India is one of the fastest growing emerging economies in the world and its government is pursuing pro-international trade policies.
India is a relatively low-cost region in which to operate and has a skilled workforce, enabling companies to use it as a strategic and operational support centre for wider operations. It is a major exporter of IT services, particularly in business process outsourcing and software services, which is the fastest growing part of the economy.
The Indian government is instituting an ongoing series of economic reforms to increase the efficiency of doing business with the global economy and to overcome the market's historical limitations, particularly in relation to FDI. These changes have included the privatisation of state-owned enterprises, a reduction of financial controls, industrial deregulation and an increase in FDI caps. India's largest export partner is the United States, followed by the United Arab Emirates and China.
India's banking sector is heavily influenced by state-owned banks, with the government holding majority stakes in many of the largest banks. There are 20 public sector banks, 42 private sector banks and 44 foreign banks.
Corporate Treasury in India
India is the fastest-growing emerging economy in the world, and a global leader in information technology. Here, we highlight some of the key factors relevant to treasury and cash management in India.
Financial Market Development
- The World Economic Forum ranks India 40th in the world for its financial system in The Global Competitiveness Report 2018.
- It ranks India 89th for the soundness of its banks, and 131st for banks’ regulatory capital ratios, although the country comes in the top 25 for venture capital availability and financing of SMEs.
- The Indian rupee (INR) is a closed currency. The Reserve Bank of India (RBI) has imposed capital controls in the past, such as in August 2013 when it cut overseas remittances by individuals to USD75,000 from USD200,000, and reduced overseas investments by Indian companies by three-quarters.
- In November 2016, large-denomination bank notes were removed from circulation and strict bank withdrawal limits were imposed. These limits have since been lifted and new bank notes have been introduced.
Sophistication of Banking Systems
- India's banking sector is heavily influenced by state-owned banks, with the government holding majority stakes in many of the country's largest banks. There are 20 public sector banks, 22 private sector banks, 33 state co-operative banks and 44 foreign banks, as well as 44 regional rural banks.
- Daily foreign exchange turnover averaged USD40 billion in April 2019, accounting for 0.5% of global turnover (Bank for International Settlements Triennial Central Bank Survey 2019).
- India's bond market is not well-developed and remains small compared with developed economies. While it is composed of both corporate and government bonds, government bonds dominate and are the most liquid component of the bond market. Total corporate bond issuances outstanding stood at IRD31.443 trillion at the end of December 2019.
- India is a member of the Asian Clearing Union.
- The banking system in India is regulated by the Reserve Bank of India (RBI). Regulation is in line with international standards. RBI approval is required in certain cases for the repatriation of funds.
- The corporate income tax rate is 30% for Indian companies. However, for companies that have a turnover of up to INR4 billion for the 2017/2018 financial year a rate of 25% is available. Companies with an income of more than INR10 million pay a surcharge of 7%, while ones with income of more than IRN100 million pay one of 12%. A health and education cess of 4% is also charged.
- Foreign companies pay corporate income tax of 40%, with a surcharge of 2% if total taxable income exceeds INR10 million, and 5% if it exceeds INR100 million, as well as a health and education cess of 4%.
- A reduced CIT rate of 22%, plus a 10% surcharge and 4% health and education cess, is available to existing domestic companies that meet certain conditions, while newly set up domestic manufacturing companies and firms engaged in the generation of electricity may qualify for a beneficial CIT rate of 15%, plus a 10% surcharge and 4% health and education cess.
- In certain circumstances, companies may be liable for a minimum alternative tax of 15%, plus a 10% surcharge and 4% health and education cess, if their tax liability under the Income-tax Act is not more than 15% of their book profits.
- Resident companies are taxed on worldwide income. Foreign companies are taxed on income that is received or generated in India.
- Foreign companies are considered to be resident in India if they have a Place of Effective Management in India.
- There is no branch profits remittance tax on remittance of profits by the branches of foreign companies to their head offices.
- Interest income received by a foreign company is subject to a withholding tax of 20% plus surcharge and cess. Under certain circumstance, the withholding tax rate on the interest will be reduced to 5% plus surcharge and cess.
- Interest expenses that are used for business purposes are generally tax deductible, unless the interest is paid to related parties, in which case the expense is restricted to 30% of earnings before interest, taxes, depreciation and amortisation. There are no thin capitalisation rules in India.
- The dividend distribution tax has been abolished for dividends distributed after April 1, 2020.
