India: Difference between revisions
imported>Doug Williamson m (Protected "India" ([edit=sysop] (indefinite) [move=sysop] (indefinite))) |
imported>Jeeten.patel@thinkpublishing.co.uk No edit summary |
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|header5 = | |header5 = | ||
| label5 = GDP: | | label5 = GDP: | ||
| data5 = $1. | | data5 = $1.93 trillion (2013) | ||
|header6 = | |header6 = | ||
| label6 = IGTA member: | | label6 = IGTA member: | ||
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|header8 = | |header8 = | ||
| label8 = Treasury association: | | label8 = Treasury association: | ||
| data8 = [ | | data8 = [Association of Certified Treasury Managers (ACTM)] | ||
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India’s currency is the rupee (INR). | India’s currency is the rupee (INR). | ||
India applies exchange controls, which are set by the government and administered by the Reserve Bank of India under the terms of the Foreign Exchange Management Act. | India applies exchange controls, which are set by the government and administered by the Reserve Bank of India under the terms of the Foreign Exchange Management Act. | ||
Unless permission has been granted by the Reserve Bank of India, all export proceeds must be repatriated within | Unless permission has been granted by the Reserve Bank of India, all export proceeds must be repatriated within six months of the shipment of goods (exporters based in a Special Economic Zone must also comply). Exporters are permitted to keep 100% of foreign exchange receipts in foreign currency accounts based in India. | ||
Any foreign exchange payment for imports with a value in excess of the equivalent of US$100,000 must be supported by relevant documentation. | Any foreign exchange payment for imports with a value in excess of the equivalent of US$100,000 must be supported by relevant documentation. | ||
==Taxation framework== | ==Taxation framework== | ||
===Corporate taxation=== | ===Corporate taxation=== | ||
Domestic companies are liable to tax at 30% and foreign companies at 40%. | Domestic companies are liable to tax at 30% and foreign companies and branches of foreign companies at 40%. | ||
A 5% surcharge applies to domestic companies if income exceeds INR 10m (2% for foreign companies); a 10% surcharge applies if income exceeds INR 100m (5% for foreign companies). An additional 3% cess is payable in all cases. | A 5% surcharge applies to domestic companies if income exceeds INR 10m (2% for foreign companies); a 10% surcharge applies if income exceeds INR 100m (5% for foreign companies). An additional 3% cess is payable in all cases. | ||
===Taxation of dividends=== | ===Taxation of dividends=== | ||
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===Transfer pricing=== | ===Transfer pricing=== | ||
The transfer pricing regime is influenced by OECD norms, although the penalty provisions in India are stringent compared to those in other countries. The definition of ‘associated enterprise’ extends beyond a shareholding or management relation-ship, as it includes some deeming clauses. The taxpayer is required to maintain certain information and documents and to provide a certificate (in a prescribed format) from a practicing chartered accountant that sets out the details of associated enterprises, international transactions, etc., along with the methods used to determine an arm’s length price. The certificate must be submitted by the due date for filing the annual tax return for companies required to submit such a certificate, i.e. 30 November. | |||
The | Where the application of the arm’s length price would reduce the income chargeable to tax in India or increase a loss, no adjustment will be made to the income or loss. If a taxpayer who benefits from a tax holiday is subject to a transfer pricing adjustment, the benefit will be denied to the extent of the adjustment. The allowable variation in computing the arm’s length price will be as notified by the government. (See ‘General anti-avoidance and disclosure requirements’ below, for application of the transfer pricing rules to transactions involving jurisdictions that do not effectively exchange information with India and for application of the general anti-avoidance rule). | ||
The scope of the transfer pricing provisions covers ‘specified domestic transactions’ if the aggregate value of those trans-actions exceeds INR 50 million in one year. Specified domestic transactions include payments to related parties, the inter-unit transfer of goods or services, transactions of profit-linked tax holiday units with other parties and any other transaction that may be notified. The pricing of these transactions must be determined with regard to arm’s length principles using methods prescribed under India’s transfer pricing rules. | |||
Advance pricing agreements are possible. | |||
===Thin capitalisation=== | ===Thin capitalisation=== | ||
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===Value added tax (VAT) / central sales tax (CST)=== | ===Value added tax (VAT) / central sales tax (CST)=== | ||
VAT is a state levy and applies to the sale of goods within the state. Each state has its own VAT legislation applicable to intra-state transactions. While the mean rate of VAT is 12.5% various states have increased this rate. However, other rates such as 5%, 4%, 1% and zero also exist for some products. As a multi-point tax, VAT has its own credit mechanism to avoid the cascading effect. | VAT is a state levy and applies to the sale of goods within the state. Each state has its own VAT legislation applicable to intra-state transactions. While the mean rate of VAT is 12.5% various states have increased this rate up to 15%. However, other rates such as 5%, 4%, 1% and zero also exist for some products. As a multi-point tax, VAT has its own credit mechanism to avoid the cascading effect. | ||
