A lot has been discussed, spoken, and written about doing business in India and how complex it is. Whether it is the complex tax laws, bureaucracy, sometimes difficult to handle tax administration or simply the high cost of compliances, India always has given jitters to any investor – Indian or foreign.
The purpose of this article is to share our experience on how the process of doing business can be eased covering mostly the practical aspects.
One of the things that I have noticed is that many times investors make decisions about market-entry based on hearsay. India presents multiple choices for types of entities and each of those have different implications and, at times, complexities. Business can be done in India either by setting up a company (which also has different options), a partnership (either as limited or unlimited liability), as unincorporated entities, and so on.
India is clearly a country wherein one cannot take a ‘one-size-fits-all’ approach. Time needs to be invested in reconciling the long-term business goals of the entrant entity with the legalities of the various options; add to this, the practical aspects associated with each such option.
For example, a business with the long-term objective of raising private third-party capital or even public capital would need to set up a company. On the other hand, a cash generating business where tax efficiency is more important, a partnership may be better. But good decision-making will come from understanding that a cash generating business (with no purpose of raising external capital) operates as a company, over a period of time, it will get stuck with surplus post-tax cash, the extraction of which will cost an additional 20% tax – this specifically being the case with corporate entities.
Hence, investing time and money in understanding the most optimal structure not only from a tax perspective but also from a business goal and operating cost perspective, can help in significantly easing the process of doing business in India over a long period of time.
Another important aspect which directly impacts the process of doing business in India is the manner in which the business is funded. Despite the presence of substantial liberalisation, India has a regime of monitoring all foreign exchange transactions. This impacts the choice of financial instruments chosen for funding of the business. Certain instruments have direct tax impact while other instruments may have challenges from a regulatory standpoint. Typically, based on the industry in which one operates, there are some thumb-rules that may be of use:
A good mix of equity and overseas debt can be chosen for this. Equity tends to lead to cash blockages over a period of time since repatriation of capital is not very efficient, hence too much is not a good thing always. Overseas debt can be up to 4 times the amount of equity and repayment of debt is not subject to tax or prior approvals. In certain cases, efficient debt funding from local banks may also be considered which also eases the process in certain aspects.
As this sector typically requires working capital, it can be funded partly through suppliers credit instead of equity from overseas parent
A partnership structure may provide ease of bringing in capital as well as its repatriation
In India, all banking transactions are governed by the Reserve Bank of India (RBI). While banks have been given a lot of autonomy in undertaking banking transactions, there is a significant amount of reporting involved – this results in copious paperwork for routine transactions as well. In our experience, the most frustrating aspect – especially for foreign investors – is to realise the amount of time and cost it can take to undertake a simple international banking transaction. Our suggestion has typically been to budget for a couple of additional days for any critical banking transaction. Also, maintaining two bank accounts, one with a multi-national bank and one with a multi-city local bank, may also ease the banking process.
Tax and regulatory compliances
India still runs significant deficits in its yearly budgets; and a very low percentage of its population is paying taxes. Both these factors in combination mean that the Government relies heavily on increasing tax collections and being strict in ensuring tax compliance. This has inevitably resulted in the Tax Department being perceived by investors to be aggressive.
Invariably, most investors rely on tax advisors for support in tax-related matters. Of course there are times when investors choose advisors based on personal relationships or lower charges – even at the risk of working with professionals with lesser experience in relevant fields. But the complexity of tax laws makes each aspect of the taxation and regulatory system in India a subject in itself. Hence, it is recommended to work with an advisory firm that is supported by a team of subject-matter experts because it is better equipped to handle all matters that exist and those that may arise in the future.
For example, regulations for domestic-owned entities and for foreign-owned entities would have different requirements. Hence, an advisor who does not have a relevant experience of dealing with multi-national businesses may find it difficult to support such an organisation while operating in India. And, unfortunately, such investors end up with the perception of ‘India being a difficult country to do business in”.
Determinate tax positions
Like most developed countries, India too has mechanisms in place – especially for foreign investors, through which it is possible to approach the Government and related the Authorities to find a conclusive answer to most tax queries. Some such platforms are:
Authority for Advance Ruling (AAR)
An authority which can be approached by a non-resident to help determine its direct tax position with respect to a transaction undertaken or to-be-undertaken India. With good reason, this is an actively used route by non-resident tax payers which provides a much-needed certainty on tax matters.
Advance Pricing Agreements (APA)
This is a mechanism that helps to reduce uncertainties in transfer pricing matters. Under this provision, a company with global-related party transactions can approach the APA authority requesting it to determine the appropriate arm’s length price for its International transaction. This process can be unilateral (without involving country of counter-party), bi-lateral (where two countries i.e. India and one other country are involved), or multi-lateral (where India and two or more countries are involved). While this process is time consuming, particularly when the authorities of other countries are also involved, the process has been found to be extremely useful and transparent by the companies having used the APA mechanism.
Being a technology importer, inviting foreign specialists or technicians is a must – particularly in the case of complex infrastructure projects. Over the last two decades, many expatriates have come, worked, and stayed in India. During this period, the overall scenario of infrastructure in India has improved, especially in metro cities. This has facilitated a good staying experience for a lot of expats who come to work in India.
However, the requirements around tax and immigration laws have been found to be rather stringent. To this extent, we feel that having a knowledge of posting expats in India and the processes to be adopted may be useful. Such expat postings are likely to result in higher tax costs that are usually covered by employer entities, and mandatory social security contributions.
India has an extensive network of Double Taxation Avoidance Agreements with various countries which eliminates any double tax for expats coming from such countries; and Totalisation Agreements which optimise the cost of social security contributions. The knowledge of such agreements can help companies plan the cost for expat deputation.
Another important aspect that used to be very tedious was the registration of expats under immigration laws because of the extensive paperwork and personal interactions with authorities that were required. Today, in many Indian cities – especially most metros, this process has been digitalized, thus making it much easier and quicker.
To resolve issues concerning bureaucracy and bottle-necks arising from red-tapeism, the Government employed digitisation as a primary solution. Today, almost all compliances of tax, corporate law, foreign exchange related matters, and so on are undertaken online. This has allowed businesses to work freely with their auditors and advisors to ensure compliances are done more efficiently. The introduction of e-Assessment in the Union Budget presented earlier this year, was a big step to reduce in-person interactions with tax authorities which otherwise was quite a cumbersome process. Presently, most of communication with Government Departments as well as registrations and compliances can be undertaken online.
In addition, through various initiatives such as ‘Invest India’ and ‘Make in India’, the Government has provided a potent opportunity to obtain single window clearances for entity setup or factory setup. One can approach these authorities seeking support in obtaining various clearances – especially in cases involving the setup of manufacturing plants in India. Although it is difficult to assess the efficacy of such institutions, there definitely have been tangible improvements in the process with their induction.
Overall, it can be said that over the past few decades, successive Governments have realised the need to ease the process of doing business in India and have made efforts to make it possible as well. Such efforts on sustained basis will assuredly help India further climb the World Bank Index of Ease of Doing Business; but until then we hope that some of the aspects shared above help your experience of doing business in Indian markets – and for any assistance, we are always there.
Written by Nitin Garg
Nitin Garg is a Partner and Co-founder at Coinmen Consultants LLP