Overview
India has plenty to entice the overseas investor. Its growth for 2022 is forecast at 11%, making it the only economy in the world expecting to hit double digits.4 It boasts a highly skilled young population – well educated, English-speaking, and with a median age of 28.5 And it’s becoming increasingly business-friendly too. As recently as 2014, India placed a lowly 134th out of 189 countries in the World Bank’s Ease of Doing Business rankings.6 By 2020, it had made a striking rise to 63rd.
“Indian authorities have worked hard to make the business environment more attractive,” says Bhavesh Thakkar, Partner, Indirect Tax, Ernst and Young LLP. “Where it used to take months to incorporate a company, for example, the process can now be complete in around 48 hours.”
The country has also built a strong intellectual property (IP) rights ecosystem and embarked on a drive to modernize its infrastructure. And in 2014, it launched the successful Make in India program, promoting India as a manufacturing hub. Targeting both international export markets and India’s domestic market – its population of 1.39 billion representing vast potential in itself7 – the initiative successfully drew multinationals making everything from consumer goods to vehicles.
As for attracting specific sectors, India is looking at electronics manufacturers and pharmaceutical companies in order to break its reliance on imports from Asia. It’s also focusing on companies that will drive large-scale employment, especially those in automotive, food processing and textiles.
“Having 65% of the population below 35 is a very significant demographic dividend,” says Thakkar. “But if you’re not able to provide them with employment, which in India largely means manufacturing, this quickly becomes a demographic disaster.”
What the region offers
Incentives overview
State-level incentives in India can be divided into three main categories – those linked to capital, to expenditure, and to tax.
With capital-linked incentives, 20%-25% of the project cost may come straight back to the company as an incentive (with specified upper limits). Incentives linked to expenditure involve reductions in tariffs for electricity and water, for example, and in property taxes and stamp duties. This can be discretionary, depending on the size of the investment.
Most important, however, are incentives around taxes. Here, taxes paid to the state government over a period of 10-12 years will come back to the company as a subsidy, subject to a limit of 60%-70% of the project cost.
“By combining all these incentives, a company may see up to 70%-80% of its project cost coming back as a subsidy over 10-12 years,” says Thakkar. “With the discretion for this to increase.”
At the federal level, meanwhile, there’s no scope for negotiating incentives. These are sector-specific and linked to production, in sectors ranging from electronics and food processing to textiles. Through these, a company may receive 3%-4% of the sales for goods it produces in India, whether sold there or overseas.
Additionally, a lower corporate tax rate of 15% for new manufacturing entities was announced in October 2019, further contributing to investor savings, provided commercial production begins before March 2023.
R&D incentives
R&D incentives have started to gain traction at India’s state government level. A handful of states now offer capital subsidies for companies setting up R&D facilities. Some areas offer expenditure-related subsidies for R&D too.
These are largely discretionary and offered by state governments – if an interested party is able to prove it’s proposing genuinely cutting-edge R&D. These are generally granted as cash back of a certain percentage of the incoming investment.
India’s federal government, meanwhile, offers R&D deductions of 100%, and a patent box system with a concessional tax rate of 10% on royalty income.8
Yet as India’s focus is largely on using incentives to spur job creation in manufacturing, it lags behind the US and Europe in terms of R&D subsidies. As far as R&D incentives go, India is still in the nascent stages.
Sustainability incentives
India currently offers no incentives directly related to sustainability.
