Compliance requirements for doing business in India

Compliance requirements for doing business in India

Gone are the days when the boundaries of doing business were limited to national borders. Today in order to compete with big players of the industry, you need to widen your playing field and expand your clientele base.

India has gone through some significant paradigm shift and placed itself a competitive stand in the world post-liberalization in 1991. India has been making rapid strides towards the new-age industry be it IT, pharma, or information technology-enabled service, you just name it. India is one of the top 5 economies based on GDP and 2nd most populated in the world. While there are ample reasons for you to start a business in India, what you do need to keep in mind is that in order to run a seamless and good reputed business without any legal hassles or loss of money in form of fines and penalties, you need to keep up with all the compliances set by the government for a foreign company in India.

In this article, we provide you with a thorough insight related to all the questions about compliance in India. It will also provide you with an impetus for building a successful venture in India while facilitating growth.

Doing business in India and all you need to know about it

1. The economic aspect

The basis on which the economy grows is based upon the poverty alleviation, building infrastructure, and rapid urbanization. This gives a path for creating opportunities for foreign investment. Today, India stands as the leading economic buyer and has the world’s largest growing middle class.

2. India’s demographic advantage

The median age of the Indian population is 25 years and this keeps India in a favourable demographic position. As predicted by the UN, the workforce will increase by 135 million by 2020 which means India’s position is strengthening in terms of an eager, young, and well-educated workforce.

3. Foreign investment

As the FDI regime progressively liberalized over the years, the number of restrictions on foreign investment has been reduced making it easier for foreign companies to invest and start a business. People from abroad can now directly invest in India either as joint ventures or on their own. Now no government approval is needed for majority of the sectors for FDI and all the decisions on foreign investment proposals are usually taken within 1 month of submission of application.

4. Economic and physical infrastructure

India’s institution offers a transparent environment that guarantees security for long term investment. India’s competitive and dynamic banking system has always been the backbone of the Indian economy. India’s emerging market has proven to possess highly skilled managerial and technical manpower that is best available in the world giving a distinct cutting edge in competition around the globe.

Legal system

The honorable Indian judiciary crowns a reputation of being non-partisan and independent. The procedural law for land and most commercial and corporate law are often relied on and referred by judges and lawyers in all the three divisions of the judicial system, that is, the supreme court, high court, and lower court.

Why choose India for starting your business venture?

The enhanced attractiveness of India as a destination for foreign investors is due to the liberalized Indian regulatory framework. India offers some key aspects that provide you insights as to why you must choose India for doing business.
  • India is the world’s largest democracy and one of the fastest-growing economies in the world. India can be rightly described as growing economies in the world. In the light of economic uncertainties around the globe due to the pandemic leading to economic slowdown, India has still managed to offer ample opportunities for people to come and invest in India.
  • Being one of the largest democracies with many political parties ruling different parts of the country, India still manages to provide political stability which constitutes as a vital factor for foreign investments. All the government agencies have a pro-business outlook and they work closely with the business sector to promote economic growth.
  • India also shares extensive trade links with countries around the world and has a wide network of trade. It has bilateral free trade agreements with many trading partners as well as smooth regional connectivity.
  • The standard of living and infrastructure of the country is also improving rapidly. This growth can be significantly seen in metropolitan cities. Robust transport facilities, best-in-class healthcare facilities, and superior entertainment centers are all coupled in too.
  • India also offers a tax regime that is very competitive with a comprehensive network. The recent taxation modification like direct tax code and goods and services tax (GST) has made the business practices even easier and more reliable.
  • A very highly-rated human capital base is also offered in India that is recognized for its talent, skill, and knowledge. This workforce has a professional way of operating along with great work ethics. You can find a dedicated and hardworking workforce who are also willing to work on holidays or weekends if necessary.

What is the meaning of compliance?

In simple words, compliances can be defined as a set of rules, specifications, policies or law that makes sure that business or organizations are following the standard set of rules set by respective authority. Usually, these rules are set by government regulatory authorities or through parliamentary legislation.

These norms or rules are related to various environmental, economic, or public interests. There is a need for operational transparency and to meet the increasing number of regulations for which business houses desire to stay aware and take required measures to comply with all the relevant policies, regulations, and law. As these norms and policies are ever changing and upgrading, businesses must try their best to keep a track of them and make efforts to fulfil each one of them.

