The change of guard at the centre, positive growth-oriented announcements and a large consumer base make India a lucrative investment destination for businesses across the globe. However, crippling laws coupled with uncertain taxation policies have resulted in investors shying away from India’s thriving economy. The “Make in India” programme focuses on inviting companies to establish manufacturing facilities in India. To make this a success, there is an urgent need for the government to adopt unprecedented measures to steer foreign investment into India.
While the 2015-16 budget made certain announcements which could encourage incoming investments in India, such as consolidating foreign investment limits and doling out tax concessions, successful implementation of a series of additional announcements aimed at boosting domestic manufacturing would also help create a conducive environment for foreign investors looking to set shop in India.
One such reform is the reduction in the corporate tax rate. Over the next four years, India seeks to bring down its corporate tax rate from 30% to 25%, bringing it at par with its competitors in the Asian region, thereby creating an incentive for foreign investors seeking to set up subsidiaries or joint ventures outside their home countries. Moreover, repeated assurances made by the government of a stable and non-adversarial taxation system, despite the dent caused by the resurfacing of the Cairn India tax dispute, are positive measures in furtherance of attracting foreign investors to India.
To achieve India’s growth target of 8.5%, India needs foreign investors to not only contribute capital but also provide access to technology. Reducing the tax rate for royalty and fees for technical services to 10% from 25% would facilitate sharing of superior technology with India and encourage skill development. However, to induce foreign partners to share technology in India, much needs to be done to better protect intellectual property rights.
Additionally, the deferment of general anti-avoidance rules along with the assurance that they would be applicable prospectively to investments made after 31 March 2017 is intended to give foreign investors a reason to accelerate investment into India.
Establishing a business
However, all these measures are not sufficient to counter frustration with the prolonged processes for establishing a business presence in India, exacerbated by lack of coordination within government departments as well as inefficiency and bureaucracy. According to a recent report by the World Bank, India ranks 142 out of 189 countries on its index of ease of doing business, indicating the need for an overhaul of the existing processes if India wishes to attract foreign investors.
The government has gradually been taking steps to facilitate business in India and has now proposed the setting up of divisions in various courts which would exclusively deal with commercial disputes. Further, efforts are being made to prune and consolidate archaic labour legislation and various states, with Rajasthan at the helm, have begun the process of amending the labour laws.
The commitment by the finance minister to establish an expert committee to consider the introduction of a consolidated permission process is a step towards a system that could immensely boost the lucrativeness of India as a manufacturing hub. The launching of the eBiz portal is aimed at reducing the time and resources expended on approvals prior to the commencement of business operations. However, the centre-state dichotomy remains a hurdle and unless the states are willing participants in streamlining the approvals process to make it comparable with global practices, foreign investment into India is bound to suffer.
States also need to provide incentives to attract foreign investors and achieve balanced development pan India. Statistics from the Department of Industrial Policy and Promotion indicate that Maharashtra and the National Capital Region absorb nearly 50% of the foreign direct investment into the country.
The exit procedure for companies needs to be simplified as well. Winding-up procedures in India can take up to 18 months. The proposed new bankruptcy code has engendered high expectations and one hopes that it will not be a missed opportunity.
Despite criticisms that the budget was not the “big bang” budget as anticipated and lacked adequate foreign investment friendly policies, the initiatives taken by the government are a step in the right direction to foster development in India. The budget has set in motion a series of reforms which will pave the path for improving the long-term business environment in India and give foreign investors the assurance they want for sharing capital and technology with India.
Luthra & Luthra Law Ofﬁces is a full-service law ﬁrm with ofﬁces in Delhi, Mumbai and Bangalore. Samir Dudhoria is a partner and Ankita Kansil is an associate at the ﬁrm. This article is intended for general informational purposes only and is not a substitute for legal advice.
9th Floor, Ashoka Estate
New Delhi – 110 001
Tel: +91 11 4121 5100
Fax: +91 11 2372 3909