CST is a central levy and is applicable on inter-state sales. The rate of CST is 2%, subject to the fulfilment of specific conditions. In cases where the conditions are not fulfilled, the rate applicable in the state of sale is applied. | CST is a central levy and is applicable on inter-state sales. The rate of CST is 2%, subject to the fulfilment of specific conditions. In cases where the conditions are not fulfilled, the rate applicable in the state of sale is applied. | ||
''Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight | ''Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight 2015 [http://www.deloitte.com (http://www.deloitte.com)].'' | ||
==Banking service provision== | ==Banking service provision== | ||
The banking sector in India is dominated by state-owned financial institutions. The country’s 20 nationalised banks accounted for 52% of total banking sector assets in December 2013. India’s privately owned banks accounted for 18.3%, with the remainder split between foreign banks (4.9%) and regional rural banks (2.6%). | The banking sector in India is dominated by state-owned financial institutions. The country’s 20 nationalised banks accounted for 52% of total banking sector assets in December 2013. India’s privately owned banks accounted for 18.3%, with the remainder split between foreign banks (4.9%) and regional rural banks (2.6%). | ||
The 43 foreign banks have established 314 branch operations in India providing local and international transaction banking services. Foreign banks can conduct business in India through representative offices rather than through establishing a branch presence, and there are currently approximately 45 foreign banks operating representative offices. Foreign banks may | The 43 foreign banks have established 314 branch operations in India providing local and international transaction banking services. Foreign banks can conduct business in India through representative offices rather than through establishing a branch presence, and there are currently approximately 45 foreign banks operating representative offices. Foreign banks may own up to 49% of an Indian bank. | ||
==Clearing and payment systems== | ==Clearing and payment systems== | ||
===Clearing systems=== | ===Clearing systems=== | ||
India has a number of different payment clearing systems. As well as an RTGS system for high-value electronic payments, there are a number of low-value electronic and paper-based clearing systems. The RBI | India has a number of different payment clearing systems. As well as an RTGS system for high-value electronic payments, there are a number of low-value electronic and paper-based clearing systems. The RBI has implemented its cheque truncation system nationwide, which allows the same-day settlement of all local cheques. | ||
Electronic payments can be processed through Electronic Clearing Services (ECS) and NEFT (National Electronic Funds Transfer). | Electronic payments can be processed through Electronic Clearing Services (ECS) and NEFT (National Electronic Funds Transfer). | ||
A new processing platform, India Pay, was introduced in 2010 to process ATM transactions. In time, India Pay will expand to process credit and debit card payments. | A new processing platform, India Pay, was introduced in 2010 to process ATM transactions. In time, India Pay will expand to process credit and debit card payments. | ||
* '''''RTGS''''' – The Real-Time Gross Settlement (RTGS) system processes high-value and urgent electronic credit transfers above INR 200,000. It is operated by the RBI and was upgraded in October 2013. At present, there are approximately 160 participant banks in the RTGS system. Nationwide, the RTGS system is addressable at about | * '''''RTGS''''' – The Real-Time Gross Settlement (RTGS) system processes high-value and urgent electronic credit transfers above INR 200,000. It is operated by the RBI and was upgraded in October 2013. At present, there are approximately 160 participant banks in the RTGS system. Nationwide, the RTGS system is addressable at about 120,000 branches in over 30,000 cities and towns. All participant banks have to maintain accounts with the RBI. | ||
* '''''Electronic Clearing Services (ECS)''''' – ECS operates a deferred net settlement system, which processes both credit and debit payments. ECS is a batch processing system, meaning payments are processed at predetermined points during the day. ECS is divided into two elements: ECS Credit and ECS Debit. Credits can be submitted as both individual and bulk electronic payments, whereas the debit element only processes individual payments. In both cases, there is no maximum payment value threshold. Payment instructions from around 117 participant banks are sent through a central office located in Mumbai. | * '''''Electronic Clearing Services (ECS)''''' – ECS operates a deferred net settlement system, which processes both credit and debit payments. ECS is a batch processing system, meaning payments are processed at predetermined points during the day. ECS is divided into two elements: ECS Credit and ECS Debit. Credits can be submitted as both individual and bulk electronic payments, whereas the debit element only processes individual payments. In both cases, there is no maximum payment value threshold. Payment instructions from around 117 participant banks are sent through a central office located in Mumbai. | ||
