India’s Regulatory Reforms Are Steps in the Right Direction
By Dafydd Williams, Senior Director, Advisory Services
India, with its entrenched bureaucracy and multitude of overlapping regulations, has never been an easy place for foreign companies to set up operations. The World Bank currently ranks it 130th out of 180 countries for ease of doing business. That’s a real improvement over 2015, when it was ranked 142nd, but the country still has a long way to go.
The Modi government, which took office in 2014, is trying to make progress. In June, it passed sweeping new legislation aimed at making it easier for non-Indian companies and individuals to do business and invest in the country. Here are some of the most significant changes.
Consolidation of Business Applications
A new eBiz platform enables companies to fill out a composite application to enter incorporation information and apply for a Permanent Account Number (PAN), a Tax Deduction and Collection Account Number (TAN), and a Director Identification Number (DIN) all in one place. Having a central online location for forms makes it easier for companies to file and track documents and speeds the submission process.
Better yet, foreign businesses may be able to skip the PAN application altogether. Thanks to one of the new laws passed in June, non-residents will no longer be required to obtain a PAN number to receive tax treaty benefits on payments, including interest, royalties, fees for technical services and payments on the transfer of capital assets. But before skipping the form, be sure to check with your Indian payers to make sure they are aware of the new law. In our experience, Indian customers who are not on top of tax law changes will often take a conservative position and withhold taxes as they always have done.
The requirement to obtain a Commencement of Business Certificate after incorporating has also been removed.
Fewer Documents for Import/Export
The country has reduced the number of documents needed to import or export goods from 10 to three. This move will lower transaction costs and speed the implementation of operations.
For international trade, the country is adopting the international SWIFT interface, making it easier to clear goods, and it has increased the number of documents that can be filed online.
New Investment Opportunities
India’s new Foreign Direct Investment policy allows outsiders to invest in Indian infrastructure and startups. Foreigners can also invest in Indian REITs, share swaps, Infrastructure Investment Trusts (InvITs) and Alternative Investment Funds (AIFs) without obtaining specific approval from the government. In addition, the government is liberalizing rules surrounding foreign investment in insurance, pension plans and sovereign wealth funds. The new eBiz platform will serve as a one-stop shop for information about investment opportunities and the steps required to participate in them.
The easing of rules should help accommodate the growing number of investors interested in entering the Indian debt market.
More Employer-Friendly Laws
India has long been stymied by its outdated employment laws, which tend to favor workers and discourage foreign employers. Despite trade-union pushback, the government plans to replace 44 employment laws with five more employer-friendly codes relating to wages, industrial relations, small factories, social security and welfare. The country has also launched a “Make in India” campaign to encourage more manufacturing activity. Work contracts have been redesigned to reduce litigation and improve compliance.
India’s e-commerce sector has evolved rapidly in recent years as a growing middle class demands more branded goods and online deals. The increasing prevalence of debit and credit cards and better online payment security systems are encouraging more people to shop online.
India also offers very favorable demographics for e-commerce — nearly half of the population is under age 24. A Bank of America/Merrill Lynch report predicts the country will have a combined annual gross e-commerce merchandise value of around $220 billion by 2025, making it a hub for foreign companies looking to invest or increase their presence in the sector.
Laws are currently favorable towards e-commerce, though the government has stated it wants to make sure online shopping doesn’t drive traditional brick-and-mortar retailers out of business.
Government ministries are considering allowing foreign universities to open campuses within special economic zones (SEZs), a move that will let them skirt many of the onerous restrictions placed on them by Indian laws. If passed, the changes would also allow foreign universities to repatriate their profits.
India has long been derided for its dense labyrinth of laws and resistance to change. The above reforms are proof that the new government recognizes the need to slim down its bureaucracy and modernize business processes. Change doesn’t come easily to a country of 1.25 billion, but to its credit India is trying.
That said, there is often a gap between efforts and results. All the changes I’ve explored here represent important, positive legislative changes. But foreign investors must bear in mind that India’s march up the World Bank’s Ease of Doing Business ladder will be a long and difficult one.
The truth is that India’s recent reforms have not yet significantly improved the process of establishing and maintaining operations in India. Bureaucracy still rules there. Paper forms — not online options — continue to dominate the regulatory landscape, and foreign currency transactions are closely scrutinized and accompanied by onerous reporting requirements.
Fortunately for Indian authorities, the country’s enduring challenges for multinationals are more than offset by its huge and growing market opportunities. India’s ongoing reforms, moreover, signal brighter days to come. In the meantime, those interested in establishing operations in India will almost certainly benefit from the guidance of reputable third-party experts well-versed in navigating the country’s complex and changing regulatory environment.