How does a foreign company deal with corruption in India?

Any foreign company doing business in India will eventually have to deal with corruption. Prime Minister Modi has made many changes in recent years to improve the situation in the country, but India still ranks 80th in Transparency International's corruption index. As an international company, you want to stay as far away as possible from paying bribes, because this can have serious consequences not only in India, but also in your own country.

Every year, Transparency International ranks 176 countries worldwide on corruption. India is ranked 80.

Clean business takes time

It is still not uncommon in India to be asked for 'speed money', an amount paid under the table to get a permit approved more quickly, for example. Despite the fact that in some cases it seems as if there is no other solution than to pay, we strongly advise international companies against this. Firstly, it is of course forbidden and secondly, it is perfectly possible to do clean business in India. 

For instance, the German IT company Optanium went to India to look for an accounting firm that could set up their entity in India without paying bribes. The process of setting up the company took longer, thirteen months instead of six, but it allowed Optanium India to get off to a flying start. An important tip is therefore to plan enough time for dealing with issues such as applying for licences or the release of your products from customs. 

It is easier for foreign companies not to cooperate with corruption'.

In an interview with Quartz, Ravi Venkatesan, former chairman of Microsoft India and author of the book 'Conquering the Chaos: Win in India, Win Everywhere', explains how companies should deal with corrupt situations. "It is easier for a foreign company not to participate in corruption. The local management can stand firm and say that paying bribes is against their company policy. If a hard line is taken, the bribe-takers will drop out." 

In addition, having a very strong administrative department is essential, according to Venkatesan. "Manage your business with competent, long-term administrative staff who can hold their own in discussions with officials. Many companies do not invest enough in these functions because they do not see them as the core of the business. Instead, they outsource these administrative tasks to local agents, who do pay the 'speed money' and simply bury it in their other expenses."

"Many companies in India do not invest enough in administrative staff. That makes them vulnerable to corruption."

- Ravi Venkatesan

Always your papers in order

Fortunately, there are more and more situations in India where corruption has been completely eliminated because those processes are now automated or better controlled, such as filing your taxes or getting your identification. If you make sure you always have all your paperwork in order and therefore never need special assistance, you can avoid corruption with ease.

Of course, the experts at IndiaConnected can help you ensure that your business is always and in every area compliant. 

Salaries in India: what do you need to think about?

Wondering how much you can really save on your personnel costs if you out-source to India? Or have you started recruiting staff for your Indian branch and are you wondering what a realistic salary proposal is? These are the average salaries in India: From university graduates to telemarketers and skilled tradespeople. Please note that these are averages regardless of the experience, education, sector and location of the candidate.

Despite the fact that the average wages in India are still a lot lower than in Europe, the average monthly salary has risen rapidly in recent years. While the average salary was ₹19,492 (€221) in 2016, it has now almost doubled to ₹31,900 (€362). This sounds very advantageous, but this average also includes the very low salaries of the many Indian farm workers. As a foreign company, you cannot rely on this average. Depending on the region where you are located, the average salary will be higher or lower. Foreign companies are often looking for staff around the big cities and those salaries are a lot higher. For instance, in Mumbai, the average salary is ₹66,900 (€760), while in Chandigargh, a much smaller city, it is only ₹43,900 (€499).

Average salary in India based on experience, education and function

A candidate's level of education and experience obviously affect salary. In general, Indian workers with two to five years of experience earn on average 32% more than freshers and juniors across all sectors. Professionals with more than five years of experience earn on average 36% more than those with five years or less of work experience. When reaching ten years within a sector, salaries increase by 21% and by a further 14% when reaching 15 years or more of experience. Not only the years of experience count, but also changing jobs has an influence. Every time a person changes jobs, the salary increases by 30-35%. An important point to consider in the recruitment process. 

Of course, several aspects play a role in determining salary, such as education, position and location. In India, employees with a basic education earn on average 17% more than colleagues who have only completed secondary school. A Bachelor's degree increases the salary by an average of 24% and a Master's degree by another 29%. There is also a big difference between the different regions. In the big cities, the cost of living is much higher than in more rural areas. Salaries are, of course, adjusted accordingly. 

To get an idea of average salaries of different jobs and sectors, we have put together some examples. Please note that these are only examples and the experience, education, sector and location of the suitable candidate are not included in the examples below. Would you like more insight into the possible salary costs for your Indian entity? Please contact our experts, they can advise you on realistic salary proposals based on the sector you are active in, your location and your specific requirements.

Fight turnover with a competitive salary offer

In India, many companies suffer from high staff turnover. To attract and retain talented employees, it is very important that your salary is equal to or higher than the average salary for that position in India. In addition, you must comply with the rules of the Indian employment arena. Legal assistance in drafting employment contracts and conditions is therefore no luxury. It is also advisable to seek practical advice on best practices, so that the policy is not only legally compliant, but also HR-friendly. IndiaConnected is happy to support you in this process, including the recruitment and selection process and contract negotiations. 

Everything you need to know as a CFO about: The Indian Tax System

The Indian tax system is often a headache for foreign CFOs with offices in the country. Nevertheless, the Indian tax system has undergone significant reforms in recent years and the paying taxes has become has become a lot clearer and easier. Here is what every foreign CFO should know about the Indian tax system.

