India presents many opportunities for business expansion due to its large population, strong GDP growth, and growing middle class. However, companies must navigate a complex regulatory environment and carefully structure their operations to comply with India's many labor laws. Setting up a wholly owned subsidiary or joint venture are two common options for market entry that require consideration of tax implications, level of control, and other strategic factors. With local expertise and a thorough understanding of compliance requirements, companies can establish successful operations while avoiding common pitfalls in this large but challenging market.
2. India – The Big Picture
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GDP Growth at 7.6%
1.2 billion population
Large increasing middle class consumer population
Strong demographic dividend – young well educated, English
speaking workforce
Entrepreneurial and innovative
Access to not only talented but cheap labor resource
India works while the US sleeps – allowing for overnight service
delivery
High Street Partners Proprietary and Confidential 2011
3. About HSP
3
Overview
• US offices: Annapolis (HQ), Boston, Atlanta, Miami, San Francisco, San
Jose, San Diego
• International offices : London, Hong Kong, Shanghai, Tokyo, India
• Employees: 125
• Customers: 350+ in over 80 countries
How we are different
• We get it – Founder opened 30+ overseas offices and is “our customer”
• We do international business services, every day, everywhere
4. Our Speakers
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Adrian Mutton, HSP’s In-Country Expert on India
19 years experience doing business in India
Founding Country Director of British Government’s
UK India Business Council
Has wide international business experience
Senior Exec/Shareholder of a successful Tech Co IPO
Manages a team of local India experts
Team located in New Delhi, Mumbai and Bangalore
Makes regular trips to the US for client consultations
• (Next trip w/c 14th November – West Coast)
5. Our Speakers
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Dafydd Williams, HSP’s Director of Advisory Services
Based out of HSP’s London office
Responsible for providing advisory services to clients with needs in the
AMESA region (including India)
Spent 15 years with PwC and Arthur Anderson working on international
mobility solutions for multinational companies and their employees
Experience with government bodies focused on inward investment and
economic development
6. Agenda
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Doing Business in India – The Opportunities & Challenges
Setting Up In India
Taxes Overview and Corporate Structure Models
Labor Laws & the Labor Market
Best Practices
Real Life Situations
Q&A
7. Doing Business in India
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Why?
• New source of revenue with continued long term growth opportunities
• Strong pool of technically and professionally qualified labor
• New technology partners and research opportunities
• Key strategic market – attractive to potential investors in your business
• Without many of the challenges faced in China
The Challenges
• Highly bureaucratic – need for strong local administrative partner
• Everyone keen to help and ‘can do’ attitude – does not always lead to
desired results
• Very large market with regional differences
• Despite English language, things still do sometimes get lost in translation
8. Setting Up in India: Permanent Establishment
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Three kinds of PE in India:
1. Basic Rule PE: A fixed place of business exists where the business of the
enterprise is at least partly carried on. Must be a reasonable permanence to
constitute PE.
2. Agency PE: Occurs when a dependent agent appointed by the foreign enterprise
has the authority to secure conclude contracts and/or maintains stock of goods
and delivers on behalf of the enterprise.
3. Service PE: Can occur when employees of foreign enterprise furnish or perform
services other than those covered under Royalties or Fees for Technical Services.
Key Considerations:
• India strictly avoids double taxation by only taxing profits in the country that are
actually attributable to the PE.
• PE is created only when linked to revenue-generating activities. A local presence for
other business activities (research, storage of goods, etc.) are typically permitted.
9. Taxes Overview
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Corporate Taxation Rates
Particulars Current Tax rates Tax rates under
Direct Tax Code
Domestic Company 33.22%* 25%
Foreign Company 42.23%* 25%
Branch profit tax Not applicable 15% (new)
Dividend distribution tax 16.995%* 15%
Minimum Alternative Tax 16.995% *of the adjusted 0.25% of the value of
(MAT - for domestic book profits gross assets of banking
company based on book companies and 2% in
profit as opposed to other cases, payable if
corporate tax profit greater than Corporate
Tax liability
*inclusive of surcharge and cess
10. Corporate Structure Models
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Direct Investment into India Investment into India through Investment into India operating
with wholly owned subsidiary overseas SPV vehicle Co with Indian JV partner
ABC Co ABC Co ABC Co
USA USA USA
SPV in preferable
tax jurisdiction XYZ India Private Limited
(Operating Co)
