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.

Offshore wind power in India erupts

Over the next seven years, India plans to install as much as 140 gigawatts (GW) of wind power capacity to source 50 percent of the country's power capacity from non-fossil energy sources by 2030. That presents huge opportunities for European suppliers, says wind energy expert Alok Kumar, director at consulting firm DNV GL in India.

First tender for offshore wind power in India

India's Ministry of Energy (MNRE) recently announced that India's first tender for leasing lots for offshore wind installation will be issued in July 2023.

The tender covers four lots in the Gulf of Mannar, off the coast of India's Tamil Nadu province. All four lots offer space for 1 GW of wind turbines. If an energy company wins the tender, it will be allowed to study the seabed, set up a wind farm and sell the electricity directly to customers.

India has so far focused mainly on onshore wind projects, as adjustments had to be made in the regulations of the various Indian states to allow offshore projects. As a result, India has been slow in terms of developing offshore wind energy projects, even though the country has a 7600-km coastline and significant potential to build offshore wind projects.

India is ambitious on green energy

Alok Kumar, director at consulting firm DNV GL in India.

While India is already currently generating 39.2 GW with onshore wind turbines and plans to double that capacity in the next four years, offshore wind development is only bursting forth this year. "This government is firmly committed to wind power development," Alok Kumar, country manager in India for DNV GL told me by phone. "In cooperation with the EU, over the past five years India, through the Facilitating Offshore Wind in India (FOWIND) consortium, has established a roadmap for the development of offshore wind farms in the coastlines of the states of Gujarat and Tamil Nadu. Because of this cooperation, there is great interest in the knowledge and skills of European companies."

Government support for wind energy

Since offshore wind power in India is more than four times more expensive than onshore wind power, the central government in New Delhi will subsidize offshore wind development. For onshore wind energy, the Indian government changed the policy in 2017. Before that, the Indian government signed a contract with a power supplier to purchase electricity at a fixed rate for a specified term (Power Purchase Agreement). Now, parties must bid for a tender to build a wind farm and the party offering power at the lowest price wins. This policy change initially caused tumult in the market, stagnation of new projects and the disappearance of small market players. "By now the craziness is over," says Kumar. "The development of new onshore wind farms is picking up. The price of electricity that initially halved has now stabilized at 75 percent of the price level."

Know-how from Europe

Through cooperation with the EU, Kumar said offshore wind farms in India will be designed according to the European model. "The production of wind turbines will take place entirely in India, but the know how will have to come from Europe. So there are many opportunities for European parties active in the chain. Some European parties have long noticed this. Take Fugro, for example. In the preparatory phase, they have mapped the Indian seabed to determine where wind turbines can be placed safely. But not all parties are taking the Indian market seriously yet. I expect that to change a lot this year."

Curious about the opportunities for your company in the Indian energy sector?

New budget plans for India favour foreign investors

India managed to attract a whopping $81.7 billion in foreign direct investment, or FDI, last year, the highest amount the country has ever seen. But India still needs much more investment, and so the government has an ambitious budget for the coming year, focusing on a major upgrade of India's infrastructure, the transition to a digital economy and clean energy, and making it easier and more profitable for foreign investors to do business. 

Key proposals

These are some of the key proposals in the new budget that will affect how foreign investors and companies do business in India:

Taxes

1. No change in tax rates for companies

The income tax rates (including surcharge and cess) for companies (domestic and foreign), corporations and limited liability companies remain unchanged, including the rates for the Minimum Alternate Tax (MAT) and the Alternate Minimum Tax (AMT).

2. Repeal of favourable tax rate on dividends received from foreign subsidiaries

Currently, dividends received by Indian companies from their investments in foreign companies are taxable at a reduced rate of 15%. Moreover, under certain conditions, these companies can avail of a special tax deduction if the foreign dividend received is further distributed. Under the new budget plans, this favourable tax rate of 15% will be abolished and the foreign dividend received will be taxed at the ordinary corporate tax rates. The deduction for further distributions remains.

3. Tax benefits for producers and start-ups

Newly established manufacturing companies and factories can benefit from the preferential tax rate of 15 per cent (plus surcharge and cess) for one more year. The scheme will be extended until 31 March 2024. Start-ups that qualify for the so-called tax holiday benefits can also avail of them for one more year, until March 31, 2023.

