India is one of the fastest growing emerging economies in the world. It is the 18th largest export economy globally (2017) and is a world leader in IT.
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 efficiencies in doing business with the global economy and to overcome the market's historical limitations, particularly in relation to FDI. These changes have culminated in the privatisation of state-owned enterprises, the reduction of financial controls, industrial deregulation and the increase of FDI caps. India's largest export partner is the United States, followed by China and the United Arab Emirates.
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 35th in the world for its financial system in The Global Competitiveness Report 2018.
- It ranks India 83rd for the soundness of its banks, and 115th for banks’ regulatory capital ratios.
- 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, 42 private sector banks, 33 state co-operative banks and 44 foreign banks, as well as more than 50 regional rural banks.
- Daily foreign exchange turnover averaged USD34 billion in April 2016, accounting for 0.5% of global turnover (Bank for International Settlements triennial global survey 2016).
- India's bond market is not well-developed and remains small compared with other 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 IRD30.672 trillion at the end of March 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 is 30% for Indian companies. However, for companies that have a turnover of INR2.5 billion for the 2018/2019 financial year, the corporate income tax will be reduced to 25%. A surcharge of 7% on income up to INR10 million and 12% on income above INR100 million is also imposed.
- Foreign companies pay corporate income tax of 40%, with a surcharge of 2% on income up to INR10 million and 5% on income above INR100 million.
- 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. There are no thin capitalisation rules in India.
- Indian companies distributing or declaring dividends are charged a dividend distribution tax of 15% (plus 12% of surcharge and 4% education cess).
- 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.
- Extremely low credit card penetration in India, with debit cards accounting for 99.9% of ATM withdrawals and 71.5% of POS and online transactions.
- 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.
- Basic Savings Banking Deposit (BSBD) accounts expand RuPay facilities into the country’s remotest interiors to improve financial inclusion.
- 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.
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
India Post Launches Mobile Banking
India Post has launched a mobile banking app for its savings account customers. The move will enable customers to check their account balance and transaction history, move money between their own accounts and other post office accounts and carry out other services, such as stopping cheques. To use the facility consumers must have a post office savings account at a core banking solutions post office. The move comes a year after India Post launched internet banking for its customers.
Read more about the development here.
E-mandates Allowed for Digital Wallets
Central bank the Reserve Bank of India has announced credit and debit cards and pre-paid payment instruments (PPIs), including digital wallets, will be allowed to process recurring transactions, known as e-mandates, valued at up to INR2,000 for the first time. Customers will not be charged for setting up an e-mandate facility. The industry has been asking the central bank to approve such payments on cards and PPIs with Additional Factor of Authentication for some time.
Read more about the development here.
Digital Payments Trump Cash
Indian consumers are opting for digital payments over other methods, according to research by YouGov and payment provider ACI Worldwide. The study found that 42% of consumers said they preferred digital payments, such as e-wallets and the government-backed Unified Payment Interface, compared with 29% who opted for cards and 27% who used cash. People were most likely to use digital payments for low value transactions, with 44% using the method to make payments of up to INR1,000.
Read more about the development here.
BHIM 2.0 Launched
The Government has launched a new version of its Unified Payment Interface (UPI) platform Bharat Interface for Money (BHIM). The new interface has additional language options, higher transaction limits and can be used to buy shares in initial public offerings. More than 17 million transactions were carried out through BHIM in September, but these accounted for just 1.8% of the total number of transactions done through UPI, and were significantly below transaction levels for other payment providers, such as Google Pay and PhonePe, which run at more than 200 million a month.
Read more about the development here.
UPI Overtakes Payment Cards
The Unified Payment Interface (UPI) overtook payment cards to become India’s most popular payment method in September. The government-backed platform accounted for 45% of total transactions during the month, with credit and debit cards making up 42.56%. UPI is continuing to grow in popularity, with the number of transactions carried out through the platform increasing by just over 37% between August and September. Google Pay accounted for the highest proportion of transactions at 61%, followed by PhonePe at 24%.
Read more about the development here.
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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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