India’s total merchandise trade has tripled from US$252 billion in 2006 to US$794 billion last year. However, the rising numbers have brought with them an increasing number of legal and administrative reforms and considerations for import/export-related businesses.
In this article we will highlight supplier due diligence issues, import/export regulatory updates, the importance of tax residency certificates when selling to Indian companies and other relevant points to consider when setting up an offshore trading company for the India market.
Supplier Due Diligence
When conducting due diligence, it is wise to create a checklist of necessary information that will allow you to make a judgment call on the status of your supplier and their ability to deliver as promised. These documents may include public and private documents such as financial statements, account information, credit checks and checks on legal status, ownership, directors and scope of business.
Unlike China, India maintains an impressive public records system that you can use to ascertain the facts about your potential supplier. As such, it is crucial that you obtain any and all information necessary to establish that your supplier is both creditworthy and in good financial standing.
A typical due diligence report on a potential supplier should contain information pertaining to the following, at the very least:
- Company and personnel information (including share capital and taxation issues)
- Corporate structure
- Directors and shareholders, their interests and conflicts (if any)
- Financial information and status
- Licenses, permits, approvals and specific statutory compliance
- Any previous court orders or litigation issues against the company in question
- Insurance – quality of insurance coverage
- Examples of previous clients, such as references
Paying attention to the most updated laws and policies in India is extremely important because Indian laws are subject to changes on an annual basis. For example, India’s Export/Import (EXIM) policy is updated annually each March 31st, and the subsequent modifications, improvements and new schemes become effective starting the following day on April 1st (India’s financial year is April-March).
Also, since Indian exports and imports are regulated by the Foreign Trade Act, 1992, the Indian government has close control over such activities and transactions. This makes it doubly important to conduct a thorough due diligence investigation and to be completely aware of the specific issues pertinent to your business activities.
For instance, when conducting an import/export business in India, it is important that you take note of all of the import/export related issues associated with your business. At the very least, you’ll need to know whether the goods to be imported are classified as restricted, canalized or prohibited.
You also need to know if the goods to be exported are classified as restricted, prohibited or only for state trading enterprises (STEs) (i.e., items that can only be exported by designated STEs as subject to India’s EXIM policy).
You’ll also need to obtain the following documents to conduct import/export activities in India:
- Import/export license
- Customs declaration form
- Dispatch note
- Certificate of origin
- Any other relevant documents
The above documents are required to import/export items to and from India, and such activities are prohibited without them.
You should also be aware of the relevant duties imposed on the items to be imported/exported as specified by Customs Act, 1962 and Customs Tariff Act, 1975. The basic customs duties vary from 5% to 40%, depending on the item.
Be aware that the duty rates are periodically amended under the Finance Act. India’s HS Codes system with all applicable tariff rates can be viewed at www.eximguru.com/hs-codes/.
Selling to India
International businesses looking to sell products to Indian companies should be aware that the Indian buyer has the right to request a Tax Residency Certificate from the overseas vendor in order to process the related payment(s). Understanding this concept is important as it may allow you, the foreign vendor, to claim additional benefits under India’s various treaties and agreements.
Specifically, Section 90(4) of India’s Income Tax Act states: “An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless [a certificate of his being a resident] in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.”
Tax residency certificates are issued by various national tax bureaus as per their own specific format. However, the Indian government’s guidelines require that the following information be mentioned on the certificate:
- Name of the assessee
- Status (individual, company, firm etc.)
- Nationality (in case of individual)
- Country or specified territory of incorporation or registration (in case of others)
- Assessee’s tax identification number in the country or specified territory of residence
- Residential status for the purposes of tax
- Period for which the certificate is applicable
- Address of the applicant for the period for which the certificate is applicable
Tax Residency Certificates can be obtained from the relevant tax departments in the country of origin.
Many international businesses, even small ones, use so-called “offshore” company jurisdictions for trade purposes to take advantage of a certain country’s regulations (e.g., lower taxes, etc.). For example, utilizing a Hong Kong-based company for the purposes of trading with China is advantageous due to Hong Kong’s excellent business and financial services environment and its status as a free port – which entitles traders to lower tax rates.
The same type of structure can also be used with regard to Indian trade. It should be noted that India has numerous free trade and double tax treaties in place with countries throughout the world that can all be used to a trader’s advantage.
It should also be noted that India maintains a significant free trade agreement with the Association of Southeast Asian Nations (ASEAN) that reduces tariffs on thousands of imported/exported products. This 10-member trade bloc – which is made up of Indonesia, Singapore, Malaysia, Laos, Cambodia, the Philippines, Vietnam, Thailand, Myanmar and Brunei – is geographically close to India and includes some of India’s largest trading partners in Asia.
ASEAN also has a number of FTAs with China and multiple treaties with other countries as well. Consequently, for an international trading company, establishing an offshore company in ASEAN is a smart move. Doing so would give it automatic rights to claim the free trade benefits with both India and China.
The most popular jurisdiction in ASEAN for establishing these companies is Singapore. Offshore companies in Singapore are easy and inexpensive to set up, and Singaporean tax rates are also low and restricted only to trade and profits generated in Singapore (i.e., if you make a profit on a transaction in India, you won’t be taxed again in Singapore).
About the Author
Dezan Shira & Associates is a specialist foreign direct investment practice that provides advisory services to multinationals investing in emerging Asia. This article was first published in India Briefing and was reedited for clarity and conciseness. For further details or to contact the firm, please visit www.dezshira.com.