With construction activity in India now worth $50 billion per annum and accounting for around 6% of Indian GDP, India is an attractive market for contractors.
The construction sector in India employs around 40 million people. The granting of ‘industry’ status to the Indian construction industry by the Indian Government has resulted in fast track procurement procedures and enabled construction companies to obtain crucial working capital at market rates. As a result, institutional investors have re-rated many Indian construction stocks and many joint ventures are being discussed with foreign construction companies.
Before plunging head long into this rapidly growing sector, here are four issues for contractors to consider for developing a coherent development plan to take advantage of the opportunities in India:
Consider: A Local Presence
For the serious players, a physical presence in India is recommended over a fly in fly out approach. A local presence helps the development of relationships with clients and key contacts in the local industry and also allows the monitoring of the supply chain or a joint venture partner. The intelligence that can be gained by such a presence is invaluable.
Consider: Structuring the Vehicle
A prime choice of corporate vehicle is an incorporated, limited liability company which can be set up as wholly owned subsidiary under the Companies Act 1956 (an Indian statute) or through a joint venture company, usually with an Indian partner. This will be treated as a domestic company, and will allow for post-tax profits to be repatriated to the foreign parent (usually as dividend payments).
It is also possible to set up unincorporated entities. These are principally liaison or representative offices, branch offices or project offices. But beware – the liaison/representative and branch offices are unsuitable as a vehicle for the carrying out of construction work. The former is not allowed to carry out any commercial activities in India and a branch office will not be authorised to carry out construction work.
A project office can be an attractive vehicle if the foreign company is only planning to execute a specific project in India rather than planning for a permanent presence. It will be treated as a foreign company but has the advantage that, with the permission of the Reserve Bank of India, it may send any surplus of the project outside India on completion.
A key factor in deciding whether to go for an incorporated subsidiary/joint venture or a project office is taxation.
A project office will be treated as a foreign company and taxed accordingly. The basic tax rate for foreign companies ‘resident’ in India is 40% (plus surcharges and cess). Compare this with an incorporated subsidiary/joint venture company, which will be treated as a domestic company for tax purposes, and is taxed at a basic rate of 35%.
If a foreign company is not ‘resident’ in India, the tax imposed will depend on the nature of the company’s income earned from a business connection in India or from Indian sources. The Double Taxation Agreement between UK and India could also be relevant in this context.
However, these figures can only ever be a guide, and the advice of a local tax lawyer is essential before deciding on a structure.
Consider: The Local Rulebook
Contractors should be sure to familiarise themselves with the regulations relating to labour (of which there are numerous in India), tax, land use, building permits, plan approvals, work inspections and work certificates. It is very important to obtain advice from locally based advisers in relation to these issues in advance of any venture.
India’s construction sector is growing rapidly, and investment is becoming more and more attractive. To maximise the opportunities on offer, a clear and concise plan at the outset is vital – plus a little help from the local experts!