance is close to a trillion dollar industry today4 and is emerging as one
of the fastest growing areas of international finance. Currently its practices have
spread to over 75 countries of the world, these include many secular countries of
Europe, North America and South East Asia.
In the past few years, Indian regulators have approved schemes with exclusive
claims of Shariah compliance. The following table gives a glimpse of the important
actions that Indian government and institutions have taken in the recent past.
These actions are seen to have important ramifications for Shariah-compliant
business in the country.
Action Year
Establishment of Anand Sinha Committee under the Reserve Bank of India for studying Islamic
2005
Financial Products.
Appointment of Justice Rajinder Sachar Committee to report on the Social, Economic and
2005
Educational status of the Muslim Community of India
Committee led by Prof. Raghuram G. Rajan recommends Interest-free banking for financial
2008
inclusion of Muslim community in India.
Government of India calls for bids in connection with reconstruction of National Minority
2008
Development Finance Corporation (NMDFC) on Shariah lines.
SEBI permits India’s first Shariah tolerant Mutual Fund. 2009
SEBI permits India’s first Shariah tolerant Venture Capital Fund. 2009
Government owned general insurance company starts international re-takaful operatrions. 2009
Government of the state of Kerala announces launching of a Shariah-compliant Investment

2009
company.
The above actions indicate a cautious but systematic approach adopted by Indian
policy makers towards Shariah Finance. India Inc, having sensed the momentum
building up in favour of Shariah Finance, has started looking for strategic vantage
positions to exploit the niche opportunity. Many private sector players have come
up with Shariah-compliant/tolerant/friendly products abroad as well as in India. A
leading private sector player has created an entire vertical for distributing Shariah
tolerant products.
4 Moody’s Investor Service: Global Credit Research, 6 April 2010.
17
Potential of Shariah Finance in India
Muslims constitute 13.4 percent of India’s total population5. In absolute terms

their population in India is second only to that of Muslims in Indonesia. According
to current estimates and research, India’s Muslim population is close to 175
million. Sixty percent of the community’s population is below 25 years of age and
over 35 percent of the community’s total population lives in urban areas, thus
making Muslims one of India’s youngest and most urbanised communities.
Economically, the Muslim community is not much dependent on agriculture which
is the mainstay of a major part (65 percent) of India’s population6.
Many prominent studies and reports have shown that Muslim participation in the
financial system of the country is minimal. A report dated November 2006 by a
committee headed by Justice Rajender Sachar (i.e. Sachar Committee Report) has
reported that almost 50 percent of the community’s population is excluded from
the formal financial sector. In some other studies it has been found that Muslim
participation in the financial sector is even less than their participation in India’s
prestigious government service (i.e. IAS). According to a Report by the country’s
Central Bank (i.e. RBI), Credit : deposit ratio of Muslims is 47 percent against the
national average of 74 percent. Another important study focusing on remittances
coming from the Middle East to the Indian state of Kerala highlights that annually
about INR 120,000 million (USD 2.4 billion) are sent back by expats of the
community. A great majority of this money is either lying idle in bank accounts
(more popularly known as 786 accounts) or is invested in real estate and
jewellery7. These findings indicate the community’s indifference towards the
financial system for religious reasons.
14 13
12
10
8 7.4
6
4
2
0.5
0
% of Population % of Deposit % of Credit disbursed
Source: Sachar Committee Report, November 2006
5 Census 2001.
6 Census 2001 and research by TASIS, 2010
7 Working papers: Remittances by Religion, Migration, remittances and employment: Short term trends and long term implications by KC Zachariah
and S. Irudaya Rajan, December 2007.
18
Shariah Compliant Companies
450
400
350
300
No. Of Companies
403 424
250 388
200 415
329 331
297
337
150 312
100
152
132
50
0
2004 2005 2006 2007 2008* 2009**
NSE Listed BSE 500

Source: Research by TASIS
19
Shariah Finance in Secular Countries
In many of the western countries such as UK, USA, Switzerland, France, Germany,
etc. many Shariah Finance institutions have come up to tap niche opportunities.
During the previous year alone UK has given licences to two Islamic banks
bringing the total number of Islamic banks in the country to five and Islamic
finance institutions to 25. In US, the number of Shariah Finance institutions is
more than 208. Tables 1 & 2 below show Islamic finance progress in recent years.
Table – 1
Islamic Finance Institution in the West
UK 25
US 20
Switzerland 5
France 4
Luxembourg 4
Ireland 3
Germany 3
Cayman Islands 2
Canada 1
Italy 1
Source: Institute of Islamic Banking and Insurance, UK
Table -2
The Size of Islamic Finance Sector
Islamic Finance Institutions Size Number
(USD billion)
Islamic Banks 750 292
Islamic Bonds 173 732
Islamic Financing for Projects and Infrastructure 464 194
Islamic Real Estate Funds 56 102
Total 1443 1320
Source: Institute of Islamic Banking and Insurance, UK
8 Institute of Islamic Banking and Insurance, UK
20
Existing Shariah Finance Products and Opportunities for Shariah

Finance in India
Considering the country’s current banking regulation, Islamic Banking may be

difficult in India at the moment but there could be various other options available
within the existing regulations which can be utilised to launch Shariah-compliant
products. Below are a few of the products that could be availed within the
available regulatory environment.
Shariah-compliant Mutual Fund

India’s first actively managed Shariah-compliant Mutual Fund scheme was
designed in a manner that while complying with all the regulatory requirements it
also followed the Shariah laws. The scheme was launched when the stock market
was at one of its lowest level still the scheme generated considerable excitement
among the investors and mobilisation was far better than expected. This model
can be easily replicated by other players who are interested in capitalising on this
niche market.
Shariah-compliant Pension Plan

This scheme was designed and structured to be India’s first Shariah-compliant
scheme in the insurance sector. Indian insurance regulator IRDA is yet to permit a
Shariah-compliant insurance structure in India but the scheme is designed in such
a way that without contravening any of the existing IRDA regulations, the scheme
has been made Shariah-compliant. The scheme has paved the way for other such
insurance schemes in the country.
Shariah-compliant Real Estate Venture Fund

This was the first Shariah-compliant real estate venture capital fund to which
Indian capital market regulator SEBI gave its seal of approval. The scheme seeks
investments from Shariah conscious investors for the purpose of investing the
same in the real estate sector in a manner and through instruments that are
approved under Shariah. Another important aspect of the scheme is regular
monitoring by the Shariah Advisor. This is aimed at providing investors a high level
of comfort in the matter of Shariah compliance. The scheme being unique has
attracted lots of interest from media, policymakers and the public.
21
International Re-Takaful Operations on Shariah basis

India is one of the most Shariah-compliant countries in the world in terms of the
number of Shariah stocks available for investment and also the variety of these
stocks. To capitalise on this opportunity an reinsurance company planned to start
an international Re-takaful operation on Shariah basis. The scheme at the moment
is India’s only reinsurance scheme on Shariah basis.
Shariah-compliant Leasing
This is an area in which Shariah-compliant mode of financing has been practiced
in the country since the eighties, albeit on a small scale. Recently a major NBFC
player has entered this field, along with participation from a foreign player. The
viability of this mode of finance is greatly dependant on government regulations
which impact on this type of transactions. Secondly, in practice competitive
pressures on pricing of the leases can make it unviable unless the lessor has
access to non-equity interest-free sources of funding (such as profit-sharing
deposits).
Musharaka and Mudaraba based Financing

These transactions too have been practiced by various corporate and non-
corporate entities. They have been used to promote ventures in various fields,
particularly real estate and construction projects. Musharaka type arrangements
mostly take on the modern partnership organisational format as they are
essentially partnerships. They could also be structured as joint ventures, with the
passing of the Bill on LLPs, that is another organisational format which is now
available to put through mudaraba and musharaka arrangements.
Islamic NBFCs
Just a few days ago there have been reports in the press that the finance
ministry is considering a new category of non-banking finance companies
(NBFCs) that will offer Islamic banking products in India. If the ministry follows
through with relevant action in accordance with the reports, it is likely to be a big
move forward for Islamic finance in the country. At present, attempts at offering
Shariah-based products in India through the NBFC route have been hamstrung
due to certain specific NBFC rules. It is hoped that if a special category of NBFCs
is created to offer Islamic banking products, these hurdles are likely to be
removed. This could see a strong surge of interest in Islamic finance products in
India and attract significant capital flows into the country too.
22
Conclusion
This is the first time government has actively shown interest in Shariah Finance
business in India. This itself reassures that Shariah Finance is poised to grow
from its current position. Various players in the corporate sector have launched
Shariah complaint products, several state governments are looking at exploring
and capitalising on Shariah-compliant financing options. Ministry of Minority
Affairs is keen to bring its financing arm (National Minority Development Finance
Corporation) under Shariah and they are further looking at strengthening Shariah
compliance of various Muslim centred activities that fall under Wakf Act or related
to performing of hajj.
An important committee which submitted its report to the Indian government
about India’s future financial structure has mentioned a paragraph about Islamic
banking.
“ While interest-free banking is provided in a limited manner through