* '''''NEFT (National Electronic Funds Transfer)''''' – NEFT is a deferred net settlement system. NEFT has no minimum or maximum value thresholds. There are | * '''''NEFT (National Electronic Funds Transfer)''''' – NEFT is a deferred net settlement system. NEFT has no minimum or maximum value thresholds. There are 159 NEFT participant banks, reaching approximately 110,000 bank branches nationwide. | ||
* Payments processed through NEFT are settled on either a same or next-day basis, depending on the location of both participating banks. | * Payments processed through NEFT are settled on either a same or next-day basis, depending on the location of both participating banks. | ||
* '''''Cheque Truncation System (CTS)''''' – This system operates nationwide and replaced the previous MICR system. Cheques can be cleared for same day settlement if both banks are in the same location. Inter-city cheques are settled on a next-day basis. Non-MICR processed cheques take between five and ten days to settle. | * '''''Cheque Truncation System (CTS)''''' – This system operates nationwide and replaced the previous MICR system. Cheques can be cleared for same day settlement if both banks are in the same location. Inter-city cheques are settled on a next-day basis. Non-MICR processed cheques take between five and ten days to settle. | ||
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===Payment instruments=== | ===Payment instruments=== | ||
Cash remains the predominant payment method for retail transactions in India. The majority of cashless payment instruments are paper-based, with cheques remaining an important method. More recently, there has been an increase in the use of card-based transactions, especially for retail payments. | Cash remains the predominant payment method for retail transactions in India. The majority of cashless payment instruments are paper-based, with cheques remaining an important method. More recently, there has been an increase in the use of card-based transactions, especially for retail payments. | ||
* '''''Credit transfers (electronic payments)''''' – In | * '''''Credit transfers (electronic payments)''''' – In 2013 credit transfers in India continued to increase sharply with over 910 million affected. The total value of credit transfers for 2013 was worth INR 780,625.9bn, an increase of 10.3% on the previous year. Bulk electronic credit transfers are used for salary and pension payments. One-to-one, low-value credit transfers are also available. | ||
* '''''Direct debits''''' – Direct debits are becoming more important, although they still represent a relatively small number of payments overall. In | * '''''Direct debits''''' – Direct debits are becoming more important, although they still represent a relatively small number of payments overall. In 2013 direct debits accounted for 2.0% of the total volume of non-cash payments and less than 0.2% of the total value. They are used by retail consumers and small businesses primarily for regular payments, such as rent, utility bills and insurance premiums. Payments can be initiated on both an intra– and inter-bank basis, but only once a signed authorisation is in place. | ||
* '''''Payment cards''''' – Both credit and debit card usage has greatly increased in the past decade. There are currently | * '''''Payment cards''''' – Both credit and debit card usage has greatly increased in the past decade. There are currently 21.11 million credit cards and 574.56 million debit cards in circulation in India. Credit cards accounted for 5.3% of the volume and 0.17% of the value of all domestic cashless payments in 2013. With a significant increase in their usage during 2013, debit cards accounted for 70% of the volume of all domestic cashless payments. Card payments are predominantly retail orientated but are also used for salary and utility bill payments. | ||
* '''''Electronic money''''' – There is growing use of electronic money schemes in India. | * '''''Electronic money''''' – There is growing use of electronic money schemes in India. From 2015, e-money instruments have been approved for use on Indian mass transit systems. At the end of 2013, there were 9.6 million e-money cards in India. All prepaid cards have a maximum value threshold of INR 50,000. | ||
* '''''Cheques''''' – | * '''''Cheques''''' – Despite a continuing decline in their use, cheques remain an important form of cashless payment in India. In 2013, they represented 10.4% of the total value and 13.1% of the total volume of cashless payments. The use of cheques to pay suppliers is normal practice. In February 2008 a cheque truncation pilot scheme (CTS) was launched in Delhi and this scheme has now been rolled out to the Chennai area, as well as the states of Tamilnadu, Kerala, Karnataka, Andhra Pradesh and the Union Territory of Puducherry. Cheques across the country are now cleared by CTS image exchange, as part of a project to reduce settlement times to D+0. | ||
