Doing business in India
In recent years, India has experienced impressive economic growth and is widely projected to be one of the two largest global economies by 2050.
While India offers great potential for overseas investors, it is a large and complex market that needs careful navigation to achieve success. The government’s commitment to digitalisation and the ongoing relaxing of regulations makes India increasingly business-friendly, but companies must properly prepare for the challenges involved in the incorporation process.
With a population exceeding 1.4 billion, India has firmly established its position as the world’s largest democracy.
In recent years, the country’s committed integration into the global economy has been accompanied by impressive economic growth. India is now the world’s third largest economy in terms of purchasing power parity and the sixth largest by nominal GDP. It is a member of several key intergovernmental organisations such as the Asian Development Bank, BRICS and the G20.
In terms of foreign direct investment (FDI), India is attracting strong inflows as a result of its improving economic performance, especially in the agricultural, mining and manufacturing sectors. India is expected to continue its rapid growth in the near future and is widely projected to be one of the two largest global economies by 2050.
The recent economic liberalisation is decreasing the complexity of doing business in India. India ranked 33rd in the world for the complexity of its business environment in TMF Group’s Global Business Complexity Index 2023, moving down from 25th in 2022.
That said, companies should still ensure they have a thorough understanding of the local economic landscape and the rules and regulations that govern its business practices.
India is one of the fastest growing countries in the world. It is currently in a period of unprecedented economic liberalisation, which allows foreign investors greater access to its vast and varied consumer market.
There are several macroeconomic factors driving India’s viability as a destination for doing business, including an emerging middle class with higher disposable incomes and a low-cost yet competitive and highly skilled workforce.
Political stability and a broad consensus on reforms has added to the ease of doing business in India, while a well-developed banking system and vibrant capital market highlight the growing maturity of its financial system.
Government programmes - such as ‘Skill India’, ‘Make in India’ and ‘Digital India’ - are attracting foreign investors as new infrastructure projects help to open the country up.
One of the best places for doing business in India is Mumbai, the country’s business capital. The city’s excellent infrastructure and business-friendly policies make it one of the most attractive locations in which to set up a new venture.
Mumbai is just one of the many business hubs that are emerging across India. There are 28 states and eight federally administered union territories in the country. It’s therefore best to view India not as a single market, but as a series of interconnected regional markets where the regulatory and investment environment may differ from state to state.
When doing business in India, it is crucial to thoroughly understand the intricacies of the country’s economic system.
The Indian government is determined to simplify business processes to attract investors and has introduced a range of appealing initiatives and incentives to achieve this.
These include the implementation of alternative investment funds along with a new wage code which makes compliance comparatively easier. And under the ‘Startup India’ initiative, eligible companies can now access a host of tax benefits.
Prompted by the Covid-19 pandemic and the increased digitisation of the global economy, the Indian government has relaxed certain business rules with the aim of overcoming some of the challenges of doing business in India. For example, many meetings can now be conducted via video conferencing, and certain residency requirements have been loosened.
R&D incentives have also started to gain more traction in India’s business ecosystem. Some states now offer capital subsidies for foreign companies setting up R&D facilities, as well as expenditure-related subsidies.
India offers excellent opportunities for foreign investors, but it is a large and complex market that requires careful navigation to achieve success.
In such a fragmented market, companies can find it difficult to ensure all their entities and branches are operating compliantly across the different territories.
One common challenge is land acquisition, which remains complex as a result of the difficulties in establishing legal ownership and a ‘clean’ holding for purchase. However, the government is introducing initiatives to help foreign companies bypass such issues, such as the Gujarat International Finance Tec-City. Referred to as GIFT City, this is India’s first operational greenfield smart city and international financial services centre that is helping to set an international benchmark for finance and technology hubs worldwide.
Despite recent government legislation to improve international trade, there are still some hurdles to overcome when importing and exporting goods. Custom duty rates can be specific (rupees per unit) or ad valorem (percentage of value). In general, duty varies anywhere between 0% and 150%.
The need to stay on top of the shifting regulatory landscape can make doing business in India daunting.
