India’s laws and regulations, though based on the English legal system, require careful navigation. Understanding the legal and regulatory framework will be vital for the long-term success of your business in India.
Foreign lawyers are not currently able to practise in India. However, excellent legal advice is available from either a UK lawyer who has a “best friend” arrangement with a law firm in India or from one of the Indian law firms that operate in the UK.
Are there any restrictions on foreign companies doing business in India?
It used to be the case that virtually every sector of the Indian economy prohibited or severely restricted foreign direct investment. However, since 1991 the rules have been gradually liberalised and simplified to encourage foreign companies to invest and do business in India.
Today, 100% foreign direct investment is permitted in most sectors, save for a few where there remain caps on foreign ownership. For example, sectors such as retail, real estate, insurance, banking, defence and the legal sector have significant restrictions.
Top tip: Check at the outset what, if any, restrictions will apply to your Indian venture.
Are there any risks to intellectual property belonging to foreign investors that is exposed to the Indian market?
There has been a perception that India is a high-risk area for intellectual property theft. However, this is changing. A reason for this is that more and more Indian businesses themselves are going global and investing in markets outside of India, particularly in sectors such as pharmaceuticals and information technology, and therefore recognising the importance of protecting their own intellectual property. This protection is increasingly being reciprocated to intellectual property belonging to foreign investors operating in India.
India is a signatory to various international treaties on intellectual property rights. Furthermore, rights such as trademarks, patents and copyright can be protected through registration. These rights are enforceable through the Indian courts, which, in the event of infringement, can provide interim remedies such as injunctions relatively quickly. The courts can also order perpetrators to account for profits generated from their infringement.
Top tip: Do an audit of intellectual property that may be exposed to the Indian market, and if it’s commercially worth it, take steps to register it in India.
How effective are Indian courts in resolving disputes?
Though India has a well-established judiciary, litigation can be costly and time-consuming. Changes are being made to speed up litigation, such as the creation of courts which sit through the night and commercial courts which adjudicate purely on commercial matters.
Notwithstanding, the Indian courts are best avoided by foreign investors. It is not unknown for some court cases to get stuck in the system for up to 10 years.
It is important that clear termination clauses are set out in contractual documents and provision made for alternative methods of resolving disputes that do not involve the courts. Arbitration is increasingly being used as a method to resolve disputes. In some cases you could opt for disputes to be adjudicated by, for example, the English courts under English law. Certain foreign judgements are enforceable in India under section 13 of the Civil Procedure Code.
Top tip: Use English law where possible.
While Indian direct tax law is governed by a single code (Income Tax Act 1961), the application of the law in practice is made complex by a vast number of tax cases, rulings and circulars.
India intends to introduce a new Direct Tax Code (DTC) 1 April 2013, a year later than originally planned. When If enacted, this Bill will replace the Income Tax Act. It aims to simplify the mainstream corporate tax system, phase out various export incentives and introduce a number of anti-avoidance measures.
The tax year in India runs from 1 April to 31 March. The current tax rates are as follows:
exceeds INR 10m
|Domestic Indian company||32.45%||30.90%|
|Foreign company with an Indian branch||42.02%||41.20%|
Where there are accounting profits but no taxable profits, a minimum alternative tax (MAT) is levied on the adjusted book profits at the following rates:
exceeds INR 10m
|Domestic Indian company||20.01%||19.06%|
|Foreign company with an Indian branch||19.44%||19.06%|
Currently India does not have any tax grouping system and therefore each Indian company is assessed to tax separately.
Dividend distribution tax
Dividend distributions made by Indian companies are subjected to dividend distribution tax at an effective rate of 16.22%. The tax is payable by the Indian company. Dividends are exempt from Indian tax in the hands of the recipient.
Many payments by an Indian company to a non-resident are generally subject to Indian withholding tax. For example, royalties and fees for technical services (FTS) or interest on loans are subject to withholding tax at a rate of 10% to 42.02%. The withholding tax rate depends on the nature of payment, tax residence of the recipient and the availability of double tax treaty benefits.
From 1 April 2010, any recipient of income from India needs a Permanent Account Number(PAN) if the income received is subject to tax withholding under Indian domestic tax law. In the absence of PAN, the Indian payer is obliged to withhold tax at the higher of:
- Tax rates specified in the Indian domestic tax law/rates in force
- 20 per cent
Capital gains are currently taxed, even in the hands of non-residents, based on the type of assets and their period of holding. Assets held for not more than 36 months (12 months in case of shares) are taxed at 42.02%, Long-term capital gains are taxed at 21.01% but there are preferential rates for listed shares and securities ranging from Nil to 15.76%.
Cash and profit repatriation
Profit repatriation is possible, provided all formalities are considered and due taxes are paid. There are various options for repatriating cash and profits such as dividends, payment of consultancy fees, capital reductions or payment of interest on loans, which have different Indian tax implications.
One of the most common pitfalls experienced by foreign investors is failing to notify the Reserve Bank of India of their investments. This creates complications for them later on when attempting to repatriate investments out of India. For example, there remain significant restrictions on loans from overseas parent companies (External Commercial Borrowings). Businesses should therefore check the rules carefully.
In addition to direct taxes, there are a host of other taxes such as customs duty, excise duty, VAT, service tax (proposed to be replaced by Goods and Service Tax), stamp duties, Securities Transaction Tax and wealth tax.
The Indian government offers a series of tax incentives to boost exports and investment. Special Economic Zones (SEZs) have been set up throughout the country (over 380 existing and more than 580 new approved proposals) in order to promote a competitive environment and industrial progress.
