2.1 Legislation on trade and investment

2.1.1 Legislation on trade administration

Laws governing Customs and customs administration mainly include Customs Act, 1962 and Customs Tariff Act, 1975. The Customs Act, 1962 is one of the major acts of India governing its import and export tariff and regulating its customs valuation standards. The Customs Tariff Act, 1975 stipulates in detail customs classification and specific tariff collection measures, including the classification and applicable tariff rates for imports and exports.

The basic trade law of India is Foreign Trade (Development and Regulation) Act, 1992. Relevant laws include the Foreign Trade (Regulation) Rules, 1993.

The Customs Tariff Act, 1975 has been amended to include various provisions on safeguard measures. The Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997 and Customs Tariff (Transitional Products Specific Safeguard Duty) Rules, 2002 govern the procedural aspects of safeguards. Section 9, 9A and 9B of the Customs Tariff Act, 1975 as well as the Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995 constitute the legal basis for anti-dumping investigations and the imposition of anti-dumping duties.

2.1.2 Legislation on investment administration

Directive laws on foreign investment in India include the Reserve Bank of India Act, 1934, Industrial Policy, 1991, Foreign Exchange Management Act, 1999, Companies Act, 1956, and Income Tax Act, 1961. In addition, India has promulgated many regulations governing specific aspects of foreign exchange management, such as the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000, Foreign Exchange Management (Establishment in India of branch or office or other place of business) Regulations, 2000, and Foreign Exchange Management (Insurance) Regulations, 2000.

2.2 Trade administration

2.2.1 Tariff system

Tariff in India is exclusively collected by the central government with the major part being ad valorem duty. The Ministry of Finance of India adjusts the tariff rates every year in its annual budgeting. In the Budget 2005-06, the import duties on a series of goods are reduced. Duty on polyester and nylon chips, textile fibres, yarns and intermediates, fabrics, and garments is reduced from 20 percent to 15  percent. Duty on primary and secondary metals is reduced from 15 percent to 10 percent. Industrial raw materials such as catalysts, refractory raw materials, basic plastic materials, molasses and industrial ethyl alcohol are now liable to a reduced customs duty rate of 10 percent; duty on lead is reduced from 15 percent to 5 percent. Duty on nine specified machinery used in pharmaceutical and biotech sectors is reduced to 5 percent. Duty on seven specified machinery used in leather and footwear industry is reduced from 20 percent to 5 percent; Duty on textile machinery and materials and parts of textile machinery is reduced from 20 percent to 10 percent. Duty on printing equipment components is reduced from 20 percent to 10 percent. From January 1st, 2005, India started to offer zero tariff to 115 products including computer, telecommunication equipment, semiconductors, and scientific instruments.

According to Customs Tariff Act, 1975, India’s tariff mainly consists of the following categories:

(1) Basic duty

This is the basic duty levied under the Customs Act. On general occasions, ordinary import duty is imposed on imports, but lower rates are offered to countries and regions with which India has signed trade agreements. At present, the average tariff rate is around 30 percent.

(2) Additional Duty

Any article which is imported into India shall, in addition, be liable to a duty (hereafter in this section referred to as the additional duty) equal to the excise duty for the time being leviable on a like article if produced or manufactured in India (means the excise duty for the time being in force which would be leviable on a like article if produced or manufactured in India, or, if a like article is not so produced or manufactured, which would be leviable on the class or description of articles to which the imported article belongs, and where such duty is leviable at different rates, the highest duty) and if such excise duty on a like article is leviable at any percentage of its value, the additional duty to which the imported article shall be so liable shall be calculated at that percentage of the value of the imported article.

(3) Export Duty

At present very few articles such as skins and leather are subject to export duty.

2.2.2 Import Administration

India has complicated regulations and restrictions on import, which can be roughly classified into the following four categories:

(1) Open general license items

At present, India allows the majority of imports into the Country without any restrictions. The importer only needs to fill in an open general license to import these items.

(2) Prohibited items

The list of prohibited items covers wild animal products, ivory, animal stomach inner membrane and animal fat.

(3) Restricted items

Special licenses need to be obtained from the Directorate General of Foreign Trade of India to import restricted items. The list covers some consumer goods, precious stones, animal and plants, seeds, some pesticide, medicine and chemicals, electronic products, safety-related products, and products reserved for the production of small enterprises.

(4) Canalized items

Some canalized items can be imported only by specified public-sector agencies. These include petroleum products (to be imported only by the Indian Oil Corporation); nitrogenous phosphates, potassic and complex chemical fertilizers (by the Minerals and Metals Trading Corporation); vitamin- A drugs (by the State Trading Corporation); oils and seeds (by the State Trading Corporation and Hindustan Vegetable Oils); and cereals (by the Food Corporation of India). However, import restrictions on these items may be phased out gradually.

In addition to the aforesaid restrictions, primary animal and plant products, food, tea waste, meat, poultry, and used cars to be imported into India are also subject to relevant laws and regulations of India.

