Article

Top challenges of doing business in India

20 April 2018

For the first time ever, India has jumped 30 positions to 100th in terms of ease of doing business ranking this year, as monitored by the World Bank. But despite the progress, there are still challenges along the way.

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Disclaimer: This article was accurate at the time of publishing. To obtain the most up-to-date information, please get in touch with our local experts.

But despite the progress, there are still challenges along the way. Doing business in India isn’t easy, and it’s vital to engage local knowledge to guide you through the regulatory, financial, bureaucratic, and cultural complexities.

Starting a business in India

It can take between one and four months to complete all the required procedures, with fees and add-on costs dependent on the size and type of business being registered.

With the introduction of the Companies Act 2013, which was enacted in the year 2014, the 58-year old Companies Act, 1956 was repealed and replaced by the new law. While the law makers had intended to introduce a modular law to the Indian economy, the stringent provisions imposed a setback to implementation.

Post implementation, dozens of amendments, circulars, and notifications were issued by the Ministry to mend loopholes in the provisions of the Act 2013. The increase in the compliance burden has, to a great extent, curbed the incorporation of companies in India. Not only has the Companies Act 2013 disheartened the market participants from floating new companies, it has also influenced a trend of de-corporatisation in the country.

A registered company, whether private or public, is bound to comply with statutory requirements, including maintenance of registers, meetings, several filings requirements and disclosure requirements, coupled with rigorous penal provisions, including high fee penalties and imprisonment up to seven years in some cases.

Due to the complexity caused by the various amendments since the Companies Act 2013 was implemented, the need for clarifying the situation, through the Companies (Amendment) Act, 2017, was keenly felt.

Depending on the nature of business to be performed, there are various entry options for a foreign investor to enter India, such as a Representative Office, Branch Office, liaison office, Private Limited Company, Limited Liability Company, etc.

The law allows foreign citizens to become full-time directors or partners in the entity; however at least one of the Directors/Partners should be a resident of India. Shareholders and directors of the proposed new company need to get Permanent Identification Numbers (PAN) from the Income Tax Department; the directors have to apply for Director Identification Number (DIN) for which documents executed outside India are required to be notarised and apostilled or consularised in the country of execution, which is one of the most stringent parts of the entire set up process.

A Digital Signature Certificate (DSC) is needed from a government certified agency, and a choice of up to six possible names for the company, in order of preference, must be given to the local Registrar of Companies.

Land acquisition in India

Land acquisition remains complex, because of the difficulties in establishing legal ownership and a ‘clean’ holding for purchase. There may be litigations due to inheritance, fragmented holdings, and demands by sellers to be paid in cash. Establishing true land ownership is fraught with issue.

Construction permits

India was ranked 185 among 190 nations surveyed by the World Bank in 2017 over the time it takes to receive a construction permit after filing an application. Previously, it took 164 days and 42 pro-cesses to get a construction permit in Mumbai, and 213 days and 29 processes in Delhi.  Now it takes only 60 days following eight online procedures to get a construction permit in both cities, but thorough guidance is needed to navigate the complex process in other parts of the country.

Electricity

The Indian government’s rural electrification programme saw the country move up to the 26th spot in the World Bank's electricity accessibility ranking in 2017, from 99th spot in 2014.

The time to obtain an electricity connection in Delhi has dropped from 138 days four years ago to 45 days, involving five procedures. But demand is currently outstripping supply, as the economy booms, and there is a potential for power outages.

Infrastructure

There is much focus on infrastructural development, boosting road transport, creating dependable power generation, and modernising state-owned railways. Roads, ports, railways, and solar energy are vibrant investment opportunities. But whilst the investment is much needed, it will be several years until it comes to fruition. In the meantime, an infrastructure straining at the seams poses a challenge to distribution and logistics.

Registering property

Registering a property can be a time-consuming process, with a bewildering range of charges. The registration fee for property documents is 1% of the value of the property, subject to a maximum of Rs 30,000. Stamp duty is compulsory but different rates of stamp duty are payable in different states, depending on the legislation prevalent in that state. Professional guidance is recommend-ed.

Investor protection and enforcing contracts

In order to afford adequate protection to the investors, provisions have been incorporated in dif-ferent legislations such as the Companies Act, Securities Contracts (Regulation) Act, Consumer Pro-tection Act, Depositories Act, and Listing Agreement of the Stock Exchanges supplemented by many guidelines, circulars and press notes issued by the Ministry of Finance, Ministry of Company Affairs and SEBI from time to time.

The initiatives taken by SEBI in the area of “ease of doing” business include rationalisation of know-ing your customer (KYC) norms, increasing the number of arbitration centres and simplifying FPI (foreign portfolio investor) norms for investing in the debt market. Likewise, the Indian govern-ment is tackling the country’s poor track-record in enforcing contracts.

Some of them include new insolvency norms, increased rights for minority investors, and designat-ing a few district courts in Delhi and Mumbai as commercial courts, able to hear cases involving dis-putes of under Rs 1 crore. The government and the regulators are pro-actively learning from global best practices.

However, there are still a few areas that need improvement, for instance fixing the accountability of auditors, and improving regulatory oversight and enforcement, but it will be a take time before new measures come into force.

India ranks still ranks a low 164th among 190 countries on enforcing contracts, according to the World Bank. On average, it takes 1,445 days (almost four years) for a dispute to be resolved, com-pared to 165 days in Singapore, which topped the list, or 1,102 days (three years) in South Asian countries, which include India's neighbours. And it takes, on average, 31% of the value of the claim to settle a dispute.