NBFCs and cooperatives, the Committee recommends that measures be
taken to permit the delivery of interest-free finance on a larger scale,
including through the banking system. This is in consonance with the
objectives of inclusion and growth through innovation. The Committee
believes that it would be possible, through appropriate measures, to create
”
a framework for such products without any adverse systemic risk impact.
- Raghuram Rajan Committee,

Chapter 3: Broadening Access to finance, Page 35
Looking at overall developments at private, government as well as international

levels it can be expected that India has the potential to become the next big
market for Shariah Finance in the world. Its success also likely depends upon the
preparedness of our corporate sector and the support it receives from our
regulators.
23
24
2 Doing business in India
Foreign direct investment in India
The objective of India’s Foreign Direct Investment (FDI) policy is to invite and
encourage foreign investments in India. Since 1991, the guidelines and the
regulatory process has been substantially liberalised to facilitate foreign
investment in India. The administrative and compliance aspects of FDI including
the modes / instruments of investments in an Indian Company (e.g. Equity,
Compulsorily Convertible Preference Shares, Compulsorily Convertible
Debentures, ADR / GDR, etc.) are embedded in the Foreign Exchange Regulations
prescribed and monitored by the Reserve Bank of India (RBI). The Foreign
Exchange Regulation also contains beneficial schemes/provisions for investments
by Non-Resident Indians/Person of Indian Origin within the overall
framework/policy.
For the purpose of FDI in an Indian Company, the following categories assume
relevance:
• Sectors in which FDI is prohibited
• Sectors in which FDI is permitted
- Investment under Automatic Route
- Investment under Prior Approval Route i.e. with prior approval of the
Government through the Foreign Investment Promotion Board (FIPB).
The following diagram depicts the FDI policy in India:
Foreign Investment
Automatic Route Prior Approval Route (FIPB)
Investment in Sectors requiring Previous venture in India in the Investment exceeding sectoral caps for
prior Government approval same field as stipulated Automatic Route permitted to the extent
25
Apart from fresh investments in an Indian company, the above is also relevant for
transfers of shares, etc. which are subject to detailed guidelines / instructions and
approval requirements to the extent applicable.
Portfolio investment in India
• Foreign Institutional Investors (FII) registered with SEBI and Non-resident

Indians are eligible to invest in India under the Portfolio Investment Scheme
within prescribed guidelines and parameters.
• Investment by FIIs are primarily governed by the Securities and Exchange

Board of India (Foreign Institutional Investors) Regulations, 1995, (‘SEBI
Regulations’). Eligible Institutional Investors that can register as FIIs include
Asset Management Companies, Pension Funds, Mutual Funds, Banks,
Investment Trusts, Insurance Companies, Re-insurance Companies,
Incorporated/Institutional Portfolio Managers, Investment Manager / Advisor,
International or Multilateral organisation, University Funds, Endowment
Foundations, Charitable Trusts and Charitable Societies, Foreign Government
Agencies, Sovereign Wealth funds, Foreign Central Bank, Broad based Fund,
Trustee of a Trust.
Sub-account means any person resident outside India, on whose behalf

investments are proposed to be made in India by a foreign institutional investor
and who is registered as a sub-account under these regulations. Entities eligible
to register as sub-account are braid based funds, portfolio which is broad based,
proprietary funds of the FII, foreign corporate and foreign individuals satisfying
the prescribed conditions, etc.
Conceptually, an application for registration as an FII can be made in two

capacities, namely as an investor or for investing on behalf of its sub-accounts.
SEBI grants registration as FII based on certain criteria, namely constitution and
incorporation of FII, being regulated in home country, track record, previous
registration with any Securities Commission, legal permissibility to invest in
securities as per the norms of the country of its incorporation, fit and proper
person, etc. SEBI grants registration to the FII and sub-account which is
permanent unless suspended or cancelled by SEBI, subject to payment of fees
and filing information every three years. The approval of the sub-account is co-
terminus with that of the FII.
26
Foreign Investment Policy on FII investment
FII investments in India are subject to the following policy / limits:
1) As per RBI, no single FII / sub-account can acquire more than 10 percent of the
paid-up equity capital or 10 percent of the paid-up value of each series of
convertible debentures issued by the Indian company. In case of foreign
corporates or individuals, each such sub-account shall not invest more than 5
percent of the total issued capital of that company.
2) All FIIs and their sub-accounts taken together cannot acquire more than 24
percent of the paid-up capital or paid up value of each series of convertible
debentures of an Indian Company. The investment can be increased upto the
sectoral cap / statutory ceiling, as applicable to the concerned Indian company.
This can be done by passing a resolution by its Board of Directors followed by
passing of a special resolution to that effect by its General Body. Also, in certain
cases, the permissible FDI ceiling subsumes or includes a separate sub-ceiling for
the FII Investment as per stipulation which needs to be complied with.
3) FIIs/sub-accounts can transact in dematerialised form through a recognised

stock broker and on a recognised stock exchange and are required to give or take
delivery of securities. Further, short selling is permitted within prescribed
parameters / norms. FIIs /sub-accounts can also lend or borrow securities in the
Indian market under a scheme framed by SEBI.
4) FIIs can buy / sell securities on Stock Exchanges in most sectors except those
that are prohibited. They can also invest in listed and unlisted securities outside
Stock Exchanges subject to prescribed guidelines / compliances / approvals.
27
Investment as Foreign Venture Capital Funds
A SEBI-registered Foreign Venture Capital Investor (FVCI) with specific approval

from the RBI under FEMA regulations can invest in Indian Venture Capital
Undertakings (IVCU) or Indian Venture Capital Fund (IVCF) or in a scheme floated
by such IVCFs subject to the condition that the IVCF should also be registered
with SEBI and compliance with the underlying framework / guidelines.
The FVCI can purchase equity / equity linked instruments / debt / debt
instruments, debentures of an IVCU or of a VCF through initial public offer or
private placement in units of schemes / funds set up by a VCF. The purchase, sale
of shares, debentures, and units can be at a price that is mutually acceptable to
the buyer and the seller.
28
Sectorwise regulation in foreign investment (illustrative)
Prior approval from FIPB where

Automatic route specified activities subject to
investment is above sectoral cap for Prohibited list
sectoral cap and conditions (if any)
activities listed below
Agriculture [excluding floriculture, horticulture, development of

seeds, animal husbandry, pisciculture, aqua-culture, cultivation
Existing Airports – beyond
Airports 100% of vegetables and mushrooms (specified) and services related to
74% up to
agro and allied sectors ) and plantations (other than tea
plantations).
Asset reconstruction
Greenfield 100% 49% Atomic energy
companies
Existing 74% Broadcasting Business of chit fund
Air transport services – scheduled FM Radio 20% Gambling and Betting
Non resident Indians 100% Cable network 49% Housing and real estate business
Direct-To-home (DTH)(Within
FDI 49% this limit, FDI component not 49% Lottery business
to exceed 20%)
Air transport services – non scheduled / Setting up hardware

49% Nidhi Company
chartered and cargo airlines facilities
Uplinking a news and current

Non resident Indians 100% 26% Retail Trading (except 51% in single brand product retailing)
affairs TV channel
Uplinking a non-news and

FDI 74% 100% Trading in Transferable Development Rights
current affairs TV channel
Air transport services- others Helicopter Cigar and cigarettes

100% 100%
services /seaplane services (specified) manufacture
Alcohol distillation and brewing 100% Commodity Exchanges 49%
Courier services other than

Banking (private sector) 74% / those under the ambit of 100%
100% Indian Post Office Act, 1898
Civil Aviation Services Credit Information Companies 49%
29
Automatic route specified activities subject to sectoral cap Prior approval from FIPB where investment is above sectoral
Prohibited list
and conditions (if any) cap for activities listed below
Ground Handling services Defense production 26%
Infrastructure companies in securities markets namely, Stock

