Differences in the way of doing business among Indian states

India is almost as large as the European Union and has more than twice as many inhabitants. No wonder, then, that there are major differences between the various Indian states in terms of language, demographics, politics and economic growth. For a successful start-up in India, it is therefore important to take these differences into account when drawing up a business plan. Because what works in Gujarat does not automatically work in West Bengal.

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The regional differences among Indian states

For a European company to succeed in India, you must be aware of the country's vast regional differences. India is a fragmented market with large, and often underestimated, regional differences in language, culture, infrastructure and wealth, all of which affect the regional business culture.

Indian states are therefore better compared to individual countries than to, say, the Dutch provinces. Indeed, India's most populous state, Uttar Pradesh, has as many inhabitants as Brazil, and the southern state of Tamil Nadu has an economy as large as that of Hungary. 

There are also large demographic differences between Indian states. For example, southern India is older, has more to spend and is more educated than the rest of the country. Northern India, on the other hand, is younger and relatively poor.

North Indians primarily speak Hindi, while South Indians prefer to communicate in English or in their regional state language, such as Kannada or Malayalam. The German wholesaler METRO, better known in the Netherlands as Makro, found out after their start in India that there are big differences between the groceries that customers in a certain region put in their shopping cart and adjusted the assortment accordingly by adding more local products. Logical really, Finns also have different preferences than Spaniards.

"METRO found out that there are big differences between the groceries that customers in different regions in India put in their shopping cart."

- Mark Alexander Friedrich, Head of International Affairs for METRO

Do not make one business plan for all of India

For a successful start in India, thorough market research is a must. Regional differences are not only obstacles, but can also work in your favor depending on your sector and product.

The southwestern states, such as Maharashtra and Karnataka, are a suitable base for technical sectors such as automotive, engineering, as well as outsourcing IT and Research & Development teams.

Northern states such as Punjab and Haryana, among others, have thriving agricultural sectors, creating opportunities for food processing and renewable energy industries.

Starting in the right regions is also essential for selling your product in India. European products almost always fall in the highest market segment in India, so it is smart to start in the regions where people have sufficient income and there is real demand for a more exclusive, expensive product.

"Approaching India as one country by working with only one distributor or partner is one of the most common mistakes European companies make in India," says Klaus Maier, CEO of Maier + Vidorno, IndiaConnected's partner in India.

"In Europe, you wouldn't ask an Italian distributor to set up your network in Norway either. An Indian partner or distributor operating in a specific state has a good network only there and will not succeed in successfully expanding sales to other states. Therefore, those who take India seriously start with about four dedicated, local managers or distributors who understand your product and the regional market well. With them, the market can be mapped and the logistics network set up, one of the biggest challenges for international companies in India. In this way, the Indian market can be conquered step by step, successfully." 

Selling successfully in India with the right strategy

For anyone looking to conquer the Indian market, IndiaConnected has put together a special guide in which we offer you insight into the steps to take to successfully start and grow your sales in India.

From preparing your first export shipment to India to setting up a solid after sales service, we guide and advise throughout your India journey.

How to avoid Permanent Establishment in India

If you are doing business in India but do not have an entity there, you may be classified by the Indian tax authorities as a Permanent Establishment (PE) in India. The consequences of this are severe, in many cases it means the end of your activities in the country. We are happy to explain how you can avoid this situation. 

What is Permanent Establishment?

Permanent Establishment (PE) is a term used worldwide, but the definition varies from country to country. Tax laws of the country or trade agreements between countries define when exactly a PE exists. If you, as a company, undertake trading activities abroad without being registered there as a legal entity and therefore pay no tax, the country can still consider you to be a Permanent Establishment, with unpleasant financial consequences. 

Permanent Establishment in India

Praveen Singhal is Chief Financial Officer at Maier + Vidorno, IndiaConnected's partner in India, and has helped hundreds of European companies circumvent this situation. Singhal explains that India has five forms of Permanent Establishment, namely:

• Dependent Agency Permanent Establishment

"One of the most common mistakes made by European companies that start selling their products in India is that they hire a permanent agent or sales manager," says Singhal. "This agent works only for them and gets a fixed salary from the head office." Despite the fact that the company is not a legal entity in India, this construction still qualifies as Permanent Establishment. The same applies to companies that only have a liaison office in India and start sales activities from there. This is not allowed and is considered tax evasion. Finally, foreign companies that outsource work to Indian employees who work for them full time are also considered Dependent Agency PE. In that case, the Indian employees are fully dependent on the income and work they perform for the foreign company.

• Place of Management Permanent Establishment

If you are a company renting a fixed space in India, such as an office, a warehouse or even a desk in a co-working space, and the rent for that space is paid directly by the European head office to the Indian landlord, this may qualify as PE. Any location where the foreign company has 'access and the right to use it at any time for a period of 6 months or more' falls under this form of PE.

