Op-Ed Commentary: Chris Devonshire-Ellis
May 22 – Having established my practice, Dezan Shira & Associates, in China 21 years ago and in India seven years ago, a question I often get asked is: “What are the business environment differences between the two countries?”
This is an especially pertinent question for foreign investors interested in emerging markets, and a question I am more than comfortable answering; not only am I one of those foreign investors, but my firm also specializes in providing business advisory, legal establishment, tax and accounting services to that same group of investors throughout emerging Asia.
In terms of the general perceptions, foreign investors have generally had a longer period of time to get accustomed to business China. China opened up its doors to foreign direct investment back in the late 1980s, whereas India only really began its reforms a decade or so later.
The amount of FDI going into China is far greater than that going into India, meaning a greater number of multinational corporations (MNCs) have been exposed to the Chinese system of administration compared to that of India’s. However, when benchmarked by global institutions such as the World Bank through its annual Ease of Doing Business index, China outplaces India by a decent margin. The latest report shows China at 91st place and India improving, but not quite there yet, at 132nd.
With that in mind, below we present a list of issues for comparison concerning setting up and running a business in these two countries.
China and India are neck and neck when it comes to numbers of mobile phone users, however the advantage will eventually lie with India as its current penetration rate per user is considerably lower. Growth for mobile phones is higher than in China, and call rates are far lower. India has jumped almost instantly from land lines to national wireless in the space of less than a decade, and they are both developing and buying the newest technology while keeping user costs low.
International Language Skills
English is a major, nationally spoken language in India, however the strength of local dialects and standard remain patchy. English language use in China is concentrated more in first-tier cities. Indian MBA graduates have a far better command of both oral and written English skills than their Chinese counterparts.
The downside of the Great Chinese Firewall in terms of damaging academia has yet to be assessed, however there is no doubt it is a major intellectual inhibitor in the country. India has no such issues and with a burgeoning IT sector, new applications are constantly available in a manner unimaginable in China.
- Communications Advantage: India
China is 15 to 20 years ahead of India in its infrastructure development. This means operational and logistics difficulties need to be calculated into business plans in India and carefully examined for bottle necks. Yet things will improve, and one reason why you see cows (a sacred animal) wandering in urban areas is due to the rapid expansion rates – in time these sorts of scenes will disappear.
China has done an amazing job in matching infrastructure to the needs of commerce over the past 20 years, but not without environmental degradation problems on a massive scale. India, being a democracy, doesn’t allow for that rapid pace of development. On the other hand, infrastructure development is the opportunity for foreign investment in India, with an estimated US$700 billion earmarked to be spent on this in next three years alone. But for now, Chinese infrastructure remains streets ahead.
- Infrastructure Advantage: China
Getting Visas and Work Permits
India is taking steps to ease its visa restrictions, including the new addition of a visa on arrival service – something China does not provide. India immigration laws state that foreigners must register with the Foreigners Regional Registration Office within 14 days of his/her arrival if he/she intends to stay in India for a duration of more than 180 days in any 365 day period. Like China, the registration is automatically carried out when checking into hotels. In addition, all major airports in India have immigration service desks to help foreigners obtain visas and resident permits. Work visas must be obtained, like China, with documentation and authentication carried out by the Indian Embassy of the applicants home country, although this process too is being eased.
In China, an employment/work visa (“Z” visa) must be applied for and obtained prior to entry into China by way of submitting supporting documentation and obtaining governmental approval. Upon arrival, the Z visa holder must then obtain his/her proper work and residence permits. When applying for a work permit, the employer’s business license, organization code certificate, tax registration certificate and foreign invested enterprise approval certificate (if the employer is foreign-invested) must be provided on top of any other relevant documents (if any).
Obtaining a visa on arrival is still restricted in China and is not an option for most foreign nationals beyond a 72-hour stay in certain major cities (such as Shanghai). China also imposes work visa restrictions on foreign graduates (minimum of two years post-graduate work experience), something India does not do.
