Opportunities Unbound Defense and Homeland Security in India 06 March 2012
Contents Speaker Profile Ernst & Young India The Indian Fact file Defense Market Oppurtunities Overview of Defence Procurement in India Homeland Security Scenario Offset, FDI and Entity structure Page 2
Himmat Mehta Himmat Mehta Associate Director, National Markets Tel: +91 0124 464 4000 Email: himmat.mehta@in.ey.com Background Himmat Mehta with an Armed Forces background is based in Delhi and has extensive experience spanning 29 years in the aerospace, defense and homeland security sector having worked in the industry as an end-user while in uniform, in R & D and subsequently has been providing consulting and business advisory services focused on strategic growth and transactions in the Indian market for over a decade Himmat also provided valuable inputs to international and domestic business entities on the DOFA policy besides having closely interacted with Government during the initial stages of policy-framing. He has worked across industry and provided services spanning India-entry Strategy, M&A, Strategic Expansion, JVs / Tech collaborations, Partner Search and funding (PE) for projects in India Indo-American Chamber of Commerce (IACC): - Member: Core Committee - Homeland Security Forum Guest speaker at various A&D Events / Seminars Relevant Experience Himmat has been involved with facilitating the business plans and launch of Indian and foreign companies in India and Africa (SADC Region) and has been on the Indian Board of some of these companies. He has also been closely associated with ASSOCHAM, the Foreign Consulates in India and industry players. India-entry and feasibility assessment for various foreign companies Market expansion facilitation and Partner Search services Lobbying with Government on policy issues While in active service in the Armed Forces he was actively involved with the modernization of the T-72 Tank and night fighting capability of A vehicles. Himmat has also been involved in the assessment of India-based System Integrators for Electronic and Allied Solutions in the Homeland Security Industry. Page 3
Pawan Khatter Pawan Khatter Manager Tax & Regulatory Tel: +91 124 464 4679 Email: pawan.khatter@in.ey.com Background Pawan is a qualified Chartered Accountant and a Manager with Ernst & Young s Tax Practice focussing on Aerospace & Defence sector He has more than 7 years experience in advising clients in corporate tax, foreign investment, exchange control and other regulatory matters Years of Experience: 7 Skills Corporate tax and regulatory advisory Inbound investment structuring Functional experience include corporate tax planning, structuring cross- border investments and transactions, and joint venture negotiations Experience Tax Advisory services to European Defence players in relation to their India operations Advised one of the largest Indian business Group with tax structuring and advisory support in relation to its Defence joint ventures with Foreign OEMs Tax Advisory services to a major US Defence player with respect to Defence contracts signed with the Government of India Assisted major Israeli Defence player in JV negotiations & structuring and tax advisory services with respect to JV with a largest Indian business Group Assisted various clients in a wide spectrum of industry sectors, on direct tax litigation at various appellate levels Advised US based financial conglomerate on its entry strategy and fund structuring for infrastructure joint venture in India Advised on Indian tax and regulatory matters relating to setting up of entity structures for investing in Indian and also on structuring their investments into specific projects/ entities Page 4
Ernst & Young Credentials Page 5
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India Fact File Page 10
India is the new land of opportunity In the next 25 years, we aspire to (having) growth rates of between 9 to 10 percent annually. This will enable us to lift millions of our people out of poverty so as to transform India into one of the largest economies in the world. Manmohan Singh, Prime Minister of India Land area Capital Population Climate Natural resources Religions Languages India fact file 3.29m sq km New Delhi 1.2 billion Broadly, India s climate can be classified as tropical monsoon. The country has four seasons summer (March June), monsoon (June September), postmonsoon (October November) and winter (December February). Coal (fourth-largest reserves in the world), manganese, bauxite, iron ore, mica, chromites, diamond, limestone, titanium ore, natural gas, petroleum, and arable land form India s natural resources. Hinduism, Islam, Christianity and Sikhism are the four main religions followed in India. Other religions include Buddhism, Jainism, Judaism and Zoroastrianism. Hindi is the official language of India. Apart from Hindi, there are 21 official languages including Bengali, Telugu, Marathi, Tamil, Urdu, and Gujarati. English is widely used in national, political and commercial communication. Literacy rate 74.04% (male: 82.1%; Female: 65.5%) Labor force 478.3 million (2010) Page 11