Non resident Indians 100% 49%
Exchanges, Depositories and Clearing Corporations
Investment companies in infrastructure / services sector

FDI 74% 100%
(except telecom)
Maintenance and repair organisations, flying training Mining and mineral separation of titanium bearing minerals
100% 100%
institutes; and technical training institutions and ores, its value addition and integrated activities
Coal and lignite mining (specified) 100% Petroleum and natural gas – Refining (PSU) - 49%
Coffee, rubber processing and warehousing 100% Print Media 26%
Publishing of newspapers and periodicals (including foreign

Construction development projects (specified) 100% news papers subject to prescribed condition) dealing with 26%
news and current affairs
Drugs and Pharmaceuticals including those involving use of Publishing of scientific magazines / specialty journals /
100% 100%
recombinant DNA technology periodicals
Floriculture, horticulture, development of seeds, animal

husbandry, pisciculture, aqua-culture, cultivation of
100% Satellite Establishment and Operation 74%
vegetables and mushrooms (specified) and services related
to agro and allied sectors
Hazardous Chemicals (specified) 100% Tea Sector – including tea plantation 100%
Industrial explosives manufacture 100% Telecommunication
49%
Basic / cellular services unified access services, value
Industrial parks 100% upto
added and other specified services - beyond
74%
49%
ISP with gateways, radio paging, end to end bandwidth -
Insurance 26% upto
beyond
74%
30
Automatic route specified activities subject to sectoral cap Prior approval from FIPB where investment is above sectoral
Prohibited list
and conditions (if any) cap for activities listed below
49%
Mining covering exploration and mining of diamonds, and ISP without gateway, infrastructure provider (specified),
100% upto
precious stones, gold, silver and minerals) electronic mail and voice mail – beyond
74%
Non banking finance companies (specified) 100% Trading
Petroleum and Natural gas Trading of items sourced from Small Scale sector 100%
Test marketing of such items for which a company has

Refining (private companies) 100% 100%
approval for manufacture
Other specified areas 100% Single brand product retailing 51%
Power including generation (except atomic energy),

100%
transmission, distribution and Power Trading
Special Economic Zones and Free Trade Warehousing Zones

100%
(setting up of Zone and setting up of units in these Zones)
Telecommunication
Basic / cellular services unified access services, value

added and other specified services 49%
ISP with gateways, radio paging, end to end bandwidth 49%
ISP without gateway 49%
Infrastructure provider (specified), electronic mail and voice

49%
mail
Source: Certain sectoral cap include investments by NRI / FII / FVCI investments and need to be read with various underlying Press Notes / Notifications / Conditions as stipulated.
31
Local Indian Subsidiary or Joint Venture Company
Subject to Foreign Direct Investment Guidelines and Foreign Exchange

Regulations, a foreign company can set-up its own wholly-owned Indian
Subsidiary or Joint Venture Company with an Indian or Foreign Partner.
Subsidiary or a Joint Venture Company can be formed either as a Private Limited

Company or a Public Limited Company. A private limited company is obliged to
restrict the right of its members to transfer the shares, can have only 50
shareholders and is not allowed to have access to deposits from public directly. It
is also subject to less corporate compliances requirements as compared to a
public company which is eligible for listing on stock exchanges. A company is
regulated inter alia by the Registrar of Companies (ROC) under the Companies
Act, 1956. The table bellow highlights certain key differences between a private
and public company.
Sr. No. Particulars Private Company Public Company
1. Minimum number of shareholders Two Seven
2. Maximum number of shareholders Fifty Unlimited
3. Minimum number of directors Two Three
4. Maximum number of directors Seven Twelve (can be increased

with Government approval)
5. Minimum paid –up capital INR 1,00,000 INR 5,00,000

requirement in general (Approx. USD 2200) (Approx. USD 11000)
A private company can commence business immediately on obtaining a

Certificate of Incorporation from the Registrar of Companies (ROC). A public
company is required to obtain a “Certificate of Commencement of Business” by
filing additional documents with the ROC.
32
Limited Liability Partnership
The Limited Liability Partnership Act, 2008 has introduced a new form of business
structure in India i.e. a Limited Liability Partnership (LLP). LLP is alike a private
limited company having a distinct legal entity separate from its partners. It has
perpetual succession and a common seal unlike a traditional partnership firm. LLP
adopts a corporate form combining the organisational flexibility of partnership with
advantage of limited liability for its partners.
Currently, there are no specific guidelines for foreign investment in LLP. However,
like Partnership Firms, this should need prior approval of the Reserve Bank of
India.
33
Comparative Summary
A comparative summary of previously discussed business entities is as under:
Representative /
Particulars Branch office Project office Subsidiary / joint venture
Liasion office
1. Setting- up Prior approval of RBI. Prior approval of RBI. Prior approval not required if If activities / sectors falls under
requirements certain conditions are fulfilled. Automatic Route, no prior approval
but Only post facto filings with the
RBI is obligated. Otherwise obtain
Government/ FIPB approval and then
comply with post facto filings
2. Permitted activities Only liaison / representation / Activities listed / permitted by Permitted if the foreign Any activity specified in the
communication role is RBI can only be undertaken. company has a secured memorandum of association of the
permitted. No commercial or Local manufacturing and retail contract from an Indian company. Wide range of activities
business activities or trading is not permitted. company to execute a project permissible subject to FDI
otherwise giving rise to any in India. guidelines / framework.
business income can be
undertaken.
3. Funding for local Local expenses can be met Local expenses can be met Local expenses can be met Funding may be through equity or
Operations only out of inward remittances through inward remittances through inward remittances other forms of permitted capital
received from abroad from from Head Office or from Head Office or infusion or borrowings (local as well
Head Office through from earnings from permitted from earnings from permitted as overseas per prescribed norms)
normal banking channels. operations operations or internal
accruals
4. Limitation of liability Unlimited liability in India Unlimited liability in India Unlimited liability in India Liability limited to the extent of
within overall liability within overall liability within overall liability equity participation in the
obligation of Foreign Company obligation of Foreign Company obligation of Foreign Company Indian Company
5. Compliance Requires registration and Requires registration and Requires registration and Required to comply with
requirements under periodical filing of accounts / periodical filing of accounts / periodical filing of accounts / substantial higher statutory
Companies Act other documents other documents other documents compliance and filings requirements
as compared to LO / BO
6. Compliance Required to file an Annual Required to file an Annual Compliance certificates Required to file Periodic and Annual
Requirements under Compliance Certificate from Activity / Compliance stipulated for various filings relating to receipt of capital
Foreign Exchange the Auditors in India with the Certificate from the Auditors purposes and issue of shares to foreign
Management RBI in India with the RBI investors
Regulations
7. Compliance No tax liability as generally it The company is obliged to pay The company is obliged to pay Liable to tax on global income on
Requirements under cannot / does not tax on income earned and tax on income earned and net basis.
Income Tax Act carry out any commercial or required to file required to file Dividend declared is freely
income earning activities. May return of income in India. return of income in India. remittable but subject to distribution
be advisable to file an Income- No further tax on repatriation No further tax on repatriation tax of 16.995 percent on Dividends
tax return. of profits which are of profits which are declared / distributed / paid
permissible in both cases permissible in both cases pursuant to which dividend is tax
free for all shareholders – limited
inter-corporate dividend set-off
apply
8. Permanent LO generally do not constitute Generally constitute a Generally constitute a It is an independent taxable entity
Establishment (PE) PE / taxable presence under Permanent Establishment (PE) Permanent Establishment (PE) and does not constitute a PE of the
Double Taxation Avoidance and are a taxable presence and are a taxable presence Foreign Company per se unless
Agreements (DTAA) due to under DTAA as well domestic under DTAA as well domestic deeming provisions of the DTAA are
limited scope of activities in income-tax provisions income-tax provisions attracted
India
34
35
Direct taxes
India follows a ‘residence’ based taxation system. Broadly, taxpayers may be

classified as ‘residents’ or ‘non-residents’. Individual taxpayers may also be
classified as ’residents but not ordinary residents’.
The ‘tax year’ (known as the financial year) in India, runs from 1 April to 31 March,
of the following calendar year for all taxpayers. The ‘previous year’ basis of
assessment is used i.e. any income pertaining to the ‘tax year’ is offered to tax in
the following year (known as the assessment year).
Taxable income has to be ascertained separately for different classes of income

