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 29 states and seven 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 knowledge and professional services to guide you through the legal, financial, bureaucratic, and cultural complexities.
That said, it's a country with huge business potential. The International Monetary Fund (IMF) says that India will be the fastest growing major economy in 2018, with a growth rate of 7.4% that rises to 7.8% in 2019 with medium-term prospects remaining positive.
The IMF's Asia and Pacific Regional Economic Outlook report said that India was recovering from the effects of demonetisation and the introduction of the Goods and Services Tax and "the recovery is expected to be underpinned by a rebound from transitory shocks as well as robust private consumption."
With a population of over 1.3 billion - equivalent to 17.74% of the world's total population – India ranks second in the world for largest country by population and is predicted to overtake China to the number one spot within a decade.
Starting a business in India
India has made starting up a new business faster by merging the applications for the Permanent Account Number (PAN) and the Tax Account Number (TAN) along with the incorporation process under the Ministry of Corporate Affair (MCA). However, it can still take several weeks to complete all the required procedures involved in a start-up, with fees and add-on costs dependent on the size and type of business being registered.
Depending on the nature of business, there are various entry options for a foreign investor to enter into India, such as a Representative Office, Branch Office, Liaison Office, Private Limited Company, Limited Liability Company, etc. After incorporation, the company can open a bank account for the foreign equity coming into India.
Public or private companies may be formed with limited or unlimited liability. The limited liability company is the preferred form in India, whereby the personal liability is limited to the amount unpaid on their shares, or by a predetermined amount.
A foreign company doing business in India can also set up a branch office, which is liable for taxes, and where operations are limited to representing the parent company as a buying or selling agent, conducting research and sharing with Indian companies, promoting collaborations between Indian and foreign organisations, and conducting export and import. A Project Office can be set up by a foreign company to carry out specific projects, and a Liaison Office provides a business foothold but cannot directly conduct commercial activity or earn any income in India.
The law allows foreign citizens to become full-time directors or partners in the entity, but at least one of the Directors/Partners should be a resident of India. Directors of the proposed new company need to get Director Identification Number (DIN).
A Digital Signature Certificate (DSC) is needed from a government certified agency, and a choice of up to two possible names for the company, in order of preference, must be given to the local Registrar of Companies. INC 32 is a new online process via the MCA, offering a search facility for company name availability before setting up a new company, plus an online facility to apply for a director identification number and incorporating the company.
Business incentives in India
The Indian government has been determined to make it easier to do business in India, and a variety of initiatives have enabled the country to leap 30 places up the global scale for ease of doing business, according to the World Bank's 'Ease of Doing Business 2018 Report'.
The improvement has also been apparent in TMF Group's Financial Complexity Index 2018, which ranks 94 jurisdictions according to their complexity for accounting and tax compliance. In the latest report, India moved out of the top 10 most complex places to do business, to number 13.
Good reforms noted by the Bank's report include faster permits for construction; combining the application for the Permanent Account Number (PAN) and the Tax Account Number (TAN) into a single submission; a reduction in the time needed to complete the applications for Employee's Provident Fund Organisation (EPFO) and the Employee's State Insurance Corporation (ESIC); a reduction in import and export border compliance costs, and improved access to credit.
There is a new online investor website providing support for investment queries, and a single-window online portal – E-Biz – to access core services such as clearances, licences, mandatory tax registrations, regulatory filings etc. There is also an online portal for labour-related information.
India's regulatory environment
The Companies Act 2013, followed by a variety of clarifications from the Companies (Amendment) Act, 2017 and 2018, replaced the previous Companies Act, which dated back to 1956. The new Companies Act is the most important law covering all aspects of a company, including the requirements for forming a company, powers and responsibilities of directors and managers, raising of capital etc.
Product liability is controlled by the Consumer Protection Act. And for Intellectual Property, patents, trademarks, copyrights, registered and unregistered designs are all governed by different Acts in India.
The World Bank says that enforcement of contract in India is still a concern. The time to enforce a contract has lengthened to 1445 days, compared with 1420 days, 15 years ago, placing India at 164th place on the Enforcing Contracts indicator.
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 to register a new business from 127 days 15 years ago to 30, entrepreneurs still need to go through 12 procedures to start a business, which is more than the five-procedure average in OECD countries.
In both Delhi and Mumbai, the introduction of the National Judicial Data Grid is to improve contract enforcement by generating case management reports on local courts.
India has strengthened access to credit by amending the rules on priority of secured creditors outside reorganisation proceedings and by adopting a new law on insolvency that provides a time limit and clear grounds for relief to the automatic stay for secured creditors during reorganisation procedures. Protection for minority investors has been strengthened by increasing the remedies available in cases of prejudicial transactions between interested parties.
Tax environment in India
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 tax and dividend distribution tax, securities transaction tax, commodities transaction tax, 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 INR 5 bil. For non-resident companies, the corporate tax rate is 40%.
Accounting standards fall under the Institute of Chartered Accountants of India and financial statements must be prepared annually, with a fiscal year-end of March 31st.
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 there. TMF Group launched its first office in Delhi in 2006, and over the years has expanded to Mumbai, Bangalore, and Noida, offering expert local knowledge to help you navigate the complexities of the Indian business environment.
Our well-established presence in India enables us to provide standard and tailor-made solutions, focused on HR and payroll, accounting and tax services, corporate secretarial services, and international incorporations. Whether you want to set up a new venture in India, or just want to streamline your Indian operations, talk to us.
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.