Doing Business in India: Avoiding Common Expansion Pitfalls

India – The Big Picture

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GDP Growth at 7.6%

1.2 billion population

Large increasing middle class consumer population

Strong demographic dividend – young well educated, English speaking workforce

Entrepreneurial and innovative

Access to not only talented but cheap labor resource

India works while the US sleeps – allowing for overnight service delivery

High Street Partners Proprietary and Confidential 2011

Overview • US offices: Annapolis (HQ), Boston, Atlanta, Miami, San Francisco, San

Jose, San Diego

• International offices : London, Hong Kong, Shanghai, Tokyo, India

• Employees: 125

• Customers: 350+ in over 80 countries

How we are different • We get it – Founder opened 30+ overseas offices and is “our customer”

• We do international business services, every day, everywhere

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About HSP

19 years experience doing business in India

Founding Country Director of British Government’s UK India Business Council

Has wide international business experience

Senior Exec/Shareholder of a successful Tech Co IPO

Manages a team of local India experts

Team located in New Delhi, Mumbai and Bangalore

Makes regular trips to the US for client consultations

• (Next trip w/c 14th November – West Coast)

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Our Speakers

Adrian Mutton, HSP’s In-Country Expert on India

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Our Speakers

Based out of HSP’s London office

Responsible for providing advisory services to clients with needs in the AMESA region (including India)

Spent 15 years with PwC and Arthur Anderson working on international mobility solutions for multinational companies and their employees

Experience with government bodies focused on inward investment and economic development

Dafydd Williams, HSP’s Director of Advisory Services

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Doing Business in India – The Opportunities & Challenges

Setting Up In India

Taxes Overview and Corporate Structure Models

Labor Laws & the Labor Market

Best Practices

Real Life Situations

Q&A

Agenda

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Doing Business in India

Why? • New source of revenue with continued long term growth opportunities

• Strong pool of technically and professionally qualified labor

• New technology partners and research opportunities

• Key strategic market – attractive to potential investors in your business

• Without many of the challenges faced in China

The Challenges • Highly bureaucratic – need for strong local administrative partner

• Everyone keen to help and ‘can do’ attitude – does not always lead to desired results

• Very large market with regional differences

• Despite English language, things still do sometimes get lost in translation

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1. Basic Rule PE: A fixed place of business exists where the business of the enterprise is at least partly carried on. Must be a reasonable permanence to constitute PE.

2. Agency PE: Occurs when a dependent agent appointed by the foreign enterprise has the authority to secure conclude contracts and/or maintains stock of goods and delivers on behalf of the enterprise.

3. Service PE: Can occur when employees of foreign enterprise furnish or perform services other than those covered under Royalties or Fees for Technical Services.

Key Considerations: • India strictly avoids double taxation by only taxing profits in the country that are

actually attributable to the PE. • PE is created only when linked to revenue-generating activities. A local presence for

other business activities (research, storage of goods, etc.) are typically permitted.

Setting Up in India: Permanent Establishment

Three kinds of PE in India:

Taxes Overview 9

Corporate Taxation Rates

*inclusive of surcharge and cess

Particulars Current Tax rates Tax rates under Direct Tax Code

Domestic Company 33.22%* 25%

Foreign Company 42.23%* 25%

Branch profit tax Not applicable 15% (new)

Dividend distribution tax 16.995%* 15%

Minimum Alternative Tax (MAT - for domestic company based on book profit as opposed to corporate tax profit

16.995% *of the adjusted book profits

0.25% of the value of gross assets of banking companies and 2% in other cases, payable if greater than Corporate Tax liability

Corporate Structure Models 10

ABC Co USA

SPV in preferable tax jurisdiction

XYZ India Private Limited (Operating Co)

Direct Investment into India with wholly owned subsidiary

Investment into India through overseas SPV vehicle

ABC Co USA

XYZ India Private Limited (Operating Co) Indian JV

Partner

Investment into India operating Co with Indian JV partner

ABC Co USA

XYZ India Private Limited (Operating Co)

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Joint ventures are one of the fastest and easiest way to enter the Indian market, but aren’t without challenges…

Should I Consider A Joint Venture?