Exports and imports

Exporters and investors face non-transparent and often unpredictable regulatory and tariff regimes.

Despite government legislation to improve international trade, there are still various hurdles to importing and exporting goods. Custom duty rates can be specific (rupees per unit) or ad valorem (percentage of value). In general, duty varies anywhere from 0% to 150%.

Other fees related to Custom duties includes Landing Charge, Countervailing Duty (CVD), Education Cess, Additional CVD, and Integrated Goods & Services Tax (IGST).  Several layers of bureaucracy make it challenging to move goods efficiently, and companies must file a long list of documents before moving products across borders.

India has implemented a Goods & Service Tax (GST) with effect from 1st July, 2017 which now requires the exporters to obtain a Letter of Undertaking (LUT) / Bond prior to export without payment of GST in India.

To encourage exports, the government of India provides certain benefits to exporters from time to time. For instance, the Service Exports from India Scheme (SEIS) of the Foreign Trade Policy 2015-2020 has been launched since 1 April 2015, offers service exporters a grant of a transferable duty credit scrip @ 2% to 5% of Net Exports that can be used for a variety of purposes, including payment of customs duty.

Intellectual property protection

The government of India made it easier in 2016 to register trademarks online with the newly hired 100 trademark examiners and reduced the 13-month review period for trademarks to eight months with the goal of lowering it to just one month. Cutting the average time for addressing pending intellectual property rights applications from more than five years to 18 months is also on the agenda.

Despite these efforts, India’s overall score improved only marginally in the fifth edition of a global intellectual property index compiled by US business-lobbying group, the US Chamber of Commerce, and published in 2017. The annual index printed along with a report titled “The Root of Innovation,” gave the country a score of 8.75 out of 35, compared to 7.05 in 2016, citing “fundamental weaknesses” in the country’s intellectual property framework.

The index scores countries in six categories: patents, copyrights, trademarks, trade secrets and market access, enforcement, and ratification of international treaties. India ranks a poor 43 out of 45 countries.

Despite increased legal protection, copyright infringement is still rampant in India due to lax administration and enforcement practices and are not in line with many developed economies.

Recruitment in India

Accessing the right skills can be a challenge, as can staff retention and high levels of employee turnover. Employment laws in India are complex although again, the government is seeking to im-prove the legislative hurdles to employing indigenous Indians, and foreign nationals. At present, there is a huge variety of laws, ranging from payment of gratuities to gender discrimination.

Taxation systems in India

India’s tax structure is complex, taking – on average – 214 hours (in 2017) a year to prepare and pay taxes (World Bank).  Laws, rules, and practices can be confusing, and foreign companies who don’t seek specialised help may overpay some taxes and underpay others. India has among the highest corporate tax rates in the world, but the effective tax liability differs across industry and sector. The Corporate Tax Rate in India stands at 35.88%.

The Goods and Services Tax (GST), which came into effect on 1 July 2017, is a destination-based tax on the consumption of goods and services with the aim of achieving a “one nation, one tax regime” in India. It is a comprehensive indirect tax on the manufacture, sale and consumption of goods and services throughout India, to replace taxes levied by the central and state governments. The GST implemented is one of the most complex with the second highest tax rate in the world among a sample of 115 countries which have a similar indirect tax system, the World Bank said in a report.

In keeping with India’s commitment to implement the recommendations of 2015 Final Report on Action 13, titled “Transfer Pricing Documentation and Country-by-Country Reporting”, identified under the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) Project, India has made necessary changes in tax regulation for furnishing of a Country-by-Country report in respect of an international group by its constituent or parent entity.

Credit and funding availability in India

India performs well on the ease of getting credit (29th on the World Bank list). The government has strengthened access to credit by amending the rules on the priority of secured creditors outside reorganisation proceedings as well as the adoption of a new insolvency and bankruptcy code that introduced a reorganisation procedure for corporate debtors. Secured creditors, such as banks and financial institutions, are given powers to enforce securities without the intervention of courts.

Risk of bribery and corruption

Companies operating or planning to invest in India face high corruption risks. India slipped from 79th to 81st position in the most recent Transparency International’s Global Corruption Perception Index.

Although the government has increased efforts to counter corruption, it is still a serious issue, particularly prevalent in the judiciary, police, public services, and public procurement sectors. The Prevention of Corruption Act is the minimum legal framework within India, with private sector corruption covered by the Companies Act.

Price sensitivity

A keen price is rated above the qualities of a product, and Indian consumers are price-sensitive, seeking the cheapest rather than the product with the most attributes. You will be expected to negotiate on the price for your goods, and to give a discount.

Business meetings

There are many different religious, ethnic, and annual variations on local and national holidays. These need careful investigation before planning business trips and meetings.

Resolving insolvency

A laborious court and administration system means it takes, on average, 4.3 years to resolve insolvency in India, far longer than the South Asian average (2.6 years) or that of OECD high income countries (1.7 years).

India also strengthened access to credit by amending the rules on priority of secured creditors outside reorganisation proceedings and adopting a new insolvency and bankruptcy code that introduced a reorganisation procedure for corporate debtors.

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 has the local knowledge to help you navigate these complexities. Whether you want to set up a new venture in India, or just want to streamline your Indian operations, talk to us.

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Written by

Jatin Mehta

Director, Mumbai

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