Expansion into overseas markets: The tax and regulatory framework

As the Indian GDP grows, the Indian industry continues to expand across the global, supplemented by digitalization. In recent years, there’s been an increase in Indian investments in foreign countries in the form of Indian industries opening places of business – subsidiaries and joint ventures outside India. According to the Department of Economic Affairs1, the actual Overseas Direct Investment (ODI) outflow from April 2000 to July 2023 stood at USD 2,88,920 million, of which FY 2021-22 has seen an actual ODI outflow of USD 18,066 million. The top country of choice for ODI has been Singapore, followed by the USA and the UK. Easier access to technology, research and development, a wider global market, reduced cost of capital and other benefits increase the competitiveness of Indian entities and boost their brand value.

“Overseas Direct Investment” or “ODI” means investment in or acquisition of unlisted equity capital of a foreign entity or investment in 10% or more of the paid-up equity capital of a listed foreign entity. It also includes investment of less than 10% in a listed entity if such investment is with control in the foreign entity. Indian investors keen to invest abroad are required to undertake a few compliances under various laws in India. As Indian investors are remitting their funds outside India with the objective of earning income outside India, two important laws to be complied with are the ‘Foreign Exchange and Management Act, 1999’ (FEMA) and the ‘Income-tax Act, 1961’ (IT Act). Any non compliances under these laws can attract hefty penalties and hinder the ease of doing business. This article enumerates some relevant aspects of these laws.