* '''''Cross border''''' – Foreign currency cross border payments from India are restricted by the country’s exchange control regime. Most outgoing cross border payments are made in the form of a foreign currency demand draft or via SWIFT. Most payments are cleared using correspondent banking relationships. | * '''''Cross border''''' – Foreign currency cross border payments from India are restricted by the country’s exchange control regime. Most outgoing cross border payments are made in the form of a foreign currency demand draft or via SWIFT. Most payments are cleared using correspondent banking relationships. | ||
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Residents can open and maintain foreign currency accounts domestically and abroad. Authorisation from the Reserve Bank of India must be obtained to hold foreign currency accounts, either domestically or abroad, except for those that the Reserve Bank includes under a general permission. Subject to exchange controls, domestic currency is convertible into foreign currency. | Residents can open and maintain foreign currency accounts domestically and abroad. Authorisation from the Reserve Bank of India must be obtained to hold foreign currency accounts, either domestically or abroad, except for those that the Reserve Bank includes under a general permission. Subject to exchange controls, domestic currency is convertible into foreign currency. | ||
Certain non-residents are also allowed to hold foreign currency accounts but these are subject to a number of restrictions. However, a company must usually have an office in India to be permitted to open a domestic currency account. Interest cannot be offered on current accounts denominated in domestic currency. | Certain non-residents are also allowed to hold foreign currency accounts but these are subject to a number of restrictions. However, a company must usually have an office in India to be permitted to open a domestic currency account. Interest cannot be offered on current accounts denominated in domestic currency. | ||
Resident foreign currency accounts | Resident foreign currency (domestic) accounts can be used to hold for unspent foreign exchange out of eligible limits from a foreign trip, foreign exchange for payment of services rendered abroad or from non-residents in India as gifts or payments. | ||
Exporters are permitted to open EEFC (exchange earners’ foreign currency) accounts. These are non-interest bearing current accounts for the payment of trade-related expenses. | Exporters are permitted to open EEFC (exchange earners’ foreign currency) accounts. These are non-interest bearing current accounts for the payment of trade-related expenses. | ||
===Money laundering=== | ===Money laundering=== | ||
India has implemented anti-money laundering legislation (the Foreign Exchange Management Act 1999; the Prevention of Money Laundering Act 2002, effective since July 2005 | India has implemented anti-money laundering legislation (the Foreign Exchange Management Act 1999; the Prevention of Money Laundering Act 2002, effective since July 2005; as amended 2009; the Prevention of Terrorism Act 2003, the Money Laundering Regulations 2003 and the Unlawful Activities (Prevention) Order 2009, plus associated Bank of India guidelines). | ||
India has established a financial intelligence unit (FIU), the Financial Intelligence Unit – India (FIU-IND), which is a member of the Egmont Group. It reports directly to the Economic Intelligence Council, which is headed by the Finance Minister. | India has established a financial intelligence unit (FIU), the Financial Intelligence Unit – India (FIU-IND), which is a member of the Egmont Group. It reports directly to the Economic Intelligence Council, which is headed by the Finance Minister. | ||
India is a member of the Asia Pacific Group on Money Laundering (APG) and has observer status with the Financial Action Task Force (FATF) and the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG). | India is a member of the Asia Pacific Group on Money Laundering (APG) and has observer status with the Financial Action Task Force (FATF) and the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG). | ||
''Information supplied by BCL Burton Copeland [http://www.bcl.com (http://www.bcl.com)]. Data as at | ''Information supplied by BCL Burton Copeland [http://www.bcl.com (http://www.bcl.com)]. Data as at January 2015.'' | ||
===Cash concentration=== | ===Cash concentration=== | ||
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===Electronic banking=== | ===Electronic banking=== | ||
Electronic banking is growing in popularity in India. However, poor communications infrastructure has inhibited growth beyond the country’s cities. | Electronic banking is growing in popularity in India. However, poor communications infrastructure has inhibited growth beyond the country’s cities. | ||
Electronic banking is offered through proprietary bank systems; there is no electronic banking standard in India. Access to | Electronic banking is offered through proprietary bank systems; there is no electronic banking standard in India, although payments processed through NEFT use a standardised format (SFMS). Access to bank systems and usage of them depends on the location of the companies themselves and the quality of infrastructure links between their various operations. | ||
The available services vary between banks. They include a range of payment and collection services, transaction initiation and balance and transaction reporting. Users can access electronic banking through a variety of channels, including ATMs, the internet and mobile phones. | The available services vary between banks. They include a range of payment and collection services, transaction initiation and balance and transaction reporting. Users can access electronic banking through a variety of channels, including ATMs, the internet and mobile phones. | ||