enabling steady macroeconomic growth Structural shift from an agrarian to a services driven economy Stable economic variables 31.5% (CAGR) One of the world s fastest growing major economies Robust forex reserves Foreign exchange reserves in India (US$ billion) 145 192 299 241 255 274 FY06 FY07 FY08 FY09 FY10 FY11F Page 12
Impact of the global economic crisis on India Rupee depreciation Additional planned expenditure Initiatives Liberalization of external commercial borrowings Impact on exports Reduction in duties/ Additional allocation for export incentive, reduction in repo/ reverse repo rates Economic slowdown did not have major impact in the Indian defence spend Page 13
Defense Market in India Page 14
Why Defense? India is the one of the world s largest importer of defense articles and services Overall size and immediate modernization needs of Indian defense forces are enormous 100% private sector investment with FDI up to 26% (prior approval of GOI), both subject to industrial licensing Target of 70% has been set for procurement through indigenous sources. As against current procurement of 9% from private sector Page 15
India Need to strengthen defence Lengthy borders/ Extensive coastline Insurgency in terrorist activities Military modernization/ Nuclear armament by neighboring countries Creation/ promotion of terrorist infrastructure/ terrorist attacks Page 16
Size of the Indian defense market The Union Budget 2011-12 has raised the defense outlays to US$ 36.54 billion representing a growth of 8.5% over the previous years original allocation of US$ 32.03 billion Defence as % of GDP Percent 2.5 2 1.5 2.35 2.16 2.12 2.03 1.95 2006-07 2007-08 2008-09 2009-10 2010-11 Defence as % of GDP There is an increase in capital outlay of 13.7% over last year's outlay of US$ 13.52 billion. The Indian Army has been granted the largest share of 50.60% in the defense budget at US$ 18.50 billion followed by Indian Air Force at US$ 10.14 billion and Indian Navy at US$ 5.40 billion Page 17
Modernization of Indian armed forces Existing Equipment Condition Desirable Equipment Condition The current profile of equipment held by Indian Armed Forces is: State-of-the-art: 15% vs. required 30% Mature: 35% vs. desirable 40% Obsolescent: 50% vs. acceptable 30% Page 18
Opportunity for participation in Indian defense industry development STRATEGIC PERSPECTIVE : GEOPOLITICAL The sophistication of India s arsenal lags it regional rivals Increased threat perception from the China- Pakistan nexus Increased proximity to the western economies Increased relevance in the economic cycle of the world STRATEGIC PERSPECTIVE : STRUCTURAL Very high dependence upon imports Very high dependence upon platforms of Russian origin Government owned defense manufacturing industry has not been efficient Private defense manufacturing industry is just starting to take off OPPORTUNITY India is embarking on one of the worlds largest and most sustained procurement cycles. India has introduced Defense Offsets and due to it being one of the top military spenders in the world, the offset obligation is a significant opportunity that will need to be addressed by the expansion of private defense manufacturing Page 19
All three defense services need new range of equipment and technology Share of Indian Defense services in the Defense budget 2011-12 % of total expenditure 0% 6% 28% 51% 15% Army Navy Air Force OFBs DRDO Page 20
New range of equipment required by Indian Defense forces Army Air Force Navy Future Infantry Soldier as a System (F- INSAS) Multi-Role Combat Aircrafts Aircraft Carrier Unmanned Aerial Vehicles (UAV) Upgrade of Jaguar MIG-27/ MIG- 29 Maritime surveillance aircraft Upgrade of T-72 Tanks/ ICV Mig-29K (Fulcrum-D) fighters Radars for Coastal Surveillance Specialized Vehicles like Mine and Protected vehicles Fifth Generation Fighter Aircraft Future MBT and Engine Device Hawk UAVs 155 mm Arty Guns, Field, SP Transport Aircraft Barak II Diesel Submarines Helicopters, UAVs Surface-to-Air Missiles ATVs (nuclear subs) Satellite Surveillance System Medium range surface-to-air missiles Short/medium range battlefield surveillance radars Battle Field Surveillance Radar Main Battle Tanks Page 21
