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. 

India's major taxes: you need to know about the Goods and Services Tax (GST)

The Goods and Services Tax (GST) is the Indian version of VAT. Anyone doing business in India will eventually have to deal with it. The GST was introduced in 2017 to make the country's complex existing tax system more manageable.

Despite having made doing business in India considerably easier, the GST tax can still be a challenge for European companies starting their operations in India. In this article, we'll explain how the tax works and how it affects you as a foreign entrepreneur.

The old, Indian GST tax system consisted of an accumulation of indirect taxes, excise taxes and surcharges levied not only at the national level, but also at the state level and even at the city level. A major tax collected by Indian states was the Value Added Tax (VAT), but there was no fixed national rate for it.

States independently determined what VAT was charged for a product, resulting in much red tape for businesses. In addition, state-to-state sales also required a Central State Tax (CST) to be paid to the national government, further underscoring the fragmentation of the old tax system.

All these different taxes from different Indian governments brought about a waterfall effect and made tax evasion and corruption relatively easy. Indian tax authorities were losing a lot of revenue as a result, so change was much needed. 

One centralized sales tax

With the new Goods and Services Tax, there came one centralized sales tax for all of India in 2017. It unifies all taxes by product type and is levied at the national level in New Delhi.

There are five rates, ranging from 0% to 28%, under which 1211 categories of goods and services are divided. Under the GST system, tax is charged at any point when value is added to the product and a sale occurs. This runs up to the final sale to the customer. To clarify this a simplified example: 

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In addition, GST is a destination-based tax. This means that if a product is manufactured in the state of Andhra Pradesh, but sold in Karnataka, the entire tax goes to Karnataka. A big improvement from the previous system where tax had to be paid at each step to a different government body. 

The benefits of Goods and Services Tax

The list of benefits of a centralized sales tax is long. First, the GST greatly simplifies India's unwieldy tax system. In addition, the GST makes it possible to effectively make India a single market in which free movement of goods between states becomes a reality.

This allows companies to organize their distribution from a central nationwide warehouse - and not have to set it up separately in each state. Furthermore, tax evasion becomes more difficult, increasing revenues for the Indian treasury. The above benefits in turn lead to positive macroeconomic effects: doing business in India becomes easier, (foreign) investment increases, the Indian government itself can invest more, and the Indian economy will grow faster.

But the GST also has disadvantages

The GST is far from perfect because it still does not bring taxes together under one roof. In fact, there are 38 different ones: a separate GST for all 29 states (SGST) and the seven "union territories" (UTGST), a federal GST (CGST) and an integrated GST (IGST) for interstate supplies of products and services.

Despite the fact that the GST system is supposed to eliminate the water vale effect and thus lower the price of products, certain products have actually become significantly more expensive. For example, since the introduction of the new tax, products such as shampoo and deodorant suddenly fall into a higher tax rate. 

What does the GST mean for you as a European entrepreneur in India?

All European companies wishing to start their own branch, joint venture or any other type of sales organization in India will face this tax. To pay this tax, you will need a PAN number and must register with the GST portal where you will get your unique GSTIN code. Through this portal, a tax form has to be submitted and paid every month.

European companies that only export to India hardly have to deal with the taxes. However, it is important to understand how the GST taxes the Indian distributor or importer you are working with.

GST is one of India's most important taxes, besides of course Corporate Tax and all sorts of other taxes such as Minimum Alternate Tax (MAT), Dividend Distribution Tax (DDT), Custom Duty and Excise Duty.

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.