- A securities transaction tax of between 0.001% and 0.125% is charged depending on the nature of the securities.
- Capital gains tax is charged at 10%, 15% or 20% depending on the type of asset and whether the gains are long term or short term.
- Tax incentives are available to certain industries operating in Special Economic Zones (SEZs). For example, offshore banks and international financial services centres that meet certain conditions are eligible for a 100% tax exemption on specified income for five years and a 50% concession for a further five years.
- Goods and services tax (GST) is charged at 5% to 28% depending on the nature of the goods or services involved and the individual state. There are also special rates and GST compensation cess on certain goods. The export of goods and services is zero-rated.
- Resident companies are charged withholding tax of 10% on interest. Foreign companies pay withholding tax of 20% on interest and 20% on dividends if no treaty is in place. Where a tax treaty is in place, withholding tax on interest ranges from 5% to 15%, and withholding tax on dividends ranges from 5% to 25%.
- India has tax treaties with more than 90 countries and territories.
- India is a signatory to the Organisation for Economic Co-operation and Development’s Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.
Benefits for Local Treasury
- India has a pro-business government that is relaxing FDI rules.
- The RBI is broadening the country’s derivative and debt markets.
- 11 Indian banks have joined SWIFT’s global payments innovation initiative, improving cross-border payment infrastructure.
- India is a relatively low-cost region in which to operate and has an adequately skilled workforce, enabling companies to use it as a strategic and operational support centre for wider operations.
- Resident and non-resident companies are permitted to participate in cross-border sweep structures, but for non-resident companies, foreign-exchange control rules and withholding tax on inter-company loans apply.
- Cash concentration is available, but non-residents may have to pay withholding tax on interest.
- Notional pooling is not permitted in India.
- International financial services centres in Special Economic Zones that meet certain conditions are eligible for a 100% tax exemption on specified income for five years and a 50% concession for a further five years.
- State-run banks are a significant part of India's banking sector, with the government owning a majority stake in two of the top five banks: State Bank of India and Punjab National Bank. Private banks HDFC, ICICI Bank and Axis Bank round out the top five.
- There are 27 public sector banks (controlling 70% of the banking sector), 21 private sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban cooperative banks and 94,384 rural cooperative banks, with further financial support from cooperative credit institutions.
- The government announced in 2014 that it would reduce its stake in state-run banks, although it also planned to boost struggling state-owned banks with private sector expertise and a central banking body, the Bank Board Bureau.
- Residents are permitted to open INR accounts domestically. Foreign currency accounts both in India and overseas are subjected to certain conditions prescribed by the RBI.
- Non-residents (as defined under Foreign Exchange Management Act, 1999) can open INR account in India, subject to conditions prescribed by the RBI.
Legal and Regulatory
- The RBI's Board for Financial Supervision oversees India’s banking sector, with the National Bank for Agriculture and Rural Development overseeing provincial rural and most cooperative banks under the auspices of the RBI. The RBI also implements foreign currency controls.
- A resident company must be registered under the Companies Act 2013 and rules made there under.
- A company incorporated outside India can enter Indian markets as a Wholly Owned Subsidiary in India or as a Joint Venture Partner of an Indian Company. A company incorporated outside India can also set up a branch, project office or liaison office in India under various regulations.
- India has anti-money laundering legislation in place and is a member of the Asia/Pacific Group on Money Laundering (APG), the Eurasian Group on Combating Money Laundering and Financing of Terrorism (EAG) and the Financial Action Task Force (FATF). It also operates the Financial Intelligence Unit under the Ministry of Finance, which is tasked with safeguarding the financial system from the abuses of money laundering, terrorism financing and other economic offences.
(Unified Payments Interface)
India’s national real-time gross settlement (RTGS) system
Cheque Truncation System
National Automated Clearing Services
National Electronic Funds Transfer
Bharat Bill Payment System
(Immediate Payment Service)
Interbank Mobile Payments Service
(Aadhaar Enabled Payment System)
- High-value (more than INR 200,000) and urgent credit transfers settled via NG–RTGS in approximate real time.
- Low-value, non-urgent, bulk credit transfers settled via NACH same day.
- One-to-one electronic payments settled via NACH or NEFT same day.
Direct Debits (auto debits)
- NACH Debit used for regular transfers for transactions up to INR 10,000,000 and supports both C2B and B2B Payments.
- Settled via NACH on T+0.
- Declining in popularity as digitised payments become more popular.
- Visa and MasterCard are the main brands of credit card used, and these are cleared next day.