Electronic invoice presentment and payment technology is offered by some banks. This allows companies to receive invoices online, interrogate them and then to pay their suppliers. | Electronic invoice presentment and payment technology is offered by some banks. This allows companies to receive invoices online, interrogate them and then to pay their suppliers. | ||
Internet banking is increasingly available to companies in India. All the major banks offer some form of internet banking which generally includes next-day or same-day domestic and international balance and transaction reporting, as well as some form of domestic and international transfer capability. | Internet banking is increasingly available to companies in India. All the major banks offer some form of internet banking which generally includes next-day or same-day domestic and international balance and transaction reporting, as well as some form of domestic and international transfer capability. | ||
==Liquidity management== | ==Liquidity management== |
Revision as of 14:01, 12 October 2015
KEY COUNTRY FACTS | |
---|---|
System of government: | federal republic |
Population: | 1.24 billion |
Currency: | Indian rupee (INR) |
FX regime: | Floating |
GDP: | $1.93 trillion (2013) |
IGTA member: | yes |
FATF member: | yes |
Treasury association: | [Association of Certified Treasury Managers (ACTM)] |
Other professional financial/banking associations: |
Indian Institute of Banking and Finance Foreign Exchange Dealers’ Association of India |
Financial regulatory framework
Bank supervision
The Board for Financial Supervision (BFS), constituted by the Reserve Bank of India (RBI), the country’s central bank, is responsible for bank supervision.
Exchange controls
India’s currency is the rupee (INR). India applies exchange controls, which are set by the government and administered by the Reserve Bank of India under the terms of the Foreign Exchange Management Act. Unless permission has been granted by the Reserve Bank of India, all export proceeds must be repatriated within six months of the shipment of goods (exporters based in a Special Economic Zone must also comply). Exporters are permitted to keep 100% of foreign exchange receipts in foreign currency accounts based in India. Any foreign exchange payment for imports with a value in excess of the equivalent of US$100,000 must be supported by relevant documentation.
Taxation framework
Corporate taxation
Domestic companies are liable to tax at 30% and foreign companies and branches of foreign companies at 40%. A 5% surcharge applies to domestic companies if income exceeds INR 10m (2% for foreign companies); a 10% surcharge applies if income exceeds INR 100m (5% for foreign companies). An additional 3% cess is payable in all cases.
Taxation of dividends
A corporate dividend distribution tax (DDT) of 16.995% is payable by a domestic company on dividends declared. Dividends on which DDT is paid are tax exempt in the hands of the shareholder. There is nil withholding tax on dividends distributed by a domestic company on which dividend distribution tax is paid/payable.
Taxation of interest
There is a withholding tax (subject to tax treaties) of 10.00% for resident companies and 20.60%, 21.012% or 21.63% for non-resident companies in respect of interest on foreign currency loans.
Transfer pricing
The transfer pricing regime is influenced by OECD norms, although the penalty provisions in India are stringent compared to those in other countries. The definition of ‘associated enterprise’ extends beyond a shareholding or management relation-ship, as it includes some deeming clauses. The taxpayer is required to maintain certain information and documents and to provide a certificate (in a prescribed format) from a practicing chartered accountant that sets out the details of associated enterprises, international transactions, etc., along with the methods used to determine an arm’s length price. The certificate must be submitted by the due date for filing the annual tax return for companies required to submit such a certificate, i.e. 30 November. Where the application of the arm’s length price would reduce the income chargeable to tax in India or increase a loss, no adjustment will be made to the income or loss. If a taxpayer who benefits from a tax holiday is subject to a transfer pricing adjustment, the benefit will be denied to the extent of the adjustment. The allowable variation in computing the arm’s length price will be as notified by the government. (See ‘General anti-avoidance and disclosure requirements’ below, for application of the transfer pricing rules to transactions involving jurisdictions that do not effectively exchange information with India and for application of the general anti-avoidance rule). The scope of the transfer pricing provisions covers ‘specified domestic transactions’ if the aggregate value of those trans-actions exceeds INR 50 million in one year. Specified domestic transactions include payments to related parties, the inter-unit transfer of goods or services, transactions of profit-linked tax holiday units with other parties and any other transaction that may be notified. The pricing of these transactions must be determined with regard to arm’s length principles using methods prescribed under India’s transfer pricing rules. Advance pricing agreements are possible.
