Conducting business in one’s own country is never easy, let alone conducting business overseas, where rules, regulations and business environments differ. ‘Ease of doing business’ is also an Index created by the World Bank. It ranks economies from high to low, with the former indicating easier, simpler and better conditions for business as compared to the latter, indicating difficulty in conducting business. This article aims at giving you a glimpse into the world of investing in and conducting a business in India.
Economies are ranked based on parameters such as starting a business, dealing with construction permits, availability of electricity, registering property, availing credit, protection of minority investors, paying taxes, international trading, distance to frontier, entrepreneurship, good practices, transparency in business regulation, resolving insolvency and enforcing contracts. For any business, it is important to acknowledge these factors, or at least those that apply, as they decide how easy or difficult it is to conduct or start the business in a country.
For the year 2016 by World Bank’s records- India moved up from 134th to 130th rank in the Ease of doing business Index. Among the parameters mentioned earlier, India has best ranked in the protection of minority shareholders. It has also bettered its rank in the availability of electricity, getting construction permits and starting a business. On the downside, paying taxes and accessing credit have been the most difficult for business. Additionally, two key parameters that India needs to work on are enforcing contracts and resolving insolvency, that have both been a hindrance in conducting business.
To give you an idea of how few other countries fare in the rankings; Singapore, New Zealand and Denmark occupy the first three spots in the world, whereas Eritrea, Central African Republic and Libya occupy the last three spots.
The Indian Government has taken several initiatives towards increasing the ease of doing business, here are some that deserve a mention:
The availability of www.ebiz.gov.in, a Government portal where services are provided such as employee registration, name availability, Director Identification Number, PAN, Certificate of Incorporation, TAN, RBI (Foreign Remittances), EPF, Importer-exporter code, Foreign currency – transfer of shares, etc. Making registering and running a business much easier than before.
Now Aadhaar eKYC and eSign are being used to grant Digital Certificates to directors (DSC) of the company. This process is now made paperless and takes only a few minutes.
The requirements for minimum paid-up capital and common seal for companies has been removed as per the Companies (Amendment) Act, 2015 and the process for starting a business is now streamlined.
The Indian Prime Minister has shown particular interest in building a positive entrepreneurial spirit. He launched MakeInIndia, a website helping young entrepreneurs set up, access information, and build a business of their own.
Employee Provident Fund Organisation (EPFO) and Employee State Insurance Corporation have online portals so that businesses have real-time registration, online application for clearances and payments be made through 56 partner banks.
An Investor Facilitation Cell has been introduced as a first in order to help investors and guide them through the course of their business.
GST (Goods and Service Tax) will replace indirect-tax, to be implemented by 2017. That is the removal of several layers of multi-layered taxes and multiple tax rates into one uniform Goods and Service Tax. This will make India attractive to foreign Investors as well as boost India’s exports because of less regulatory and bureaucratic tangles.
In cities like Delhi and Mumbai, online construction permits such as DPMS (Development Permissions Management Systems) are in the process of being launched. Since the permits are completely digitized, the biggest impact this will have is speeding up the process of getting a permit by 5-8 months. It will save one the trouble of meeting someone in person, which has a direct positive impact on reducing corruption, delayed work and human error to a large extent.
A business being affected by a cyber crime is every founder and investors’ nightmare. Training programmes for officers in the sensitization towards cyber crimes and related infringements is also a significant initiative taken by the Indian Government.
Special management teams have been set up to fast track and facilitate investments made to India from South Korea or Japan. The plans are coined ‘Japan Plus’ and ‘Korea Plus’.
If your business deals with cross-border trading, you’re in luck. The Government has made the process highly efficient by reducing the time utilised at ports and airports. Necessary clearances for exporters and importers has also been prioritized. As a result of the improvements made, export and import clearance that once used to take nearly 5 and 11 days has reduced by more than half the time.
Minority shareholder’s Interests are well protected in India. Apart from ranking high on the ‘ease of doing business Index’, a greater disclosure is now required of the board members on matters of ‘conflict of interest’.
A National Company Law tribunal and an appellate tribunal was set up to replace the existing Board for Industrial and Financial Reconstruction (BIFR) and Company Law Board (CLB). The National Company Law Tribunal was set up to resolve corporate disputes faster and efficiently, to examine existing laws that relate to winding up procedures and to suggest reforms regarding winding up and insolvency in an effort to match up to international standards and practice in this field.
The ease of doing Business in India is also about exiting a business efficiently as much as it is about starting and running one. Thankfully, the Government is soon to enact the ‘Bankruptcy Code’, which will make it easier for investors to exit a business in case of Insolvency. At present, it takes 4 years to resolve an issue related to insolvency. With the new code, time taken to exit from a business will be reduced to a period of under a year.
Foreign companies that invest in Indian businesses have contributed heavily to India’s economic growth over the past years. The Government has set up FDI and FEMA measures to increase economic activity, set regulations and caps on sectors and generate employment opportunities.
Foreign Direct Investment (FDI)
Money that India receives from investors abroad is FDI. Foreign companies that invest in Indian businesses gain a monetary advantage in terms of labour wages and benefit from the high economic growth rate prevailing in India.