Nowadays, SEZs exist as multi-product, sector-specific or free-trading warehouses, and units may be set up for manufacture, trading or services activity. Non-tax incentives of SEZs could include reduced paperwork, accessibility to common infrastructure, and uninterrupted power supply, though these vary between SEZs.
Export tax incentives
Businesses located in Free Trade Zones (FTZ), Hardware or Software Technology Parks (HTP/STP) can enjoy tax holidays on profits derived from exports of articles, products or computer software though MAT remains payable. However, unless extended, these tax holidays are set to expire on 31 March 2011.
Developers and occupiers of SEZs also enjoy substantial long term tax holidays and concessions and are worth exploring when establishing an operation in India although these may be phased out under the DTC.
The Ministry of Commerce is the government arm responsible for regulating, promoting and approving SEZs.
Direct tax incentives
New undertakings in designated sectors can also enjoy a tax deduction on 100% of profits. Typically, new projects in sectors such as manufacturing, hospitals, infrastructure, power or industrial parks are eligible for this incentive. New undertakings can enjoy tax exceptions for periods of 5, 7 or 10 years, depending on the sector and project. Companies are advised to consult the scheme relevant to their sector for information on eligibility, time period and tax exemption schedule.
Many Indian states offer incentive packages such as tax concessions, capital and interest subsidies and reduced power tariffs. Businesses should make sure they weigh incentives, for instance the benefits of setting up in a SEZ, against those of a potentially more competitive location.
(sourced from PwC)
Indian Business Culture
India is a vast, populous and diverse nation encompassing many different identities, languages, cultures and religions. These factors, in addition to the caste system’s legacy and the gap between poor and wealthy, make India one of the most diverse nations on earth. This makes it very difficult to make generalisations about Indian culture. There are, however, a few tips that can guide you in your Indian business venture.
- There are many Indias within India: be aware of the cultural diversity and be cautious about generalisations. The great Cambridge economist Joan Robinson once observed: “Whatever you can rightly say about India, the opposite is also true.”
- Research each contact thoroughly: traditional Indian businesses may be family-run and hierarchical, but India’s openness has introduced Western management practices into some emerging industries.
- Hierarchy plays a key role: decisions are made at the highest level and roles are well defined.
- Indians place great value on relationships: take the time to develop contacts and relationships.
- Time is fluid, so flexibility is essential.
Business Culture in India
Relationships are of utmost importance. Indians will base their decisions on trust and intuition as much as on statistics and data, so be mindful of the importance of a good working relationship. Take the time to engage in small talk and get to know your prospective partner. Rushing straight into the business issue could be perceived as rudeness.
Business Meetings and Negotiations Give as much warning as possible of your intended dates of travel and try to schedule your meetings well in advance. Do bear in mind that the arrangements may change several times and may not be confirmed until the day of the meeting itself. Time is flexible. Although punctuality is expected, meetings may start a few minutes late and be subject to frequent interruptions, such as phone calls or staff members walking in to have documents signed. Do not be fazed by individuals taking phone calls during meetings. Taking calls immediately is seen as a priority, since it can be seen as rude not to, and those making phone calls regard it as impolite if their call is not answered immediately since the recipient will know who is calling. This can be frustrating but it is accepted practice. In any case, it is important to keep an eye on texts and emails in case the next meeting is rearranged. Negotiations can be slow by Western standards. Be patient and demonstrate good character; forcefulness will likely drive your contact away.
Meeting and Greeting
Small talk at the beginning of a business meeting is common and could include questions about your family. Establishing trust is essential. When entering a meeting, always greet the most senior person first.
Etiquette requires a handshake, although some Indians may use the namaste, a common greeting involving pressing your palms together with fingers pointing upwards, and accompanied by a slight bow. A flexible approach is important and it is often best to be guided by the person with whom you are meeting.
When exchanging business cards, make sure to receive the card with your right hand and put it away respectfully. Dress code mostly consists of smart, comfortable clothing. A lightweight suit is appropriate and ties are not compulsory, except in traditional sectors such as banking or law. Women are advised to wear a trouser suit rather than a skirt.
The weather in India is not always hot. Delhi and other parts of north India can be extremely cold in winter. Hotels and offices can also have very cold air conditioning, so it is well worth packing a sweater or pashmina.
English is widely spoken in business and is one of India’s official languages. Many Indians and business managers speak it fluently, though of course meaning can vary across cultures and countries. Indians may have a particular difficulty saying “no”, as it can convey an offensive message. Instead, they will prefer making statements such as “we’ll see”, “yes, but it may be difficult”, or “I will try” when they likely mean “no”.
Listen carefully and be aware of the meaning behind these answers. Do not attempt to compel your contact to be more direct, as this can be very difficult to do.
A way to seek a more positive answer is to rephrase the question, for instance if you are trying to secure a meeting and there is some evasion, one approach is to ask what day and time would be convenient to meet. Similarly, if there is resistance in providing a purchase order, the question could be asked when it is likely that a purchase order will be raised. This type of questioning may provide a more meaningful response.
Indian businesses are often very hierarchically structured. In negotiations, decisions are generally made at the highest of levels. Therefore, unless the company director, owner or a very senior manager is present at a meeting, a decision is not likely to occur at that stage. Roles are well defined and tasks such as manual labour will only be carried out by a specific person. An Indian manager is typically not expected to carry out tasks that could otherwise be undertaken by someone at a lower level in the organisation.