Thin capitalisation
There are no thin capitalisation rules.
Capital gains tax
The tax treatment depends on whether gains are long or short term. Gains are long term if the asset is held for more than three years (one year in the case of shares and specified securities). Long-term gains on listed shares and specified securities are exempt if the transaction is subject to the Securities Transaction Tax (STT). Where such gains are not subject to the STT, a 10% tax applies (without benefit of an inflation adjustment). The applicable tax rate on long-term capital gains derived by a non-resident from the sale of unlisted securities is 10%. Gains on other long-term assets are taxed at 20% (with the benefit of an inflation adjustment). Short-term gains on listed shares and specified securities, which are subject to the STT, are taxed at 15%, and gains from other short-term assets are taxed at the normal tax rates. A surcharge and cess also are imposed. An unlisted domestic company is liable to pay an additional tax of 20% on any income distributed to a shareholder on account of a buyback of the company’s shares. The distributed income is the amount of consideration paid by the company on the buyback of shares, reduced by the amount received by the company on account of the issue of the shares. The shareholders will not be charged for any income arising from the buyback of shares.
Value added tax (VAT) / central sales tax (CST)
VAT is a state levy and applies to the sale of goods within the state. Each state has its own VAT legislation applicable to intra-state transactions. While the mean rate of VAT is 12.5% various states have increased this rate up to 15%. However, other rates such as 5%, 4%, 1% and zero also exist for some products. As a multi-point tax, VAT has its own credit mechanism to avoid the cascading effect. CST is a central levy and is applicable on inter-state sales. The rate of CST is 2%, subject to the fulfilment of specific conditions. In cases where the conditions are not fulfilled, the rate applicable in the state of sale is applied.
Tax information provided by Deloitte Touche Tohmatsu and Deloitte Highlight 2015 (http://www.deloitte.com).
Banking service provision
The banking sector in India is dominated by state-owned financial institutions. The country’s 20 nationalised banks accounted for 52% of total banking sector assets in December 2013. India’s privately owned banks accounted for 18.3%, with the remainder split between foreign banks (4.9%) and regional rural banks (2.6%). The 43 foreign banks have established 314 branch operations in India providing local and international transaction banking services. Foreign banks can conduct business in India through representative offices rather than through establishing a branch presence, and there are currently approximately 45 foreign banks operating representative offices. Foreign banks may own up to 49% of an Indian bank.
Clearing and payment systems
Clearing systems
India has a number of different payment clearing systems. As well as an RTGS system for high-value electronic payments, there are a number of low-value electronic and paper-based clearing systems. The RBI has implemented its cheque truncation system nationwide, which allows the same-day settlement of all local cheques. Electronic payments can be processed through Electronic Clearing Services (ECS) and NEFT (National Electronic Funds Transfer). A new processing platform, India Pay, was introduced in 2010 to process ATM transactions. In time, India Pay will expand to process credit and debit card payments.
- RTGS – The Real-Time Gross Settlement (RTGS) system processes high-value and urgent electronic credit transfers above INR 200,000. It is operated by the RBI and was upgraded in October 2013. At present, there are approximately 160 participant banks in the RTGS system. Nationwide, the RTGS system is addressable at about 120,000 branches in over 30,000 cities and towns. All participant banks have to maintain accounts with the RBI.
- Electronic Clearing Services (ECS) – ECS operates a deferred net settlement system, which processes both credit and debit payments. ECS is a batch processing system, meaning payments are processed at predetermined points during the day. ECS is divided into two elements: ECS Credit and ECS Debit. Credits can be submitted as both individual and bulk electronic payments, whereas the debit element only processes individual payments. In both cases, there is no maximum payment value threshold. Payment instructions from around 117 participant banks are sent through a central office located in Mumbai.