(called as ‘heads of income’) and is then aggregated to determine total taxable
income. Income tax is levied on ‘taxable income’, comprising of income under the
following categories, referred to as ‘Heads of Income’:
- Salaries
- Income from house property
- Profits and gains of business or profession
- Capital gains and
- Income from other sources.
Generally, the global income of domestic companies, partnerships and local

authorities are subject to tax at flat rates, whereas individuals and other specified
taxpayers are subject to progressive tax rates. Foreign companies and non
resident individuals are also subject to tax at varying rates on specified incomes
which are received / accrued or deemed to be received / accrued in India.
Agricultural income is exempt from Income-tax at the central level but is taken
into account for rate purposes. Income earned by specified organisations e.g.
trusts, hospitals, universities, mutual funds, etc., is exempt from Income-tax,
subject to the fulfillment of certain conditions.
India adopts the self-assessment tax system. Taxpayers are required to file their
tax returns by specified dates. The Tax Officer may choose to make a scrutiny
assessment to assess the correct amount of tax by calling for further details.
36
Generally, taxpayers are liable to make Income-tax payments as advance tax, in

three or four instalments, depending on the category they belong to, during the
year in which the income is earned. Balance tax payable, if any, can be paid by
way of self-assessment tax at the time of filing the return of income. Employed
individuals are subject to tax withholding by the employer on a ‘pay-as-you-earn’
basis. Certain other specified incomes are also subject to tax withholding at
specified rates.
Residential status
Individual
Depending upon the period of physical stay in India during a given tax year, an
individual may be classified as a resident or a non-resident or a ‘not ordinarily
resident’ in India.
Company
A resident company (also referred to as an Indian Company) is a company formed

and registered under the Companies Act, 1956 or one whose control and
management is situated wholly in India. An Indian company by definition is always
a resident.
A non-resident company is one, whose control and management are situated

wholly outside India. Consequently, an Indian company that is wholly owned by a
foreign entity but managed from India by foreign individuals / companies is also
considered as a resident Indian company.
Kinds of taxes
Corporate income tax
Income-tax is levied on income earned during a tax year as per the rates declared
by the annual Finance Act.
Minimum Alternate Tax (MAT)
With a view to bring zero tax paying companies having book profits, under the tax
net, the domestic tax law requires companies to pay MAT in lieu of the regular
corporate tax, in a case where the regular corporate tax is lower than the MAT.
37
However, MAT is not applicable in respect of:
- Income exempt from tax (excluding exempt long-term capital gains from tax-
year ending 31 March 2007)
- Income from units in specified zones including Special Economic Zones

(SEZs) or specified backward districts
- Income of certain sick industrial companies.
MAT is levied at 152 percent (plus applicable surcharge and education cess) of the
adjusted book profits of companies where the tax payable is less than 15 percent
of their book profits. Surcharge is applicable at 103 percent in the case of
companies other than a foreign company, if the adjusted book profits are in
excess of INR 10,000,000. Education cess is applicable at 3 percent on income-
tax (inclusive of surcharge, if any).
A tax credit is available being the difference of the tax liability under MAT
provisions and regular provisions, to be carried forward for set off in the year in
which tax is payable under the regular provisions. However, no carry forward shall
be allowed beyond the tenth assessment year succeeding the assessment year
in which the tax credit became allowable.
Dividend Distribution Tax (DDT)
Dividends paid by an Indian company are currently exempt from Income-tax in

the hands of the recipient shareholders in India, however the company paying the
dividends is required to pay DDT on the amount of dividends declared. The rate
of tax is 16.9954 percent (inclusive of surcharge and educational cess). DDT is a
tax payable on the dividend declared, distributed or paid. An exemption from this
tax has been granted in case of dividends distributed out of profits of SEZ
developers.
Domestic companies will not have to pay DDT on dividend distributed to its
shareholders to the extent of dividend received from its subsidiary if:
- The subsidiary has paid DDT on such dividend received; and
- Such a domestic company is not a subsidiary of any other company.
A company would be subsidiary of another company if such a company holds

more than half in nominal value of equity share capital of the company.
2 As per the Finance Bill, 2010 MAT is proposed to be levied at 18 percent (plus applicable surcharge and education cess) of the adjusted book
profits of companies where the tax payable is less than 18.
3 The Finance Bill, 2010 has proposed to reduce the surcharge from 10 percent to 7.50 percent.
4 16.609 percent proposed in the Finance Bill, 2010.
38
Securities Transaction Tax (STT)
STT is levied on the value of taxable securities transactions at specified rates.
The taxable securities transactions are –
- Purchase / Sale of equity shares in a company or a derivative or a unit of an

equity-oriented fund entered into in a recognised stock exchange
- Sale of unit of an equity-oriented fund to the mutual fund
- The rates of STT are:
Transaction Purchase/Sale of Sale of equity Sale of Derivatives Sale of an option in Sale of derivatives Sale of unit of an
equity shares, units shares, units of (on the premium securities (where the option is equity oriented fund
of equity oriented equity oriented amount) exercised) to the mutual fund
mutual fund mutual fund (non -
(delivery based) delivery based)
Rates 0.125% 0.025% 0.017% 0.017% 0.125% 0.25%
Paid by Purchaser/ seller Seller Seller Seller Purchaser Seller
Source: Certain sectoral cap include investments by NRI / FII / FVCI investments and need to be read with various underlying Press Notes / Notifications / Conditions as stipulated.
Wealth Tax
Wealth tax is leviable on specified assets at 1 percent on the value of the net
assets plus surcharge and cess as held by the assessee (net of debts incurred in
respect of such assets) in excess of the basic exemption of INR 3,000,000.
Capital gains tax
Capital gains arising from the transfer of capital assets (e.g. shares, stocks,
immovable property, etc.) are liable to capital gains tax. The length of time of
holding of an asset determines whether the gain is short term or long term.
39
Long term capital gains arise from assets held for 36 months or more (12 months
for shares, units, etc).
Gains arising from transfer of long-term capital assets are taxed at special rates /
eligible for certain exemptions (including exemption from tax where the sale
transaction is chargeable to STT). Short-term capital gains arising on transfer of
assets other than certain specified assets are taxable at normal rates.
The following figure shows the rates of capital gains tax:
Type of gain Tax rate in case of transfer of assets Tax rate in case of transfer of
subject to payment of Securities other assets
Transaction Tax (STT)
Long-term capital gains NIL 20 percent
Short-term capital gains 15 percent Normal Tax Rates applicable to

corporates/ individuals
Source: Corporate tax rates are given under the head ‘Companies’ and individual tax rates are given under head ‘Personal taxes’
Taxability of non resident Indians

Non-resident Indians are also be liable to tax in India on a gross basis depending
upon the type of income received.
Foreign nationals
Indian tax law provides for exemption of income earned by foreign nationals for
services rendered in India, subject to prescribed conditions. For example:
- Remuneration from a foreign enterprise not conducting any business in India

provided the individual’s stay in India does not exceed 90 days and the
payment made is not deducted in computing the income of the employer
- Remuneration received by a person employed on a foreign ship provided his

stay in India does not exceed 90 days. Automatic route specified activities
subject to sectoral cap and conditions (if any)
40
Companies
A resident company is taxed on its global income. A non-resident company is

taxed on income which is received/accrued or deemed to accrue/arise in India.
The scope of Indian income is defined under the Act. The tax rates for the tax
year 2010-11 are given in the table below:
Type of Company Effective tax rate (including surcharge and educational cess)
Domestic company 33.995 percent#
Foreign company 42.23 percent*
Source: Income-tax 30 percent plus surcharge of 106 percent (if the total income exceeds INR 10,000,000) thereon plus education
cess of 3 percent on Income-tax including surcharge
Note: * Income-tax 40 percent plus surcharge of 2.5 percent thereon plus education cess of 3 percent on Income-tax including
surcharge.
A company is additionally required to pay the other taxes e.g. STT, MAT, Wealth
tax, DDT, etc.
The Limited Liability Partnerships

The Finance Act 2009 has introduced the tax treatment for the Limited Liability
Partnerships which are recently introduced by the Limited Liability Partnership
Act, 2008 in India. The terms ‘Firm’, ‘Partner’ and ‘Partnership’ has amended and
an LLP defined under the LLP Act has been put on par with a partnership firm
under the Indian Partnership Act, 1932 (General Partnership) for the purpose of
income-tax. Consequently, provisions relating to interest and remuneration to
partners would apply to a LLP, while provisions applicable to companies such as
MAT, DDT, etc. will not apply to an LLP.
5 33.22 percent is proposed in the Finance Bill, 2010.

