In recent years, India has received considerable attention not only in the political and cultural world, but also in the financial world. About 1,000 years ago, India was one of the most powerful economies in the world and now seems to be a good opportunity to regain its position. 

India has a complex legal system. Therefore, foreign companies need to take some steps to obtain the necessary licenses and permits to start a business in India. Both citizens and foreigners wait months or years to get the 100+ licenses needed to start a business. This is partly due to the fact that the bureaucracy still thrives, and sometimes persists. But in India, bureaucratic hurdles and difficulties in overcoming red tape often outweigh the benefits of successfully entering the market. Foreign companies may face difficulties and may not be able to gauge their experience working with government agencies, but they still adhere to these principles.

As a foreign company seeking to establish itself in India, investing in solid and efficient infrastructure is equally important. There are important factors which a company considers while relocating or opening a manufacturing unit in a country, and the probable reasons why India is losing the battle to Vietnam to attract businesses relocating from China. 

Cost of starting a business

The cost of starting a business in India is astronomical and the process involved can be daunting without some local help. The initial construction of the business involves completing 12 processes at a cost of 49.8 percent of per capita income. The average task takes approximately 18 days to complete as compared to the OECD average of 12 days. 

Obtaining construction permit 

Building permits are also a costly affair, covering 34 procedures and taking 110 days. It takes about a month for the building proposal office to reject the proposal and pay the fees. NOCs must be obtained from the Tree Authority, the Department of Rainwater and Sewage, the Department of Sewerage, the Department of Electricity, the Department of Environment, the Department of Traffic and Coordination and the CFO.

Electricity Permits 

Though, the cost of electricity per unit is low compared to other countries in South Asia, but the number of stages to obtain the permits and licences are very daunting. Furthermore, each procedure is quite limited in time and it takes about eight days and three weeks to run an external test, meter and test installation in place of external connections.

Business across border

Despite India’s attempt to liberalise the markets, there still exists a number of obstacles while importing and exporting goods. One of the major reasons for this delay is the multi-layered bureaucracy; additionally, the companies are made to file a long list of documents before moving the goods across borders.  

Paying taxes

In addition to sourcing cheap raw materials, labour, and operational professional excellence, there is another factor that has a major impact on the prices of foreign companies and their product taxes. According to the World Bank, it takes about 252 hours a year to prepare and pay taxes in India. This is the complexity of India’s tax structure. The Corporate Income Tax (CIT) levied on foreign companies is 40 percent or higher and additional fees for educational expenses. The same applies to foreign companies with incomes above. 1,00,00,000 plus 5 percent on fee or income. 10,00,00,000. The success rate of education is 2 percent and the success rate of secondary and higher education is 1 percent. Tax rules can be difficult and companies can pay wrong taxes without the guidance of experts. On July 1, 2017, the Indirect Tax (Goods and Services Tax) (GST) was imposed on the production, sale, and consumption of goods and services across India. The World Bank report on our plight states that the GST tax reform is the most complex and the second highest in Asia with a sample of 115 countries with a GST system. The Government of India promotes some direct tax payments in the form of tax deductions, deductions, etc. for new industrial industries, Research and Development activities, designated sectors, exports, and more. The corporation charges 30 percent tax on Indian companies. And foreign companies are taxed at 40 percent. India has signed various double tax avoidance agreements with different countries. 

Resolving insolvency

India introduced a new bankruptcy code in 2016. Prior to the reform, securing defaulting companies was a burden on secured creditors. The most common way to repay a loan to a secured creditor is to last about five years without an effective recovery from a very profitable long process. The new law introduces the option of a corporate restructuring (corporate resolution) as an alternative to bankruptcy and other debt enforcement mechanisms, enabling insolvent companies to regain financial prosperity. Or you can close it. The restructuring process gives companies access to effective tools to keep their finances, and gives them better tools to negotiate and repay their debts at the end of the bankruptcy process. More payment opportunities are available. Since it came into force, more than 2,000 companies have adopted the new law. Approximately 47,770 of these were abandoned, over 120 reorganization projects were approved, and the rest remain. Previously, foreclosure of law practitioners was common practice in both Delhi and Mumbai, with the bankruptcy index measuring 4.3 years on average. Despite some challenges in implementing the reforms, especially in court proceedings and the application of the law by many stakeholders, the number of restructurings in India is steadily increasing. As a result, restructuring is becoming more common in viable companies and improving overall recovery rates, from 72cents a dollar to 27 cents a dollar. 

Ease of doing business in India

According to the Ease of Doing Business report 2020, India’s position has improved considerably. India has moved 14 places to be 63rd among 190 nations in the World Bank’s Ease of Doing Business ranking in 2019. The country was 77th among 190 countries in the previous ranking last year, an improvement by 23 places. Nonetheless, the improvement in India’s standards falls short to attract multinational companies. One of the main reasons for the shortcoming is the majority of the reforms are directed towards two cities i.e. Delhi and Mumbai. Such a concentration of development is detrimental to India’s overall growth.

Additionally, many companies see such concentration as an impediment in their growth. Different companies have different demographical needs and thus require a special establishment. Therefore, although the business reforms adopted by India are in the right direction there are a lot of areas still left unattended.

(The writer is a final year law student of Maharashtra National Law University, Nagpur, India. The views expressed are personal. He can be contacted at jhs.shivamtripathi@gmail.com)