- NEFT (National Electronic Funds Transfer) – NEFT is a deferred net settlement system. NEFT has no minimum or maximum value thresholds. There are 159 NEFT participant banks, reaching approximately 110,000 bank branches nationwide.
- Payments processed through NEFT are settled on either a same or next-day basis, depending on the location of both participating banks.
- Cheque Truncation System (CTS) – This system operates nationwide and replaced the previous MICR system. Cheques can be cleared for same day settlement if both banks are in the same location. Inter-city cheques are settled on a next-day basis. Non-MICR processed cheques take between five and ten days to settle.
Payment instruments
Cash remains the predominant payment method for retail transactions in India. The majority of cashless payment instruments are paper-based, with cheques remaining an important method. More recently, there has been an increase in the use of card-based transactions, especially for retail payments.
- Credit transfers (electronic payments) – In 2013 credit transfers in India continued to increase sharply with over 910 million affected. The total value of credit transfers for 2013 was worth INR 780,625.9bn, an increase of 10.3% on the previous year. Bulk electronic credit transfers are used for salary and pension payments. One-to-one, low-value credit transfers are also available.
- Direct debits – Direct debits are becoming more important, although they still represent a relatively small number of payments overall. In 2013 direct debits accounted for 2.0% of the total volume of non-cash payments and less than 0.2% of the total value. They are used by retail consumers and small businesses primarily for regular payments, such as rent, utility bills and insurance premiums. Payments can be initiated on both an intra– and inter-bank basis, but only once a signed authorisation is in place.
- Payment cards – Both credit and debit card usage has greatly increased in the past decade. There are currently 21.11 million credit cards and 574.56 million debit cards in circulation in India. Credit cards accounted for 5.3% of the volume and 0.17% of the value of all domestic cashless payments in 2013. With a significant increase in their usage during 2013, debit cards accounted for 70% of the volume of all domestic cashless payments. Card payments are predominantly retail orientated but are also used for salary and utility bill payments.
- Electronic money – There is growing use of electronic money schemes in India. From 2015, e-money instruments have been approved for use on Indian mass transit systems. At the end of 2013, there were 9.6 million e-money cards in India. All prepaid cards have a maximum value threshold of INR 50,000.
- Cheques – Despite a continuing decline in their use, cheques remain an important form of cashless payment in India. In 2013, they represented 10.4% of the total value and 13.1% of the total volume of cashless payments. The use of cheques to pay suppliers is normal practice. In February 2008 a cheque truncation pilot scheme (CTS) was launched in Delhi and this scheme has now been rolled out to the Chennai area, as well as the states of Tamilnadu, Kerala, Karnataka, Andhra Pradesh and the Union Territory of Puducherry. Cheques across the country are now cleared by CTS image exchange, as part of a project to reduce settlement times to D+0.
- Cross border – Foreign currency cross border payments from India are restricted by the country’s exchange control regime. Most outgoing cross border payments are made in the form of a foreign currency demand draft or via SWIFT. Most payments are cleared using correspondent banking relationships.
Cash and bank account management
Account availability
Residents can open and maintain foreign currency accounts domestically and abroad. Authorisation from the Reserve Bank of India must be obtained to hold foreign currency accounts, either domestically or abroad, except for those that the Reserve Bank includes under a general permission. Subject to exchange controls, domestic currency is convertible into foreign currency. Certain non-residents are also allowed to hold foreign currency accounts but these are subject to a number of restrictions. However, a company must usually have an office in India to be permitted to open a domestic currency account. Interest cannot be offered on current accounts denominated in domestic currency. Resident foreign currency (domestic) accounts can be used to hold for unspent foreign exchange out of eligible limits from a foreign trip, foreign exchange for payment of services rendered abroad or from non-residents in India as gifts or payments. Exporters are permitted to open EEFC (exchange earners’ foreign currency) accounts. These are non-interest bearing current accounts for the payment of trade-related expenses.