The Foreign Direct Investment allowed for an entity based in another country is:
|Direct route||Indirect route|
|Insurance and Pension||49%|
|DTH, Cable, sky broadcasting||100%|
|Brownfield Airport Projects||100%|
|Scheduled Air Transport Services||49%||49%-100%|
|Foreign Airline Companies||49% of paid up capital||Upto 49%|
|Marketplace Model of e-commerce||100%|
|Food products manufactured/produced in India||100%|
|Asset Reconstruction Companies||100%|
|Brownfield Pharmaceuticals||74%||above 74%|
|Private Security Agencies||74%|
|Non ‘News and Current Affairs’ linking channel||100%|
|Mining and Mineral separation of Titanium||Upto 100%|
|Publication of foreign newspapers||Upto 100%|
|Publication of Indian versions of foreign magazines||Upto 26%|
|Banking Private Sector||50%-Upto 74%|
|Banking Public Sector||Upto 20%|
|FM Radio||Upto 49%|
(Figures as of August 2016)
The Foreign Exchange Management Act, 1999 (FEMA)
The Foreign Exchange Management Act, 1999, was set up with the aim of Increasing foreign exchange through increasing external trade and promoting foreign exchange markets in India. All Offences relating to Foreign exchange are considered Civil offences.
Some of the revisions in regulations of FEMA to promote the ease of doing business are:
- Acquisition and transfer of fixed/immovable property – several conditions for which RBI approval is no longer required to buy immovable property outside India by a company registered in India.
- Possession and Retention of Foreign currency – an individual can have up to a maximum of USD 2000 in foreign currency at any time. This applies in all cases other than if the individual is not a permanent resident of India, he obtained the foreign currency while being resident outside India or if such currency was brought in compliance with the laws applicable.
- Export and Import of Foreign Currency – the upper limit of notes an individual can take outside the country or bring into India is INR 25000 (currency notes or RBI notes).
- Import of Foreign Exchange – foreign exchange sent to India has no upper limit except in the case of currency notes, traveler’s cheques and bank notes. The upper limit on these types is USD 10000.
- Postal Order/Money Order – any person can buy foreign exchange from any Indian Post Office in the form of money order or postal order.
- Declaration of exports – for businesses that are either engaged in exports or those that are set up in Special Economic Zones or Special Technological Parks need to declare their exports backed up with evidence.
- Insurance – regulations that are stated for an individual resident in India that avails a general or a life insurance policy issued by an insurer outside India and vice-versa.
Routes to Invest in India
Automatic/ Direct Route – No permission from the Central Government required under this route.
Government Route – Applications that are considered by the Foreign Investment Promotion Board (FIPB) come under this route.
Who can Invest in India?
An Individual – FCVI, Pension/PF, Financial Institutions
A Company – Non-Resident Indians, Foreign Trusts, Wealth Fund
Foreign Institutional Investors – Private Equity Funds, Partnership Firm, Proprietorship Firm
Note: Investors from Pakistan and Bangladesh can Invest only through the Government of India. Residents from Pakistan cannot invest in Defence, Atomic, Space and other select sectors of the economy.
How to Invest?
Foreign Investors can invest in India in the following ways:
- Incorporating a company – Either a ‘Private limited’ or a ‘Public Limited’ Company.
- Sole Proprietorship/Partnership – Under RBI approval.
- Limited Liability Partnerships – Allowed under Government Route in sectors that have 100% FDI.
- Other Structures – Not for Profit entities, etc. are subject to FCRA regulations.
The steps an Investor should follow before investing are:
- Identify Sector
- Obtain Central Government approval if required for that sector
- Transfer Funds through eligible financial instruments
- Meet the stipulated requirements of the RBI Act
- Registration and Document Filing (PAN, TIN)
- Find Ideal Space and obtain clearances, if any
- Obtain Licence(s) if required
- Finding staff, paying taxes, etc
An individual – Is taxed on the net income earned based on the tax bracket
A company – 30% tax + surcharge + education cess. Profits withdrawn are Taxed
Branch Office or Permanent Establishment – 40% + surcharge + cess
Incentives provided by the Government
- Special Economic Zones (SEZ), Export Oriented Units (EOU) and National Investment and Manufacturing Zones (NIMZ) offer incentives such as tax reduction and tax holidays for businesses set up in such zones. Manyata Tech Park and Eco-Space are examples of SEZ’s.
- Incentives on exports such as duty remission/exemption scheme, market schemes, focus products, duty drawback, etc. to increase exports.
- Area based Incentives for operating in particular areas of India such as Uttarakhand, Assam, Jammu and Kashmir, etc.
- Apart from these Incentives, each State Government has its own incentive policy.
It is safe to say that with the Governments several acts and initiatives to stimulate increased investment and growth, India has truly built favourable all-round business conditions. India emerged as the top destination for foreign direct investment (FDI) by capital investment in 2015, attracting $65 billion worth of investments, overtaking China and USA. Business in India? Absolutely.
Guest post by LegalDesk.com, a Do-It-Yourself legal platform for making legal documents online. LegalDesk.com helps startups with incorporation and legal documentation services. It also provides Aadhaar-based eSign service to businesses.