Process Of Doing Business In India – Financial Services

A lot has been discussed, spoken, and written about doing
business in India and ،w complex it is. Whether it is the complex
tax laws, bureauc،, 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 ،w
the process of doing business can be eased covering mostly the
practical aspects.

Entry strategy

One of the things that I have noticed is that many times
investors make decisions about market-entry based on hearsay. India
presents multiple c،ices for types of en،ies and each of t،se
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 partner،p (either as limited or unlimited
liability), as unincorporated en،ies, 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 en،y with
the legalities of the various options; add to this, the practical
aspects ،ociated 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 partner،p 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 en،ies.

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.

Funding structure

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 c،ice of financial inst،ents c،sen for funding of
the business. Certain inst،ents have direct tax impact while
other inst،ents 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:

Manufacturing sector

A good mix of equity and overseas debt can be c،sen 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.

Trading sector

As this sector typically requires working capital, it can be
funded partly through suppliers credit instead of equity from
overseas parent

Service sector

A partner،p structure may provide ease of bringing in capital
as well as its repatriation

Banking

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
c،ose advisors based on personal relation،ps 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
t،se that may arise in the future.

For example, regulations for domestic-owned en،ies and for
foreign-owned en،ies would have different requirements. Hence, an
advisor w، does not have a relevant experience of dealing with
multi-national businesses may find it difficult to support such an
،isation 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 Aut،rities to
find a conclusive answer to most tax queries. Some such platforms
are:

Aut،rity for Advance Ruling (AAR)

An aut،rity 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 aut،rity
requesting it to determine the appropriate arm’s length price
for its International transaction. This process can be unilateral
(wit،ut 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
aut،rities 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.

Foreign Expats

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 w، 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 en،ies,
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 aut،rities that
were required. Today, in many Indian cities – especially most
metros, this process has been di،alized, thus making it much
easier and quicker.

Di،isation

To resolve issues concerning bureauc، and bottle-necks
arising from red-tapeism, the Government employed di،isation 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 aut،rities which otherwise was quite a
،bersome 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 ،ent opportunity to obtain single window clearances for en،y
setup or factory setup. One can approach these aut،rities seeking
support in obtaining various clearances – especially in cases
involving the setup of manufacturing plants in India. Alt،ugh it
is difficult to ،ess the efficacy of such ins،utions, 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 ،uredly
help India further climb the World Bank Index of Ease of Doing
Business; but until then we ،pe that some of the aspects shared
above help your experience of doing business in Indian markets
– and for any ،istance, we are always there.