• Fixed Place Permanent Establishment

If you as a company use a fixed location to conduct your business activities, such as an office, branch office, factory, workshop, etc., this can be considered as PE. In many cases, the foreign company also uses the address of the location in official correspondence. Again, the location must be in use for more than six months.

• Construction, Installation or Assembly Permanent Establishment

A specialised foreign company that carries out a project in India, such as the construction of a new bridge, brings over the necessary machinery and imports special materials. Often, project managers, engineers and architects are also flown in to supervise the project. This may feel harmless, as it is only for a short period of time. But such a project, where the company, through equipment and people, stays in India for more than a period of 6 months, can be classified as PE.  

• Service Permanent Establishment

In this case, the company is not offering goods, but services. No local party is involved, but the company's employees deliver the services to the customer in India. They stay in the country for more than six months. An example is the provision of project management services. In this case, there is no physical location used by the company and it is therefore often a case of services on a project basis. 

The consequences of Permanent Establishment

If your company is classified as a PE, it will have a significant impact on your business in India. Singhal: "The situation we encounter most often is one in which the foreign company has a permanent sales agent and is therefore a dependent agency permanent establishment. The Indian tax authorities often discover this form of PE when they check the agent's tax return and see that he or she is receiving a salary from abroad. All sales activities then come to an immediate halt and all goods already stored in India are locked up until the case is closed, penalties paid and you have officially started a business in India."

The tax authorities not only fine you but also calculate what you owe them in tax and interest. "Because you are not an official legal entity in India, you also do not have any books that you can produce to give them insight into your income in India," explains Thomas Breitinger. He is Senior Manager of Consulting Strategy at Maier + Vidorno. "Therefore, a broad estimate of the income is always made, which is often far above the real figure. An example: your agent has been working for your company for 5 years, which means that for the tax authorities you have been a PE for five years. A PE is always valued as a Branch Office, which is 42% of total income. They estimate that you have a ten million rupees (about 110,000 euros) income per year, of which you therefore have to pay 42%. On top of that, there is the interest and penalty. Some companies get a bill on the mat that is triple what they have earned in five years in India."

Permanent Establishment in India

"To get out of this awkward situation, we sometimes see European companies paying bribes," says Breitinger. "You really shouldn't do that. There is a greater chance of you ending up behind bars in your own country than in India. We strongly advise against accepting such an offer." What you do need to do is hire a good lawyer and have a lot of patience, because according to Breitinger, these procedures take a long time. "But better, of course, is to avoid the situation altogether. For companies that work on a project basis, and could fall under the heading of construction permanent establishment, there are ways to make this PE legal in a simple way. But for companies that sell purely in India, it is a lot trickier."

There are two ways in which you can operate safely as a starter in the Indian market without starting an entity. "One is by working with distributors and agents who also do jobs for other companies. Because they do not receive a full fixed income from your business, there can never be dependent agency PE. But then you must be 100% certain that this is the case. We still see too many examples where the company is unwittingly at risk of permanent establishment because the agent has not honestly told you that there are no other clients."

Avoid PE risks with the Business Incubator

According to Breitinger, a part-time sales agent is not enough for many European companies to succeed in India. "The products they enter the Indian market with are high end. So you need a well-trained agent who not only understands your product, but also the market. Often, this is not someone who will take on two other jobs on the side, so you have to look at legal methods to be able to work with a permanent employee."

Maier + Vidorno and IndiaConnected offer a solution for this through the business incubator. You as a company find the right people to start selling your products in India and we take care of the rest. Your employees will be put on our payroll and the legal liability and responsibility will therefore also rest with us. No more PE risks. In addition, we arrange everything from back office to performance reviews and we have five physical locations where we can accommodate your team. "Over a hundred companies are currently working in India through our incubator," says Breitinger. "It is a safe option to explore the market and grow. If you have any doubts about whether your company is at PE risk, we will do a free screening for you. If it is, then you and your employees can continue to work directly through the incubator in a safe way."

Starting in India: why a Liaison Office is a popular choice among international companies

A Liaison Office (LO) is an easy and therefore popular way to enter the Indian market, as it offers European companies the flexibility to get to know India and the sector in which they are active, without being immediately burdened with heavy financial, legal or administrative obligations. What opportunities does an LO in India offer? And is it really the best choice for your company?

A Liaison Office (LO) is the representation of a foreign company in India. The Indian Central Bank defines such an office as "an office that is allowed to undertake only linking activities". These include:

1. Gathering information about the market and potential Indian consumers;

2. advertise, promote and carry out other marketing related activities;

3. boost exports to or imports from India;

4. Establish technical and financial cooperation between the head office and Indian companies;

5. Provide a communication channel between headquarters and local partners.

An LO is not allowed to generate turnover in India and therefore cannot produce goods or provide services. The costs of an LO must therefore be paid in full by the parent company outside India. A liaison office is not only useful for companies that want to explore the Indian market, it is also an interesting legal form for international investors who do not directly want to bring their products or services to the Indian market, but want to outsource work to India, for example.

