Step-By-Step Guide on How to Shift Manufacturing to India :Mr. Ricky Chopra
Introduction
India is increasingly becoming the preferred location for businesses looking to set up a strong business f oothold, especially in the Asia-PaciďŹ c region. The reasons for this could be manifold. Cheap availability of skilled labour, availability of qualiďŹ ed and experienced managers, favourable tropical weather conditions, space, access to the huge and often diverse consumer market etc. are just some of the reasons in India. Of late, many players in the technology sector, such as Apple have expressed a desire to shift a signiďŹ cant portion of their manufacturing bases to India. Apart from this, players in the FMCG, home appliances, education technology sector etc. are also planning to take similar steps. This article shall therefore provide you with a detailed guide on what regulatory compliances are required while shifting manufacturing processes to India.
Setting Foot in India The first step toward setting up business in India, requires one to have a registered office in India. This would involve, either purchasing or renting a land and registering the same with the Registrar of Companies under Section 12 of the Companies Act, 1872as the registered office of your manufacturing unit in India. This is important because all legal notices of suits, arbitrations, etc. shall be sent to the same office and delivery to the registered office is considered due service of summons under Indian civil procedural law. Procuring a land would attract the provisions of the Indian Contract Act, 1872 and the Transfer of Property Act, 1882. The contract for sale or lease of the land must be for a lawful purpose and must not be used for manufacturing anything against the public policy of India, for example, for manufacturing prohibited drugs. If the entity is looking forward to a long-term existence in India, they must either purchase the land or get a long-term lease. Section 105 of the Transfer of property Act, 1882 permits perpetual leases.
Industrial Licenses Getting a license under the Industries (Development & Regulation Act), 1951 is the sine qua non for starting any manufacturing activity in India. Application for an Industrial License may be made online on the e-Biz portal of the government. Such a license, once granted is valid for a period of three years from the date of grant. While there existed strict licensing requirements under this act for almost all major commercial activities, the scope of the same has been drastically reduced over time. In fact, from September 2019 onwards a license under this act is required for manufacturing activities in only four sectors- defence equipment, hazardous chemicals, tobacco and explosives. Apart from this,there are some sectors which are reserved only for the MSME sector. Non-MSMEs who wish to manufacture products in these sectors would then be required to get an industrial license for the same and are then also obliged to export 50% of the production for at least three years.
Industrial Classification Code Once you have determined the sector for which you shall be manufacturing the goods and procured the requisite license for manufacturing the same, it is necessary that you also procure an Industrial Classification Code under the national Industrial Classification- 2008. This code helps the Central Statistical Organisation of the Central Government to keep updated records of all economic activities taking place in the nation. While these are more important for the government, than for the industry, having a business presence in India would imply conforming to this policy.
Conforming to Quality Standards Once the unit is set for production, it is important that it meet the quality standards. The Bureau of Indian Standards Act, 2016 governs the same. Under the act, the BIS has appointed regional offices, where the factory must send its sample manufactured products for testing.Only if the tests meet the prescribed quality standards for sale in the Indian consumer market will the unit be permitted to go ahead with mass production.
Registration as an MSME In case your enterprise qualifies under the prescribed turnover limits, it is advisable to get registered under the relevant category an MSME. They are governed by the MSMEs Development Act, 2006. Under the Act, micro, small and medium sized industry is an entity involved in manufacturing or processing whose investment in machinery does not exceed 25 lakhs, 5 crores and 10 crores respectively. Once registered, an MSMEmust also get an Aadhar Udyog Registration number, which is a 12 digit Aadhar code given to MSMEs for easing regulation of MSMEs.The government has devised several incentive-based policies, ranging from liquidity assistance, credit guarantee for borrowing, tax exemptions etc. to give a boost to the MSME sector.
While these were the general steps that every manufacturer has to be mindful of, there are other special compliances required to be adhered to by a new business entrant in India. The Companies Act, 2013, the Goods and Services Tax Act, 2017, the Income tax Act, 1961, the Factories Act, 1948, are a few of such legislations.
Companies Act, 2013 This is the legislation with the maximum number of compliance requirements. Ranging from auditing, annual returns, maintenance of books of account, holding of annual general meetings, requirements relating to composition of the board, shareholders’rights, protection of minority shareholders etc. However, these become applicable only once the manufacturing unit and the business entity have been successfully established in India. Therefore, apart from registration of the office, and registering the name of the entity in case of a start-up, not many provisions of the Companies Act, 2013 are directly applicable at the time of setting up of the manufacturing unit.
Foreign Investment Laws If a foreign entity is planning to shift its operations to India, the most important relevant laws for that entity are those pertaining to foreign investment. Since setting up a new manufacturing unit in India, amounts to a greenfield investment,the laws pertaining to that will apply. These are primarily governed by the Foreign Exchange Management Act, 2000 and are subject to various regulations set by the central government and RBI for foreign investment in India. Such investment may either be through the direct route or the approval route. There are 11 specified sectors like atomic energy where prior approval of the government is necessary before investment. The other route is direct route wherein the entity may directly set up a unit in India.
