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A major investment hub in South Asia and well connected to central, west, southeast, and east Asian countries, India is a prime location for foreign multinationals. The country has doubled down on efforts to diversify its economy resulting in the prominence of its services sectors, boosted by ICT capabilities and English as the lingua franca. According to UNCTAD, India was the fifth largest FDI recipient in the world in 2020. This shows that as geopolitical events transpire, India is emerging as a reliable alternate destination for manufacturers and supply chain diversification due to its large labor and consumer base, low operating costs, and linkages to important international markets.

Push for local manufacturing, upgradation of sector capabilities

For companies interested in or already manufacturing in India, the Production-Linked Incentive (PLI) Schemes gives financial incentives to manufacturers in 13 target sectors based on the value of their committed investment in the country, product innovation and addition to the existing value chain, and incremental sales of finished output.

Cumulatively, the PLI schemes aim to boost domestic manufacturing, increase exports, and attract more FDI inflow by inviting both foreign and local companies to set up, engage in R&D, or expand their manufacturing units in the country.

Companies that are currently beneficiaries of the PLI schemes (both foreign-invested and domestic enterprises) will be important targets for joint ventures, business matchmaking, supply chain partnerships, private equity investment, and other forms of investment. The PLI scheme coverage ranges from a period of four to six years, depending on the sector.

The regional locations of the target sector beneficiaries could prove to be ideal for setting up – based on the nature of the business operation.

Extensive double tax treaties

India has one of the largest networks of tax treaties for the avoidance of double taxation and prevention of tax evasion. The country has Double Tax Avoidance Agreements (DTAAs) with over 85 countries under Section 90 of the Income Tax Act, 1961. The purpose of such tax treaties is to develop a fair and equitable system for the allocation of the right to tax different types of income between the ‘source’ and ‘residence’ countries.

A DTAA simply mitigates double imposition of tax when there is a cross national flow of income and ensures tax neutrality. The agreement between the negotiating countries provides specific guidelines on how the income generated in one country and transferred to another is to be taxed by the source and resident country. This ensures protection to taxpayers against double taxation and prevent any deterrence that the double taxation may otherwise promote in the free flow of international trade, investment, and transfer of technology between two countries.

A DTAA between India and other countries covers only residents of India and residents of the negotiating country. Foreign or non-resident companies operating in India are subject to withholding tax on their income – dividend, interest, royalty, or fees for technical services, as prescribed under the IT Act. However, foreign companies that are resident in the countries that India has a DTAA with, can claim more beneficial provisions and rates between the IT Act and the DTAA.

Reforms to tax regime

India cut the corporate tax rate for domestic companies in 2019, whereby new companies would be subject to a 22 percent rate and new domestic manufacturing companies, 15 percent. The effective tax rate for these domestic companies is around 25.17 percent inclusive of surcharge and cess.

Those companies opting for the concessional corporate tax rate also do not have to pay minimum alternate tax. As a result, India’s current effective tax rate brings it at par, on average, with leading Asian investment destinations and manufacturing hubs like China, Vietnam, Malaysia, Singapore, and South Korea.

Below we illustrate the respective tax rates and actual corporate tax liability.

Strategic location with superb connectivity

India's location at the head of the Indian ocean is of strategic importance and connects it with the Middle East, Europe, and West Africa from the western coast and Southeast Asia and East Asia from the eastern coast. India’s transit sea routes thus connect Europe with East Asia. India also has the longest coastline in the Indian ocean.

Besides, India’s internal connectivity has also drastically improved. The country has the second largest road network and fourth largest rail network in the world and seven international airports.

Availability of skilled and presence of a large English-speaking workforce

India has the world’s largest adolescent and youth population. It will continue to have one of the youngest populations in the world till 2030. The country has the third-largest group of scientists and technicians in the world. About 10 percent of the country’s population speaks English; it is among the country’s official languages.

India is also an information technology hub, and the IT sector employs 3.9 million, making it the largest private sector jobs creator in the country. The country spends US$1.6 billion annually on training its IT workforce. India’s IT clusters are located in the states of Andhra Pradesh, Karnataka, Maharashtra, New Delhi, Tamil Nadu, and Telangana.

Excellent IP protection regime

India has been a World Trade Organisation (WTO) member since 1995. WTO member nations must include some IP protection in their national laws. India is also a signatory to the following international IP agreements:

  • Paris Convention: Under this convention, any person from a signatory state can apply for a patent or trademark in any other signatory state and will be given the same enforcement rights and status as a national of that country would be.
  • Berne Convention: Under this convention, each member state recognizes the copyright of authors from other member states in the same way as the copyright of its own nationals.
  • Madrid Protocol: Under this convention, a person can file a single trademark application at their national office that will provide protection in multiple countries.
  • Patent Cooperation Treaty: This is a central system for obtaining a ‘bundle’ of national patent applications in different jurisdictions through a single application.

India is, however, not a signatory to the Hague Agreement, which would have enabled the protection of designs in multiple countries through a single filing.

Efficient legal system

Indian companies are governed by the Companies Act, 2013. Limited liability partnerships are governed by a separate legislation, the Limited Liability Partnership Act, 2008. The Indian government has also launched a series of initiatives aimed at enhancing the ease of doing business in India.

India’s Competition Act, 2002 is the principal legislation dealing with anti-trust issues. The Act prohibits or regulates (a) anti-competitive agreements (b) abuse of a dominant position and (c) combinations.

  • Anti-competitive agreements are cover ‘production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India’. Certain agreements such as tie-in arrangements or bid-rigging are identified as causing appreciable adverse impact on competition.
  • The Act prohibits any entity or business enterprise from abusing its ‘dominant position’. An enterprise is considered ‘dominant’ if it is able to operate independently of competitive forces prevailing in the relevant market or can impact competitors, consumers, or the relevant market at large in its favor.
  • Also, under the Act, combinations (mergers, acquisitions, de-mergers) that exceed specified asset/turnover thresholds will require approval from the Competition Commission of India. This is to establish that they will not cause an appreciable adverse impact on competition within relevant markets in India.

India follows the common law system and has a written constitution, which has both federal and unitary features. It provides for the distribution of legislative and executive powers between the central government and state governments while also providing for a unified judiciary. The legislative powers are divided between the central and state legislatures through:

  • The Union List (which comprises 100 subjects, which include matters of national importance, such as national defense, taxation, incorporation of companies and banking).
  • The State List (which comprises 61 subjects, which include agriculture, land, trade, and commerce with the state territories).
  • The Concurrent List (which comprises 52 subjects, which include areas such as contracts, bankruptcy and insolvency, trust and trustees, on which both the central and state level legislatures may pass laws; however, in case of a conflict, the central law shall prevail).

India has a single court system to administer both Central and State laws. The court system is three tiered, comprising the lower district courts, the high courts, and the apex Supreme Court of India. Court litigation in India is often subject to delays and owing to massive case backlogs, commercial disputes are subject to alternative modes of dispute resolution like arbitration. Investors should be careful in their choice of dispute resolution mechanism, such as opting for litigation before Indian courts or arbitration, as this can have significant commercial, financial, and legal consequences.

Entry options for foreign companies

Several entry options are available for foreign investors to enter the India market. 

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