- Visa Advantage: India
Establishing a Company
Both India and China have very similar legal structures for foreign investors to utilize. Liaison offices (LOs) and representative offices (ROs) operate in essentially the same way in the two countries, as do wholly foreign owned enterprises (WFOEs) and joint ventures (JVs).
If you are familiar with China’s legal establishment procedures, then you will find that India’s is very similar. However, China tends to sub-divide categories more, such as even dividing WFOEs into a separate sub-category called “foreign invested commercial enterprises,” whereas India does not.
India, on the other hand, has the useful “project office” (PO) structure that China previously provided several years ago. POs allow a company to set up a temporary presence to fulfill a specific contract, and they are especially useful for foreign contractors involved in specific infrastructure projects that are completed when built. Please note that POs are not similar to WFOEs in structure or operations.
The overall registration process to set up a foreign entity in India is generally two to three procedural steps fewer than in China.
- Establishing a Company Advantage: India
Becoming a Company Director
In India, the procedures to become a company director include the notarization of your passport at the Indian Embassy in your home country, which tends to be an administrative hassle, especially for expats already based overseas. Foreigners also need to obtain a Permanent Account Number (PAN) and a corresponding card if they wish to be named a director.
In China, there are no special requirements or procedures to be taken for foreigners to be named a company director. Foreigners are subject to the same eligibility requirements as Chinese citizens as long as they have a valid passport/visa and all of the relevant approvals and permits for working in China are properly finalized.
- Company Director Advantage: China
Opening up a Bank Account
The banking system of India has evolved since it was restructured as part of reforms, and provides a relatively positive framework for foreign investors to shape their businesses in India.
The banking process involves opening up an account with a commercial bank, but the typical documentation needed in India compared to that in China is far simpler. The banks require the following apostiled and notarized documents: proof of address, copy of the applicant’s passport and certificate of incorporation and permanent account number (for registered Indian companies).
Foreign investors in China are restricted to having a basic RMB account in addition to a foreign currency capital contribution account. A FIE may have only one basic RMB account for its daily business operations in China, and the account is the only account from which the company can withdraw cash in RMB. The basic RMB account also often acts as the designated tax payment account.
Other types of foreign currency accounts may be opened up for different purposes, such as settlement accounts for the collection of payments given in a foreign currency, foreign debt special accounts (for receiving shareholder loans) and temporary capital accounts (used to hold capital and funds for the payment of expenses incurred prior to the establishment of an FIE, after which the funds can be transferred into the FIE’s capital account). Please note that an FIE must have a foreign currency capital contribution account to receive capital injections from foreign investors, and the FIE must receive the necessary approval from the State Administration of Foreign Exchange (SAFE) in order to open up this type of account.
To open up a bank account, an FIE typically needs to provide a foreign exchange registration certificate, any relevant company documents and an application form noting the specific type of account that it wants to open up. Foreign investors can open up any of the account types listed above through an international bank that has a local Chinese presence or through a Chinese banks.
Despite the appeal of opening up an account through a foreign bank, there are many advantages to opening up an account through a Chinese bank, namely:
- The application process for opening up a bank account through an international bank in China is more document-intensive and takes longer than through a Chinese bank;
- There are a greater number of Chinese banks compared to branches of foreign banks in China; and
- Most Chinese companies have local bank accounts, and conducting transactions with them will be easier if done via a Chinese bank.
- Bank Account Advantage: India (as the process is less cumbersome and time-consuming)
Domestic Competition: Foreign Investors vs. State-Owned Enterprises
A major difference between China and India is that the Indian government is not involved in business except in the strategic industries sector. To illustrate this, only about 10 percent of the companies listed on the Bombay Stock Exchange have some sort of government investment.
In China, the government is heavily involved in business, and some 90 percent of companies listed on the mainland Chinese exchanges are either partly or fully state owned. This means that coming up against government-backed competition is far more likely in China, and the chance of having a level playing field is significantly reduced.
There is far less distinction in India politically between domestic and foreign-invested companies when it comes to impartiality, except for the corporate income tax playing field, which is not level (Indian companies are taxed at lower rates than foreign ones at 30 percent compared to 40 percent). Tax reform is on the agenda in India to equalize this, but has not yet been passed.