4. Submission of updated tax returns 

Previously, no changes could be made to a submitted income tax return, but with the new budget, this changes. To encourage voluntary tax compliance and filing of returns, taxpayers can file an updated tax return within three years of the end of the tax year, provided they pay additional taxes on undisclosed income. However, an updated tax return cannot be filed if it leads to a reduction in tax liability, a tax refund or an increase in the refund. 

5. Changes in withholding tax

Under the Indian tax code, the value of any benefit or fringe benefit received by a taxpayer in the course of his business is taxable as business income. The Budget 2022, therefore, proposes the imposition of a 10% withholding tax on such benefits or favours, requiring the person paying or providing such benefits or favours to a resident of India to withhold such taxes.

6. International Financial Services Centre (IFSC)

In recent years, India has introduced various tax breaks for entities based in the IFSC to make it a global hub of the financial services industry. A tax exemption is now announced for non-resident income from offshore derivatives or over-the-counter derivatives issued by an offshore bank, income from royalties, and income from portfolio management services provided by the IFSC, subject to certain conditions.

7. Deadline for submitting the monthly GST declaration

The deadline for filing monthly GST returns by foreign companies is brought forward to the 13th of the month (previously it was the 20th).

8. Input tax credit (ITC)

Budget 2022 imposes additional restrictions on the application of the ITC under the GST laws, making taxpayers even more compliant. 

The Indian tax system can become a real headache without the right local help. IndiaConnected has therefore put together this guide, which provides insight into the complex tax and financial system every CFO in India has to deal with, and which we can support you with at all times. 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.

Export

1. Less benefit on import duties and more focus on Make-in-India

The new budget announces a phased review and partial elimination of nearly 350 duty exemptions to encourage companies to set up a manufacturing plant in India.

2. Special Economic Zones (SEZ)

To promote exports from India, the Special Economic Zones Act is being replaced by a new legislation that will bring the states together as partners in 'Development of Enterprise and Service Hubs'. The aim of these hubs is to improve cooperation between all major existing and new SEZs, make the best use of available infrastructure and increase export competitiveness.

The number of SEZs in India will also increase substantially in the coming year, with almost 40% of the approved SEZs yet to become operational.

Interesting opportunities for international companies in India

Defence
In the new budget, 25% of the 66 billion dollar defence budget will be made available for R&D in this sector by companies, start-ups and academia, providing opportunities to international players with innovative solutions. In addition, this investment is expected to create exciting opportunities for manufacturers in this sector based in India. In 2020, India changed its regulations for FDI in the defence sector and now allows investments of up to 74 per cent. 

Healthcare
The Indian government is expanding the favourable tax regime for manufacturers in this sector, with the aim of stimulating, among other things, the production of pharmaceuticals and medical devices. It has also identified the pharmaceutical sector as one of the key growth sectors and is supporting the sector with favourable policy measures. However, in the budget it leaves out the R&D segment of this sector, which is a missed opportunity. 100 per cent FDI is allowed in almost all segments of the healthcare sector. 

Digitalisation and technology
India's new budget shows the ambition to move towards a digital society and economy. As a result, almost every sector (digital currency, infrastructure focuses on EVs, e-passport, etc) will get a digital boost, creating significant direct and indirect opportunities for start-ups and companies, such as software, hardware and service companies. In the technology sector, 100 per cent FDI is allowed.

The Indian government also aims to boost the country's data centres and energy storage systems, charging infrastructure and battery systems. It wants to build a world-class data centre ecosystem by attracting investments from domestic and international players, thereby boosting this sector.

Agriculture
One of the sectors where the government is trying to make a big push for development is agriculture. A new fund has been announced that will support start-ups that lease agricultural machinery to farmers and provide companies with innovative, digital solutions to make their operations more efficient. Innovative solutions are also being looked at: such as using drones to help farmers with land registration. In the agricultural sector, 100 per cent FDI is allowed.

Are you curious about the specific opportunities that exist in the Indian market for your company or sector? Our local experts are ready to answer your questions.