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Choosing an Investment Model for India’s Medical Devices Industry

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By Dezan Shira & Associates
Publications Editor: Samuel Wrest

Medical IllustrationThis year, India’s medical devices industry will be opened up to 100 percent foreign direct investment (FDI).  The move had been in the works for some time – India’s union cabinet met last year to discuss the reform, while the industry’s regulatory framework has been tweaked several times since it was first introduced in 2005.

India presents an attractive market opportunity for global medical device manufacturers, but the country has never been able to tap into its potential as a domestic manufacturing base. Despite having a medical device market that ranks in the world’s top 20, the industry has a long history of being under-resourced.

The new FDI cap will spur foreign investment in India’s domestic medical device industry. However, companies should be careful when planning their entry strategy. The type of entity a firm chooses and the state they choose to locate it in is influential, and a thorough understanding of the industry’s various regulations is absolutely necessary.

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Direct Investment

When foreign entities invest in India, their investment will go through one of two FDI routes, which affects the amount they are able to invest and the investment timeline The two routes are:

  • The Government Route: For investment in business sectors requiring prior approval from the Foreign Investment Promotion Board (FIPB)
  • The Automatic Route: For investment in business sectors that do not require prior approval from the government

India previously permitted 100 percent FDI in its medical devices industry through the government route, which has been widely identified as a key reason for the sector’s poor investment inflows. However, the government has said that India’s domestic firms will not be able to invest the kind of capital that the sector needs. Increased FDI is therefore seen as the primary way to see the industry grow. 

The decision to change the investment route had an almost instant impact on the shares of domestic Indian medical device manufacturers. Opto Circuits (India) Ltd saw a sharp rise of 16 percent, while Siemens India rose by 2.2 percent. Local analysts expect this trend to continue.  

Although the changes in FDI policy will go some way to improve the sector, there are a number of other problems that could deter foreign investors from manufacturing in India. High tax rates imposed on domestic manufacturers have made investment unappealing to some foreign companies, especially given the comparatively low amount of tax levied on imported medical goods. It is therefore hardly surprising that foreign firms often choose to access India’s medical market without establishing a direct presence – many companies establish factories in neighboring China and export devices into India.

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Importing Medical Devices 

Accessing India’s medical devices industry through an indirect route remains attractive to foreign firms. India is heavily reliant on foreign imports:  70 percent of its medical devices and equipment are outsourced from other countries, particularly from the U.S.

Medical device companies that have already been approved in the U.S., Europe, Canada, Japan or Australia are able to legally sell in India. Prior to starting the import process, firms must prepare and submit a technical dossier; documents that clearly detail the type of devices intended for import and their associated risks. Devices with higher levels of risk to patients, and which necessitate greater control for safe use, will require a longer dossier and will further be subject to stricter checks. Should the dossier be found to lack all relevant information, it will likely be rejected.

If a company does not have a branch office in India, it will have to contract an importer that possesses a valid import license. Doing so is often a difficult process for companies that have not sourced a consultant, and should not be completed without first conducting a thorough due diligence of the prospective candidate.   

India’s Domestic Market 

The global size of the medical devices sector is predicted to reach US $400 billion this year. However, India – a key player in the global pharmaceuticals industry, of which medical devices used to be covered – is underperforming. The country’s market share stood at US $6.3 billion in 2013, contributing around 7-8 percent to overall healthcare spending in India as opposed to the 18 percent contributed by pharmaceuticals. With per capita spending estimated to be at less than US $3, it is understandable that the government feels FDI is the only way to spur domestic growth.

Despite such figures, India’s medical devices sector is expected to experience unprecedented growth during the next decade. By 2025, the industry is projected to be worth US $50 billion. This can be attributed to the country’s growing middle class, an increase in the number of hospitals and, consequently, a greater need for sophisticated medical devices and better healthcare.


About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

 

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IB Nov issue smallEstablishing Your Sourcing Platform in India
In this issue of India Briefing, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.

Taking Advantage of India’s FDI Reforms
In this edition of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.

China Investment Roadmap: The Medical Device Industry
In this issue of China Briefing, we present a roadmap for investing in China’s medical device industry, from initial market research, to establishing a manufacturing or trading company in China, to obtaining the licenses needed to make or distribute your products. With our specialized knowledge and experience in the medical industry, Dezan Shira & Associates can help you to newly establish or grow your operations in China and beyond.