XYZ India Private Limited
(Operating Co) XYZ India Private Limited
(Operating Co) Indian JV
Partner
11. Should I Consider A Joint Venture?
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Joint ventures are one of the fastest and easiest way to enter the Indian
market, but aren’t without challenges…
Benefits Concerns
Immediate sales/distribution Lack of control
channel
Local knowledge, expertise and Differences in long-term goals
technical support between the parties
A mandatory requirement in some Potential dilution of IP/Brand Trade
sectors Marks unless registered at level
above JV
12. Labor Laws & the Labor Market
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Huge volume of labor legislations enacted by central and state governments
Movement away from a protectionist model to stay internationally
competitive
The applicability of legislation depends on
• Nature of activity (“factory”, “industry”, “shop”, or “establishment”)
• Number of employees employed
• Location of the organization
Laws regulate general working conditions, as well as procedures in specific
industries (building & construction, pharmaceuticals, dockyards, mines)
Key Considerations:
As the employment environment is getting more competitive in India, the regulatory
authorities have shown considerable flexibility towards a few labor compliances for
industries like Media, Hospitality, IT & ITES. International companies must avoid
misunderstanding local statutory requirements and compliances.
13. Key Laws at a Glance
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Industrial Dispute Act (ID): Provides procedure for the negotiation of industrial
disputes (retrenchment, lay-off, closure, change in service conditions, etc.)
Local Shops and Establishments Act (S&E): Regulates service conditions such as
hours of work, payment of wages, overtime, leave etc. Can vary state-to-state
Contract Labor Regulation and Abolition Act (CLRA): Regulates employment of
contract labor and provides for its abolition in certain circumstances
Employees Provident Funds &Miscellaneous Provisions Act (PF): Mandates
compulsory contributory provident fund, pension and insurance
Employees State Insurance Act (ESI): Provides benefits to employees for leave
(i.e. maternity, temporary or permanent disability, etc.)
Payment of Gratuity Act (PG): Provides for payment of gratuity to all employees in
specified establishments in which 10+ persons are employed
14. Labor Law - Penalties
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Most labor laws hold all those in charge at the time of the offence
responsible
Penaties can include officers and directors
• Exception: Proof that the offence was committed without a person’s
knowledge or that he/she exercised all due diligence to prevent the
commission of such offence
• Penalties can range from fines to imprisonment of company
representatives
It is therefore important to be compliant from day one and plan your HR
strategy with due care and attention. Penalites are then easily avoided.
15. Employee Engagement
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Most Indian employerstypically hire directly (temp or perm)
Employers can also engage consultants and/or contract labor through
a service provider/ contractor as the agency model is expanding
In hiring/terminating employees, consider the following concerning
labor laws:
• Whether or not the employee in question is a workman or professional
• Total number of employees in the establishment or office or factory
• Nature of business in which the employer is engaged, and the nature of
work being performed by the employee in the course of his employment
• Monthly wages of the employee
• State in which the office/establishment/ factory is located
16. Current Market Employment Scenario
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Much economic liberalization in India in the last two decades has
fuelled a hugely expanded workforce (particularly in urban regions)
Regulatory authorities more willing to recognize the right of the
employer to carry on his business in the manner he/she thinks fit
commercially, as long as employer is compliant with minimum
requirements
India is typically a very hierarchial environment. This is changing
rapidly as a new young well educated workforce emerges, though Job
Titles, Status and Reporting Lines are still very important
considerations in the work environment
A general weakening of the trade union movement as the private
sector in India expands
17. Business Best Practices
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Develop a thorough business plan and be realistic about timing
Take time to pick your partners and location of focus
Work with local support organizations that understand your
objectives, culture and objectives and who will look after your
interests
Enter the market step by step, but then be prepared to focus and
scale your local business
Ensure you have focused and committed support from your
international management office. Local teams need management
and guidance.
18. Real Life Situations
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Contractors vs. Employees
Limit of activities of liaison office
Appointing nonresident directors
Requirements for PAN
How and when Service Tax and Withholding Tax apply
Cost to company remuneration
Benefits
