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.

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.

What does the Indian corona crisis support package mean for the different sectors?

In mid-May, Prime Minister Modi announced an aid package of some USD 280 billion to give the Indian economy a boost after the country came to a complete standstill during the lockdown. In his speech, Modi focused heavily on India's self-reliance and urged Indians to be 'vocal about local'. At the same time, measures have been introduced to make it attractive for foreign companies to start production in India, such as the provision of land for industrial use and subsidies. What does this support package mean for the different sectors?

An overview of the Covid-19 support package

As early as March, right after the Indian Government declared a complete lockdown, financial measures were taken to support the poorest of Indians. USD 25.6 billion was made available for free food, cereals, rice and cooking gas. The Reserve Bank of India also immediately took liquidity measures of about $107 billion. Two months later, five days after Modi's speech, Finance Minister Nirmala Sitharaman announced the rest of the aid package in five tranches: 

• Tranche 1 - $79.2 billion: provides financial assistance and loan guarantees to SMEs, non-bank lenders, distributors and salaried employees

• Tranche 2 - $41.3 billion: provides financial assistance to migrant workers, small farmers and day labourers. 

• Tranche 3 - USD 20 billion: provides financial support to larger agricultural enterprises, the food industry and related industries. 

• Tranche 4 - $1 billion: announced structural reforms in eight sectors, including mining industry, defence industry, social infrastructure projects, power distribution companies, aviation and aerospace sector and nuclear power.

• Tranche 5 - $5.3 billion: additional investments in unemployment benefits, education and health reforms.

Unlike in Europe or the United States, the Indian aid package does not provide direct payments to citizens or stimulate consumer demand. The measures are intended to soften the impact of the coronavirus on the Indian economy and avoid a recession, but it is clear that a full recovery cannot be achieved with this aid package alone.

An overview of corona aid measures by sector:

Agriculture and the food industry: 

USD 13 billion will be available for cold chain distribution and post-harvest storage facilities. In addition, a fund worth USD 1.3 billion has been set up to boost the agriculture cluster and support small businesses in the food industry. The Indian government has made available USD 2.6 billion to grow fisheries. With this amount, an additional 7 million tonnes of fish will be caught and an additional 5.5 million jobs created. The livestock sector will receive USD 1.7 billion for vaccinations to prevent foot-and-mouth disease and an additional USD 2 billion will be made available to further invest in the dairy industry and livestock expansions. 

In addition to $528 million, one million hectares of farmland will become available to farmers who grow herbs and medicinal plants. This freed up land will provide farmers with an additional 650 million dollars in income. The government is also making $200,000 available to support beekeepers. Finally, several legislative changes are being made that will give farmers better prices for their crops and improve the legal position of farmers in contracts with exporters, wholesalers, processors, etc.

Mining and Metallurgy 

The Indian government is planning to introduce commercial coal mining with the aim of making India self-sufficient in coal production. It will also encourage private investment in the minerals sector and 500 mining blocks will be auctioned through an open and transparent process. This will be a joint auction of bauxite & coal mines, the government hopes to strengthen the competitiveness of India's aluminium industry.

Aviation and defence sector

The Indian government aims to produce more spare parts locally, which are currently imported. This will automatically lead to an increase in jobs. There will also be separate budgetary provisions for domestic capital purchases. The Foreign Direct Investment limit in the defence industry has been increased from 49% to 74% and India wants to become a global hub for aircraft maintenance and repair. Therefore, current restrictions on the use of Indian airspace are being relaxed and three of the country's six airports will be operated and maintained through a public-private partnership (PPP). It is expected that around USD 1.7 billion of private investment will be made in the 12 airports in the coming years. 

Energy and utilities

India's energy distribution companies are being privatised to bring efficiency and stability to the entire energy sector. In addition, the government wants to invest more in technological developments within this sector. Incubation centres for the nuclear sector are being set up to promote collaborations between research facilities and tech entrepreneurs. A research reactor has also been set up in PPP (public-private partnership) mode for the production of medical isotopes.

Healthcare

In the fight against the coronavirus COVID-19, USD 2 billion has been allocated to the Indian states to set up test laboratories, roll out teleconsultation services, launch the Indian coronavirus app Arogya Setu and purchase additional protective equipment for health workers. In addition, investments in health infrastructure will be continued by expanding access to care to all districts through small local hospitals and additional laboratories. Insurance coverage of USD 600,000 per person will be introduced for health workers.

Automotive industry 

According to the Society of Indian Automobile Manufacturers (SIAM), the auto industry has been forgotten in the corona support package. According to SIAM President Rajan Wadhera, while the agriculture sector support package indirectly benefits the auto industry in the medium term, a direct stimulus is needed to boost consumer demand in the industry, which has not happened. The Indian auto industry already contracted by 18 per cent last year, and due to the Covid-19 virus, the industry expects a further decline between 22 per cent and 35 per cent. This could have a negative impact of around 1 per cent on India's overall GDP growth for 2021.

Textile sector

While the textile industry welcomed Modi's stimulus package, garment manufacturers are sceptical whether there will be any gains. The Confederation of Indian Textile Industry (CITI) said that the new definition of Micro, Small and Medium Enterprises brings small weaving mills under the new MSME norms and garment manufacturers can benefit from this. Another industry expert said that the credit guarantee scheme will benefit textile companies as banks will now be in a better position to lend with reduced risk exposure. 

But Anup Mathew of BrandClub, a garment manufacturer in Bengaluru, said he was hoping for lower interest rates and a delay in loan repayments for his sector. Mathew runs two production facilities and still employs over 100 people, but with the losses of the past two months and the gloomy outlook for the rest of 2020, he sees little chance of his factories surviving.

Targeted advice for your sector in the corona crisis

Are the opportunities for your business in India still unclear due to the rapid developments of the coronavirus? Or have you encountered new challenges in recent months, such as remote management or finding the right staff? We are happy to help. Our local experts are up to date with the latest developments and can help you take the right follow-up steps to be able to go full steam ahead again after this corona crisis.