Foreign Direct Investments (FDI) in Defence & Aerospace in India-2: Lawyers Advice on Foreign Investments in India | Law Firm for Foreign Investments in India | FDI Attorney in India | India Business Entry | Legal Advice for Foreign Investors in India
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Company Registrations, Compliances, Licenses & Permits which are to be procured:
• The Industrial License have to be filed with Ministry of Defence which is examined by a standing committee and comments are then forwarded to the licensing authority. Maintenance, Repair and Overhaul (MRO) activities in defence sector are to be taken as services and hence, won’t be subjected to industrial license under the Act unless it includes any activity of manufacturing of any component or sub-assemblies for which license has to be taken.
• Further, the Ministry of Home Affairs (MHA) vide Notification S.O. 1636 (E) dated 19.05.2017, has clarified that MHA would be the licensing authority for Small Arms and Ammunitions which would be licensed under the Arms Act, 1959 and Arms Rules, 2016.
• For items like Tanks or other armored fighting vehicles, spacecraft, warships and other items of defense equipment’s other than small arms, which would be licensed by DIPP.
Precautionary Measures:
• Security Manual: Defence Industry is required to follow the Security Manual notified by the Department based on the product of manufacturing and their categorization for which an industrial license is granted to a company.
• External Security Audit: Companies are subjected to an external security audit by intelligence agencies once in two years and a cybersecurity audit every year by CERTIN.
• Company Chief Security Officer (CCSO): Mandatory for defense manufacturers to appoint an Indian citizen as the CCSO, who would be responsible for implementing security architecture as notified in the Security Manual.
• Classified Documents: The safety of classified documents and material has to be ensured and a security system has to be set in place to ensure that no unauthorized person has access to such documents.
• Disaster Management Plan: The manufacturer needs to lay down an elaborate disaster management plan to ensure the safety of the facility in cases of major catastrophic incidents, further there should be frequent mock rehearsals to ensure the effectiveness of the plan.
Functioning & Management:
• Minimize Cost: To minimize costs not only based on maximum utilisation of installed capacity but by working to tight norms in areas such as material wastage, overheads, materials management, labour capital expenditure; and working capital.
• Accountability: To streamline procedure and increase delegation of powers combined with the retention of the, essential checks and balance to ensure that effective monitoring is possible at all levels.
• Research and Development: To develop as strong in-house research, design and development organisation which can interact closely with all research organisation like the DRDO, National Laboratories, suppliers.
• Adequate Staffing: To improve production, planning, control system, production technologies, safety standards, working conditions and provide effective staff support to the production unit in areas such as standardisation of raw materials and components, manufacturing technology, duality control, industrial engineering and material management.
Taxation Aspects:
• Units set up in a SEZ enjoys 100% tax holiday on profits on exports for five years and 50% tax holiday for the next 10 years, but they are subject to MAT provisions.
• Income earned by a foreign company by way of fee for technical services or royalty, pursuant to an agreement with central government, for providing services on projects concerning security of India is exempt from tax, provided the same is notified in the official gazette.
• A deduction of 200% is available to a manufacturer of defense products on the expenditure made for scientific research or on in-house R&D facility.
• The Government has done away with the preferential treatment in respect of excise duty/custom duty given to Defence Public Sector Undertakings to create a level playing field.
Export Potential:
• The export market in India for defense products for the financial year 2017- 2018 is worth Rs. 4682 Crores.
• Some of the major defence equipment exported by Defence Public Sector Undertakings (DPSUs) and Ordnance Factory Board (OFB) are Patrol Vessels, Helicopters & their spares, Sonars & Radars, Avionics, Radar Warning Receivers (RWR), Small Arms, Small Caliber Ammunition, Grenades and Telecommunication equipment.
Recent Developments:
• The limit for investment through automatic route has been increased to 74% by the current Finance Minister Nirmala Sitharaman on 16th May, 2020.
• Initially, the validity of Industrial License granted under IDR Act was for 3 years. The same has been increased to 15 years which can be further extended for more 3 years on case to case basis
• Government has undertaken to establish 2 new defence corridors with the aim of boosting economic development and to facilitate the growth of defense industry in India. One is on Tamil Nadu and the second in Uttar Pradesh.
Authored By: Adv. Anant Sharma