Technology requirements Advanced rocket technology SEEKER Technology Surveillance, communicatio ns and navigation technologies High Power Laser generation Sensors/detec tors/radars Combat technology/pro tection Hypersonic Propulsion Miniature SAR &ISAR Technology for Hypersonic Propulsion Trajectory correction system/missile guidance System simulators Shared & Conformal Apertures Miniaturization /nano technology Thermal imaging (TI) & image intensification Networking technologies for seamless integration Page 22
Large orders-projected (all budgets are estimated) FICV (Future Infantry Combat Vehicle) FMBT (Future Main Battle Tank) P-75I (Submarine) Project TCS (Tactical Communication System) Replacement for AVRO Mahindra ; L&T ; Tata ; OFB MAKE US$ 5 Bn DRDO Design & Development N/A DCNS; HDW; Navantia; Rosoboronexport Buy & Make US$ 12 Bn Wipro; BEL; ECIL; TATA POWER; TCS; Rolta; Mahindra Satyam MAKE US$ 2 Bn SAAB; EADS; Alenia; Embraer; Bombardier; Ilyushin; Antonov Buy & Make Global US$ 3 Bn (est.) Page 23
Large orders in recent times C-130J (6+6) Lockheed Martin FMS US$(1+1)Billion P-8i (8+4) Boeing DCS US$ (2+1) Billion C-17 (10) Boeing FMS US$ 4.1 Billion MMRCA-Rafale Dassault Aviation Buy & Make Global US$ 18 Billion (est.) P-75 (Submarine) DCNS Buy & Make Global US$ 6 Billion Page 24
Market Composition Page 25
Indian players: Landscape Defense PSU s Top Private Players New Entrants India SME s HAL BEL MIDHANI OFB BrahMos Aerospace Private Limited BEML ECIL Tata Group L&T Mahindra Defense Systems Godrej and Boyce Mfg. Co. Ltd Ashok Leyland Alpha Design Technologies Auto Component companies Non Defense companies (having established manufacturing base) IT companies Suppliers/ vendors to Defense PSUs/ OFB Suppliers/ vendors to Foreign OEMs (very limited in number) Anjani Thermoplast MKU Private Limited Page 26
Different players have employed different business models in the A&D sector Complex L&T Tata & Israel Aerospace Tatas and L&T MACMET Technologies Product complexity Astra Microwave, Wipro, HCL Johnson Pumps, Verstala India, Dynamatic Technoligies L&T Ramoss India L&T and EADS Tata and Lockheed Martin Tata and Sikorsky Kirloskar Brothers Mahindra Defense Systems, Tata Motors, Ashok Leyland, Ramoss India Max Aerospace and Aviation Limited Qwest, Genser Aerospace and IT Private Ltd Offset player Sub system supplier JV with OEM Independent OEM player Services Simple Business models Page 27
Indian Aerospace & Defense Sector- Capability division Original Equipment Manufacturers / System Integrators Only Hindustan Aeronautics Ltd (HAL); Bharat Dynamics Ltd. (BDL); Bharat Electronics Limited (BEL); Bharat Earth Movers Limited (BEML) and other DPSU s have this tag This is largely because these were the only entities that were allowed to be present in the Aerospace & Defense market Private participation was only permitted from 2001 onwards Also Government budgetary support was only available to these companies TIER-1 TIER-2 TIER-3 These 2 tiers did not exist in India prior to 2001 It was only after 2001, when Private participation was permitted in the sector, did some activity start to take place The real shot in the arm was the OFFSET POLICY that was introduced in 2005 and enacted in 2006 With the continuous evolution of the offset policy, a higher level of participation is expected Traditionally DPSUs were playing the roles of primes but with significant in-house production capability spread across the entire production process and little outsourcing beyond component level supplies As a result they were managing thousands of vendors as suppliers, each with component level capability and very little tiering throughout the supply chain. For example OFB has 8000+ vendors and HAL has 2500+ vendors Page 28
Key international players active in India Company Product profile Indian presence Boeing Dassault Commercial Airplanes Integrated Defense Systems Space & Airborne Systems Commercial Airplanes Integrated Defense Systems In 2007, Boeing and major Indian public sector player, HAL signed a 10 year long MOU to work together for mutual benefit Joint Venture with Tata s Eight P-8I long-range maritime reconnaissance and anti-submarine warfare aircraft to the Indian navy Supply of 126 fighters to Indian Air Force ( IAF ) under Buy & Make Global category of Indian Defense Procurement Procedure Thales In India, Thales Group is equally active in the civil domain as in the field of aerospace & security Has a Joint Venture in India with Rolta and Samtel It also has a stake in DCNS which is engaged in construction of 6 Scorpene submarines at Mumbai s Mazagon Docks Page 29