- RuPay is a domestic debit and credit card payment network used at ATMs, POS devices and e-commerce websites. It is operated by the NPCI.
- Most card credits and debits are processed by National Financial Switch (NFS) and settled via the Clearing Corporation of India (CCIL) same or next day.
- Electronic money schemes are available through top-up prepaid cards.
- Multi-application cards have been introduced by the RBI for use in banking, postal and financial services. The banks authorised to issue these cards are: ICICI Bank, HDFC Bank and Oriental Bank of Commerce.
- In 2016 the government took extreme measures as part of a demonetisation programme aimed at becoming a cashless society. This has been the main driver in the country’s fast adoption of financial technology (fintech) to promote faster payment initiation and settlement.
- India was the second fastest country to adopt financial technology (fintech) in 2017, with 52% of digitally active consumers adopting the technology (EY Fintech Adoption Index).
- The government has provided initiatives such as the establishment of UPI and Aadhaar Enabled Payment System (AEPS), and an application programming interface (API) aimed at increasing efficiencies in payments and banking systems through the provision of a unique identification number for every Indian resident. FY18 saw a staggering 95% growth rate of retail electronic payment transactions volume due to the steep growth of UPI.
- The government has set up an eight-member steering committee to supervise the development of the fintech sector and formulate regulations that allow a more flexible environment and promote financial inclusion to ensure that every Indian has a bank account.
- Maharashtra is the first Indian state to launch a fintech policy that aims to establish a global fintech hub in the Mumbai Metropolitan Region.
- Digital wallets are forecast to overtake cards as the preferred online payment method, driven by government initiatives and incentives by retailers. The most popular digital wallets are Paytm, PayPal, Mobikwik and Freecharge. Amazon Pay and Google Tez also have a significant user base. With over 87% of Indians owning a smartphone and the expansion of mobile infrastructure, digital wallets are rapidly rising in popularity after the demonetisation programme.
- WhatsApp payment services, supported by its parent company Facebook, launched in India, where the messaging app has its largest number of users globally. Payments are currently processed by HDFC Bank, ICIC Bank, Axis Bank and the State Bank of India.
- The RBI has implemented strict regulations regarding know-your-customer (KYC) guidelines in preparation for interoperability measures between prepaid payment instruments (PPI), bank accounts and payment cards.
- Mobile wallet adoption in India is one of the highest in the world (Consumer Payments Insight Survey).
- Digital banking has been mainly targeted at the retail sector. The coverage will be extended to corporate and SME banking.
- Cryptocurrency is not legal tender, and the government has taken measures to curtail or halt virtual exchange activity. The central bank has said it will no longer deal with or provide services to any individual or businesses dealing with or settling virtual currencies.
Cash, Cheques and Money Orders
- Despite the demonetisation programme, cash has had a resurgence in popularity.
- There’s been a significant drop in cheque usage as digitised payments become more popular.
- Cheques truncated and processed via CTS through grid system, which is divided into three grids.
- Money orders are a common service provided by India Post, which offers electronic (eMO), instant (iMO) and international (IFS) orders. Western Union and MoneyGram also operate in the country.
India has been gradually relaxing its foreign exchange controls since 1991. Despite this policy, a number of restrictions still remain.
- The official currency of India is the Indian rupee (INR) which is partially convertible. The INR is convertible for current accounts but not capital accounts.
- India’s monetary policy is set and managed by the Reserve Bank of India (RBI), which sets interest rates and governs foreign exchange controls.
- The exchange rate of the INR is determined by market supply and demand, however, the RBI will intervene in the market by buying or selling foreign currencies, either directly or through public sector banks, if deemed necessary.
- India has average daily trading volumes of USD40 billion of FX and OTC derivatives, accounting for 0.5% of global turnover, according to according to the Bank for International Settlements’ Triennial Central Bank Survey. (Bank of International Settlements, https://www.bis.org/statistics/rpfx19.htm, December 2019)
- There are offshore INR centres in London, New York, Singapore and Dubai.
- The RBI has imposed capital controls in the past, such as in August 2013 when it cut overseas remittances by individuals to USD75,000 from USD200,000, and reduced overseas investments by Indian companies by three-quarters.
- In November 2016, large-denomination bank notes were removed from circulation and strict bank withdrawal limits were imposed. These limits have since been lifted and new bank notes have been introduced.
