As businesses get used to the “new normal”, many are now beginning to ask, “What next?” In a post-covid world, for a lot of businesses, the instinct may be to conserve what they have, rather than go into expansion mode. At this stage, however, with the right strategy and risk-mitigation in place, expansion into India could prove to be hugely profitable in the future.
In today’s article we continue to look at the reasons why this may be the right time to consider an India expansion. You can find the first part of this analysis here: Investing in India – a Post-Covid perspective: Part 2
6. Changes to FDI rules for manufacturing
Until recently, a 100% investment by overseas shareholders in an Indian company was allowed in the manufacturing sector, however this excluded contract manufacturing. For many international groups looking to start small in India, this was a problem – it meant that they could fully own the Indian company only if they leased their own plant, hired several staff members and bought expensive machinery.
These rules have now been changed such that even contract manufacturing is considered manufacturing now, allowing much greater flexibility to foreign-owned companies who wish to start producing in India
7. Amendments to corporate law
The number of sections in corporate law that could trigger a criminal prosecution against company directors or management have been reduced. This provides better protection for key managerial personnel involved with the company.
8. International taxation: capital gains and dividends
India has tax treaties with most countries and these have been mutually beneficial historically. The tax on long-term capital gains (on selling equity in an Indian company) is among the lowest rates in the world.
Dividend payments from an Indian company were subject to Dividend Distribution Tax or DDT previously, wherein the company declaring a dividend was to pay DDT on that amount, with the amount being tax-free for the shareholder. Overseas shareholders would then have to pay tax again in their home country on such dividend income. This has now been changed such that dividends will be taxed only in the hands of the shareholder. This is advantageous for overseas shareholders because the respective DTAA provisions are now triggered and tax credit for tax withheld in India would be available in their respective home countries, reducing the overall tax burden.
9. International taxation: Repatriation through other means
Many global groups repatriate a portion of the Indian company’s income by way of royalty, fees for technical services, sales commissions and other charges. These are all covered by DTAAs and tax rates can be as low as 10% plus surcharge and cess. Tax credit is usually available for tax deducted in India.
The structuring of such agreements, however, requires a certain amount of work and in the case of inter-group transactions, is also subject to transfer pricing regulations.
10. External Commercial Borrowing rules and ease of doing business
External Commercial Borrowing (ECB) is the term for loans from overseas parties to Indian companies, which are regulated by the Reserve Bank of India. These regulations previously allowed loans from group companies only when the loan amount was to be used for capital expenditure such as setting up a factory. This has now been eased and loans for various purposes are permissible.
Similarly, post-Covid, the compliance burden for many companies has been reduced by allowing digital filings and reducing the number of filings to be done.
While this is a time of uncertainty, it’s also a time for strategizing and planning. Global groups will benefit from asking key questions like what their growth trajectory over the long term will be, and where that growth must come from. We hope this has been a helpful insight into how India could be a good match for your group in the post-covid era.
For more information on our India set-up and advisory services, please see India Strategy: Setting up a business in India
Categories: Company Incorporation in India, Foreign Company Entry, India Strategy, Uncategorized