Do you want to start selling, manufacturing or other commercial activities right away? Then there are several legal forms to choose from. We have listed them all for you to help you understand which form best suits your sector and activities in India:

How to set up a Liaison Office?

In order to set up an LO in India, various registration and approval procedures have to be gone through with different Indian government agencies. These are the following seven steps:

1. Get approval from an Indian bank to open a bank account for the liaison office. This bank will then automatically become theAuthorized Dealer Bankfor the new office.

2. Submit an application, with all necessary documents, to the Reserve Bank of India (RBI) through the Authorised Dealer Bank.

3. Once the RBI has given its approval, a 'Certificate of Establishment of Place of Business in India' needs to be obtained from the Indian Chamber of Commerce: the Registrars of Companies (ROC).

4. Subsequently, a Tax Deduction Account Number (TAN) and a Permanent Account Number (PAN) must be obtained from the Indian tax authorities: the Income Tax Authority.

5. Once these are received, the LO bank account can be officially opened at the authorised bank.

6. The liaison office must be registered under the Shop and Establishment Act and under the Professional Tax in the state where the office is located.

7. If samples are imported to the LO, the office must also be registered under the Import Export Code.

To ensure that this does not become an endlessly frustrating process, it is advisable to go through these steps with a consultant. Not only can it be very confusing what documentation should and should not be submitted, but it will also take at least 3 to 6 months to complete this list. The approval of the Indian Central Bank alone takes an average of 2 to 3 months. So it is smart to choose a partner who can speed up this process.

Mandatory compliance requirements

Once all the steps are completed and the LO is registered, you are not quite done. In India, there is still a lot of reporting to be done back to the various government agencies under which the LO is registered. 

Six months after the Central Bank of India (RBI) gives its approval for the new office, the official address, PAN and 'Certificate of Establishment of Business Place in India' from the Indian Chamber of Commerce (ROC) must be declared to the RBI. 

As an LO is not allowed to undertake commercial activities, several documents have to be submitted every year to prove that the LO is compliant with the regulations:

• Annual Activity Certificate (AAC) - This document proves that the LO has only carried out activities that are permitted. The AAC must be prepared by a Chartered Accountant. This is a full-time practising accountant who is officially registered with the Institute of Chartered Accountants of India (ICAI). This certificate must then be sent to the RBI and the Director General of Income Tax (DGIT).

• FC-3 form - All foreign companies are required to submit an annual FC-3 form to the ROC with a detailed list of all the foreign company's places of business and financial statements.

• FC-4 form - Through this form, foreign companies submit their annual returns to the ROC.

• 49-C form - Is an income tax form specifically required to be filed by foreign companies with an LO in India. This form also needs to be verified by a Chartered Accountant and must be filed with the DGIT.

Because the activities of the liaison office often focus on research and communication between the head office and local parties, companies sometimes seem to forget that an LO must remain compliant with local (tax) regulations. Failure to do so can have serious consequences. For example, you may be classified as a permanent establishmentThis could mean the end of your activities in India.

Therefore, make sure that you introduce annual checks to ensure that you are fully compliant. For example, engage local consultants who can conduct a health check of your company and HR policies to alert you to the potential risks you face.

Duration of a Liaison Office in India

The liaison office is initially approved for a period of three years, after which it can be extended for another three years. For this purpose, an application must be submitted by the Authorised Dealer Bank to the RBI one month before the expiry of the initial approval.

The purpose of an LO is to flexibly introduce your company to the Indian market and prepare it for the next step. In principle, in three years, you should be able to gain enough insights to draw up a strategy for your actual entry into the Indian market. But if you need more time, an extension is a good option.

There are a number of things you should focus on if you want to explore the market with your LO and formulate a sound strategy:

• Set up a good system in which you collect and analyse the information from your market surveys.

• Carry out feasibility studies to ensure that your product or service fits the Indian market.

• Based on your research, adjust your product or the price of the product or service to suit the needs of the Indian consumer.

• If you are going to sell, take the time to get to know different distributors and find the right match for your product.

Less bureaucracy 

The Indian government has already shown in recent years that it wants to make doing business in the country easier. In 2020, we will see a further simplification of the tax system and an improvement in the handling of disputes between entrepreneurs and local authorities. Despite the fact that all these new rules should only make things easier, it is still a lot of paperwork to set up your first office in India. Help is therefore no luxury. IndiaConnected has a team of local experts ready for you to your market entry run as smoothly as possible.