Direct and indirect taxes

There are two types of taxes in India: direct taxes and indirect taxes. Direct taxes are levied on the income earned by companies or individuals in a financial year. The income tax paid by individual taxpayers is the Personal Income Tax (PIT). Individuals are taxed based on tax brackets at different rates. The income tax paid by domestic companies and foreign companies on their income in India is the Corporate Income Tax (CIT). The CIT has a specific rate as stipulated in the Indian Income Tax Act.

As the name suggests, indirect tax is not imposed directly on the taxpayer. Instead, this tax is levied on goods and services. Some examples of indirect taxes in India are the Central Excise and Customs Duty, and Value Added Tax (VAT). One of the most important indirect taxes is the Goods and Services Tax (GST), read all about it here.

Corporate Income Tax

In India, both domestic and foreign companies have to pay corporate income tax. According to the Indian Income Tax Act, you are a domestic company if you have a registered office or head office in India. A subsidiary company also falls under this category. You will be assessed as a foreign company if you have a branch office, project office or permanent establishment in India. While a domestic company is taxed on its universal income in India, a foreign company is taxed only on the income made in India. This sounds more advantageous, but it is not always the case. 

Corporate Income Tax - Domestic Enterprises

The rate of Corporate Income Tax (CIT) applicable to a domestic company for the financial year 2020-21 is as follows: 

Articles 115BAA and 115BAB

In September 2019, the Government of India added a new section, 115BAA, to the existing Income Tax Act, 1961. This section offers domestic companies a reduced corporate tax rate from the 2019-2020 financial year (AY 2020-21) onwards, if these domestic companies meet certain conditions. The tax rate will then no longer be 25 or 30 per cent, but 22 per cent. 

What are the terms of Articles 115BAA and 115BAB?

Firstly, domestic companies must not already be using other exemptions or incentives to qualify for deduction under 115BAA. Therefore, the total income of such companies must be calculated without: 

• Claiming any deduction specifically available to units located in special economic zones (Section 10AA).

• Request for additional depreciation under Article 32

• Allowance for investments in new plants and machinery in designated backward areas of the States of Andhra, Pradesh, Bihar, Telangana and West Bengal under Article 32 AD. 

• Deduction under Article 33AB for tea, coffee and rubber factories.

• Claiming deductions under Section 33ABA for deposits made into land rehabilitation funds by companies engaged in the extraction or production of petroleum, natural gas or both in India.

• Applying for Article 35 deductions for scientific research.

• Claiming deductions for the capital expenditure of specific farms under Section 35 of the Agriculture Act.

• Article 35CCC - Expenditure on agricultural information projects.

• Article 35CCD - Expenditure on a skills development project.

• Claims for deduction under Chapter VI-A (80IA, 80IAB, 80IAC, 80IB, etc.) are not allowed, but deduction under Section 80JJAA is exempted. Section 80JJAA allows an employer to claim part of the salary of new employees through tax. 

• Claiming set-off of any losses carried forward from previous years, if such losses were incurred in relation to the above deductions. 

The conditions for 115BAB are:

• The company was incorporated and registered after 1 October 2019. 

• Production starts before 1 April 2023

• The company shall be engaged in the manufacture or production of any article or product, and/or research relating to such product. The company may also engage in the distribution of the article or product produced by them. 

• The company may not invoke this condition if it is formed by splitting or reconstructing a pre-existing company within the meaning of Article 33B.

• The company cannot apply this condition if it is using a plant or machinery which has been used for any purpose previously. Used imported machinery is allowed if such machinery has never been installed in India and depreciation of such machinery has never been claimed in India.  

Please note!

It is extremely important that companies are certain that they will be better off by opting for the lower tax rate of 115BAA before they actually take that step, because once a company takes advantage of the reduction, it must be continued in subsequent tax years. Since there is no time limit in which the option under section 115BAA can be exercised, it is better to take your time and find out how much benefit other exemptions and incentives can bring to the company. Subsequently, 115BAA can always be opted for, but note that once it is exercised, it must be continued.

Corporate Income Tax - Foreign Corporations

As explained earlier, if you have a branch office, project office or permanent establishment in India, you will be taxed as a foreign company. While a domestic company is taxed on its universal income in India, a foreign company is taxed only on the income earned in India.

The rate of Corporate Income Tax (CIT) applicable to a foreign company for the financial year 2020-21 is as follows: 

These tariffs are higher than the tariffs for domestic companies and you, as a foreign company, cannot claim tariff reductions like the 115BAA either. If you are just starting out in India and your turnover is still low, these high tariffs are manageable. But once you start growing, it is advisable to set up your own entity in India so that you can take advantage of the favourable tax rates for domestic companies. 

Filing your income tax return

Normally, all companies, including foreign companies, must file their income tax returns on or before 30 October each year. Even if the company is incorporated in the same financial year, income tax returns must be filed for the period before 30 October. In addition, companies that have a turnover, profit or gross receipts of more than INR 10 million or about EUR 110,000 are required to have an audit carried out. This audit report must be submitted to the Indian Tax Department along with the income tax return. The audit report should be submitted annually by September 30, if the rule is applicable to your company.

A guide for CFOs in India

Doing business in India can be challenging, especially because the government processes require a lot of time and energy. That is why consultancy firm IndiaConnected wants to offer you insight into the fiscal and financial system every CFO in India has to deal with. From obtaining all necessary documents for your first export from the Netherlands to taking care of the entire back-office of your Indian entity, so you can always fully focus on your activities in India.