Key international players active in India Company Product profile Indian presence EADS Finmeccanica Develops and markets Civil and Military Aircraft, as well as Missiles, Space Rockets, Satellites and related systems Operates globally in the Aerospace, Defense and Security Sectors, and is one of the world's leading groups in the fields of Helicopters and Defense Electronics. Sources aero structures such as doors from HAL & software from TCS EADS has set up a JV in India with L&T to explore opportunities in the Indian defense & aerospace sector Acquired a 24% stake in Indian Aero Ventures (IAV) MBDA, subsidiary of EADS is proposing a JV with India s BDL TATA with EADS is bidding for Army s Tactical Communication Systems Finmeccanica subsidiary WASS has contracted with India private player, Mahindra Defense Systems to help enhance the product offerings Finmeccanica & BEL have signed an agreement to produce radio systems for the Indian Army Page 30
Key international players active in India Company Product profile Indian presence Lockheed Martin P-3C Orion & Integrated Platform Management System for the Indian Navy C130J & F16 Aircrafts for the Indian Air Force Weather Radars, radars, Vessel Traffic Management System, Littoral Combat Ship, Aegis Weapon System, etc Negotiating with the Indian Navy & the DRDO for collaboration in the IT sector, aerospace security, RFID & other areas Has a joint venture with TATA AgustaWestland 12 AW101 helicopters AgustaWestland, a Finmeccanica company, has been awarded a contract with a value of EUR 560 million by the Indian Air Force for the supply of 12 AW101 helicopters for government transport. AgustaWestland AW119 helicopters in Hyderabad. Signed a joint venture (JV) with TATA to assemble AW119 helicopters in Hyderabad To Deliver 3 engined AW-101 helicopters to IAF Page 31
Key international players active in India SAAB Company Product profile Indian presence RIGS head-up display (RIGS HUD) Signed a memorandum of understanding to jointly develop, manufacture and market RIGS head-up display (RIGS HUD) in India. RIGS is a new generation advanced light-weight head up display (HUD) designed by Saab to provide helicopters with a cost-effective display solution Eurocopter Paramount Group MRO (maintenance, repair, overhaul) facility Mine-protected armoured vehicles (MPV) JV with Pawan Hans Helicopter Limited to establish an MRO (maintenance, repair, overhaul) facility in Delhi or Mumbai Second JV with Pawan Hans Helicopter LimitedStart a pilot training facility with a full-flight simulator Signed an agreement with Ashok Leyland Page 32
Overview of Defence Procurement in India Page 33
Organisational Structure Indian MoD Established to improve time and cost management across all capital acquisition processes Defense Acquisition Council (DAC) Ministry of Defense Ensures effective implementation fo Government policy directions and execution of approved programmes within approved budget Raksha Mantri Raksha Rajya Mantri Defense Services Dept of Defense Dept of Defense R&D (DRDO) Dept of Defense Production (DDP) Defense Finance - Headquarters of Integrated defense Staff (HQ IDS) - Army - Navy - Indian Air Force defense budget, establishment matters, defense policy, matters relating to Parliament, defense co-operation with foreign countriesand co-ordination of all defense related activities Prime design agency for formulation and execution of programmes of design/development of state of weapons systems and equipment of Armed forces Deals with matters pertaining to defense production, indigenisation of imported stores, equipment, spares, planning control and responsible for DPSUs - Examines need for equipment - Examines financial requirement - Makes budgetary provisions - Participates in commercial negotiation Page 34
Spirit of Defense Procurement Procedure ( DPP ) Expeditious decision making Simplification of Contractual and financial provisions Establish level playing field private and public Ship Building competitive basis Expansion of scope of offsets discharge Aim expeditious procurement, optimal utilization of budgetary resources, probity, public accountability, transparence in operations, free competition and impartiality Page 35
Defense Acquisition Plans 15 Years Long Term Integrated Perspective Plan (LTIPP) formulated based on defense planning guidelines in consultation with SHQ. Approved by DAC Five Year Services Capital Acquisition Plan (SCAP) indicating list of equipment to be acquired, keeping in view operational exigencies and overall requirement of funds. Approved by DAC Annual Acquisition Plan (AAP) would be a two year roll on plan for capital acquisitions and would consist of the schemes from approved five year Services Capital Acquisition Plan. Approved by DDP Page 36
