India Regulatory Brief: Positive Defense Reform, Hiccups for Web-Based Taxis and Medical Devices

Validity of Defense Industrial License Increased

The government extended the validity of industrial licenses for the defense industry from three to seven years. Further, defense companies can now extend the license for three additional years after the initial period. Industrial licenses are currently required to make items such as armored fighting vehicles, defense aircraft, warships, as well as arms and ammunition. Items that have both military and civilian applications do not require a defense-related industrial license.

The reform means that defense companies now effectively have ten years to begin manufacturing in India – a significant development given the long gestation period for large defense contracts. Department of Industrial Policy and Promotion officials report that the reform is designed to allow companies to focus on manufacturing, not compliance.

India is one of the largest defense importers in the world. The government has subsequently sought to protect and encourage domestic defense manufacturers. The foreign direct investment limit in defense stands at 49 percent, while laws permit foreign portfolio investments of up to 24 percent under the automatic route. Despite this, domestic firms have struggled to develop the capabilities needed to sate India’s defense requirements – the defense ministry recently reported that Indian companies have been unable to fulfill approximately US$ 15 billion in government tenders issued since 2013.

New Regulatory Framework for Web-Based Taxis?

If passed, the proposed Road Transport and Safety bill will require web-based taxi services like Uber and Ola to register as traditional taxi operators. The bill defines these web-based taxi services as “on demand transportation technology aggregators”, further stipulating that web-based taxi services will need to comply with Information Technology Act regulations as well.

Consequently, web-based transport providers will be unable to legally lease a vehicle, employ a driver, or represent themselves as a taxi service unless they register as a taxi operator. Once registered, web-based taxi services will have to provide information relating to fare structures, total number of journeys undertaken by passengers and distance covered.

Many of these stipulations fall outside of the current operating procedures and business models of web-based taxi service providers. Although the bill should provide a shock to the industry, which is currently unregulated, it should not come as a surprise. Federal and local governments have sought to bring web-based taxi service providers into a regulatory framework ever since the highly publicized sexual assault case involving an Uber-contracted driver in December 2014.

Government Exploring Price Caps for Medical Devices

The Department of Pharmaceuticals is setting up a committee to assess which medical devices should be brought under price controls in the domestic market. Media reports state that the committee will evaluate a number of factors – including the device’s nature of use, performance and related regulatory standards in other countries – before determining which products will be affected by a price cap.

The medical devices market in India is valued at US$6.3 billion; multinational firms supply an estimated 80 percent of India’s medical devices. Condoms and intra-uterine devices are the only medical devices that currently have capped prices in India; however, the new committee is expected to add another 14 devices to the list. Media reports suggest the committee will add some high-end medical devices – such as stents, catheters and other implants – to the list because their prices are particularly high in India.

Jaitley Provides MAT Clarifications

Following widespread criticism, Finance Minister Arun Jaitley recently offered some clarifications on exemptions from the minimum alternate tax (MAT) on the capital gains of foreign portfolio investors (FPIs). According to Jaitley, FPIs that have funds in bonds or private equity funds won’t be affected by the MAT, which stipulates that affected firms have to pay a 20 percent tax on their book profit if their taxable income was less than 18.5 percent of the book profit. All capital gains from the sale of securities, royalties, interest and technical service fees earned by foreign companies will also be exempt from MAT.

However, these changes will only be applicable as of this financial year, which began on April 1, 2015. This means tax disputes from before this date will still be decided through the courts. Jaitley also announced that foreign companies with just one board meeting in India won’t be treated as an Indian company for tax purposes.

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Doing Business in India 2015 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. We discuss a range of pertinent issues for foreign businesses, including India’s most recent FDI caps and restrictions, the key taxes applicable to foreign companies, how to conduct a successful audit, and the procedures for obtaining an employment visa.

Establishing 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.

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