6 The Finance Bill, 2010 has proposed to reduce the surcharge from 10 per cent to 7.50 percent.
41
Foreign Institutional Investors (FII)
To promote the development of Indian capital markets, qualified FIIs / sub

accounts registered with the Securities and Exchange Board of India (SEBI) and
investing in listed Indian shares and units, are subject to tax as per beneficial
regime as under:
Interest 20 percent
Long-term capital gains # NIL
Short- term capital gains # 15 percent
Source: Subject to payment of Securities Transaction Tax (STT)
In addition, there is a surcharge of 2.5 percent in case of companies and 10

percent in case of non-corporate where the income exceeds INR 1,000,000 and
education cess of 3 percent. Additionally, capital gains earned by an FII are not
subject to withholding tax in India.
The rate of tax on other short-term capital gains is 30 percent plus surcharge and
education cess; and on long-term capital gains (if not exempt) is 10 percent plus
surcharge and education cess.
Relief from Double Taxation

For countries that have Double Tax Avoidance Agreements (DTAAs) with India,
bilateral relief is available to a resident in respect of foreign taxes paid. Generally,
provisions of DTAAs prevail over the domestic tax provisions. However, the
domestic tax provisions may apply to the extent that they are more beneficial to
the taxpayer. The DTAAs would also prescribe rates of tax in the case of dividend
income, interest, royalties and fees for technical services which should be applied
if the rates prescribed in the Act are higher. Business income of a non-resident
may not be taxable in India if the non-resident does not have a permanent
establishment in India.
42
Tax Incentives
Special Economic Zones (SEZs)
Units set up in SEZs
A unit which sets up its operations in SEZ is entitled to claim Income-tax holiday
for a period of 15 years commencing from the year in which such unit begins to
manufacture or produce articles or things or provide services.
The benefits are available against export profits, as under:
Deduction of 100 percent for the first five years
Deduction of 50 percent for the next five years (unconditional)
Deduction of 50 percent for the next five years (subject to conditions for creation
of specified reserves).
SEZ developer
A 100 percent tax holiday (on profits and gains derived from any business of
developing an SEZ) for any 10 consecutive years out of 15 years has been
extended to undertakings involved in developing SEZ’s notified on or after 1 April,
2005 under the SEZ Act, 2005.
Offshore Banking Units (OBU) and International Financial Services Center

units (IFSC) set up in SEZs
OBUs and IFSCs located in SEZs are entitled to tax holiday of 100 percent of
income for the first five years and 50 percent for next five consecutive years.
Export oriented Units (EOU)
Undertakings set-up in Export Processing Zones (EPZ) / Free Trade Zones (FTZ) or
Electronic Hardware Technology Park (EHTP) or Software Technology Park (STP) or
100 percent EOUs, are eligible for a deduction of 100 percent on the profits
derived from exports for 10 consecutive years beginning from the year in which
such undertaking begins manufacturing or commences its business activities.
Such a deduction would be available only up to financial year 2011-2012.
43
Food processing
A 100 percent tax holiday to undertakings from the business of processing,

preservation, and packaging of fruits or vegetables or meat and meat products or
poultry or marine or dairy products or from the integrated business of handling,
storage, and transportation of food grains for the first five consecutive years and
thereafter, 30 percent (25 percent for non-corporate entities) for the next five
consecutive years.
Business of collecting and processing biodegradable waste
A 100 percent tax holiday to undertakings from the business of collecting and
processing or treating of bio-degradable waste for generating power or producing
bio-fertilisers, bio pesticides or other biological agents or for producing bio-gas or
making pellets or briquettes for fuel or organic manure, for the first five
consecutive years.
Commercial production or refining of mineral oil
A 100 percent tax holiday to undertakings (excluding undertakings located in

North eastern region) engaged in commercial production of mineral oil for the
first seven consecutive years. An undertaking, which is wholly owned by a public
sector company or any other company in which a public sector company or
companies hold at least 49 percent of the voting rights, engaged in refining of
mineral oil set up before 31 March, 2012 will be entitled to a 100 percent tax
holiday for the first seven consecutive years provided it has been notified by the
Indian Government before 31 May, 2008.
44
In-house research and development
A deduction is available of one and one-half7 times of the scientific research

expenditure incurred (excluding expenditure on cost of land or building) on an in-
house research and development facility as approved in bio-technology or in the
manufacture or production of drugs, pharma, electronic equipments, computers,
telecom equipments, chemicals, or other specified articles. The weighted
deduction is available on such expenditure incurred upto 31 March, 2012.
A deduction is available of 1508 percent of the scientific research expenditure

incurred (excluding expenditure on cost of land or building) on an in-house
research and development facility engaged in the business of manufacture or
production of any article or thing other than prohibited article or thing listed in the
Eleventh Schedule. The weighted deduction will be available from 1 April 2010.
Capital expenditure incurred in specified industries
The Finance Act, 2009 has introduced a deduction in respect of entire capital
expenditure (excluding expenditure on cost of land or goodwill or financial
instrument) incurred by the taxpayer engaged in following businesses:
• Setting up and operating cold chain facilities for specified products
• Warehousing facilities for storage of agricultural produce
• Laying/operating cross-country natural gas or crude or petroleum oil pipeline

network for distribution/storage
• Business relating to building and operating a new hotel of two star or above
category anywhere in India which starts operations on or after 1 April, 2010 (
proposed insertion by the Finance Bill, 2010).
Deduction to the expenditure incurred prior to commencement of operation of

the above specified business will be allowed, if the expenditure was capitalised in
the books of the taxpayer on the date of commencement of operation. The
deduction will be allowed to the taxpayer in the year of commencement of the
operation.
7 The Finance Bill, 2010 has proposed to increase the weighted deduction to two times of the scientific research expenditure from one and one-half times.
8 The Finance Bill, 2010 has proposed to increase the weighted deduction to 200 percent from 150 percent.
45
Industrial parks, model towns, and growth centers
For developers of industrial parks
Hundred percent tax holiday is available to developers of industrial parks for any
10 consecutive assessment years out of 15 years beginning from the year in
which the undertaking or the enterprise develops, develops and operates or
maintains and operates an industrial park, provided the date of commencement
(i.e. the date of obtaining the completion certificate or occupation certificate) of
the industrial park is not later than 31 March, 2011.
Tax holiday in respect of infrastructure projects
Undertakings engaged in prescribed infrastructure projects are eligible for a

consecutive 10 year tax holiday as set out below:
- A 10 year tax holiday in a block of 20 years has been extended to undertakings

engaged in developing / operating and maintaining / developing, operating and
maintaining any infrastructure facility such as roads, bridges, rail systems,
highway projects including housing or other activities being an integral part of
the project, water supply projects, water treatment systems, irrigation
projects, sanitation and sewerage systems or solid waste management
system
- A 10 year tax holiday in a block of 15 years has also been extended to

undertakings involved in developing / operating and maintaining,/ developing,
operating and maintaining, ports, airports, inland waterways, inland ports or
navigational channels in the sea
- A similar tax holiday (10 years out of a block of 15 years) has been extended to
undertakings engaged in the business of laying and operating cross country
natural gas distribution network, including pipe lines and storage facilities
being an integral part of such a network. Since the Finance Act, 2009 has
introduced this incentive in a modified form (given above under the heading
“Capital expenditure incurred in specified industries”) the same has been
proposed to be discontinued.
46
Tax holiday in respect of power projects
Undertakings engaged in prescribed power projects are eligible for a consecutive