This ultimately means that both India and China may not provide a level playing field for investors, but at least India’s is more transparent since company details (such as balance sheets and shareholder information) are available on the public domain. However, the actual competitive nature of business in the Indian marketplace for foreign investors is far less discriminatory than in China, as the Indian government is not involved in their state owned enterprises to the same extent as the Chinese government.
- State Influence Advantage: Neither – China currently has better income tax rates than India in terms of the treatment of foreign companies. However, state-owned monopolies dominate and manipulate the Chinese market in ways that do not occur in India.
Neither countries have historically great track records with regard to protectionism, but both are members of the World Trade Organization. However, there is one difference: India is improving in this regard, while China is not.
Part of the reasons as to why are to do with the differing political regimes: certain industries in China are off-limits to foreign investors as the Communist Party wishes to limit external influences on its own population. Examples here are the education and media and entertainment sectors, all of which are heavily sanctioned by China in a way in which they are not in India.
With the Chinese states and government also heavily involved in commerce, the likelihood of beating out a state-owned business in China’s competitive arena is drastically reduced. In addition, regulatory barriers are coming down in India, and we have recently seen foreign ownership in key industries raised to up to 75 percent, which has led to several MNCs buying equity from their Indian partners.
I think we have gone about as far as we will in China with regard to regulatory reforms for the foreseeable future, even though key areas such as the finance, banking and insurance all need additional foreign investment. Unfortunately, China’s governmental structure at present precludes any major restructuring in these areas. Fortunately, that is not the case in India, which recognizes its need for FDI in all areas of its economy and continues to push reforms to make this happen.
- Regulatory Protectionism Advantage: India
China is signatory to the many international conventions that govern and standardize the protocols of applying for and registering trademarks and patents. In theory, these protocols should provide some additional international protection if your mark/invention is registered in five or more of these signatory nations, although, in practice, Chinese courts often have a hard time taking cases under this structure as they do with any legal documentation that is either not in Chinese or legally registered in China. This is exactly the reason why it always makes sense to register your intellectual property (IP) rights in China even if you have international protection by way of multiple registrations according to the protocols guidelines.
On the other hand, India is not a signatory to these conventions, and registering trademarks and patents in India has to be done within the guidelines of India’s own system (which is actually not that different compared to the rest of the world). There are moves for India to switch and join the Madrid, Nice, Paris and other conventions to bring the country in line with global standardization, however this is still a ways off.
- Intellectual Property Advantage: India. Theoretically this should be China, as it is a signatory to various internationally agreed upon protocols. However, India has proven to be better at upholding its own IP protection, even while being outside of the global protocols. Where India does score big over China is in IP theft – it has a far better attitude towards acknowledging intellectual property ownership than China does, assisted by the fact that the Indian Courts of Law are independent from government.
Cross-Border Internal Tariffs
China previously imposed tariffs on the movement of goods across different provinces and cities, but these tariffs were abolished about 17 years ago.
On the other hand, some Indian states still impose tariffs on the movement of goods across state borders. This, too, should be abolished, but doing so will be a hard political battle to win as it raises local state revenues. In the meantime, these tariffs add another layer of research to do when looking to establish a presence in certain Indian cities, having to know what these duties are and the administrative costs in having to deal with them
- Cross-Border Internal Tariffs Advantage: China
General and Operational Tax Treatment
Over the past 20 years, China has done a good job of standardizing the types of taxes and tariffs applicable across the country. There are variations, but these tend to be minimal. An exception, however, is the calculation of payroll related issues – such as mandatory welfare payments – as these are linked to the performance of the local economy and not the national economy.
The main problem with operating in China is, therefore, working out the mandatory welfare payments. That aside, China’s treatment of general operational taxes (i.e., value added taxes, etc.) is uniform across the nation.