- Exchange-traded currency futures are available in India through the National Stock Exchange, the Bombay Stock Exchange and the Multi Commodity Exchange of India. The trading of currency futures is jointly regulated by the RBI and the Securities and Exchange Board of India.
- The RBI has facilitated the increased availability of derivatives in the foreign exchange market, including allowing trading in INR-foreign currency swaps, foreign currency-INR options, cross-currency options, interest rate swaps and currency swaps, forward rate agreements and currency futures.
- Residents companies are permitted to open INR accounts domestically. Foreign currency accounts both in India and overseas can also be opened subjected to certain conditions set by the RBI.
- Non-residents (as defined under Foreign Exchange Management Act, 1999) can open INR accounts in India, subject to conditions set by the RBI.
- Indian companies are allowed to take out FX-denominated loans and bonds overseas subject to certain guidelines.
- India offers a wide range of products to help companies manage FX risk, including FX swap, FX spot, FX options, FX futures, and cross-currency options.
- Export contracts and invoices must be denominated in a freely convertible currency or Indian rupees. Export proceeds must be realized in a freely convertible currency, except for exports to Iran, within nine months.
- Only banks and institutions licensed as authorised dealers by the RBI can deal in foreign exchange. FX accounts can only be opened with licensed institutions.
- The INR is convertible for current accounts but not capital accounts.
- Regulatory approval is required for domestic companies that want to invest money or purchase assets overseas above a certain threshold.
- Foreign investment in India is allowed in the majority of sectors, and for many sectors, non-resident companies do not require prior approval from the Government or the RBI. For certain industries, including telecoms and pharmaceuticals, the level of investment is capped, with regulatory approval required above these limits. Following a recent rule change, government approval is currently required for FDI from countries that share a border with India.
- Cross-border inward remittances into India are allowed under the Rupee Drawing Arrangement up to a cap of INR15 lakh (IND1.5 million) for trade-related transactions, but there are no other limits on remittance amounts or the number of remittances that can be made. (Reserve Bank of India, https://m.rbi.org.in/Scripts/FAQView.aspx?Id=112)
- Foreign exchange transactions in India are subject to goods and services tax at 18%. (PwC, https://taxsummaries.pwc.com/india/corporate/other-taxes, 2020)
- Profits made by foreign companies can be repatriated once all taxes have been paid, unless the company operates in the defence sector. Companies must submit an application for remittance to the RBI including the following documents: an audited account statement for the relevant year, three auditors’ certificates stating how the amount to be remitted was calculated, confirming the company’s RBI approval number and date, and confirming that Indian tax liabilities have or can be met. Other documents include confirmation that the entire income of the branch office was generated from sources in India, confirmation that the requirements of the Companies Act 1956 have been met, and a declaration that the money was earned in the normal course of business.
- India has a number of withholding taxes ranging from 1% to 40% charged on transactions including interest payments, interest on foreign currency, commission, and dividend payments. (PwC, https://taxsummaries.pwc.com/india/corporate/withholding-taxes, 2020)
- Domestic intercompany loans, known as inter-corporate deposits in India, are allowed with the consent of the board or shareholders. Loans cannot exceed 60% of the company’s paid up share capital, free reserves or security premium account, or 100% of its free reserves and security premium account. The interest rate must not be lower than the prevailing yield of one-year, three-year, five-year or ten-years Government Security depending on the tenure of the loan. Companies must include the loans in their financial statements. (Minsitry of Corporate Affairs, https://www.mca.gov.in/SearchableActs/Section186.htm)
- Interest on foreign currency loans paid to non-resident companies is subject to a 5% withholding tax. (PwC, https://taxsummaries.pwc.com/india/corporate/withholding-taxes, 2020)
- Restrictions on trading FX futures were recently liberalised, allowing traders, institutional investors and eligible foreign investors to trade currency futures and options contracts involving INR with positions of up to USD 1 billion, or 15% of the total open interest, whichever is higher, at international financial services centres. Foreign investors also no longer need a permanent account number (PAN) from the Income Tax Department to comply with know your client (KYC) regulations. (India International Exchange)
India’s trade with the rest of the world has expanded rapidly in the past decade as the government pursues pro-international trade policies. Its largest export partners are the US, UAE and China.
- India has more than 35 trade agreements, including free trade agreements, preferential trading agreements and agreements on economic cooperation, with more currently being negotiated. (Ministry of Commerce and Industry, https://commerce.gov.in/InnerContent.aspx?Type=InternationalTrademenu&Id=32, 2020)
- It is a member of the South Asian Free Trade Area, the South Asian Association for Regional Cooperation, and the Asia-Pacific Trade Agreement.