10 year tax holiday as set out below:
- A tax holiday of 10 years in a block of 15 years has also been extended to

undertakings set up before 31 March, 2010 with respect to the following:
- Generation / generation and distribution of power laying of network of new

lines for transmission or distribution undertaking a substantial renovation
(more than 50 percent) and modernisation of the existing network of
transmission or distribution lines.
- The Finance Act, 2009 has extended the start date from 31 March 2010 to 31
March 2011.
Tax holiday in respect of hospitals/hotels/convention centers
- A 100 percent tax holiday for the first five consecutive years to an undertaking
deriving profits from the business of operating and maintaining a hospital
located anywhere in India (subject to exclusions), provided the hospital is
constructed and has started or starts functioning at anytime before 31
March,2013.
- A tax holiday for the first five consecutive years to an undertaking deriving
profits from the business of a hotel or from the business of building, owning
and operating a convention centre, in specified areas, if such a hotel/
convention centre is constructed and has started or starts functioning before
31 July 2010 (As proposed in the Finance Bill, 2010).
- A tax holiday for the first five consecutive years to an undertaking deriving
profit from the business of a hotel located in the specified district having a
World Heritage Site, if such hotel is constructed and has started or starts
functioning before 31 March, 2013.
47
Transfer Pricing in India
India introduced detailed transfer pricing regulations in the Income Tax Act, 1961
(Act), as an anti - avoidance measure aimed to ensure that fair and equitable
proportion of profits arising from cross border transactions between related
entities are received in India.
The Indian transfer pricing provisions are generally in line with the Transfer Pricing
Guidelines for Multinational Enterprises and Tax Administrators issued by
Organization for Economic Co - Operation and Development (“OECD Guidelines”)
albeit with some significant differences such as a wider definition of the term
associated enterprise; and the concept of arithmetical mean as opposed to
internationally followed statistical measures of median/arm’s length range. The
regulations also prescribe rigorous mandatory documentation requirements and
impose steep penalties for non-compliance.
Determination of arm’s length price

The Indian transfer pricing regulations require arm’s length price in relation to an
international transaction to be determined in accordance with the most
appropriate method from out of the following prescribed methods:
• Comparable uncontrolled price (CUP) method
• Resale price method (RPM)
• Cost plus method (CPLM)
• Profit split method (PSM)
• Transactional Net Margin Method (TNMM).
Unlike the OECD guidelines, there is no order of preference prescribed, although

in practice transfer pricing authorities do attempt to use traditional methods such
as CUP, RPM and CPLM, before accepting a profit-based approach. The choice of
the most appropriate method is required to be made having regard to factors
which inter alia include nature and class of transaction, the classes of associated
enterprises undertaking the transaction, the functions performed by them, etc.
Compliance Requirements
The burden of proving that the international transactions comply with the arm’s
length principle lies with the taxpayer. Further, the Act requires every person
entering into an international transaction to maintain prescribed information and
documents relating to international transactions.
48
The prescribed documentation includes details of ownership structure, description

of functions performed, risks undertaken and assets used by respective parties,
discussion on the selection of most appropriate method and economic analysis
resulting into determination of arm’s length price. Failure to maintain the
prescribed documentation can result in penalties up to 2 percent of the value of
the international transactions. Further, failure to furnish the prescribed
documentation within the prescribed time limit can result in penalties that can
extend up to 2 percent of the value of the international transactions.
In addition to maintaining the prescribed documentation, taxpayers are also

required to obtain a certificate (detailing the particulars of international
transactions) from an accountant and file the same with the Revenue Authorities
on or before the due date of filing return of income. Penalty of INR 100,000 can be
levied for non - filing of the certificate by the prescribed date.
Transfer Pricing Assessments

Transfer pricing matters are dealt by specialised Transfer Pricing Officers. In
accordance with the past internal administrative guidelines of the Revenue
Authorities, all taxpayers reporting international transactions with associated
enterprises exceeding INR 150 million are subjected to a mandatory transfer
pricing audit. To the extent of transfer pricing adjustments made as a result of the
audit, taxpayers lose any tax exemption to which they are otherwise entitled to.
Further, there are potential penalties to the extent of one - time to three - times of
the incremental tax arising as a result of any adjustment.
Dispute Resolution Mechanism

In order to facilitate expeditious resolution of transfer pricing disputes and
disputes relating to taxation of foreign companies, an alternate dispute resolution
mechanism is provided in the form of Dispute Resolution Panel (DRP) effective
from 1 October 2009 [a collegium comprising of three Commissioners of Income -
tax]. Under this mechanism, the Assessing Officer (AO) is required to forward the
draft of the proposed assessment order to the taxpayer, which the taxpayer may
accept or lodge an objection with the DRP within 30 days. The DRP upon hearing
both sides shall issue necessary directions to the AO for completing the
assessment, within a period of 9 months from the end of the month in which the
draft order is forwarded to the taxpayer. Such directions of the DRP would be
binding on the AO. Any appeal against the order passed by the AO in pursuance of
the directions issued by the DRP shall be filed by the taxpayer directly with the
Income - tax Appellate Tribunal.
49
50
Indirect taxes
• The Ministry of Finance, Government of India (Department of Revenue)

through the Central Board of Excise and Customs (CBEC), the apex Indirect
tax authority, implements and administers Central Excise, Customs and
Service tax laws. Circulars, notifications and clarifications issued by the CBEC
supplement these Indirect tax laws.
Customs duty
• Customs duty is a federal levy payable on the import of goods into India. The
rate of Customs duty is based on the tariff classification of goods being
imported in terms of the Customs Tariff Act, 1975 (Customs Tariff) [which is
aligned with the Harmonized System of Nomenclature (HSN) followed
internationally]. Further, various concessions/ exemptions are available
depending on the nature of goods, their intended use, status of the importer,
country of export, etc.
• The general effective rate of Customs duty on import of capital goods is 21.52
percent and for other goods is 24.42 percent, and comprises of various duties
and cesses levied on a cumulative basis [Basic Customs Duty is usually levied
at the rate of 7.5 percent on capital goods and at 10 percent on other goods;
Additional Customs Duty in lieu of Excise duty (CVD) at 8.24 percent;
Additional Duty of Customs in lieu of local sales tax (ADC) at 4 percent;
Education Cess (including the Secondary and Higher Education Cess) at 3
percent].
51
Import-export policy
• Import of goods into India and export of goods from India is regulated by the
Foreign Trade Policy (the Policy) which is framed by the Ministry of Commerce
and Industry, Government of India. The Policy remains in force for five years
and is periodically amended. The Policy provides for various exemptions and
concessional schemes which may be availed for the import and export of
goods.
Excise duty
• Excise duty is a federal duty levied on manufacture of goods in India and is
payable upon clearance of the goods from designated establishments
(factories, warehouses, etc.). Excise duty is levied as per the provisions of the
Central Excise Act, 1944 (the Excise Act) at the rates prescribed in the Central
Excise Tariff Act, 1985 (Excise Tariff). The excise tariff is also aligned with the
HSN.
• The duty is usually levied at the rate of 8.24 percent (excise duty at 8 percent,
education cess at 2 percent of excise duty and Secondary and Higher
Education cess at 1 percent of excise duty.
Service tax
• Service tax is a federal levy on provision of notified taxable services in India.
Service tax is currently leviable at the rate of 10.30 percent (Service tax at
percent, education cess at 3 percent of Service tax and Secondary and Higher
Education cess at 1 percent of Service tax) on the gross amount charged for
services provided. Presently, more than 100 taxable services are notified
under Chapter V of the Finance Act, 1994 which is the governing legislation for
Service tax.
52
Export of Services
• As per the Export of Service Rules, 2005 (the Export Rules), Service tax is not
applicable on ‘export’ of taxable services.
• Export Rules prescribe three different categories under which taxable services
may be classified depending on their nature, in order to determine whether
provision of the same to an offshore service recipient would qualify as an
export of service. The essential concept of ‘export’ is based on zero-rating
principles adopted by several countries around the world.
Import of Services
• As per the Taxation of Services (Provided from outside India and Received in
India) Rules, 2006 (the Import Rules), where any taxable service is provided by
a service provider based outside India to a service recipient located in India,
liability to discharge Service tax devolves upon the recipient of such services
in India under the reverse charge mechanism, subject to the satisfaction of
specified conditions.
Cenvat credit
• In order to reduce the cascading effect of both Excise duty and Service tax,
the Cenvat Credit Rules, 2004 provide for Cenvat credit of Excise duty paid on
inputs and capital goods and Service tax paid on input services that are used
in the manufacture of excisable goods or for provision of taxable services.
Such credit may be used to discharge an output Excise duty or Service tax
liability.
• Further, Cenvat credit is also available in respect of specified components of

the import duties paid (Generally CVD and ADC in case of manufacture and
any CVD in case of services) where such imported goods are used in the
manufacture of excisable goods / provision of taxable services in India.
53
Value Added tax (VAT) / Central Sales tax (CST)