The government has set limits for foreign investment in every sector. Therefore, the business entity must ensure that its investment in India falls under the sectoral limits. The DPITT issues the FDI Policy from time to time in this regard. It is therefore important to keep track of Press Notes issued by the DPIIT under the FDI Policy to track the latest developments in the area. Ensuring compliance with foreign investment would require conforming to provisions of the Foreign Exchange Management (Non-debt Instruments) Rules 2019 and the RBI Circulars and master Directions. As these vary for dierent sectors, the entity would have to determine for itself, which of these provisions are applicable to it and which are not.
Tax laws All registered entities doing business in India are liable to pay tax on the income they earn from India. This becomes more true for entities that seek to have a physical presence in the country, for example, a manufacturing unit. Section 115 BAB of the Income Tax Act, 1961 allows a newly set up domestic company in the manufacturing sector to pay tax at the rate of 15% of its total income. Apart from this, depending on whether the manufactured goods are transported intra-state or inter-state, the entity shall also be liable to pay the tax under the Goods and Services Tax, 2017. This will depend on the turnover of the entity, the sector in which it is operating, the State in which the manufacturing is being carried out etc. Again, these are applicable, once the entity starts manufacturing and begins earning proďŹ ts and not at the time of setting up.
Environmental Laws Indian environmentalists are becoming increasingly conscious of the effects industrial activities have on the environment. This has led to development of a strict jurisprudence on environment. The manufacturing entity therefore would have get environmental clearances under the EIA Notification, 2006 prior to setting up the unit. This would require the industry to submit detailed plans of the geographical area sought to be covered etc. to the authorities. Pursuant to that, the respective Pollution Control Boards under the Water Act, 1974 and the Air Act, 1981 have the authority for inspection, collection of samples, and analyse the pollution being caused by the industry. They have even been vested with the authority to cancel the operating license of a unit if they find the operations to be extremely harmful for the environment. Unlike, most other laws, these are applicable prior to setting up of the unit, and in fact constitute a pre-requisite for commencing operation.
Labour Laws The factory being set up for manufacturing is bound to employ workers for its operation. The Factories Act, 1948, the Payment of Wages Act, 1936 and the Industrial Disputes Act, 1947 are just some of such legislations. They ensure workers get proper living wages, in a timely manner and have adequate means of dispute resolution with the employer. Here are other social security legislations like the Maternity Benefits Act, 1961 (which provides for paid maternity leave for a period of 6 months), and the Workmen’s Compensation Act, 1923 (which provides for compensation for injuries received at the workplace).
Sectoral Compliances This is probably the most resource consuming compliance. This is because while other compliances are common to all industries, these are compliances that are specific to the sector your company operates in. For example, an entity manufacturing edible products, will have to comply with provisions of the Food Safety and Standards Act, 2006 and obtain a license from the FSSAI. Similarly, company engaged in refining oil and petrochemicals is bound by the provisions of the Boilers Act, 1923, and a company manufacturing drugs would have to obtain the relevant license under the Drugs and Cosmetics Act, 1940. Since these vary from sector to sector, it won’t be possible to list them exhaustively. The entity would have to make sure that these are complied with. Most of the time, the authorities do provide assistance in this regard. For example, for SEBI related compliances, there is an informal advice mechanism. Similarly, for tax related queries, the Authority for Advance Ruling usually clarifies the same.
Ricky Chopra International Counsels: Full Service law Firms Excelling in Corporate Advisory As a result, laws governing manufacturing and processing are changing by the day. Such a dynamic and unpredictable regulatory scenario is bound to burden business entities with the responsibilities of compliance. In order to save time and resources sent of compliance, a lot of entities are increasingly resorting to assistance of Indian legal professionals, being more adept with the local laws. Ricky Chopra International Counsels is one such corporate law firm in India which specializes in advising clients on regulatory and compliance requirements. We have decades of experience in assisting major corporate houses, including the Fortune 500 companies in setting up businesses, complying with local laws and fulfilling all regulatory requirements. Our full-service firm has experts in every possible field ranging from tax, capital markets, IPR, competition, and labour laws.
Conclusion The Federation of Industrial Chambers of Commerce and Industry (FICCI) recently brought to the notice of the government that an entity that intends to set-up manufacturing in India requires close to 2000 regulatory compliances. The government is therefore planning to streamline many of these processes and ease the norms for manufacturing entities. This is the need of the hour considering the number of entities that have expressed a desire to shift their production units to India. The improvement of India’s rank in the Global Ease of Doing Business Index is also an indication that foreign investors are likely to show much interest in the Indian market in the coming years. It is only advisable that the regulatory environment be made favourable for them when they arrive.
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