Corporate Treasury & Cash Management in India
Corporate Treasury & Cash Management in India
At a glance
About India
India is a fast-growing emerging economy, and its government is putting a focus on foreign investment and pursuing pro-international trade policies to enhance economic growth.
A relatively low-cost region in which to operate with a skilled workforce, India can be utilised as a strategic and operational support centre for wider operations. India is a major exporter of information technology (IT) services, particularly in business process outsourcing and software services, which is the fastest growing part of the economy.
The Indian government has been instituting an ongoing series of economic reforms to increase the efficiency of doing business within the global economy and to overcome the market's historical limitations, particularly in relation to foreign direct investment (FDI). These changes have included the privatisation of state-owned enterprises, a reduction of financial controls, industrial deregulation and an increase in FDI caps.
Corporate Treasury in India
India is one of the fastest-growing emerging economies in the world, and a global leader in IT. In this section, we highlight some of the key factors relevant to treasury and cash management in India.
Financial Market Development
- Mumbai is ranked 65th in the 2021 Global Financial Centres Index produced by Z/Yen Group, 30 places lower than in 2020.
- The Indian rupee (INR) is convertible for current accounts but not capital accounts. The Reserve Bank of India (RBI) has imposed capital controls in the past, such as in August 2013, when it cut overseas remittances by individuals to USD75,000 from USD200,000, and reduced overseas investments by Indian companies by three-quarters.
- India has a skilled, cost-effective English-speaking workforce, a strong rule of law and a pro-business government. The digital business infrastructure, such as telecommunications and payment systems, is also of a high standard.
Sophistication of Banking Systems
- Historically, India’s banking sector has been heavily influenced by its state-owned banks, however, a list of the sector’s largest banks now includes both public and private institutions. There are more than 100 banks in India, including over 40 foreign banks.
- Daily foreign exchange turnover in India accounted for 0.5% of global turnover in the Bank for International Settlements’ latest Central Bank Survey.
- India's bond market is not well-developed and remains small compared with developed economies. While it is composed of both corporate and government bonds, government bonds dominate and are the most liquid component of the bond market. Total corporate bond issuances outstanding stands at more than IRD33 trillion.
- India is a member of the Asian Clearing Union.
Regulatory Bodies
- The banking system in India is regulated by the Reserve Bank of India (RBI). Regulation is in line with international standards. RBI approval is required in certain cases for the repatriation of funds.
Tax
- The corporate income tax rate is 30% for resident companies. Companies with an income of more than INR10 million pay a surcharge of 10%. A “health and education cess” or levy of between 2% and 4% is also charged.
- Foreign companies pay corporate income tax of 40%, with a surcharge of 10% if total taxable income exceeds INR10 million, as well as a health and education cess of 4%.
- A reduced corporate income tax (CIT) rate of 22%, plus a 10% surcharge and 4% health and education cess, is available to existing domestic companies that meet certain conditions. Newly established domestic manufacturing companies and firms involved with electricity generation may qualify for a beneficial CIT rate of 15%, plus a 10% surcharge and 4% health and education cess.
- In certain circumstances, companies may be liable for a 15% minimum alternative tax plus a 10% surcharge and 4% health and education cess if their tax liability under the Income-tax Act is not more than 15% of their book profits.
- Resident companies are taxed on their worldwide income. Foreign companies are taxed on income that is received or generated in India.
- Foreign companies are considered to be resident in India if they have a Place of Effective Management in India.
- There is no branch profits remittance tax on the remittance of profits by the branches of foreign companies to their head offices.
- Interest income received by a foreign company is subject to a withholding tax of 20% plus surcharge and cess. Under certain circumstances, the withholding tax rate on the interest will be reduced to 5% plus surcharge and cess.
- Interest expenses that are used for business purposes are generally tax deductible, unless the interest is paid to related parties, in which case the expense is restricted to 30% of earnings before interest, taxes, depreciation and amortisation. There are no thin capitalisation rules in India.
- A securities transaction tax of between 0.001% and 0.125% is charged depending on the nature of the securities.
- Capital gains tax is charged at 10%, 15% or 20%, depending on the type of asset and whether the gains are long term or short term.
- Tax incentives are available to certain industries operating in Special Economic Zones (SEZs). For example, offshore banks and international financial service centres that meet certain conditions are eligible for a 100% tax exemption on specified income for five years and a 50% concession for a further five years.
- Goods and services tax (GST) is charged at 5% to 28%, depending on the nature of the goods or services involved and the individual state, with a general rate of 18%. There are also special rates and GST compensation cess on certain goods. The export of goods and services is zero-rated. Additional details can be found here: https://cbic-gst.gov.in/gst-goods-services-rates.html
- Resident companies are charged withholding tax of 10% on interest. Non-resident companies pay withholding tax of 20% on interest and 10% on dividends, if no treaty is in place. Where a tax treaty is in place, withholding tax on interest ranges from 5% to 15%, and withholding tax on dividends ranges from 5% to 25%.
- India has tax treaties with more than 90 countries and territories.
- India is a signatory to the Organisation for Economic Co-operation and Development’s Multilateral Competent Authority Agreement, through which information is exchanged between tax administrations, to provide a single, global picture on some key indicators of economic activity within multinational enterprises.
Benefits for Local Treasury
- The RBI is broadening the country’s derivative and debt markets.
- A number of Indian banks are part of the Society for Worldwide Interbank Financial Telecommunication’s (SWIFT) global payments innovation initiative, improving cross-border payment infrastructure.
- India is a relatively low-cost region to operate in and has an adequately skilled workforce, enabling companies to use it as a strategic and operational support centre for wider operations.
- Resident and non-resident companies are permitted to participate in cross-border sweep structures. However, for non-resident companies, foreign-exchange control rules and withholding tax on inter-company loans apply.
- Cash concentration is available, but non-residents may have to pay withholding tax on interest.
- Notional pooling is not permitted in India.
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