Two decades ago, any company worth its grain of salt looked at China as the Holy Grail. A country of 1.2 billion people and an economy growing close to or more than 10%. You ignored China at your own peril.
Fast forward to the current day and we see a similar excitement throughout the world about India, a country always known to be waiting to realise its potential, and why not? It is growing continuously at 7-8% and has a population of 1.3 billion, half of which is under 25 years of age. It also has the world’s largest population of college graduates. India, it seems, has finally caught the momentum over the last 3-4 years and the attention of Chinese companies.
Having born and grown up in India, travelled around the world and settled in China for 10 years doing cross-border investments, I have gathered some insights. And here are my two cents.
Chinese companies often operate with a FOMO (Fear of Missing Out) mind set. When they see a competitor entering India, it gives them the courage and motivation to do the same. If they can compete in China, why shouldn’t they do it in India?
This has led to a rapid proliferation of Chinese companies entering the country, and they can be broadly categorised under the baskets below:
- As a natural extension of their businesses to cater to the huge Indian market.
- Shifting or adding to their manufacturing base to meet the uncertainty that the trade war with US brings, along with the rising labour costs in China.
- Growing inorganically by making corporate acquisitions.
- Making more primary investments by early stage VCs.
In this frenzy, many companies, including the big ones, have learnt the hard way that India and China are different. They make the mistake of believing that their success in China can be equally replicated in India by doing certain things the exact same way.
The similarity between India and China begins and ends with both being big countries, with macro factors supporting a long-term sustainable growth. Everything else is different: from legal to political system, from culture to religion.
From financial and tax perspectives, here are some differences between the two countries.
In 2017, India replaced many forms of indirect taxes with one single tax — Goods and Services Tax or GST. Before 2017, the Indian tax system was such a complex maze that not only foreigners, even Indian professionals were often confused on their applicability. Thus, GST is considered a game changer.
Despite the massive effort to simplify the Indian tax regime, GST and its filing requirements are confusing to Chinese companies. There are four slabs of GST rates for different products, then there are Integrated GST, Central GST and State GST. Companies are required to have separate GST registrations for each of the states they operate in and prepare an e-way bill to transfer goods from one state to another.
This has prompted my Chinese friends to ask, “… if after the biggest tax reform, it is this complex, how complex was it before the GST regime?”
If indirect taxes are complicated, direct taxes (Income Tax) aren’t any easier. While doing the accounting of a company, the depreciation of assets is done on a straight-line method as per accounting standards. However, for calculating the taxes, the depreciation is done on a written-down value method. Also, the depreciation rates as per accounting standards and for tax calculations are different.
Furthermore, for the asset heavy industry, where depreciation is a major component, if the tax payable as per the tax accounting is lower than that of financial accounting, then the company needs to pay something called “MAT (Minimum Alternate Tax)”. Taxes paid under the MAT scheme are actually tax credits that can be recovered from a company’s tax payments over 15 years. By the time someone grasps half of how all this works, they can pat themselves on the back for becoming a half accountant.
Another pertinent concern I hear from many founders, chairmen and general managers is “Can we bring our profit and money out of India?” Both the intensity and frequency of these questions have increased in the last couple of years.
I believe that the backdrop of this is the increasing strictness of capital control in China. Somehow, they associate the difficulty of receiving and sending money in and out of China as the benchmark to evaluate India. However, this is one aspect they should not be concerned about, as the profit repatriation from India is much easier.
Actually, India is much better in this aspect than many countries as it does not impose any Withholding Tax while repatriating dividends out of India. However, there is a Dividend Distribution Tax of approximately 17% that a company needs to pay whenever it announces dividend. Though it’s high, it’s advantageous to foreign companies.
In most countries, no tax is imposed on local companies for issuing dividends. However, while taking the money out of the country, there is a withholding tax. Thus, only foreign companies have to bear this additional cost, which makes them less competitive against domestic firms. In India, since the tax is at the company level, all domestic and foreign companies face the same expense.
One of the lesser known and even lesser realised fact is that India is one of the most expensive places to open a company from a regulatory and compliance perspective. I will highlight two points.
While setting up a Private Limited Company, a fee is to be paid to the ministry of corporate affairs. This fee depends on the amount of authorised capital (registered capital), which is higher than most of the jurisdictions in the world. For example, for authorised capital of Rs 10 crore (RMB 10 million), the MCA fees is Rs 8.8 lakh (RMB 88,000). A company which sets up a holding company and an operating company underneath it for a better capital structure must pay the MCA fees twice for the same operations.
There is another strange requirement as per the Company Law of India. Any company whose paid-up capital has crossed Rs 5 crore (RMB 5 million) needs to employ a full-time registered Company Secretary in its payroll. If there are three companies in the group, where two are holding companies and one is operational company, as per the law, each of the three need to employ a registered Company Secretary. So, while setting up and operating a company in India, such hidden costs need to be understood and accounted for in budgeting operational expenses.
India is incredible indeed, both with the opportunities and the challenges it poses to a new entrant to the market.
Ritwik Ghosh is the board director at ICOSYS and VRX Sports. He is a senior investment professional with experience in IOT, sportswear fashion, VC investments, energy sector, real estate, luxury hotel sector, movie theatre sector, theme park and entertainment. He has lived in Shanghai for over a decade. The opinions expressed in this article are those of the author alone.