This article is written by Bhumika Saishri Panigrahi, pursuing Diploma in M&A, Institutional Finance and Investment Laws (PE and VC transactions) from Lawsikho. The article has been edited by Ruchika Mohapatra (Associate, LawSikho).
Table of Contents
Introduction
Whether you associate India with temples, modern skyscrapers, or widespread slums, if you are a businessperson trying to develop into the global market, India is a must-see destination. India has one of the world’s fastest-expanding economies. Realizing that India has the potential to explode one’s sales figures, the country’s liberalisation in 1991 resulted in a significant entry of large multinational corporations. Despite favourable market conditions, a large number of foreign brands have struggled to thrive in India. There were a lot of reasons for their failure in India, whether it was the leaving of General Motors or the closing of the Royal Bank of Scotland.
A preliminary evaluation of the situation is critical before determining the top three hurdles faced by a foreign company in establishing its operations in India. First, determine why India is important to your organisation and re-validate it through thorough market analysis. Second, calculate the amount of money and time needed to create a long-term presence. Once you’ve considered this, you’ll be better prepared to face at least some of the challenges that this country may throw your way.
This year, India climbed 30 positions to #100 on the “ease of doing business” index. Over the course of the 2000s, the FDI policy was gradually liberalised. A number of foreign investment prohibitions have been lifted, and procedures have been streamlined. For international investors, India’s optimistic economic prospects and regulatory reforms have made it a desirable market. Despite this progress, foreign businesses are concerned about the myriad regulatory, financial, bureaucratic, and cultural obstacles highlighted in this article.
Legal challenges
India’s legal system is complex, and its courts are overburdened with cases. There are also many procedural compliances that need to be adhered to before an establishment can begin its operations in India. Sometimes, even before operations begin, investors get entangled in legal disputes concerning property, operation in general etc. As a result, foreign enterprises must jump through multiple hoops in order to obtain the necessary permits and approvals to begin doing business in India. Citizens and foreigners alike must wait months, if not years, to obtain the 100 or more approvals required to start a business. This is largely due to the fact that bureaucracy continues to soar, occasionally accompanied by corruption. The hassles of clearing India’s bureaucratic stumbling blocks and red tape are frequently overcome by the rewards of a successful market entry. Foreign companies may not appreciate dealing with unnecessary complications and communicating with government officials, but they must adhere to the regulations. When you don’t respond, Indian government representatives have a reputation for getting back to you.
It is equally important for a foreign company looking to establish a base in India to invest in both hard and soft infrastructure. Collaboration with local business partners, on a technical, financial, and legal level – could thus help you avoid initial risks and save time and money. A company named Larive International connects Dutch businesses with peers in rising markets such as India and other Asian countries.
The following options are available to a foreign company wishing to establish operations in India
- As a wholly owned subsidiary of an Indian company- Foreign companies may establish subsidiaries in India, and they are treated as Indian residents and companies for regulatory purposes.
- Joint venture with a local Indian partner- This is a strategic alliance with a local Indian partner that is subject to Foreign Investment Regulations and Restrictions. Profit distribution in a Limited Liability Partnership, for example. The LLP FDI policy was recently announced, making it a feasible entity structure for foreign investors conducting business in India. When compared to other entities, this has fewer compliance issues.
- As a foreign company liaison office- A liaison office is not permitted to engage in any business activity in India other than liaison activities and, as a result, cannot earn foreign companies an opening a branch office in India with the RBI’s prior clearance. Branch offices, on the other hand, are not permitted to perform manufacturing activities in India.
- Project office- Foreign corporations might establish project offices in India to carry out specialised projects; this serves as a temporary or site office for foreign companies’ income.
Tax system
Aside from sourcing low-cost raw materials, labour, and operational excellence, there is one more aspect that has a significant impact on a foreign company’s product prices: taxes!
According to the World Bank, tax preparation and payment in India takes roughly 214 hours per year. The tax system in India is extremely complicated. Foreign enterprises are subject to a whopping 40% corporate income tax, plus a surcharge and an education cess. Foreign enterprises with income over Rs. 1,00,00,000 are subject to a 2% surcharge, or a 5% tax if the income exceeds Rs. 10,00,00,000.
The education cess rate is 2%, and the secondary and higher education cess rate is 1%. Due to the complexities of tax rules, businesses may end up paying incorrect tax payments if they do not seek the advice of specialised professionals.
The Goods and Services Tax (GST) went into force on July 1, 2017, and it is an indirect tax that applies to the manufacture, sale, and consumption of goods and services in India (GST). A World Bank analysis, much to our chagrin, indicated that the GST tax reform is one of the most complex, with the highest rate in Asia and the second-highest rate among 115 nations using a GST system. New industrial ventures, R&D activities, promotion of certain areas, exports, and other direct tax incentives are provided by the Indian government in the form of tax holidays, deductions, and other forms.
This is done to promote commerce, investment, and reciprocal economic interactions. To be eligible for this benefit, one must first determine whether the country in which they live or generate money has a DTAA with India. The entity responsible for deducting tax at source must receive Form 10F, a tax residence certificate, and a self-declaration in an authorised manner.
The long-awaited Goods and Service Tax was adopted in India, simplifying the tax system and improving the credit chain, removing the taxation cascade effect.
Under the SEZ concept, the Indian government wants to establish a hassle-free environment for exports, supported by an integrated simplified infrastructure and a package of incentives to attract foreign and domestic investment. The government has made a number of steps to rekindle investor interest in SEZs, including liberalising different regulations such as minimum land area requirements, ownership transfer/sale, and so on.
Rights to intellectual property
If you plan to conduct business in India or already do business there, you must understand how to use, protect, and enforce your rights to your company name, logo, design, or idea. India, as a party to the General Agreement on Tariffs and Trade (GATT) and the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), has met its commitments by implementing relevant statutes controlling the following:
• Trademarks,
• Geographical indications,
• Patents,
• Industrial designs,
• Copyrights and other related rights.
India has proper copyright laws, and it joined the WIPO Internet Treaties in July 2018, especially the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WIPO PPT) (WPPT). However, enforcement is lax, and copyrighted media piracy is rampant. There is no statutory protection for trade secrets in Indian law. When an infringement occurs, it is critical to gather as much evidence as possible. In India, companies experiencing counterfeiting have a variety of options.
Dispute resolution
In India, the legal system is founded on common law. Because of the long period of British colonial dominance under the British Raj, it is mostly based on English common law. The Indian Arbitration and Conciliation Act, 1996 is the country’s controlling arbitration act, and it is based on the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on International Commercial Arbitration, which was adopted in 1985. Meanwhile, the Indian Council of Arbitration (ICA), the Delhi International Arbitration Centre (DAC), the Indian Merchant Chamber (IMC) in Mumbai, and the Nani Palkhivala Arbitration Centre (NPAC) in Chennai are among the domestic institutions.
Conclusion
There are a plethora of issues faced by foreign investors trying to invest in any country in general. Through this article, the author has highlighted the issues faced by investors trying to invest in India. These issues range from legal and procedural to political. While there is an increase in foreign investments around the world, India needs to pay close attention to and ensure that these loopholes and issues are addressed before India can become the next global hub for foreign investment.
References
- https://rbidocs.rbi.org.in/rdocs/Speeches/PDFs/OV27022012.pdf
- https://www.natlawreview.com/article/india-foreign-investment-recent-trends-and-issues
- https://www.investindia.gov.in/foreign-direct-investment
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