The Sticky Maze

International luxury brands have their eyes set on Indian shores, particularly as developed markets slow down. Here is a lowdown on what you need to do to enter the market

By: Pallav P. Narang, Partner, Arkay & Arkay, Chartered Accountants

Posted on: April 18, 2013

International luxury brands have their eyes set on Indian shores, particularly as developed markets slowdown. Here is a lowdown on what you need to do to enter the market.

While quite a few well-known, ‘main’ international luxury brands have entered India, there are many more out there who are confused about the various laws and procedures required to enter this maze of a country which, mind you, is not so easy to woo.

Trying the ease the path, we have penned down nine things, from a tax and finance perspective, which international luxury brands should absolutely know, and find a solution for, before entering India.

Deciding the level of presence
In the Indian scenario, foreign brands have the option of operating via either of these three methods:
a) 100% ownership in Single brand retail - This allows the brand to have complete control over all elements of operations of the Indian subsidiary. The earlier clauses mandating compulsory sourcing from the SSI sector in the case of 100% FDI have been relaxed making this option more preferable.

b) JV with local partners - Brands hesitant to take the plunge may also rely upon a JV arrangement with a local Indian partner. This allows foreign enterprises to leverage the local knowledge and expertise of the Indian partner while at the same time giving them control and room to maneuver.

c) Franchisee route - Offering the least amount of control, the franchisee route allows brands to explore the market without having to invest in infrastructure, personnel or in some cases, stock.

Each of these methods has pros and cons that would necessitate an in-depth look by themselves. However the three options offer control over brand image, positioning and finances in decreasing levels from a to c. Make your choice depending on the long term plans you have, as a brand, for India.

Choosing the right investment jurisdiction
Businesses looking at the Indian luxury market are invariably businesses with global scale and reach. Given that businesses are run with the intent of profit maximization, it is important to ensure that the investments made in such businesses in India are tax efficient, and provide the most margins possible for businesses to operate. In addition, given the high rates of taxes applicable on the Indian luxury sector, it is but obvious that alternative investment routes should gain prominence in such an environment.

The decision on such investments has to be made in light of the forthcoming General Anti Avoidance Regulations (“GAAR”) and the uncertainty over Mauritius as an interim jurisdiction. Jurisdictions such as Singapore are finding favour, specially for luxury brands, as many have pre-existing operations that allow them to bypass limitation of benefit (“LOB”) clauses in the Double Taxation Avoidance Agreements(“DTAA”). The right investment structure is also critical in light of the increased rate of withholding taxes applicable on royalties and fee for technical services as applicable in India.

Due diligence on potential partners, vendors, deals
While the Indian business community is vetted and known for its honesty, still as a general practice, it is critically important to evaluate your partners, vendors and key personnel to ensure they have the financial, technical and general wherewithal to be able to transact business on the scale as envisioned by the foreign partner. It has been noted ever so often that in a JV situation, the local partners do not have the capabilities that they represent to the foreign incumbents, leading to failures in execution, missed revenue targets and management breakdowns at various stages of the JV. Hence a well-timed due diligence inquiry into the financial and technical capabilities of the proposed partners is the proverbial stitch in time.

Be prepared for multiplicity of taxes
While import duties and other taxes on luxury products are perhaps higher in India than most places in the world, they are complicated further by India’s federal system of taxation, whereby taxes are levied both by the central government and by various states. A case in point is the category of liquor. Therefore, there exist multiple layers of taxes, which luxury businesses have to contend with. These taxes include, but are not limited to income taxes at the direct tax level, and to excise, octroi, entry tax, VAT, and service tax at the indirect tax stage. More often than not, after accounting for all taxes, products end up being more expensive in India than other countries, even more so on a purchasing power parity (PPP) basis. To be successful, one would have to adapt to such high tax levels and contain costs and overheads to be able to sell the product at prices which shall induce greater spending.

Cross your T’s and dot your I’s from a compliance perspective
In addition to the various taxes there are also multiple regulations that businesses in India have to comply with. For each tax levied on a business in India, there is, at the very least, one annual return and several other periodic returns that have to be submitted. In addition there are annual compliance filings with the registrar of companies (RoC) containing annual reports and associated documentation for the company. Taxes need to be withheld on payments, taxes need to be further withheld on remittances outside of India, and so on it goes. It is easy to get lost amidst the myriad of regulations and compliances. However, non-compliance with such requirements puts the company and its employees at risk of prosecution, and can cost the company not just monetarily, but also impact the ability of the company to do business in India. It is, therefore, critical that such compliances be adhered to and followed up competently.

Complex import-export regulation
India has historically placed a great emphasis on self sustenance and indigenous production of goods and services. It should, therefore, come as no surprise that our import regulations are some of the most stringent in the world. Any incumbent business thinking of establishing should pay heed to such complex regulations and factor them in their business projections. Specially in case of products made from the skin and other parts of endangered species, check beforehand what can be imported in India and what not, to avoid any nasty surprises.

Starting a business entity in India takes longer than you expect

Thanks to the new era of corporate reforms, forming a business entity takes much less time than it used to in the past. However, the time from formation of entity to the actual commencement of business activities still takes a much longer time than you would expect and much more than it should. This mainly boils down to regulatory approvals and associated permissions. Therefore, businesses planning their India timelines would do well to keep some leeway in the estimated start-up time for their India operations.

E-commerce routes not available unless complex structures are adopted
Despite the relaxations offered to companies wishing to invest in India under the 100% FDI model, the ability to sell goods online is still not available to such businesses. This potentially limits the reach of luxury brands and also increases costs since the marginal cost of online sales is much lesser than similar costs for retail sales. However, by adopting certain legally accepted structures, luxury brands can offer the e-commerce route to their customers. Some of these structures have been discussed in greater details here

Cash is still king in India
While there is increasing talk of curbing black money, the uneasy truth is that cash is still the king as far as the Indian consumer is concerned. Often consumers will pay for high priced luxury goods and services in cash. This offers several challenges to luxury business owners since there are information requirements and other legal and logistical issues that are involved with such cash sales.

Issues related to entering India are not limited to these. However, they will surely serve as good starting points to consider, and also judge, whether you are ready to get into such high levels legalities and investment or not.

Disclaimer: No reader should act on the basis of any statement contained herein without seeking professional advice. The authors and the firm expressly disclaim all and any liability to any person who has read this article, or otherwise, in respect of anything, and of consequences of anything done, or omitted to be done by any such person in reliance upon the contents of this Article.

Pallav Pradyumn Narang is a Chartered Accountant specializing in the Tax and advisory domains. He works as a Partner with Arkay & Arkay, Chartered Accountants, A Tax and Advisory firm based out of New Delhi

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