Challenges

Challenges Foreign Companies Face When Setting Up Business in the World's Fastest Growing Economy

Citizens and foreigners both wait for months, at times extending to years, to collect the 100+ approvals needed to start up their business
Challenges Foreign Companies Face When Setting Up Business in the World's Fastest Growing Economy
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Contributor
Founder, KS Legal and Associates
8 min read
Opinions expressed by Entrepreneur contributors are their own.

Whether you associate this country with temples, modern skyscrapers or prevalent slums; if you are a businessman looking to expand in the world market – you cannot miss India. India is one of the fastest growing economies in the world.

India holds the potential to skyrocket your sales figures and realizing this, the liberalisation in 1991 lead to a massive influx of large foreign companies into the country. Also, the economy has been growing at the rate of 8.2% p.a. However, despite favourable market conditions, countless foreign brands failed to survive in India. Be it the General Motors exit or the closure of Royal Bank of Scotland, there were a number of reasons for their failure in India.

Before assessing the top 3 challenges faced by a foreign company, a preliminary examination of your India rationale is of utmost importance. First, identifying why India matters to your business and revalidating it through careful market assessment. Second, estimate the level of investments and time required to establish a sustainable presence. Once you have thought this through, you are equipped to handle at least some of the obstacles this country might hurl at you.

This year, India’s ranking for the “ease of doing business” index went up 30 positions to #100. The FDI regime has been progressively liberalised during the course of the 2000s. A number of restrictions on foreign investment have been removed and procedures have been simplified. India’s positive economic outlook and regulatory reforms have made it an attractive market for foreign investors. Despite this advancement, foreign companies cringe at the numerous regulatory, financial, bureaucratic, and cultural complexities, which will be discussed in this article. Understanding and preparing for these challenges is the key to success in India.

Legal Challenges 

India has elaborate legal systems and overloaded courts. So, foreign companies have to jump through several hoops to secure licenses and approvals required to start business in India. Citizens and foreigners both wait for months, at times extending to years, to collect the 100+ approvals needed to start up their business. This is partly because bureaucracy is still flying high, and occasionally followed by corruption. However, the difficulties of navigating India’s bureaucratic hurdles and red tapism are often outweighed by the benefits enjoyed upon a successful market entry. Foreign companies may not enjoy the experience of dealing with redundant complexities and interacting with government authorities but nevertheless, follow the rules! Indian government representatives also have a reputation of getting back to you whenever you do not.

As a foreign company looking to setup base in India, it is equally important to invest in hard and soft infrastructure. Thus, collaborating with local business partners – technically, financially and legally, could help you mitigate initial risks and save you blood and sweat. A certain company called ‘Larive International’ puts Dutch companies in contact with counterparts from emerging markets as India, and other Asian countries as China, Myanmar, Thailand and Vietnam. In other words, by leveraging on local soft power you are setting up an infrastructure for success.

Choosing a Right Entity

A Foreign Company setting up operations in India has got following Options:

As an Indian Company

  • Wholly Owned Subsidiary – Foreign Companies may set up subsidiaries in India and it is treated as an Indian resident and an Indian Companies for Indian regulation.

  • Joint Venture with local Indian Partner – It is a strategic alliance with Indian local Partner subject to Foreign Investment restrictions and regulations.

  • Limited Liability Partnership - distribution of profits. The FDI policy for LLPs has been notified recently making this a possible viable entity form for Indian business operations of foreign investors. This has less compliance challenges as compared to other entities.

As a Foreign Company

  • Liaison Office - A liaison office is not allowed to undertake any business activities other than liaison activities in India and cannot, therefore, earn any income in India.

  • Branch Office – With Prior approval of RBI, foreign Companies can set up branch office in India. However, branch offices are restricted from conducting manufacturing activities in India.

  • Project Office – Foreign Companies can set up Project offices in India to execute certain specific projects, this works as a temporary or site office for foreign companies.

Tax Regime:

Apart from sourcing cheap raw materials, labour and operational excellence, there is another factor that impact a huge impact on a foreign company and its product prices – Taxes!

According to the World Bank, it takes about 214 hours per year for preparation and payment of taxes in India. Such is the complexity of India’s tax structure. The Corporate Income Tax (CIT) charged on foreign companies is a massive 40% plus surcharge and education cess. A surcharge of 2% is applicable on foreign companies with income exceeding Rs. 1,00,00,000, or a surcharge of 5% if the income exceeds Rs. 10,00,00,000. The rate of education cess is 2% and secondary and higher education cess is 1%. Rules surrounding taxes can be tricky and so companies may end up making erroneous tax payments without the guidance of specialised professionals.

On 1st July 2017, an indirect tax came into effect on the manufacture, sale and consumption of goods and services throughout India known as the – Goods and Services Tax (GST). Much to our plight, a World Bank report stated that the GST tax reform is one of the most complex and is the highest rate in Asia and second highest among a sample of 115 countries that have a GST system.The Government of India provides certain direct tax incentives in the form of tax holiday, deductions, etc, to new industrial undertakings, R&D activities, promotion of specified areas, exports, etc. The Corporates are taxed being an Indian Company are taxed at 30% and Foreign Companies at 40%. Indian has signed various Double tax avoidance agreements with various countries so that tax payers can avoid paying double taxes on their income earned from the source country as well residence country. This is done to promote mutual economic relations, trade and investment. To claim this benefit, one needs to know whether the country one resides in or earns income in has a DTAA with India. One has to file Form 10F, a tax residency certificate and self declaration in the prescribed format to the entity responsible for deducting tax at source. 

Much awaited Goods and Service Tax was implemented in India and has simplified the tax structure, improved credit chain thereby eliminating cascading effect of taxation.

There are other multiple advantages to foreign companies under Special Economic Zones with the SEZ scheme, the Government of India aims to create 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 taken many measures to revive the investors’ interest in SEZs by liberalizing various norms such as minimum land area requirements, transfer/sale of ownership, etc.

Intellectual Property Rights

If you are planning to do business in India or if you are already trading there, it is essential to know how to use, guard and enforce your right to your company name, logo, design or your invention. India being a signatory to the General Agreement on Trade and Tariff (GATT) and Trade Related Aspects of Intellectual Property Rights (TRIPS) agreement, has complied with the obligations therein by enacting necessary statutes governing the following:

• Copyrights and other related rights • Trademarks • Geographical indications • Patents • Industrial designs

India has adequate copyright laws, and in July 2018, India acceded to the WIPO Internet Treaties, namely the WIPO Copyright Treaty (WCT) and WIPO Performances and Phonograms Treaty (WPPT). However, enforcement is weak, and piracy of copyrighted materials is widespread. Indian law provides no statutory protection of trade secrets. When experiencing an infringement it is important to collect as much evidence as possible. Companies facing counterfeiting have different choice of actions in India.

Dispute Resolution

The litigation process in India is based on common law. It is largely based on English common law because of the long period of British colonial influence during the British Raj. The Indian Arbitration and Conciliation Act, 1996 the governing arbitration statute in India and it is based on the Model Law on International Commercial Arbitration adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1985. Meanwhile, there are various domestic institutions such as 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. Most recently, these have been joined by the Mumbai Centre for International Arbitration (MCIA).

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