Acquisition Categories Capital acquisitions are categorized as under: Buy Outright purchase of equipment Make Indigenous development to meet complete requirement Buy and Make Import partial requirement and produce balance in India Buy (Global) Both foreign and Indian vendors can bid Buy (Indian) Only Indians can bid with min 30% local content Buy and Make Global tenders are issued, partial quantity bought and balance produced in India Buy and Make (Indian) Only Indian bidders invited and equipment to have min 50% indigenous content Make (DRDO) Development of strategic, complex and security sensitive systems by DRDO Make (High-Tech) High-tech complex systems with min 30% indigenous content in prototype Make (Low-Tech) Low-tech mature systems with min 50% local content Page 37
Homeland Security Scenario Page 38
Security Paradigm In India India Nation Very High Threat Perception Internal & External Till Recently Indian & State Governments were largely responsible for providing security cover to its citizens, borders, buildings, airports, rail, transport etc. After 26/11 it is becoming a collaborative responsibility. Governments going for advance & on line state of art security systems. Privatization bringing in new players for securing national & organizational assets. Page 39
Indian security market Overall homeland security market is spread across central and state government spending and private security business Key Insights Total homeland security spending in the Indian market is expected to exceed USD 10 billion by 2016 Over the past five years, private security business in the country has grown at a CAGR of 25% to reach an estimated value of USD2 billion Mass transport security Seaport security Maritime security Border security Key threat domains Large event security Airport security First responder Critical infrastructure security Page 40
Internal Security Market in India: Government sector India s homeland security agencies received a substantial 25% y-o-y increase in their budget spending for 2009 10 vs only Approx 3% increase in the Defence Budget In 2009 10, Paramilitary forces were allocated USD 4.3 Billion as against USD3.4 billion in 2008 09 Additional amount of USD 100 Million is Drivers Increased threat perception across all threat domains Liberalization and opening up of Market to Private Players Growth of Indian Economy being proposed for modernization of police forces in the current year Additional amount of USD 500 Million is being provided for construction of fences, roads, flood-lights on the international borders Delhi Police was allocated USD 1.5 Billion Budgetary Constraints Manpower intensive security measures for Commonwealth Games Delhi 2010 security requirements Page 41
Critical focus areas & Scope of Work in developing your Business Strategy 1 Market Landscape Govt. & Private Demand estimate Core focus of the Security Mission Opportunities after 26/11 2 3 4 5 Stakeholders Major Programs- Contracting Procedures Competitive Landscape Implications & Challenges Central & State Govt. Stakeholders Interdependence of Ministries Govt. agencies responsible for implementation Large programs under implementation & to be announced Relationships between the State & Central Govt. Contracting & selection methodology Understanding & Analyzing CLIENT Product offerings Competitive Landscape Alignment & Solution Development of GOI/ States Requirements & Integration with Govt. Programs. CLIENT s current bouquet of solutions and its mapping to India s requirements Developing The Right Channel & OEM Organization & Strategy Building The Right Connects. Page 42
The Ministry of Home Affairs India Does Not Have A Concept Of Home Land Security. Apex Body is called Ministry of Home Affairs. (MHA). Police & Public Order Is A State Subject List II 7 th Schedule Of Indian Constitution MHA has multifarious responsibilities including internal security, Border Management, Centre-State relations, administration of UTs, disaster management, & others. MHA Department of Internal Security Department of States Department of Jammu and Kashmir (J&K) Affairs Department of Border Management Indian Police Service Central Police Forces Internal security Law and order Insurgency Terrorism Naxalism Security clearances Centre-State relations Inter-state relations Administration of UTs Human rights Prison reforms Police reforms Constitutional provisions in respect of the State of Jammu and Kashmir and all other matters relating to the State, excluding those with which the Ministry of External Affairs is concerned Management of international borders Strengthening of border guarding Border infrastructure development Border areas development Page 43