Benefits Concerns

Immediate sales/distribution channel

Lack of control

Local knowledge, expertise and technical support

Differences in long-term goals between the parties

A mandatory requirement in some sectors

Potential dilution of IP/Brand Trade Marks unless registered at level above JV

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Labor Laws & the Labor Market

Key Considerations: As the employment environment is getting more competitive in India, the regulatory

authorities have shown considerable flexibility towards a few labor compliances for industries like Media, Hospitality, IT & ITES. International companies must avoid

misunderstanding local statutory requirements and compliances.

Huge volume of labor legislations enacted by central and state governments

Movement away from a protectionist model to stay internationally competitive

The applicability of legislation depends on

• Nature of activity (“factory”, “industry”, “shop”, or “establishment”)

• Number of employees employed

• Location of the organization

Laws regulate general working conditions, as well as procedures in specific industries (building & construction, pharmaceuticals, dockyards, mines)

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Key Laws at a Glance

Industrial Dispute Act (ID): Provides procedure for the negotiation of industrial disputes (retrenchment, lay-off, closure, change in service conditions, etc.)

Local Shops and Establishments Act (S&E): Regulates service conditions such as hours of work, payment of wages, overtime, leave etc. Can vary state-to-state

Contract Labor Regulation and Abolition Act (CLRA): Regulates employment of contract labor and provides for its abolition in certain circumstances

Employees Provident Funds &Miscellaneous Provisions Act (PF): Mandates compulsory contributory provident fund, pension and insurance

Employees State Insurance Act (ESI): Provides benefits to employees for leave (i.e. maternity, temporary or permanent disability, etc.)

Payment of Gratuity Act (PG): Provides for payment of gratuity to all employees in specified establishments in which 10+ persons are employed

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Labor Law - Penalties

Most labor laws hold all those in charge at the time of the offence responsible

Penaties can include officers and directors

• Exception: Proof that the offence was committed without a person’s knowledge or that he/she exercised all due diligence to prevent the commission of such offence

• Penalties can range from fines to imprisonment of company representatives

It is therefore important to be compliant from day one and plan your HR strategy with due care and attention. Penalites are then easily avoided.

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Employee Engagement

Most Indian employerstypically hire directly (temp or perm)

Employers can also engage consultants and/or contract labor through a service provider/ contractor as the agency model is expanding

In hiring/terminating employees, consider the following concerning labor laws:

• Whether or not the employee in question is a workman or professional

• Total number of employees in the establishment or office or factory

• Nature of business in which the employer is engaged, and the nature of work being performed by the employee in the course of his employment

• Monthly wages of the employee

• State in which the office/establishment/ factory is located

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Current Market Employment Scenario

Much economic liberalization in India in the last two decades has fuelled a hugely expanded workforce (particularly in urban regions)

Regulatory authorities more willing to recognize the right of the employer to carry on his business in the manner he/she thinks fit commercially, as long as employer is compliant with minimum requirements

India is typically a very hierarchial environment. This is changing rapidly as a new young well educated workforce emerges, though Job Titles, Status and Reporting Lines are still very important considerations in the work environment

A general weakening of the trade union movement as the private sector in India expands

Develop a thorough business plan and be realistic about timing

Take time to pick your partners and location of focus

Work with local support organizations that understand your objectives, culture and objectives and who will look after your interests

Enter the market step by step, but then be prepared to focus and scale your local business

Ensure you have focused and committed support from your international management office. Local teams need management and guidance.

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Business Best Practices

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Contractors vs. Employees

Limit of activities of liaison office

Appointing nonresident directors

Requirements for PAN

How and when Service Tax and Withholding Tax apply

Cost to company remuneration

Benefits

Real Life Situations

Q&A

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Questions?

+1.888.881.6576 info@hsp.com

@HSP_Inc