India has taken significant steps to reduce the regulatory variation between its 28 states to win over both domestic and international investors.

The country's central government has promoted the concept of competitive federalism by incentivising each state to become the best place to set up and operate a business. Some Indian state governments have offered electricity subsidies, waived – or partially waived –  stamp duty on land registrations while centrally, reduced corporate tax rates and direct tax 'holidays' are on the table for units set up in Special Economic Zones (SEZs) in specified states for certain industries.

The approach appears to be working. Apple is set to invest $1 billion in India through its partners, while Kia Motors intends to increase investment in the country to $2 billion by 2021.

TMF Group's 2019 Global Business Complexity Index ranks India 28th most complex, however of the world's ten largest economies, it's considered the 5th simplest jurisdiction in which to do business. The World Bank's Ease of Doing Business (EDB) Index 2020 puts India in 63rd place and lists it among the ten most improved countries for a third consecutive time. Prime Minister Narendra Modi recently highlighted the country's impressive 79-point EDB rank improvement between 2014 and 2019.

So what has changed?

Various Modi Government initiatives designed to ease the operational burden in India are starting to pay off.

  • Digital India launched in 2015 with a national e-Governance framework among its key objectives. Four years later, most regulatory compliance has moved – or is in the process of moving – online, providing for increased transparency, swifter business processes and reduced costs.
  • GST – introduced in 2017 – subsumed almost all state and central level taxes in the country. Despite initial teething problems, the goods and services tax has paved the way for a simpler indirect taxation regime.
  • The company incorporation process is now easier. Various mandatory registrations such as PAN, TAN and DIN merged to become SPICe (Simplified Proforma for Incorporating Company
  • Electronically) in late 2016. The single form for company incorporation and various mandatory compliance registrations has greatly reduced company setup headaches and aligned them with international best practices.
  • New accounting standards such as IndAs115 and IndAs116 continue to bring the country's reporting framework closer to globally accepted accounting language.
  • Compliance returns for MSMEs under eight labour laws and 10 Union rules must now be filed just once per year. 

More improvements to come

While the above changes are boosting India's attractiveness to international business, Finance Minister Nirmala Sitharaman notes there is more to be done, and she has her sights set on India cracking the EDB top 50 list.

  • Companies looking at entering – or expanding to – India can expect further adjustments to GST-related laws. 
  • The role of Directors has increased under new corporate laws in order to boost corporate governance standards. Failure to comply can result in criminal liabilities ranging from fines of a few thousand rupees to imprisonment of up to 10 years. 
  • India's labour laws have been flagged as needing urgent reform not only for better compliance but also to better align with business growth cycles.

India's time is now

India has seen record foreign direct investment for the past few years and the ongoing trade war between the USA and China offers the potential for even further growth. To make the most of it, the Modi government must move quickly to simplify direct taxes, improve indirect tax regulations, provide more clarity on the roles of directors, introduce more balanced labour laws, simpler liquidation procedures and effective and time-bound contract enforcements.

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