Key Trends Focus on private sector participation The MHA intend to leverage the capabilities of the private industry in IT and engineering design for meeting the needs of the homeland security The ministry plans to acquire up to 70% of its infrastructure requirements from the domestic private sector There are significant opportunities for the private industry to partner in the MHA s security upgrade initiatives. Rising transaction with international firms Increasing role of para military forces internal security US-based Raytheon and Boeing, Germany s Carl Walther & Rheinmetall, Britain s BAE, Sweden s SAAB and France s Thales are attracted by opportunities offered by the Indian domestic security market Further, Indian companies are partnering international specialist companies to acquire the requisite capability/technology to garner a larger share of the domestic security market in the country Israeli firms are the front-runners to form JVs with the Indian firms: Most Israeli firms offer integrated security systems. They have "off-the-shelf" solutions and have the capacity to tailor make products With change in security dynamics, the role of the Para Military forces Border Management, Airport protection, sensitive area management, air surveillance is expected to increase substantially. Page 44
FDI, Defense offsets and Entry options Page 45
A highly regulated sector FDI in Defense Production (26%)/ Security Agency in Private sector (49%) Ministry of Finance - Approval from Foreign Investment Promotion Board ( FIPB ) in consultation with Ministry of Defense ( MOD )/ Ministry of Home Affairs ( MHA ) Defense Production License application will be considered and given by Department of Industry Policy and Promotion (DIPP), Ministry of Commerce in consultation with MoD Import of defense equipment/ raw material License from Directorate General of Foreign Trade (DGFT) in consultation with MOD Export of Defense products MOD in consultation with the Ministry of External Affairs Page 46
FDI in IT related services and homeland security 100% FDI permitted under automatic route in IT- related services including Software development, system designs, etc. There is no specified sector restriction in the FDI policy for software development related activities In the past, foreign OEMs have either formed JVs with Indian Cos with more than 26% FDI or set up wholly owned subsidiaries to provide IT related services including software development with focus on defence sector Recently, MoD has raised issues in FDI in defence related software development. DIPP alongwith MoD will shortly release the list of specific defence products/ services which would be subject to 26% FDI limitation Homeland Security (FDI) Private Security Agencies Manufacturing Facilities 49% No specified policy exists Page 47
Offset policy Offset Policy was introduced as part of Defence Procurement Procedure ( DPP ) 2005 which was further fine tuned in DPP 2006, 2008 & 2009. DPP provides for an uniform offset of at least 30% in case of foreign contracts valued over INR 300 crores (USD 62.5 million). Offset is eligible only for value addition done in India i.e. value of imported components will not be counted towards offset Applicable where the acquisition project is categorized as: Buy (Global), i.e. outright purchase of equipment Minimum 30% offsets Buy and Make with Transfer of Technology, i.e. purchase from foreign vendor followed by Licensed Production Minimum 30% offset of the foreign exchange component Offsets not applicable for following categories: Buy (Indian), i.e. purchase from Indian vendors only minimum 30% indigenous content Buy (Global) including Indian JV with Foreign OEM if indigenous content in the product is at least 50 per cent Buy & Make (Indian) including Indian JV with Foreign OEM if indigenous content in the product is at least 50 per cent Fast track procurement DPP 2008 has added list of defence products/ services to facilitate the foreign vendors in implementing the offset obligations and such has been broadened by DPP 2011 Page 48
Means to discharge offset obligations Direct purchase of, or executing export orders, for defence products & components manufactured by, or specified services provided by Indian defence industry FDI in Indian organizations engaged in research in defence R&D as certified by Defence Offset Facilitation Agency (DOFA) FDI in Indian defence industry for industrial infrastructure for services, joint ventures & co-production of defence products & components As per DPP 2011 the words defence products and Indian Defence Industries have been modified as Eligible products and Indian Industries to include items and manufacturers / service providers of Homeland security and Civil aerospace Page 49