The Companies Act 2013, which has been followed by subsequent changes and clarifications from the Companies (Amendment) Act, replaced the previous Companies Act 1956. The Companies Act 2013 (No.18 of 2013) is an Act of the Parliament of India which now forms the primary source of Indian company law.
It covers 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. It is crucial that companies have a thorough understanding of the Act to navigate potential market problems.
The World Bank has stated that the enforcement of contracts in India is still a significant concern. It has estimated that the average time to enforce a contract is 1445 days, which places India 163rd on the ‘enforcing contracts’ indicator of its ‘Doing Business’ report.
Property registration and property transition, land registry and administration remain complicated when compared to other countries. Although India has reduced the time required to register a new business in recent years, entrepreneurs still need to go through multiple procedures to get their company up and running.
In February 2021, the Ministry of Electronics and Information Technology released the Information Technology (Guidelines for Intermediaries and Digital Media Ethics Code) Rules 2021, which replaced the Information Technology Rules of 2011. The aim is to enable ordinary users of digital platforms to seek redressal for their grievances and command accountability when their rights are infringed.
Taxation in India is complicated, with different taxes levied by central and state governments. The central government levies direct taxes, such as Corporate Income Tax (CIT), Capital Gains Tax, Securities Transaction Tax, Commodities Transaction Tax and various customs duties. Taxes levied at state level includes profession taxes and real estate taxes.
To help counterbalance these complexities, there is a range of tax relief measures for eligible companies India also has a Double Taxation Avoidance Agreement (DTAA) in place with 85 other nations which enables non-resident Indians who work abroad to avoid paying taxes twice on their income from both their home country and their country of residence.
Transaction taxes recently sustained a major overhaul under the Goods and Services Tax (GST) Act to establish uniformity across the country. But the tax environment in India remains challenging, with a risk of errors unless companies seek professional advice.
|Major taxes to be aware of in India
Corporate entities liable for income tax include Indian companies and entities incorporated abroad. Different rates apply to resident and non-resident companies. 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.
Accounting standards are governed by the Institute of Chartered Accountants of India (ICAI) and financial statements must be prepared annually, with a fiscal year-end of 31 March.
Perhaps two of the main challenges of doing business in India are access to the right skillsets and the ability to retain talent with the high levels of employee turnover.
Employment laws in India are complex, though the government is seeking to remove legislative hurdles for employing both Indians and foreign nationals.
Under the Companies Act 2013, for example, a private limited company is not subject to any restrictions regarding appointing foreign nationals to key managerial positions, providing those foreign nationals comply with the necessary criteria in the Act. An employment visa is generally granted for one year or the period of the employment contract – whichever is shorter. It may be extended on an annual basis for a maximum period of five years.
Social security benefits, such as employee state insurance, typically apply only to employers with 10 or more employees, and the provident fund applies only to employers with 20 or more employees. However, it is worth noting that in the case of foreign workers, social security can be applied to companies with a smaller headcount.
In India, the work culture differs from one organisation to another, depending on its sector, size and location. Companies should actively seek to understand the country and its culture and build a market strategy around this learning. This strategy is a key priority for achieving long-term, sustainable growth.
Foreign companies setting up operations in India can either operate as an Indian entity (by creating a separate legal entity in the country) or as a foreign entity with an office in India.
There are various options for a foreign investor to enter India, such as a representative office, branch office, liaison office, private limited company or limited liability company. After incorporation, a company can open a bank account for the foreign entity.
India has complex and multi-layered requirements and procedures that make company formation and incorporation complicated and can significantly increase the cost of doing business.
For example, there are extensive regulations around the presence of a local director, the legalisation of foreign documents (where a foreign company intends to incorporate in India) and prior government approval (if investment is from a restricted country). And in the wake of the Covid-19 pandemic, the Indian government amended its FDI investment policy to curb opportunistic takeovers or acquisitions of Indian companies.
TMF Group helps companies expand into India and achieve full compliance with all local regulations. Find out everything to know in our article about incorporating in India or let our local experts assist with your company setup and ongoing growth.