Land Acquisition May Become Easier in India, but Risks Remain

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 By Adam Pitman, International Business Advisory Manager, Dezan Shira & Associates 

When foreign companies announce plans to invest in India, they are often inundated with incentives from different levels of Indian government. However, outside the halls of government, officials are constrained in what they can feasibly deliver. In many cases, officials trip on their own shoelaces – projects worth billions of US dollars are currently stalled because of land acquisition regulations.

In recent weeks, the government announced two initiatives that will make acquiring and repurposing land easier for many businesses. Reforms to land acquisition and environmental regulations compliment the government’s ‘Make in India’ initiative, which is designed to improve conditions for manufacturers, but will also improve international perception of India’s investment climate.

The government’s initiatives will alter pre-investment considerations for many businesses; some burdensome aspects of land acquisition and use will be removed for projects in critical development areas. The reforms will also change the nature of on-going land disputes. However, land acquisition and environmental regulations remain sensitive issues; market entry and business advisory services are still mission-critical for foreign companies.

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Investing in India’s Emerging Wine Industry

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By Dezan Shira & Associates
Editor: Grace Tate 

India’s expanding wine industry is in the midst of a vital transition. Last year, the country’s wine production hit a record 17 million liters, with export sales rising 40 percent year-on-year to reach US$4.4 million in the first 7 months. With a rapidly growing export sector, expanding domestic consumer market and increasing industry support in major wine-producing States, the Indian wine industry has potential to be a global market competitor.

This year, the Indian Government, in conjunction with the newly formed Indian Grape Processing Board (IGPB), is aiming to finalize the harmonization of Indian wine standards with the International Organization of Vine and Wine (OIV) guidelines. Set to be a catalyst for state reform, the new standards are good news for producers, investors and traders alike, who have eagerly anticipated the industry’s rise for the past decade.

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An Introduction to Doing Business in India 2015 – New Report from Dezan Shira & Associates

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Doing biz coverAn Introduction to Doing Business in India 2015, out now and available as a complimentary download in the Asia Briefing Bookstore, is designed to introduce the fundamentals of investing in India. As such, this comprehensive guide is ideal not only for businesses looking to enter the Indian market, but also for companies who already have a presence here and want to keep up-to-date with the most recent and relevant policy changes.

2014 was an important year for India.  A perceived high level of risk previously limited the country’s ability to attract foreign businesses, but a slew of new policies have had an instant impact. The reforms that have already been implemented are numerous and include infrastructural improvements, the raising of FDI caps, and the simplification of visa obtainment procedures. These policies and a myriad of other subjects are included in this guide.

Doing Business in India 2015 covers the following:

  • Establishing and Running a Business
  • Tax and Accounting in India
  • Human Resources and Payroll Considerations

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A Guide to India’s Transfer Pricing Law and Practice – Part 1

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By Shilpa Goel – Business Advisory Associate, Dezan Shira & Associates 

India enacted transfer pricing rules in 2001, which require companies to conclude international transactions with associated enterprises at an arm’s length. The legislation is primarily targeted at large business groups who engage in base erosion and profit shifting to avoid paying corporate income tax in India. This article is the first of two that will provide an insight into some of the key compliance issues that surround India’s transfer pricing regime, which has, since its enactment in 2001, evolved and acquired new shapes.

The key transfer pricing legislation in India is contained in Chapter X of the Income Tax Act (IT Act), 1961. In addition, the Central Board of Direct Taxes (CBDT) issues circulars and notifications as well as specific guidance known as Taxpayer Information Series, which, together with rulings of tax tribunals and courts, comprise Indian transfer pricing rules. These are given effect to by specialists working under the CBDT’s supervision, including the Directorate of International Taxation and Transfer Pricing, Transfer Pricing Officers (TPO), and Assessing Officers (AO).

In interpreting domestic transfer pricing rules, courts in India rely on guidance published by the Organization for Economic Cooperation and Development, such as commentaries on specific transfer pricing provisions contained in model double tax avoidance conventions and the transfer pricing guidelines for multinational enterprises and tax administration. However, the domestic legislative framework takes precedence over the OECD guidance.

Concept of “arm’s length price”, “international transaction” and “associated enterprises”

Section 92 of the IT Act requires international or specified domestic transactions carried out between associated enterprises to reflect arm’s length pricing – that is, the price that would have been paid if such transactions were made between independent third parties at general market value.