• VAT and CST are levied on the sale of movable goods in India including various
intangibles (e.g. Patent, Trade Mark, etc.).
VAT
• VAT is a state specific levy on sale of goods within a state in India. VAT is
generally payable at the rates of 4 percent (on specified products including
industrial inputs, information technology products, capital goods, etc.) or 12.5
percent (residual rate applicable to most of the goods), though higher rates are
also prescribed for specified goods.
• Further, subject to prescribed conditions, VAT paid on inputs may be available

as credit for set-off against output VAT or CST liability of the dealer.
CST
• Where a sale transaction entails the movement of goods from one state in
India to another, the transaction would qualify as an inter-state sale and would
be chargeable to CST under the Central Sales Tax Act, 1956 (‘the CST Act’). In
case the purchaser can issue the required statutory declaration forms, CST
would be levied at a concessional rate of 2 percent, else the VAT rate
applicable on local sale of goods in the dispatching state, would be applicable
on such sales.
• Further, it is pertinent to note that the CST is a non-creditable levy and cannot
be off-set against an output VAT or CST liability.
• It may be noted that CST is intended to be phased out on introduction of

Goods and Service Tax (‘GST’) which is proposed to be introduced from April
2010.
54
Entry tax
• Entry tax is a state levy on the entry of specified goods into a state for
consumption, use or resale within a specified jurisdiction. Entry tax is payable
by the person bringing such goods into the local area/ state (typically referred
to as ‘importer’).
• Typically, many states allow a set-off of the Entry tax paid against the output
VAT payable on the sale of goods. Alternately, a refund is provided for in case
the goods are sent out of the local area/ state in the same condition. The rate
of Entry tax on different products varies from state to state, and generally
ranges between 2 percent to 15 percent.
• It may be noted that the constitutionality of Entry tax laws in various states is
under review before the Supreme Court of India and developments with
respect to the same need to be monitored closely.
Research and Development Cess (R&D Cess)

• R&D Cess is leviable at the rate of 5 percent on import of technology under a
foreign collaboration. The term ‘foreign collaboration’ has been defined to
include Joint ventures, partnerships, etc.
• Import of any designs/ specifications from outside India or deputation of

foreign technical personnel, under a foreign collaboration, would also be liable
to R&D Cess.
• R&D Cess paid is available as deduction with respect to Service tax payable
for Consulting Engineer’s services and Intellectual Property Right-related
services.
Octroi duty
Octroi duty is a local authority levy, which is levied on entry of goods into a
municipal/ local area for use, consumption or sale. This levy is presently applicable
only in certain municipalities.
55
New Visa Regulations
The Ministry of Commerce and Industry (MCI) had issued a letter dated 20 August
2009 requiring all foreign nationals in India holding Business Visa (BV) and working
on project/ contract based assignments in India to return to their home countries
on expiry of their BV or by 30 September 2009, whichever is earlier. This deadline
was subsequently extended to 31 October 2009 by the Ministry of Home Affairs
(MHA).
The MHA has now issued Frequently Asked Questions 1 (FAQs) on work related
visas issued by India, clarifying the purpose, duration and various scenarios under
which BV/ Employment Visa (EV) may be granted to foreign nationals.
Key clarifications as per the FAQs issued by MHA.
56
Employment Visa (EV)

EV shall be granted to a foreign national who is a skilled and qualified professional
or person who is being appointed at a senior level or as a technical expert.
EV shall not be granted for jobs which are routine/ ordinary/ secretarial in nature or
for which large number of qualified Indians are available.
The FAQs provide the following illustrative scenarios under which EV shall be
granted to foreign nationals:
• For execution of a project/ contract (irrespective of the duration of the visit).
• Visiting customer location to repair any plant or machinery as part of warranty

or annual maintenance contract.
• Foreign engineers/ technicians coming for installation and commissioning of

equipments/ machines/ tools in terms of contract for supply of such
equipment, etc.
• Foreign experts imparting training to the personnel of the Indian company.
• For providing technical support/ services, transfer of know-how, etc. for which
the Indian company pays fees/ royalty to the foreign company deputing the
foreign national.
• Foreign nationals coming to India as consultants on contract for whom the

Indian company pays a fixed remuneration (whether monthly or otherwise).
• Foreign artists engaged to conduct regular performances for the duration of

employment contract given by Hotels, clubs, etc.
• For taking up employment as coaches.
• Foreign sportsmen who are given contract for a specified period by the Indian
club/ organisation.
• Self-employed foreign nationals coming to India for providing engineering,

medical, accounting, legal or such other highly skilled services in their capacity
as independent consultants.
57
Business Visa
The FAQs provide the following illustrative scenarios under which BV shall be
granted to foreign nationals:
• To establish industrial/ business venture or to explore possibilities to set up an

industrial/ business venture in India.
• To purchase/ sell industrial/ commercial products or consumer durables.
• For attending technical meetings, board meetings, general meetings for

providing business services support.
• Foreign nationals who are partners in the business or functioning as Directors

in the company.
• For consultations regarding exhibitions, participation in exhibitions, trade fairs,

etc. and for recruitment of manpower.
• Foreign buyers who come to transact business with suppliers/ potential

suppliers, to evaluate/ monitor quality, give specifications, place orders, etc.
relating to goods/ services procured from India.
• Foreign experts/ specialists on a visit of a short duration in connection with an

ongoing project for monitoring the progress of the work, conducting meetings
with Indian customer and/ or to provide high level technical guidance.
• For pre-sales or post-sales activity not amounting to actual execution of any

contract/ project.
• Foreign trainees of multinational companies coming for in-house training in

regional hubs of the concerned company located in India.
• Foreign students sponsored by AIESEC for internships on project based work

in India.
BV cannot be converted into EV in India

Foreign nationals who are already in India on BV are not allowed to convert their
BV into EV in India. Therefore, they have to necessarily leave India by 31 October
2009 and get EV overseas.
58
Foreign company not having presence in India cannot sponsor EV

Where a foreign entity does not have any project office/ subsidiary/ joint venture/
branch office in India, it cannot sponsor a foreign national for EV.
EV does not necessarily to result in legal employment
An Indian company/ organisation which has awarded a contract for execution of a

project to a foreign company can sponsor employee of a foreign company for EV.
Further, such Indian organisation/ entity would not necessarily be considered the
legal employer of that person.
• The Ministry of Labour and Employment has provided for new norms of
granting employment visa (as per the press release dated 16 December 2009).
• In the present economic situation, Indian companies are awarding work for
execution of projects/contracts to foreign companies, including Chinese
companies which have resulted in inflow of foreign nationals. It has come to
the notice of the Government of India that a large number of foreign nationals
coming for execution of projects/contracts in India are on Business Visas
instead of Employment Visas.
• After reviewing the matter, the Government of India has decided that Business
Visa is to be issued only to foreign nationals visiting India to establish an
industrial/business venture or to explore possibilities to set up
industrial/business venture in India.
• The Government of India has also decided that all foreign nationals coming for
execution of projects/contracts in India will have to come only on Employment
Visa. Such visas are to be granted only to skilled and qualified professionals
appointed at senior levels and will not be granted for jobs for which a large
number of qualified Indians are available. (For details, please refer to our earlier
Flash News )
• As per the internal guidelines issued by Ministry of Labour and Employment to

the Indian embassies abroad, employment visa for foreign personnel coming
to India for execution of projects/contracts may be granted by Indian Missions
to highly skilled and professionals to the extent of 1 percent of the total
persons employed on the project subject to a maximum of 20. However, the
number of employees can be for a maximum of 40 for power and steel sector
projects till June 2010. In case more foreign nationals are required for any
project then clearance of Ministry of Labour & Employment is required.
59
New Foreign Trade Policy – Introduced on 27 August 2009.
The Government had announced a new Foreign Trade Policy on 27 August 2009.
Though the Policy does not introduce any new scheme, it seeks to extend relief
through relaxation of the existing schemes to exporters impacted by global slow
down. The Policy aims at encouraging exports, increasing employment in the
country and fuel growth in the share of international trade.
The Government expects to double India’s exports of goods and services by 2014
(USD 168 billion in 2008-09) and to double India’s share in global trade by 2020
(1.64 percent in 2008). While the measures proposed in the Policy are not radical,
they appear to be in the right direction.
Highlights of the Policy are summarised below:
Export Promotion Capital Goods (‘EPCG’) Scheme

Import of capital goods allowed at zero customs duty to exporters of specified
products, like engineering and electronic products, basic chemicals and
pharmaceuticals, apparels and textiles, plastics, etc. In these cases, export
obligation (‘EO’) equivalent to 6 times of duty saved required to be met in 6 years.
This specific Scheme to be valid till 31 March 2011
EO on import of spares, moulds, etc. reduced to 50 percent of the normal

specific EO
Served from India Scheme (SFIS)

