A driving force behind many multinational companies locating in India has been the tax incentives offered by the government. One reason for the creation of a tax-friendly policy was India's complicated tax structure that included a base corporate tax rate of 30-35% and a variety of other indirect taxes that could end up creating a total tax rate in excess of 50%. By offering a 10-year tax holiday, India was able to attract many players in the IT industry. Building on that success, it is offering the same incentives to the manufacturing community.
"Through the establishment of Special Economic Zones (SEZ) the government is able to steer companies toward geographical locations that are in need of development. The SEZ regulations offer tax exemptions from 50% -100% over a fifteen year period," explains Dharmesh Pandya, the leader of KPMG LLP's India Center of Excellence.
This strategy has been working, according to Pandya, for the automotive industry as well as component parts manufacturers and suppliers amongst others. With SEZ zones across a broader geographic location garnering the necessary resources for production is easier. The SEZs are viewed as foreign territories, with the requirement that companies located there must export products or services in order to qualify for the tax benefits,
Since the SEZs give preferential treatment to exporters, domestic manufacturers that have an export component to their business are entering into joint ventures with multinational companies and thus increasing their markets.
Joint ventures are a very common ownership structure in India. "There are still certain restrictions in place under the foreign investment guidelines which do not allow companies to have 100% ownership of a company in India in certain sectors. Therefore joint ventures became very popular. But that system is changing and India will see more deregulation. Companies are also structuring ownership deals so that there are buy-out provisions," explains Pandya.
Another benefit to joint ventures is that it allows manufacturing companies to tap into local talent to understand the varying labor laws and other local and state customs. But the more important aspect of the partnership is the ability to gain knowledge of local market preferences in order to build a strong brand.
"Especially for small companies that don't have the resources to send personnel to India and who also aren't familiar with dealing with diverse geographical locations, securing a partner who can help navigate the stages of setting up a business and dealing with the various tax implications of moving goods back and forth is extremely beneficial," says Pandya.
Another advantage that India offers is that it is a central Hub for Asia. "It's a strategic location from which to launch a manufacturer's Asian distribution. As the Asian market increases, having a facility in India, which offers strong tax incentives to business, is an important component of any manufacturer's global strategy," says Pandya.
Looking ahead as to which industries will expand in India, Pandya feels that India is on the "cusp of triggering a new wave for consumable products for the middle class." For example production of clothing, jewelry and plastics will all increase as the overall infrastructure improves and business processes are streamlined. The added advantage to manufacturers is that the products they create for the Indian market can then be exported globally. Pandya points to the example of several Telecom companies that developed products specifically for the Indian market and found that these products became very popular outside of India.