India offers enormous opportunities for overseas investors, but it is a large and complex market which needs careful navigation to achieve success. It is best to view India not as a single market, but as a series of interconnected regional markets where the regulatory and investment environment may change from one state to another. There are 28 states and eight federally administered union territories, so the intricacies of the system need to be thoroughly understood.
Doing business in India isn't easy, and it's important to engage local professionals with the knowledge to guide you through the legal, financial, bureaucratic and cultural complexities.
That being said, it's a country with huge business potential. The International Monetary Fund (IMF) estimates real GDP growth of 12.5% in 2021/22. The prospects still remain strong with intermittent growth spurts despite the pandemic.
With a population of 1.39 billion – equivalent to 17.8% of the world's total population – India ranks as the second most populous country in the world and is predicted to overtake China within a decade.
Starting a business
India has complex and multi-layered requirements that make company formation and incorporation a complex process. For example, there are requirements around the presence of a local director, legalisation of foreign documents (where a foreign company intends to incorporate in India) and prior government approval (if investment is from a restricted country).
Depending on the nature of the business, there are various options for a foreign investor to enter into India, such as a representative office, branch office, liaison office, private limited company, limited liability company, and so on. After incorporation, the company can open a bank account for the foreign entity coming into India.
In the wake of Covid, the Government of India amended its foreign direct investment policy to curb opportunistic takeovers or acquisitions of Indian companies. Accordingly, any investment being made from neighbouring countries, or where the beneficial owner of an investment into India is situated in or is a citizen of any of the neighbouring countries, shall require prior approval of the government regardless of the sector or activities in which investment is being made.
The Indian government has been determined to make it easier to do business in India and has implemented a variety of initiatives. The country sits 63rd on the global scale for 'ease of doing business', according to the World Bank's 'Doing Business 2020' report. However, India has ranked among the top ten improvers in the past three of these reports.
The improvement has also been apparent in TMF Group's Global Business Complexity Index 2021, which ranks 77 jurisdictions for the complexity of their business environments. In the latest report, India is ranked in 20th position, down from 18th in 2020. The change in ranking from represents a decrease in complexity; some of the factors that are making India simpler for businesses include:
- The implementation of a new wage code, which will make compliance comparatively simpler
- The government is encouraging investment in India by promoting alternative investment funds
- The government's initiative of 'Start-up India' will give a boost to the ecosystem of entrepreneurship and innovation.
The Covid pandemic is having an overwhelming impact on global fiscal policies. However, in order to curb the crisis, the government has introduced the following measures to facilitate business:
- Meetings are allowed to be conducted via video conferencing
- CSR spending is allowed towards Covid-related causes
- Residency requirements have been relaxed.
The Companies Act 2013, followed by a variety of clarifications from the Companies (Amendment) Act, replaced the previous Companies Act 1956. The new Companies Act is the most important law covering all aspects of a company, including the requirements for forming a company, the powers and responsibilities of directors and managers, the raising of capital, and so on.
The World Bank states that the enforcement of contracts in India is still a concern. The average time to enforce a contract is 1445 days, ranking India 163rd on the 'enforcing contracts' indicator of its 'Doing Business' report.
Property registration and property transition, land registry and administration remain complicated in India compared to many other countries and, although India has reduced the time required to register a new business to 68 days, entrepreneurs still need to go through ten procedures to start a business, which is more than the average in OECD countries.
Taxation in India is complex, with different taxes levied by central and state governments. Central government levies direct taxes, such as corporate income tax, capital gains, securities transaction tax, commodities transaction tax and customs duties. Taxes levied at state level include profession tax and real estate taxes.
Transaction taxes recently went through a major overhaul, under the Goods and Services Tax Act, to establish uniformity across the country. But the tax environment in India remains challenging, with a high risk of confusion and error unless professional advice is sought.
Corporate entities liable for income tax include Indian companies and corporate entities incorporated abroad. A resident company is liable for tax on its worldwide income, as is a resident partnership firm, LLP, or other non-individual entity. A non-resident entity is liable for income tax on income arising in or received in India.
Different rates apply to resident and non-resident companies. The standard corporate tax rate for domestic companies has been reduced from 30% to 25% for companies having gross turnover up to INR4bn. For non-resident companies, the corporate tax rate is 40%.
Accounting standards are governed by the Institute of Chartered Accountants of India and financial statements must be prepared annually, with a fiscal year-end of 31 March.
In India, the work culture differs from one organisation to another depending upon its type, size, location and industry. Understanding India, its culture and building an emerging market strategy around it must be one of the core priorities for businesses and corporations seeking to build value and long-term sustainable growth here.
India is hierarchical, even in office situations. In meetings, small talk, particularly about the family, is highly valued as you build a relationship.
Important rules of behaviour include:
- using right hand in all situations
- always having a business card to present.
Business and official contacts are addressed as Mr/Mrs/Ms or Sri/Smt with a surname.
Insights into India
Accounting & taxation (A&T)
In India, accounting, reporting and auditing requirements are governed by regulations issued by multiple governing bodies.
Any person investing or doing business in India must be aware of various taxes, levied and collected by the government in India. These taxes are levied either directly on income (direct tax) or indirectly based on consumption (indirect tax).
Human resource & payroll (HRP)
Employment laws in India do not stem from any single piece of legislation. India has numerous labour laws that aim to guarantee fair and humane working conditions, social security, a minimum wage, and the right to form and organise trade unions and enforce collective bargaining.
The employment contract, HR policy, employee handbook, working hours and holidays, and procedures that expats in India must comply with are important elements to be considered.
Most attractive factors for doing business in India
There are ample macroeconomic indicators that support India's viability as a destination for doing business. Namely, higher disposable incomes, an emerging middle class and a low-cost but competitive and skilled workforce.
India currently has a stable government which makes the Indian market more attractive for business. Political stability helps in making economic decisions and reducing the risk of imbalance in the economy.
Government programmes such as 'Skill India', 'Make in India' and 'Digital India' have also influenced investor choices. The 'Smart Cities' project and growing expenditure on infrastructure are among the recent administrative reforms which investors believe to positively influence India's attractiveness as an investment destination.
2021 and beyond
In 2021, we've continued to observe the trend of simplification through digitalisation on a global scale. This has, in part, been accelerated by the Covid pandemic, which has rendered physical procedures impractical. We have seen the dual forces of a decline in the requirement of in-person processes, combined with the rise of technologies and automation as enablers of simplicity.
TMF Group in India
Due to the ever-changing regulations governing foreign ownership of businesses in India, it is wise to involve expert help in setting up a business venture here.
TMF Group launched its first office in Delhi in 2006, and over the years has expanded to Mumbai, Gurgaon, New Delhi, Bangalore, Pune and Noida, offering the local knowledge and expertise to help you navigate the complexities of the Indian business environment.
Our well-established presence in India enables us to provide tailor-made solutions, focused on HR and payroll, accounting and tax services and entity management, including corporate secretarial services and international incorporation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.