Entry options in India Liaison office Offices opened by foreign corporations in India To act as communication channel between them and Indian customers To spread awareness about their products To explore new opportunities Branch office Foreign companies may open branch offices in India to undertake business activities as permitted by the RBI such as: Consultancy services Research work Technical support services Export/import of goods, etc. Local Indian subsidiary company Foreign corporations set up wholly owned subsidiaries in India, subject to FDI guidelines Funding can be via debt, equity & internal accruals No approval required for repatriation of dividend Project office A foreign corporation which has secured a project from Indian company can set up project office in India, provided: Project funded by inward remittance from abroad Indian entity awarding the contract has a term loan from financial institution in India Limited liability partnership Form of business where the liability of the partners is limited to their agreed contribution to the LLP. Capital contribution by partner only in cash 100% FDI permitted in LLP with prior approval of FIPB* (in automatic route sector s only) *FIPB: Foreign Investment Promotion Board Page 50
Tax exemption for Defence services/ Technology Tax exemption under section 10(6C) Royalty/ Fees for Technical services Agreement between GOI & Foreign Company for security of India Exemption not available Exemption is notified by GOI in the Official Gazette of India For supply contract profits arising to Foreign Enterprise on account of supply of equipment could be taxable in India if Foreign Enterprise has a PE in India Page 51
Direct taxes in India Administration Regulator: Administration, supervision and control in the area of direct taxes lie with the Central Board of Direct Taxes (CBDT), which works under the Ministry of Finance. Indian tax year: The Indian tax year extends from 1 April of a year to 31 March of the subsequent year. A corporation tax year also ends on the same date. Submission of return: All corporations (except those who are required to submit transfer pricing certificate in Form 3CEB in respect of international transactions) are required to file a return of income (ROI) by 30 September, even in the event of loss. Payment of advance tax: Corporate tax liability needs to be estimated and discharged by way of advance tax in four instalments on 15 June, 15 September, 15 December and 15 March every year. Corporate income tax Income tax (individuals) Composition: A corporation s income of: Income from house property Income from business Capital gains on disposition of capital assets Residual income arising from non-business activities Tax treaty: If there is a tax treaty between India and the country of residence of the taxpayers, then provisions of the Indian Income Tax Act or the tax treaty, whichever is beneficial will apply. Liability of income tax: Liability for income tax is governed by the residential status of individuals during the tax year. Types of income subject to tax in India: Employment income Taxation of employer provided ESOPs Income from house property Self employment and business income Capital gains on assets Page 52
Direct taxes in India Rates Nature of Income Corporate income tax Rates of corporate tax Domestic Corporation (h) 30 Foreign Corporation 40 Dividend Distribution Tax 15 Long term capital gains tax 20 MAT (Minimum Added Tax) 18.5 Withholding Tax Dividends Paid to domestic companies 0 Paid to foreign companies 0 Interest Paid to domestic companies 10 Paid to foreign companies 20 Royalties from patents, know how etc Paid to domestic companies 10 Paid to foreign companies 10 FTS Paid to domestic companies 10 Paid to foreign companies 10 Net operating losses Carry back 0 Carry forward 8 Tax Rates Residential status Resident and ordinary resident Resident and not ordinarily resident Income slabs (INR) Taxability 0 180,000* Nil Worldwide income Income received in India or deemed to be received in India Income accruing or arising in India or deemed to accrue or arise in India Income accruing or arising outside India, either from a business controlled from India or a profession setup in India Non-resident Income received in India or deemed to be received in India Rates of individual tax Income accruing or arising in India or deemed to accrue or arise in India* Income tax 180,001 500,000 10% of income in excess of INR 180,000 500,001 800,000 INR 32,000 plus 20% of income in excess of INR500,000 800,001 upwards INR 92,000 plus 30% of income in excess of INR 800,000 Page 53