While there is some debate that these norms are restricting free flow of work and downgrading the quality of operation, some argue that these norms are necessary in promoting assessment of risk. However, since the regulations are already formulated by the government, all the businesses and companies must adhere to the compliances to avoid facing the consequences.

What is the importance of compliance?

  • Companies today are formulating a number of new and complex products that are a product of the technology revolution and geo-economic policies. In order to assess and identify all the factors of risk that are products of these new inventions, formulation of new and complex compliances for all sectors is necessary. As risk management has become an issue for both public and private organizations, compliance with social, economic, environmental norms has become important.
  • Compliances work as a full-proof method for gaining trust of stakeholders that include both customers and stakeholders. This is because the compliances ensure accountability and stability of products and services offered. These regulatory compliances also enhance credibility of businesses as they raise them as environmentally and socially responsible entities winning the trust and confidence of customers.
  • As companies grow, their independence and complexity also grow, and therefore it becomes the government's duty to appraise the policies to the companies. Therefore, in order to achieve this goal, the government of India enacts risk regulation policies to further intensify the measure. Government adds all the compliances and regulations and manifests them to ensure an appropriate response policy to prevent all the risk, and if ever some problem occurs, it gives solutions to effectively alleviate its effect when it occurs in the process of the organization's work.
  • Environment plays a major role when it comes to compliances as every business needs to take up technology and policies that facilitate efforts towards saving the environment and safeguarding it and therefore must take every step to keep up with the compliances.

What are key compliances that businesses must follow?

Registration

A company is required to get registered in order to conduct business in India. The company must complete all its legal formalities, including getting MoA, AoA, a list of directors, the company’s name, etc., with the registrar of companies (ROC). After the approval, the company gets a letter of incorporation, and only then is the company seen as a separate legal entity.

Permanent account number (PAN)

A 10 digit alphanumeric number is issued by the income tax department known as PAN card that is used to keep track of financial transactions of the company and income tax payments and returns. This document is very important and it is used as an address proof and also identity proof of the company. In case, a company does not have a PAN card, high taxes are deducted.

Tax deduction and collection account number (TAN)

TAN is a ten-digit alphanumeric number that is used to deduct and collect taxes at a source issued by the commercial tax department of that particular state.

Professional tax

This kind of tax is applied to any individual practicing as a profession like a doctor, lawyer, architect, or accountant. The tax is deducted by the employer and is directly paid to the municipal corporation.

Employee state insurance (ESI)

It is a scheme exclusively for Indian workers that are employed in India. This scheme is a social security scheme, and it provides cash and medical benefits to employees.

Employee provident fund (EPF)

Employee provident fund is set up under the Employee Provident Fund and Miscellaneous Provisions Act, 1952. The main function is to assist the employee with work, employment, illness, education, death, or any other such condition. The employers are required to provide EPF to all its employees.

Goods and services tax (GST)

GST is an indirect tax used in India on the supply of goods and services by companies. Unlike the previous tax regime, where taxes were collected at the point of origin, it is now collected at the point of consumption. It is important for companies to pay the GST taxes and keep up with the compliance.

What are the challenges that businesses face with compliance management systems?

  • The compliances are of ever evolving nature making it difficult for companies. However, there is no escape from the relevant and relentless changes that are meant to happen. Therefore, using artificial intelligence can ease the whole process of keeping up with everchanging compliances.
  • Compliances tend to push you businesses and companies to share their private data with the customers. This information can be private and personal. While sharing data is important for maintaining transparency, privacy is also important on the other hand. Therefore, the burden falls on shoulders on the government to decide the degree of data to be shared while not violating privacy completely.
  • Artificial intelligence has started to set in the daily working paradigm of the companies. The continuous changes happening in the world have made companies dependent on artificial intelligence. But firms need to know which technology works best for them because at the failure of technology, companies may have to face huge losses.

Few final thoughts

While compliances might come at the face of it as a compulsion to which business needs to adhere to strictly, when carefully observed, it is in itself a very structured and meaningful concept. It is important to strike a balance between the norms the companies have to follow and needs of the society that can only be done by the government.

Only when businesses work in sync with the compliances and rules of government, the companies prove to be successful and profitable for the government, society, and itself.