5 May 2020
Introduction
The noise around large companies shifting their manufacturing bases out of China has gotten shriller with the advent of Covid-19 related disruption. The theme is not new. Since the trade war between the United States and China, much has been written about companies shifting their operations from China to other South East Asian countries such as Vietnam, Thailand and Taiwan. India is hopeful of getting it right this time around and is competing with other South East Asian countries in rolling out the red carpet to companies exiting China. In anticipation of any announcements that may be made by the Government in this regard, this article examines some of the key factors that are relevant for companies contemplating a shift to India.
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Foreign investments regime for Manufacturing
Foreign investment laws in India are liberal for investments that originate from countries that do not share a land border with India. Nearly 90% of the sectors do not require any prior governmental approval for receiving foreign direct investment (FDI). So far as the manufacturing sector is concerned (including contract manufacturing), 100% FDI has been permitted under the automatic route, i.e. without any government approval. A manufacturer is permitted to sell products manufactured in India through wholesale and/ or retail, including through e-commerce, without government approval.
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Setting up a Manufacturing Company in India
The process for registering and incorporating companies is not cumbersome. Under the present laws, a simplified form has been prescribed that integrates application for name reservation and incorporation, obtaining director identification number, tax registrations, key labour law registrations and opening of bank account. The application form is filed and processed online, and the registration costs are nominal. The time taken for incorporation is around 3-5 working days.
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Tax regime
In order to reduce tax burden on the corporate sector and to boost further investments into the country, the government has reduced the corporate income tax rates. Companies with gross receipts of up to INR 4 billion pay a reduced corporate tax of 25%, as compared to a rate of 30% applicable to companies whose gross receipts are above INR 4 billion. Domestic companies also have an option to pay lower corporate tax of 22%, provided they do not claim certain specified deductions and incentives. Manufacturing companies set up in India on or after October 1, 2019 and which commences operations before March 31, 2023 are eligible for a special tax rate of 15%, subject to compliance with certain conditions. The above rates are exclusive of surcharge and cess. Overall, the present corporate tax rate is one of the lowest for manufacturing units, globally.
Dividend income is taxable in the hands of the shareholders at the tax rates applicable to such shareholders. This enables foreign taxpayers to take advantage of the lower tax rates specified in the applicable Double Taxation Avoidance Agreement on the dividend income and also claim credit for the tax paid in India, against the tax payable in the country of their residence.
In 2017, India revamped its entire indirect tax regime by introducing goods and service tax (GST). GST has subsumed numerous erstwhile central and state taxes such as central excise tax, service tax, sales tax, luxury tax, special additional duty of customs etc. and consequently reduced multiple compliance requirements. All tax filings are now online.
Apart from the above, there are various other tax benefits, holidays and government incentive schemes that are available to corporates. For example, companies engaged in manufacturing of electronics can get special incentives from Schemes implemented under the 2019 National Policy on Electronics. Such benefits will depend on investment size and the sector in which the company operates.
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Infrastructure
Non-availability of well-developed infrastructural facilities is considered a serious bottleneck in India’s growth story. Over the last decade, India has significantly improved its infrastructure facility offerings by developing well-connected road and rail transportation network, domestic and international airports across all major cities, several major ports across its large coastline and availability of power. Five major industrial corridors are being set up across the country where infrastructural, logistical and educational facilities will be developed to support establishment of industries. The Government should accelerate its efforts to expedite development of the industrial corridors. Effective implementation of projects such as Bharatmala and Sagarmala will also help optimise efficiencies.
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Warehousing
Free trade and warehousing zones (FTWZ) offer various facilities and integrated solutions, such as one-stop for customs clearance capability, customised warehousing, assembly of complete and semi-knocked down kits, packing management, re-invoicing, sorting, strapping and kitting, inspection, speedy delivery of cargo and taxation benefits. India has four operational FTWZs and more are in the pipeline. Operationalisation of more FTWZs will add tremendous value for importers, exporters and re-exporters, as they are deemed foreign territories. These help companies to efficiently manage their supply chain, ensure faster turnaround by reducing custom-related formalities and increase operational efficiencies.
