In case of companies engaged in the manufacture of certain specified consumer goods, it would be necessary to balance the dividend outflow by export earnings over a period of seven years from the commencement of commercial production. Right or bonus shares can be issued by the Indian Company to the foreign shareholder or foreign entity only after obtaining the permission of the Reserve Bank of India. The company incorporated in India, in which the foreign collaborator has acquired shares, will be liable to tax on its profit in a manner identical to any other Indian Company. The dividend income will be taxed in the hands of the foreigner in the country of his residence depending upon the local tax laws. In India dividend income is not taxable in the hands of the shareholder.
Capital gains arising in the hands of the foreigner, on sale of shares is taxable in India.
However, capital gains is computed in terms of the currency in which the shares were initially acquired. In other words the foreigner will be protected against the devaluation of the Indian Rupee and will be liable to capital gains tax only if he has made a profit in terms of the currency in which he acquired the shares. The sale proceeds will be credited to the account of the foreign shareholder net of the above Indian Taxes. Repatriation of the capital investment is permitted in the normal course with the approval of the RBI, except where the investment was permitted on specific condition that it will not be eligible for repatriation. A financial collaboration, generally involves a significant financial contribution and a permanent relation between the foreigner and the Indian party.