Money laundering
India has implemented anti-money laundering legislation (the Foreign Exchange Management Act 1999; the Prevention of Money Laundering Act 2002, effective since July 2005; as amended 2009; the Prevention of Terrorism Act 2003, the Money Laundering Regulations 2003 and the Unlawful Activities (Prevention) Order 2009, plus associated Bank of India guidelines). India has established a financial intelligence unit (FIU), the Financial Intelligence Unit – India (FIU-IND), which is a member of the Egmont Group. It reports directly to the Economic Intelligence Council, which is headed by the Finance Minister. India is a member of the Asia Pacific Group on Money Laundering (APG) and has observer status with the Financial Action Task Force (FATF) and the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG).
Information supplied by BCL Burton Copeland (http://www.bcl.com). Data as at January 2015.
Cash concentration
Cash concentration is a liquidity management capability whereby account balances are physically transferred to/from a single account (known as a master, header or concentration account) for liquidity management purposes. Cash concentration can take these forms:
- Zero balancing (ZBA) – Sometimes referred to as sweeping, zero balancing is a cash concentration capability whereby the total of all account balances is physically transferred into a nominated account.
- Target balancing – Also known as sweeping, target balancing is a cash concentration capability similar to ZBA, whereby all account balances are physically transferred into a nominated account leaving a predetermined amount in the sub-accounts.
- Threshold balancing – A cash concentration capability similar to ZBA, whereby the balances of the sub-accounts are physically transferred in their totality into a nominated account each time the sub-account balances reach a predetermined threshold.
For residents, domestic cash concentration techniques are the main method of liquidity management in India. A cash concentration structure can include accounts held in the name of different legal entities; however, all participants must have the same beneficial ownership and the structure must comply with limits on inter-company borrowing levels. Non-resident bank accounts may participate in a cash concentration structure. Non-residents may have to pay a withholding tax on interest payments. Banks may apply lifting fees on transfers between resident and non-resident accounts. For larger companies, the level of any fees applied will be negotiable.
Cross border sweeping
Resident and non-resident companies are permitted to participate in cross border sweep structures. However, India is rarely chosen as a location for regional and global cash concentration header accounts. Resident and non-resident companies must comply with Indian foreign exchange controls and will usually be liable to pay a withholding tax on any inter-company loans that arise. Non-resident companies rarely participate in cross border sweep structures based in India, as foreign exchange control rules and withholding tax on inter-company loans apply.
Notional pooling
Notional pooling is not permitted in India.
Electronic banking
Electronic banking is growing in popularity in India. However, poor communications infrastructure has inhibited growth beyond the country’s cities. Electronic banking is offered through proprietary bank systems; there is no electronic banking standard in India, although payments processed through NEFT use a standardised format (SFMS). Access to bank systems and usage of them depends on the location of the companies themselves and the quality of infrastructure links between their various operations. The available services vary between banks. They include a range of payment and collection services, transaction initiation and balance and transaction reporting. Users can access electronic banking through a variety of channels, including ATMs, the internet and mobile phones. Electronic invoice presentment and payment technology is offered by some banks. This allows companies to receive invoices online, interrogate them and then to pay their suppliers. Internet banking is increasingly available to companies in India. All the major banks offer some form of internet banking which generally includes next-day or same-day domestic and international balance and transaction reporting, as well as some form of domestic and international transfer capability.
Liquidity management
Short-term investments
Short-term investments include:
- Bank deposits – Interest bearing term deposits are available in local and foreign currency.
- Certificates of deposit (CDs) – CDs can be issued by all commercial banks in India, with the exception of Regional Rural Banks and Local Area Banks. Maturities range between seven days to not more than one year. The most common maturity is 91 days. CDs must be issued in multiples of INR 100,000. They can be interest bearing or issued at a discount. Other financial institutions, authorised by the RBI, can issue CDs for a period of between one and three years.
- Commercial paper – Commercial paper is issued in tenors from seven days to a year, with the most common maturity being three months. All commercial paper must be issued in multiples of INR 500,000. All commercial paper must be rated by an Indian rating agency.
- Treasury bills – There is an active secondary market in treasury bills. Most issuance is with 91 or 364 day maturity.
- Money market funds – There is a significant market in money market funds in India.
- Repurchase agreements (repos) – Repos are not used by companies, as their use is restricted to specific financial institutions.
Websites
Government of India
Ministry of Finance:
The Reserve Bank of India
Securities and Exchange Board of India
Invest India
Department of Industrial Policy and Promotion
The Associated Chambers of Commerce and Industry of India
National Stock Exchange of India Ltd
Bombay Stock Exchange