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Import and export
India has made imports and exports easier. It has reduced border compliance time by, integrating government agencies and trade stakeholders under a single electronic platform, enabling post-clearance audits and upgrading infrastructure at various ports. To reduce cost of exports, India also provides incentives on export duty payable on goods manufactured in the country. The time necessary for the logistical processes of exporting and importing goods has been significantly reduced. However, unlike some of the other South East Asian countries, India does not have free trade agreements with the US or European Union. India ought to negotiate FTAs with its major export destinations in a manner that will promote exports from India and at the same time not make domestic production unviable.
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Market
India is currently the world’s sixth largest economy and one of the fastest-growing large countries. Global corporations view India as one of the key markets from where future growth is likely to emerge. The large youth population and the continuous urbanisation of rural India are creating a large potential consumer base with increased purchasing power. As per various research reports, the maximum consumer spending is likely to occur in food, housing, consumer durables, and transport and communication sectors. Unlike smaller investment destinations in South East Asia such as Vietnam, Thailand and Taiwan where manufacturing is mostly export oriented, the Indian market not only serves as an ideal destination for manufacturing consumer goods, but also provides a ready-made consumer economy to generate domestic sales.
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Skilled workforce
India being one of the most populated nations in the world has a large workforce and its percentage of young working population is among the highest in Asian countries. India also has a vast resource of educated and English-speaking youth. The government of India has also launched the National Skill Development Mission aiming to train approximately 400 million youths across the country by 2022. With targeted training and development, India’s population can provide an abundant supply of skilled workforce at a low cost.
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Labour laws
The existing labour laws in India are myriad and archaic. They prescribe multiple compliances and inter alia regulate payment of wages, hiring, termination, lay-offs in relation to workmen and employees. To promote ease of doing business, the government of India has taken steps to streamline the compliance processes by launching a platform (Shram Suvidha Portal) for filings and registrations in a single harmonised online form. This simplifies the compliance process and reduces transaction cost for employers. Further, the government has initiated the process of consolidating the existing labour legislations into four codes, i.e. Code on Wages, Code on Industrial Relations, Occupational Safety, Health and Working Conditions Code, and the Social Security Code. While the Code on Wages has already received Presidential assent and is awaiting notification, the other three codes are under advanced stages of consideration. The new codes will not only consolidate all existing labour laws but also reduce compliance burden on employers.
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Land acquisition
Obtaining large parcels of land continues to be a challenge due to bureaucracy and time-consuming acquisition and registration processes. Also, issues surrounding consent requirements, compensation to land owners, rehabilitation and resettlement of affected persons, etc. remain a major hurdle. Due to a lack of clarity on central land acquisition provisions, several state governments such as Gujarat, Maharashtra, Telangana, Andhra Pradesh, Rajasthan etc. have come up with their own alternative land policies to make it easier for companies to acquire land. If India has to compete effectively with the other South East Asian countries, the land acquisition process for businesses should be streamlined.
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Intellectual property protection
India has a well-developed intellectual property regime with legislations in place to protect various forms of intellectual properties, including copyright, designs, patents, trademarks, and geographical indications. As a signatory to inter alia the Paris Convention and the TRIPS Agreement, India has made amendments and harmonised all intellectual property laws to become compliant. Being a common law jurisdiction, India also affords protection to business goodwill and reputation represented by a mark, name or get-up under the law of passing off. Despite stringent intellectual property protection laws, enforcement has been a hindrance. The government should take stringent measures to effectively implement the National Intellectual Property Rights Policy, 2016, that lays down the road map to establish an ecosystem which is conducive to innovation, creativity, commercialisation and enforcement.
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Environment, Social and Governance factors
India has a strict regime for environment protection and for implementation of labour laws, providing a higher rating on ESG parameters. Hence India is a preferred destination for stakeholders conscious about their ESG related concerns. India encourages its industries to improve their standards for environmental protection through its sustainable development programs, social responsibility through measures such as strict enforcement of labour laws and CSR initiatives, and governance through various compliance requirements such as those under the Companies Act, 2013.
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Political Stability and International relations
India has a stable government and is the largest democracy. It has cordial political relationships with major economies of the world for trade and commerce, including United States and European Union. India has also entered into double taxation avoidance agreements with most countries to ensure there is no tax evasion, and to prevent dual payment of tax. All of these provide a stable and transparent environment for long term sustainable development and growth.
For further information, please contact:
Akila Agrawal, Partner, Cyril Amarchand Mangaldas
akila.agrawal@cyrilshroff.com
