Your legal guide to setting up a business in India

26 July 2019

Arbinder Chatwal, Head of India Advisory, provides practical legal advice on setting up a business in India. Arbinder has been in the driver's seat helping UK companies and individuals to invest in India and vice-a-versa.

Foreign Direct Investment (FDI) in India has been a political hot potato for several years now. New Delhi has jumped 53 hoops in the World Bank's ease of doing business index and is ranked at the 77th place as of 2019. But foreign investors aiming for a slice of the 1.3 bn Indian market size, are challenged by existing red-tapism and bureaucratic hurdles. The Indian government has been inching towards a digital application process to help British businesses establish their branch or liaison offices in India either through the “government” or “automatic” route. While the latter does not require businesses to take any prior approval from the Reserve Bank of India (RBI). In the “government” route, businesses have to seek approval from concerned ministries/departments.

Digital application process and a simpler taxation system

The licensing application and compliance requirements for a majority of the Government departments are now online; providing for accountability by the Government officials. The Indian Government has also set up single window clearances for certain registrations. But I also believe that the implementation of GST (Goods and Services Tax) is helpful to foreign businesses because they don't have to deal with the complex taxation system that existed before.

FDI in India is allowed in almost all sectors, barring areas such as Mining, Aviation, multi-brand retail trading, among others. For businesses operating in a specified sector, say Defence, approval may have to be sought from several nodal authorities. In this case from the DIPP, Ministry of Commerce & Industry, in consultation with the Ministry of Defence and Ministry of External Affairs. The Government, in line with its 'Make in India' initiative, has been giving speedy clearances to such approvals over the last two years. However, UK companies intent on investing in India's defence sector are reluctant to relinquish their R&D and IP; a challenge for them.

“Protectionist Economy” and repatriation of profits

Investments can be made either on a repatriable basis; considered to be at par with investment by other foreign investors and subject to the same terms and conditions or a non-repatriable basis; wherein the capital cannot be repatriated. This special window for investment has been granted to NRI/PIOs to entitle them to make their investment out of domestic funds; with less terms and conditions to be adhered to. India has the perception of being a protectionist economy where investment is easier but repatriation of generated profits for the NRIs or the PIOs a lengthy process. While this has been liberalised over the years, the quantum of the amount that could be repatriated is a challenge. This could perhaps be best highlighted through the 'Vodafone Retrospective Tax Dispute Case'. Profits generated during the year can be repatriated by way of dividends. But it comes with a dividend distribution tax cost. The Interest payable on debt is restricted by virtue of the transfer pricing provisions. The capital debt can be repatriated only after the minimum maturity of three five years. Despite, compliance issues, regulatory complications, and repatriation of profits, India has seen an increase in FDI from British companies.

The UK is the largest single western investor representing 7% of all FDI in India as of 2018. This is expected to grow in light of post-Brexit UK-India trade relations.

BDO UK provides assistance with market research, helps with the selection of the right joint venture partners and carries out the necessary due diligence.

This article was first published in Asian Voice: Finance Banking Investment magazine, June 2019.