2.2.3 Export administration

Since 1991, India has formulated schemes for different industries and has constantly issued various incentive measures. Tax reduction and exemption is offered to export enterprises, enterprises in special economic zones or export processing zones for the purpose of promoting export. In addition, the Foreign Trade Policy 2004-09 that took effect in September 2004 stipulates a series of new 5-year import and export incentive measures. The new policy mainly involves agriculture, handicraft industry, handloom, jade, jewellery, leather and shoe making sectors, exempting import duty for agricultural production materials, service tax for goods and services to be exported, service tax for export-oriented companies and enterprises, and bank securities for importers and exporters whose business volume reaches Rs. 5 crores.

2.2.4 Other trade-related tariff systems

With a view to protecting the interests of its domestic enterprises, the central government of India levies protective tariff through government announcement. Besides, it also has the power to increase the import and export tariff as an emergency measure and to levy safeguard duty, anti-dumping duty and countervailing duty. A particularly noteworthy fact is that the Customs Duty Act, 1975 particularly provides that the central government of India is entitled to impose transitional products special safeguard duty on imports from China.

2.3 Investment administration

The foreign investment policy of India is showing signs of loosened control. In 2005, India expanded the proportion of foreign investment allowed in private banking and telecommunication sectors. In February 2005, India raised the maximum limit of foreign ownership in private banks from 49 percent to 74 percent. In August 2005, The India cabinet abolished the restrictions that foreign investors are only allowed 10 percent votes in private banks. In February 2005, India raised the investment ceiling of FDI allowed in basic telecommunications services from 49 percent to 74 percent, but such investment is subject to Government approval.

At present, there exist two kinds of approval procedures for FDI. One is automatic approval procedure and the other is government approval procedure. Foreign investors are allowed to invest in all sectors (including the service sector) freely provided that the investment proportion is in compliance with that allowed in the foreign investment policy applicable to that particular industry. The government of India authorizes the Reserve Bank of India (RBI) to handle approval and examination in accordance with the automatic procedures. With regard to other foreign investments, approval must be obtained with the relevant government authorities, namely, to be approved by the Indian government with the recommendation of Foreign Investment Promotion Board (FIPB) of India.

2.3.1 Foreign direct investment under automatic route

FDI up to 100  percent is allowed under the automatic route from foreign/NRI (Non-residents in India) investors without prior approval in most of the sectors. FDI in sectors/activities under automatic route does not require any prior approval either by the Government or RBI, but the investors are required to notify the regional office concerned of RBI within 30 days of receipt of inward remittances.

In the event of any change in the industrial policy or the maximal limit for foreign investment, the Department of Industrial Policy & Promotion and the Secretariat for Industrial Assistance (SIA) under it will issue foreign investment announcements promptly. After that, RBI will announce the policy issued by the Secretariat for Industrial Assistance in the Foreign Exchange Management Act.

2.3.2 Foreign direct investment subject to government approval

Except for FDI under the automatic route mentioned above, all the other FDI requires government approval, particularly the following:

• Activities/items that require an Industrial License (including sectors retained for small enterprises, sectors that require compulsory license, and sectors subject to regional restrictions);
• Proposals in which the foreign collaborator has an existing venture/tie up in India in the same field
• Proposals for acquisition of shares in an existing Indian company in the Financial services sector and where Foreign Exchange Management Rules, 1997 is attracted; and
• All proposals falling outside notified industrial policy or under sectors in which FDI is not permitted.

FDI applications with NRI (Non-residents in India) Investments and 100 percent export-oriented unit (EOU) should be submitted to the Public Relation & Complaint Section (PR&C) of Secretariat of Industrial Assistance (SIA), and the other FDI applications should be made in FC-IL forms and submitted to the Department of Economic Affairs under the Ministry of Finance.

The Government usually makes decisions on whether to approve investment applications within 30 days.

2.3.3 Sectors forbidding FDI

The extant foreign investment policy does not permit FDI in the following cases: gambling and betting, lottery business, business of chit fund, housing and real estate business (except for the development of townships, housing, built-up infrastructure and buildings notified in Investment Press Note 2 (2005 series)), trading in transferable development rights (TDRs), retail trading; atomic energy; agricultural or plantation activities (excluding floriculture, horticulture, development of seeds, animal husbandry, pisiculture and cultivation of vegetables, mushrooms etc. under controlled conditions and services related to agriculture and allied sectors) and Plantations(other than tea plantations).

2.4 Competent authorities

The Ministry of Commerce and Industry is India’s trade administration authorities. It consists of the Department of Commerce and the Department of Industrial Policy & Promotion. The Department of Commerce is in charge of trade affairs and consists of Directorate General of Foreign Trade and Directorate General of Supplies & Disposals (DGS&D).

The Central Board of Excise and Customs under the Ministry of Finance is responsible for setting tariff rates, levying tariff duties, monitoring the customs and fighting against smuggling.

The Reserve Bank of India (RBI) is the competent authority of foreign exchange management. It is responsible for formulating, implementing and monitoring monetary policy, regulating and monitoring the operation of banks and the financial system, managing and controlling foreign exchange as well as issuing currency. The Foreign Direct Investment Promotion Board of India is the authority responsible for examining and approving FDI that falls beyond the automatic approval route. India Foreign Investment Implementation Authority (FIIA) has been established to facilitate quick implementation of FDI approvals and assist foreign investors in getting necessary approvals.

The Indian Investment Centre is the official investment management organization of India. It is the first contact point and is the single window agency for authentic information or any assistance that may be required for investments, technical collaborations and joint ventures. Its services are free of charge.