Direct taxes in India Proposed changes Direct Tax Code Bill, 2010 (DTC 2010) DTC 2010 marks a new era in the Indian tax scenario after more than 50 years of operation of the current Income Tax Act, 1961. It intends to lend simplicity, flexibility and stability to the taxation system and also reduce the scope for ambiguity and litigation. Particulars Current tax rates under IT Act Tax rates under DTC 2010 Domestic Company 30%* 30% Foreign Company 40%* 30% Branch Profit Tax (BPT) Not Applicable 15% (New Tax) DDT 15%* 15% MAT 18.5%* of adjusted book profits 20% of adjusted book profits Wealth tax 1% on net wealth exceeding INR 3m 1% on net wealth exceeding INR 10m * Surcharge and Cess as applicable Page 54
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Annexure - List of products eligible for offset credit PRODUCTS Small arms, mortars, cannons, guns, howitzers, anti tank weapons and their ammunition including fuze Bombs, torpedoes, rockets, missiles, other explosive devices and charges, related equipment and accessories specially designed for military use, equipment specially designed for handling, control, operation, jamming and detection Energetic materials, explosives, propellants and pyrotechnics Tracked and wheeled armoured vehicles, vehicles with ballistic protection designed for military applications, armoured or protective equipment Vessels of war, special naval system, equipment and accessories Aircraft, unmanned airborne vehicles, aero engines and air craft equipment, related equipment specially designed or modified for military use, parachutes and related equipment Barco s product Electronics and communication equipment specially designed for military use such as profile electronic counter measure and counter measure equipment surveillance and monitoring, data processing and signaling, guidance and navigation equipment, imaging equipment and night vision devices, sensors Specialized equipment for military training or for simulating military scenarios, specially designed simulators for use of armaments and trainers Page 56
List of products eligible for offset credit Forgings, castings and other unfinished products which are specially designed for products for military applications and troop comfort equipment Miscellaneous equipment and materials designed for military applications, specially designed environmental test facilities and equipment for the certification, qualification, testing or production of the above products Software specially designed or modified for the development, production or use of above items. This includes software specially designed for modeling, simulation or evaluation of military weapon systems, modeling or simulating military operation scenarios and Command, Communications, Control, Computer and Intelligence (C 4 I) applications High velocity kinetic energy weapon systems and related equipment. Direct energy weapon systems, related or countermeasure equipment, super conductive equipment and specially designed components and accessories Products for Internal Security Arms and their ammunition including all types of close quarter weapons. Protective Equipment for Security personnel including body armour and helmets. Vehicles for internal security purposes including armoured vehicles, bullet proof vehicles and mine protected vehicles. Riot control equipment and protective as well as riot control vehicles Specialized equipment for surveillance including hand held devices and unmanned aerial vehicles Page 57
List of products eligible for offset credit Civil Aerospace Product Design, Development, Manufacture and Upgrade of all types of fixed wing and rotary wing aircraft or their airframes, aero engines, avionics, instruments and related components Composites, forgings and castings of the product Training Aids viz simulators, associated equipment, software and computer based training modules Guidance and navigation Equipment Test facilities and equipment required for testing, certification, qualification and calibration of the above products Software specially designed, developed or modified for the above products SERVICES Maintenance & overhaul of defence products (including defence software) Upgradation and life extension of eligible products (including software) Engineering, design, testing of eligible products (including software) Quality Assurance services Training (including training services and equipment excluding civil infrastructure) Page 58