Ahead of trade deal, U.K. firms urge India to unravel ‘frustrating’ red tape

Fixing legal, tax and regulatory complexities is as critical to boost economic ties as the trade pact, says U.K. India Business Council

Published - October 02, 2022 09:12 pm IST - NEW DELHI:

Commerce and Industry Minister Piyush Goyal and U.K.’s Secretary of State for International Trade Anne-Marie Trevelyan. File.

Commerce and Industry Minister Piyush Goyal and U.K.’s Secretary of State for International Trade Anne-Marie Trevelyan. File.

Legal and regulatory impediments in India continue to be a source of “frustration” for investors looking to set up or expand operations in India, even as land acquisition and “regular delays” in Customs clearances remain problematic, the U.K. India Business Council (UKIBC) has conveyed to the Government of India.

The Council has urged India to take a “broader view” of priority sector lending norms for foreign banks operating in India and sought equitable tax treatment, while flagging rising instances of counterfeit product sales through e-commerce platforms as a deterrent for intellectual property (IP) owners.

With India and the U.K. working to seal a free trade agreement (FTA) soon, the Council has said making it easier to do business is as important as the trade pact to bolster trade and investment flows. Its recent submissions to the government, based on inputs from British firms operating in the country, include a laundry list of procedural, taxation and other areas that need intervention.

“Legal and regulatory impediments remain a frustration according to businesses. Duplication of regulation wherein two sets of regulations are administered by two different arms of Government on the same issue was cited as a key issue,” the UKIBC has pointed out.  

Such duplication leads to delays and costs, and are most common in areas on the Constitution’s concurrent list of legislations, such as labour, environment, food and personal care. “Unnecessary, duplicated regulations are a disincentive to investment,” it said, adding that there are several grey areas in compliance, be it in tax or telecommunications.

“In essence, our recommendations are about reducing bureaucracy, simplifying legal and regulatory complexities and taxation, developing world class IP and infrastructure environments, and enshrining investor protection,” said UKIBC executive chair Richard Heald, underlining that U.K. businesses want to scale up their India investments.

Noting that lack of enforcement of IP rights is problematic and can stifle innovation, U.K. firms have cited examples of counterfeit items in circulation, with more instances coming up in online commerce, which has assumed greater import post-pandemic. This has heightened the problem of “breakdown of intellectual rights”, the Council said.

U.K. firms have also sought improvements in land acquisition processes, particularly from the public sector, and stressed that conversion of land use is a long-drawn process that impedes business plans.

“Businesses also struggle to expand structures in India due to complex compliance requirements, particularly the structural compliances. Together, reforms to make greenfield and brownfield acquisition and development simpler would help businesses to open more stores, factories, and other facilities, thus enabling them to expand faster and provide gainful employment,” the UKIBC said.  

While the lower corporate tax rates, including a 15% levy for new manufacturing units incentivises investments, the UKIBC has said there is a “significant disparity” between the effective corporate tax rates for foreign firms using a “branch model”, taxed at 43.68%, compared to domestic peers who are taxed at 25.17%.

“This serves as a major disincentive for international businesses using this model, such as banks,” the Council said, attributing part of the problem to the abolition of the dividend distribution tax.

“Providing tax parity would lead to greater investments and development of the domestic market and the economy… Moreover, the obligation to accord with fair and equitable treatment in foreign investments appears in the great majority of international investment agreements of which tax treatment is a part,” it noted, adding that such factors help determine whether investments should be made in India or competing countries like Vietnam or China.

While any foreign bank with over 20 branches gets the same priority sector lending (PSL) targets as domestic banks, U.K. institutions have said this is ‘rather restrictive’ as they bring different expertise to the table. This “directly limits” their ability to contribute to sustainable financing for sectors like infrastructure that need long-term and affordable funds.

“In certain cases, foreign banks are better able to serve and fully participate towards cross-border financing, trade finance and sustainable financing, rather that support PSL targets for agriculture, for example. Agriculture and allied sectors are slightly beyond their reach in terms of domestic knowledge, capabilities, and the geographic reach required to India’s rural areas,” the Council said, suggesting the inclusion of sovereign green bonds and infrastructure financing in such lending norms.

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