For the purpose of the IT Act, “international transaction” means a transaction between two or more associated enterprises and includes purchase, sale or lease of tangible or intangible property, provision of services, or lending or borrowing money, or any other transaction that has a bearing on the profits, income, losses or assets of the enterprise.

“Associated enterprise” means, in relation to another enterprise, an enterprise that participates, directly or indirectly, in the management, control or capital of the other enterprise. The IT Act also sets out a certain shareholding participation threshold under which two or more enterprises are deemed to be associated with each other.

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Methods for calculating arm’s length price

The rules state that the arm’s length price must be established using five specific transfer pricing methods. These methods – which largely mirror those outlined in the OECD guidance – include comparable uncontrolled price, resale price, cost plus, profit split, and transactional net margin methods. Additionally, the CBDT prescribes other appropriate methods to establish the arm’s length price so long as they are in conformity with the OECD guidelines.

Transfer pricing documentation and penalties

An enterprise entering into an international transaction with an associate enterprise must maintain transfer pricing documentation, the requirements of which are set out in Section 92D of the IT Act and Rule 10D of the Income Tax Rules. The rules require enterprises to submit details of international transactions in Form 3CEB, which is appended to the tax return. Any supplementary documentation must be produced before the tax authority upon request.

Transfer pricing documentation is pivotal in defending the enterprise’s own transfer pricing treatment and avoiding transfer pricing penalties. A penalty is applicable where the enterprise has failed to file Form 3CEB, or where the enterprise fails to submit all necessary details of international transactions and associated enterprises, and where submitted, the details provide an inaccurate account of particulars of income.

Transfer pricing audit, adjustments and appeal

In India, the principal approach in selecting cases for transfer pricing audit is “risk-based”, which is carried out through the Computer Aided Selection System (electronic software). CASS plays an important role in selecting cases for transfer pricing audit as large taxpayers (with annual income of more than INR 10 lakhs, approximately US $15,750) submit electronic returns. Paper returns, however, escape such an extensive selection process.

Taxpayers who have recorded international transactions worth more than INR 15 crores (approximately US $2.4 mil) in a given year are subject to mandatory scrutiny. In 2014, a government-appointed Tax Administration Reform Commission recommended doing away with mandatory scrutiny for lack of adequate infrastructure, hinting that the CBDT fails to pursue other “appropriate” cases in its pursuit for cases under mandatory scrutiny.

The tax authority is entitled to make transfer pricing adjustments to the enterprise’s total income in calculating the arm’s length price. The tax adjustment is subject to penalties, which is calculated based on the increase in the total taxable income or a decrease in the amount of allowances following such an adjustment.

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An enterprise disputing the tax authority’s adjustment may file an appeal against assessment orders according to the provisions set out under Sections 246 to 262 of Chapter XX of the IT Act. An appeal first lies with the Commissioner of Income Tax (CIT Appeals), and must be made within 30 days from the date of assessment order. Alternatively, Section 144C of the IT Act provides for an optional Dispute Resolution Panel (DRP) to speedily adjudicate disputes relating to international transactions, including transfer pricing.

An appeal further lies with the Income Tax Appellate Tribunal within 60 days from the date of the order of the CIT Appeals or the DRP. Thereafter, appeal lies with the respective High Court and finally with the Supreme Court. The limitation period prescribed for appeals is fixed and may only be varied at the discretion of the adjudicating authority and subject to presentation of satisfactory evidence justifying the delay.

Advance pricing agreements

In 2012, the Government introduced an advance pricing agreement (APA) regime with a view to reducing transfer pricing litigation. An APA is an agreement between the tax authority and the taxpayer to determine, in advance, the arm’s length price in relation to an international transaction. Under Section 92CC of the IT Act, the CBDT is empowered to enter into an advance pricing agreement with any person, determining the arm’s length price or specifying the manner in which the arm’s length price is to be determined, in relation to an international transaction to be entered into by that person.

An APA can be of three kinds: unilateral, and bilateral or multilateral APAs involving foreign tax authorities. Once entered, an APA is usually binding and valid for five years, but may be declared void on grounds of fraud or misrepresentation of facts. Primarily, an APA is entered into with the following four objectives:

  • Increases tax certainty, as arm’s length pricing is pre-determined;
  • Avoids double-taxation, as a bilateral or multilateral APA binds a foreign tax authority;
  • Reduces compliance costs, as audit risks are eliminated; and
  • Easy transfer pricing documentation.