It is, however, totally different in India. In addition to the cross-border tariffs mentioned above, India’s individual states still operate as quasi-independent business units in their own right with a uniform national standard income tax (rather similar to the different regional tax rates and policies in the United States of America). An example is the national habit of imposing “CESS” – a type of tax on taxes paid. Often used to subsidize education, in addition to other smaller surcharges, it also varies from state to state and can be difficult sometimes to pinpoint due to occasionally arcane definitions of what should be included. This is the reason why common questions over operational taxes do not elicit a straight answer in India.
The short answer is, taxes in India depend upon location, cross border issues and even the type of product being sold.
- Tax Treatment Advantage: China, as the national tax and tariff system is far easier to navigate. Much of the issues concerning India’s bureaucracy and difficulties in understanding India come from this area alone.
Both China and India maintain their own audit standards, but both are relatively straightforward to navigate once familiarity with the local differences is obtained. India has rather more smaller taxes and surcharges than China does, meaning unobservant accountants may miss things on occasion, but generally speaking both are at about the same levels of both competency and administrative ease. Experienced international accountants will be able to consolidate both Chinese and Indian financial reports into their group accounts.
The only black spot is with China’s Ministry of Finance, which has declared the accounts of its state-owned enterprises to be “state secrets” and therefore essentially unverifiable by all but Chinese auditors and the state itself. As a result, Chinese companies may in the future find themselves unwelcome on major international bourses.
- Audit Advantage: Neither, but China’s MOF interference with the transparency of Chinese SOEs audited accounts is a worrying development.
The remittance of funds out of India involves structured procedures with a valid and authorized banking channel – the remitter is required to furnish the details of the earned income in addition to an accompanying relevant certificate nothing the proper deduction of taxes along with a request form.
Corporations can remit their earned profits out of India by way of dividends on the shares held by the parent company, or by the interest on the loans or debentures held by the parent company in India. They also have the option to remit profits out of the country as royalties paid for software or other related products as provided by the parent company in their home country.
China employs strict currency regulations that are designed to prevent large amounts of currency moving out of the country. China controls and monitors the amounts of money coming into and out of the country through the SAFE. In order to legitimately take money out of China (typically in the form of a wire transfer), an application needs to be submitted to the SAFE, with the relevant documents noting that the proper income taxes have been paid in China in addition to details of the overseas bank account to which the funds are to be wired. The onus is on the applicant to demonstrate that the money was legitimately earned and that the proper taxes have been paid on it.
Corporations that issue dividends overseas also face additional taxes.
- Fund Remittance Advantage: Neither – the repatriation of profits overseas is taxable at high rates in both countries. However, if India’s tax reform gets passed (it is currently under debate) the tax rate advantage will pass to India.
These results demonstrate that while China has done a better job than India of standardizing most of its tax treatments and policies. This is partly to do with China’s reforms having occurred earlier than India embarked upon its own policies of reform. China has also benefited from having a one party state that can enact reform without the need for mass political debate, and this has driven much of the streamlining of administration when it comes to commercial activities. However, countered against this are serious issues with legal enforcement, and with State interference in competition.
India, meanwhile, generally has no interest in its state-owned industries competing with foreign investors and its rule of law, being independent from government, upholds this by keeping the government at arm’s length. It is a market-based economy, albeit one that still needs significant reform.
The main area of Indian bureaucracy comes when dealing with documentation relating to the importation of goods. Indian customs officers are eagle-eyed and insist on documentation accuracy over common sense at times. India as a collection of states is also more complex to deal with than China due to the fact they tend to operate under local laws with little national uniformity. However, proposed Indian legislation will bring in much needed changes, and the country will become a far easier place to do business if, as part of these reforms, the bureaucratic nature of dealing with different States can standardized.
Therefore, my views (developed through many years spent dealing with administrative and tax issues as a foreign investor in both countries) are that China and India are probably about equal in terms of their frustrations. They remain different, however, and China’s longer term problem is that its weakness – state control – is systematic, whereas India’s weaknesses are not and can be resolved through reform. India may overtake China in ease of doing business in the next 10 years, but for now both remain equally difficult – albeit in different ways.