- India has bilateral free trade agreements with ASEAN, Mercosur and 19 African countries.
- India has around 240 free trade zones, special economic zones and warehousing zones, which offer duty free imports and full or partial exemptions from certain taxes, such as income tax and goods and services tax. Many of the zones are specific to certain products or industries. (Ministry of Commerce and Industry, https://pib.gov.in/newsite/PrintRelease.aspx?relid=191168, 2019 and http://sezindia.nic.in/cms/operational-sezs-in-india.php, 2020)
- India has been a member of the World Trade Organisation since January 1995.
- India does not have an autonomous sanctions regime, however, it does implement some UN sanctions, including sanctions against individuals and entities suspected of having terrorist links as named by the Unites Nations Security Council.
- Imports are regulated by the Foreign Trade Policy under the Development and Regulation Act 1992.
- Importers must obtain a permanent account number (PAN) from the Income Tax Department.
- All importers must also obtain an Importer-Exporter Code (IEC) number from the Directorate General of Foreign Trade Organisation.
- For authorisation to import, companies must obtain a registration cum membership certificate (RCMC) from the relevant authority or commodity board.
- The following documents are required for imports: bill of lading or airway bill, commercial invoice,, shipping bill or bill of entry, insurance certificate and import licence if applicable.
- Most goods are classed as freely importable items and do not require an import licence.
- Import licences are required to important certain goods classed as ‘restricted’, such as precious stones, chemicals, pharmaceuticals and animal products. Licences are issued by the Director General of Foreign Trade and are valid for 24 months for capital goods and 18 months for raw materials. Some goods, such as petroleum products, are classified as canalised items and can only be imported through specified channels or government agencies.
- A number of items are prohibited from being imported, including tallow fat, wild animals and unprocessed ivory.
- India has a complex system of customs duty made up of different components. Imported goods are subject to goods and services tax, known as integrated goods and service tax, and compensation cess if applicable. A basic customs duty (BCD), which varies according to the product and country of origin is also levied, along with a social welfare surcharge of up to 10% on the BCD. The Indian Trade Portal includes a search function to enable importers to establish what rate of BCD they will pay. (PwC, https://taxsummaries.pwc.com/india/corporate/other-taxes, 2020)
- Certain goods are exempt from GST and customs duty, while there are also full and partial exemptions for goods imported into free trade zones, special economic zones and warehousing zones.
- Letters of credit are widely used for import financing in India. Documentary collections, contract advance and import factoring are also available.
- Exports are regulated by the Foreign Trade Policy 2015-2020 under the Development and Regulation Act 1992.
- Exporters must obtain a permanent account number (PAN) from the Income Tax Department.
- All exporters must obtain an Importer-Exporter Code (IEC) number from the Directorate General of Foreign Trade Organisation, which acts as an export licence.
- For authorisation to export, companies must obtain a registration cum membership certificate (RCMC) from the relevant Export Promotion Council, Federation of Indian Export Organisations, authority or commodity board.
- The following documents are required for exports: bill of lading or airway bill, commercial invoice, packing list, shipping bill or bill of export.
- After shipment the following documents must be submitted to the exporter’s bank within 21 days to be sent to the foreign bank to receive payment: bill of exchange, letter of credit, invoice, packing list, bill of lading or airway bill, declaration under foreign exchange, certificate of origin, and an inspection certificate if required.
- Customs duty is levied on only a limited number of exported goods.
- All items are freely exportable except for those on the prohibited/restricted list, which include human skeletons, wild animals and their parts, specified live birds and animals, animal fat and certain seashells.
- A range of options are available including letters of credit, export factoring, export credit and forfaiting.
- Export insurance is available through the Export Credit Guarantee Corporation.
- Export contracts and invoices must be denominated in a freely convertible currency or Indian rupees. Export proceeds should be realised in a freely convertible currency, except for exports to Iran. Export proceeds must be realised within nine months.
1 (Variable) depending on type of good or service and individual state
2 Resident company: 30%; foreign company: 40%
3 (Progressive) max rate for incomes over INR1 million
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Sources: World Economic Forum, PwC, International Monetary Fund, CIA World Factbook, Trading Economics, Organisation for Economic Co-operation and Development, Bank for International Settlements, Reserve bank of India, Securities and Exchange Board of India, India Brand Equity Foundation, India Today, National Payments Corporation of India.
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