To strengthen the administrative set up of APA to expedite disposal of applications, Budget 2014 introduced a “Roll Back” provision in the APA scheme, which implies that an APA entered for future transactions may be applied to international transactions undertaken in the previous four years in specified circumstances.

Mutual agreement procedure

In addition to APAs, countries usually agree a mutual agreement procedure (MAP) at the time of concluding double tax avoidance agreements (DTAAs). The procedure is usually contained in Article 25 of the DTAA, which requires two contracting countries to endeavour to amicably resolve tax disputes (by way of arbitration) that arise from the DTAA. As part of its work on base erosion and profit shifting (analysis to be included in part 2 of this article), the OECD is seeking to set out a uniform framework on MAP for countries to apply. However, at the recently concluded meeting of the Group of Twenty (G-20) nations in Australia, India’s representation expressed reservations on introducing a mandatory arbitration clause in tax treaties.

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About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

 

Related Reading-IB

IB Nov issue smallEstablishing Your Sourcing Platform in India
In this issue of India Briefing, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.

Taking Advantage of India’s FDI Reforms
In this edition of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.

An Introduction to Audit in India In this issue of India Briefing, we examine how India’s accounting standards differ from the globally accepted IFRS and IAS protocols, and outline the standard steps and procedures an Indian auditor will go through during the audit process and explain pre-audit preparations that can be carried out to make the process easier to follow and understand for foreign executives.

Sidestepping Due Diligence, E-Commerce Giant Uber Falls Hard in India

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By Adam Pitman

The absence of modern e-commerce regulations in India has setback app-based Uber. While disruptive innovators regularly maintain that their businesses help develop regulatory environments, the risks of disruptive innovation can outweigh the rewards in countries where the rule of law is unpredictable and regulatory conditions are fluid. These conditions make due diligence a necessity.

When Uber began India operations in September 2013, the company rode a wave of positive customer reviews and glowing media exposes. Tech savvy consumers happily abandoned unreliable municipal and radio taxi services; Uber quickly expanded to eleven cities across India, growing at an average of 35 to 40 percent a month. Indeed, Uber grew so rapidly that it struggled to contract enough drivers – the company began training inexperienced drivers and even provided individual loans for drivers to buy vehicles.

Uber’s innovative operating model allowed it to keep pace with high levels of demand. However, the rapid expansion of the service created liabilities that Uber did not anticipate.

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Tax Disputes in India – a Year in Review

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By Andrew Salzman

When elected in May 2014, India’s Prime Minister Narendra Modi and the BJP sought to establish rule of law in disputes with foreign firms and reduce uncertainty amongst foreign investors caused by issues surrounding Vodafone  and Nokia. With the end of the year fast approaching, in this article we take a look at some recent court decisions to see if the climate for foreign investors in the judiciary is matching recent efforts by the government to make the country friendlier for foreign firms.

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Registering your Indian Employment Visa

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CB-illustrationBy Adam Pitman

Expatriates first in-country encounter with Indian bureaucracy often occurs at the Foreign Regional Registration Office (FRRO). After obtaining an Indian visa, registering the visa at a FRRO is often an afterthought for expatriates. Unfortunately, however, registering a visa is a cumbersome process.

If the duration of the visa exceeds six months (180 days), the visa holder must register the visa within 14 days of arrival at a FRRO. The only exception to this is for Pakistan nationals, who must register within 24 hours.

 Long-term visa holders should plan to register their visa as soon as possible; failing to register a visa within the specified time period can result in a fine, and in some cases, an investigation. An investigation can take several weeks – the visa holder is not permitted to leave the country during this time period. In addition, investigations may complicate any future visa applications or renewals. 

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Registration Documents

 Before visiting a FRRO to register an employment visa, a visa holder needs to prepare the registration documents required by Indian authorities. Like the visa application, both the visa holder and their employer must provide support documents to register the visa. This process requires coordination between the visa holder and their employer; visa holders and their employer should plan to allow 2-3 days to gather and complete these documents.