Entitlement of duty credit scrip increased from 5 to 10 percent of foreign
exchange earnings for specified hotels, clubs and other service providers in the
tourism sector.
Following would not be included for computation of SFIS entitlement:
- Telecommunication services provided by service providers in Telecom sector
- Foreign exchange earnings for services provided by airline and shipping lines for
routes not touching India.
60
Duty Entitlement Passbook (‘DEPB’) Scheme

Scheme extended up to 31 December 2010.
Advance Authorization Scheme (‘AAS’)

A minimum 15 percent value addition on imported inputs is prescribed.
Export Oriented Units (‘EOU’) Scheme

Board of Approvals to consider extension of block period by one year for
calculation of Net Foreign Exchange, for those units which complete five years
block period in between 30 September 2008 and 30 September 2009.
Procurement of finished goods for consolidation along with manufactured goods

allowed to the extent of 5 percent of exports in the preceding year.
Focus Market Scheme (‘FMS’)

Percentage of credit entitlement increased from 2.5 percent to 3 percent and
benefit of credit entitlement extended for exports made to 26 more countries
(including 16 from Latin American Block and 10 from Asia-Oceania block)
Focus Product Scheme (‘FPS’)

scope expanded to specified products including engineering products, electronic
products, plastic products, textile products, green technology products (like wind
mill, wind powered generating sets, electrically operated vehicles etc.), etc.
61
Market Linked Focus Product (MLFP) Scheme

benefit of credit entitlement extended to products including pharmaceuticals,
articles of iron and steel, articles of aluminium, dyes, paints, soaps, etc. exported
to countries like Brazil, South Africa, Australia, etc.
Miscellaneous
Additional incentive scrip equivalent to 1 percent of FOB value of exports made
during 2009-10 and 2010-11 to be given to Status Holders in leather, textiles and
jute, handicrafts, specified engineering, plastics and basic chemicals sectors. The
scrip can be used for procurement of capital goods with actual user condition.
Exemption from terminal excise duty has been extended for supplies made by an
Advance Authorisation holder to a manufacturer holding another Advance
Authorisation if such manufacturer supplies to ultimate exporter.
Payment of customs duty for EO shortfall under AAS, EPCG and Duty Free Import
Authorisation allowed by debiting duty credit scrips, like DEPB, SFIS. Earlier the
payment was allowed in cash only.
Various procedural relaxations provided such as:
- Reduction in/ exemption from application fees for availing incentives
- Transit loss claims received even from private approved insurance companies
allowed for EO fulfilment
- Incentives not to be recovered from the exporters where RBI specifically

writes off the export proceeds realisation
- Dispatch of imported goods directly from port to site allowed under AAS for
deemed supplies
- Additional ports/ locations to be enabled on the EDI
- A Directorate of Trade Remedy Measures and an Inter Ministerial Committee

to be set up to resolve issues faced by exporters.
An updated compilation of standard input and output norms and (HS) classification
of export and import published after five years.
kpmg.com/in
KPMG in India KPMG Contacts
Bangalore Kochi Vikram Utamsingh
Maruthi Info-Tech Centre 4/F, Palal Towers Executive Director and
11-12/1, Inner Ring Road M. G. Road, Ravipuram, Head - Markets
Koramangala, Bangalore – 560 071 Kochi 682 016 +91 22 3090 2320
Tel: +91 80 3980 6000 Tel: +91 484 302 7000 vutamsingh@kpmg.com
Fax: +91 80 3980 6999 Fax: +91 484 302 7001
Abizer Diwanji
Chennai Kolkata Executive Director
No.10, Mahatma Gandhi Road Infinity Benchmark, Plot No. G-1 +91 22 3090 2380
Nungambakkam 10th Floor, Block – EP & GP, Sector V adiwanji@kpmg.com
Chennai - 600034 Salt Lake City, Kolkata 700 091
Tel: +91 44 3914 5000 Tel: +91 33 44034000 Naresh Makhijani
Fax: +91 44 3914 5999 Fax: +91 33 44034199 Executive Director
+91 22 3090 2120
Delhi Mumbai nareshmakhijani@kpmg.com
Building No.10, 8th Floor Lodha Excelus, Apollo Mills
DLF Cyber City, Phase II N. M. Joshi Marg
Gurgaon, Haryana 122 002 Mahalaxmi, Mumbai 400 011
Tel: +91 124 307 4000 Tel: +91 22 3989 6000
Fax: +91 124 254 9101 Fax: +91 22 3983 6000
Hyderabad Pune
8-2-618/2 703, Godrej Castlemaine
Reliance Humsafar, 4th Floor Bund Garden
Road No.11, Banjara Hills Pune - 411 001
Hyderabad - 500 034 Tel: +91 20 3058 5764/65
Tel: +91 40 3046 5000 Fax: +91 20 3058 5775
Fax: +91 40 3046 5299
The information contained herein is of a general nature and is not intended to address the circumstances of © 2010 KPMG, an Indian Partnership and a member firm of the
any particular individual or entity. Although we endeavour to provide accurate and timely information, there KPMG network of independent member firms affiliated with
can be no guarantee that such information is accurate as of the date it is received or that it will continue to KPMG International Cooperative (“KPMG International”), a Swiss
entity. All rights reserved.
be accurate in the future. No one should act on such information without appropriate professional advice
after a thorough examination of the particular situation. KPMG and the KPMG logo are registered trademarks of KPMG
International Cooperative (“KPMG International”), a Swiss entity.

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TA X

India Shariah Finance Summit 2010

What is Shariah Finance 4

Basic Contracts in Shariah Finance 6

Takaful (Shariah-compliant Insurance) 12

Shariah Guidelines for Insurance 12

Shariah Finance in India 16

Potential of Shariah Finance in India 17

Shariah Finance in Secular Countries 19

2. Doing business in India 24

Portfolio investment in India 25

Foreign Investment Policy on FII investment 26

Investment as Foreign Venture Capital Funds 27

Sectorwise regulation in foreign investment (illustrative) 28

Local Indian Subsidiary or Joint Venture Company 31

Limited Liability Partnership 32

Transfer Pricing in India 47

New Visa Regulations 55

New Foreign Trade Policy 59

1 Shariah Finance – Indian perspective

Financial arrangements constitute an integral part of the process of economic

Shariah Finance (also called as Islamic Finance, Ethical Finance Interest-free

The Banker in association with the Cambridge Consultancy Maris Strategies,

“ Today’s Islamic finance industry is rapidly evolving from niche to

What is Shariah Finance?

Shariah is an understanding of Islamic Law. The codified form of Islamic law is

• receipt and payment of interest (known as Riba)

• excessive ambiguity (known as Gharar)

• any kind of non-productive speculative activities such as gambling, wagering,

It is important to highlight here that it is not mandatory (from a Shariah point of

1 Research by TASIS, 2010

is desired that a Board of reputed scholars of Shariah is appointed to oversee and

Basic Contracts in Shariah Finance2

The section below gives a brief account of Shariah-compliant financing

Mudarabah (Capital Financing):

This type of partnership may be called trust financing or sleeping partnership.

Source: Research by TASIS, 2010

2 Research by TASIS, 2010

b. Profits are shared between the parties in a pre-agreed ratio

c. Entrepreneur’s return is only through profit

e. Mudaraba could be “restricted” or “unrestricted”

i. In “restricted Mudaraba” the managing partner (mudarib) is given

Partner 2 Musharakah (Joint Venture)

Source: Research by TASIS, 2010

a. All partners bring capital towards the project

b. Profits are shared among the parties in a pre-agreed ratio

e. Partnership could be equal (Mufawada) or unequal (inan). In the former case

f. Partnership could also be perpetual or diminishing. In the latter case, the

g.There are two variants of partnership in Musharakah:

i Partnership of ownership (Shirkat al-Milk). This is a partnership based on

ii Partnership through contract (Shirkat al-Aqd). This partnership is effected

Murabahah (Cost plus financing):

Payment made in installments

Source: Research by TASIS, 2010

b. This structure is tax inefficient and cannot be adopted by banks in countries

c. In many of the secular countries this mechanism is accommodated through

d. Countries looking at forms have accepted this as equivalent to interest-based

e. In case of any delay in payment of installments, the finance agency cannot

Payment of lease rentals

Source: Research by TASIS, 2010

e. A significant difference between an Islamic lease and a conventional lease is

Bay al-Salam (Forward Purchase):

Istisna (Manufacturing contract):