 The visa holder must ordinarily provide:

  • A completed visa registration application form
  • Six passport size photos of the applicant
  • A copy of the photo page within the passport
  • A copy of the visa page within the passport
  • Proof of address, such as a driver’s license or utility bill, from the visa holder’s home country
  • A notarized copy of a lease deed/agreement or a C-Form from a hotel of residence
  • Visa registration fees

The employer must ordinarily provide:

  • Two copies of a permission letter that requests approval for the applicant’s visa registration
  • Two copies of a sponsorship letter that pledges responsibility for the applicant’s activity in India and promises to repatriate the applicant at company cost if any adverse conduct comes to notice
  • Two copies of a letter confirming the visa holder’s residential address in India
  • Two copies of an employment contract that specifically states the monthly salary, designation, tenure of employment, etc.
  • The company’s Incorporation Certificate

All documents, with an exception for the Incorporation Certificate, must be original copies, drafted on company letterhead, signed by a senior manager, and marked with the company’s official stamp.

Visiting FRROs

After the registration documents have been completed, visa-holders can register their visa at FRROs located across India. The latest available listing shows that FRROs are located in the following cities:

India-map (2)

Indian authorities ask visa-holders stationed outside of these regional centers to register their visa with the local police. However, visa-holders should attempt to register their visa with a FRRO if possible. Local police are often unaware of the visa registration process, which can lead to unnecessary delays and complications. Moreover, local police officers in rural and un-developed areas are often under-resourced.

For these reasons, many visa-holders stationed in rural and un-developed areas register their visa at a FRRO. This ensures that visa-holders receive the swiftest possible service and maintain privacy at their field location. To do so, the applicant must stay at a regional center with an FRRO for several days, listing a local affiliate office – such as a sales office – as a place of business.   

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Registering Your Visa

To register a visa, the applicant must bring all required documentation and physically visit an FRRO. Visa holders may schedule a visa registration appointment; however, many visa holders simply visit the FRRO at a time of their choosing. Visa holders that have not scheduled a registration appointment should arrive at the FRRO as early as possible to avoid large crowds.

While visa holders will likely need to wait several hours for a registration officer, well-organized applicants will receive a registration certificate from the officer in a matter of minutes. Once the process is completed, the visa holder becomes legally eligible to work and reside in India for the allowed period.

Although visa holders seeking to register their stay in India can successfully do so independently, many companies employ a local visa consultant. These consultants, who are often certified lawyers, can provide form letters and crosscheck registration documents to ensure that registration applications do not invite any undue scrutiny.

In addition, visa consultants can enter the FRRO with the visa holder to provide support during the registration. Visa holders are not allowed to bring local guests into the FRRO; the presence of a visa consultant ensures that the applicant is accompanied by someone who can speak the local language and answer technical questions during the registration.

A Cumbersome but Valuable Experience

Although registering an employment visa can be a burden for freshly arrived expatriates, the experience provides important insights into the Indian bureaucratic process. Expatriates unfamiliar with Indian bureaucracy will learn local practices that are critical for preparing and submitting official documents in India. Moreover, the process can help managers understand the amount of time and energy required for doing business with local government offices. 


About Us

Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

Stay up to date with the latest business and investment trends in Asia by subscribing to our complimentary update service featuring news, commentary and regulatory insight.

 

Related Reading-IB

IB Nov issue smallEstablishing Your Sourcing Platform in India
In this issue of India Briefing, we highlight the advantages India possesses as a sourcing option and explore the choices available to foreign companies seeking to create a sourcing presence here. In addition, we examine the relevant procurement, procedural and tax duty concerns involved in sourcing from India, and conclude by investigating the importance of supplier due diligence – a process that, if not conducted correctly, can often prove the undoing of a sourcing venture.

Taking Advantage of India’s FDI Reforms
In this edition of India Briefing Magazine, we explore important amendments to India’s foreign investment policy and outline various options for business establishment, including the creation of wholly owned subsidiaries in sectors that permit 100 percent foreign direct investment. We additionally explore several taxes that apply to wholly owned subsidiary companies, and provide an outlook for what investors can expect to see in India this year.

Passage to India: Selling to India’s Consumer Market
In this issue of India Briefing Magazine, we outline the fundamentals of India’s import policies and procedures, as well as provide an introduction to the essentials of engaging in direct and indirect export, acquiring an Indian company, selling to the government and establishing a local presence in the form of a liaison office, branch office, or wholly owned subsidiary. We conclude by taking a closer look at the strategic potential of joint ventures and the advantages they can provide companies at all stages of market entry and expansion.

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