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Starting A Business In India Tools & GuidesE-mailPrint

Starting A Business

Any Business is an Economic Institution that is occupied in the Production & Distribution of Services & Goods. They in turn gain profits and obtain wealth. Business generally, has a wide scope and includes a large number of activities. The activities are broadly classified under two heads: 'Industry', concerned with the production of the goods and 'Commerce' concerned with the distribution of goods.

The dream of every entrepreneur has been to build and expand a business. Business plan plays the most important role here. For a successful business, the first thing you need is a Business Plan.

In India, The Commissionerates or Directorates of Industries of Department of Industries & Commerce are nodal agencies in different states that encourage, assist, and guide new entrepreneurs in starting new industrial unit in the state concerned. It acts as an interface between the industry and other agencies providing industrial inputs. It also assists the entrepreneur to get industrial clearances and approvals from different departments.

It also sanctions incentives to eligible industrial undertakings. Further, it creates a transparent and automatic system of allocation of insufficient raw materials to different industrial units. Thus, a new entrepreneur must approach the concerned Directorates of Industries of the state concerned before starting a business in the state.

Investment & Incentives

The unique geography, the diverse topography and the rich endowment, which India has, attracts investors from all over the world to make India their destination for investment. It is the world’s largest democracy with stable policy environment, law and order and also with receptive administrative set up.

With huge area allocated for farming, India is the chief producer of food in the world. It is the largest producer of milk, sugarcane and tea and the second largest producer of rice, fruits and vegetables. India has a pool of manpower base with an increasing income in the burgeoning market.

The sectors attracting the highest Foreign Direct Investment (FDI) are:
  • Cement
  • Chemicals
  • Construction activities
  • Drugs & Pharmaceuticals
  • Fuels
  • Gypsum Products
  • Telecommunication
  • Transportation Industry
The two most imminent sectors with huge investment potentials in India are: Knowledge Process Outsourcing or KPO and Real Estate.

The Indian Government is making efforts to enhance the advantages of the investors. The development in infrastructure is the key focus of that development. The government has developed sound connectivity through air, rail, road and water with the states of India as well as with the rest of the world. Along with this, it is providing efficient power supply and telecommunication. The government has undertaken a number of such steps to attract investors and provide a good quality of life for them.

India is one of those rare markets, which offer high prospects for earning and growth in all areas, especially, information technology (IT), tourism and agricultural sectors. These sectors offer immense possibilities for investments both at the national and state level.


Trade is the obligatory way for sustaining the economic growth and development of a nation. The main legislation governing foreign trade in India is Foreign Trade (Development & Regulation) Act, 1992. According to the provision of this act, the Government of India announces and amends this provision from time to time.

The new Foreign Trade Policy (FTP) announced in August 2004, covering a period of 5 years, states the two major objectives of India's foreign trade in these five years:
  • To increase India's percentage of share in Global Merchandise Trade within the time period of these 5 Years by Twofold and
  • To ensure that Trade acts as an effective instrument for economic growth.
The Ministry of Commerce & Industry is the most important appendage associated with the regulation of foreign trade in India. It has two important offices concerned with trade:
  • The Directorate General of Foreign Trade (DGFT) and
  • The Directorate General of Commercial Intelligence and Statistics (DGCI&S)
DGFT is answerable for implementing the foreign trade policy with an aim to encourage the Indian exporters. It also issues license to the exporters and monitors their consequent obligations through a network of regional offices.

DGCI&S is entrusted with the responsibility of collecting, compiling, dissembling and publishing the trade statistics and various types of commercial information that is required by the policy makers, importers, exporters, traders, researchers as well as overseas buyers.

At multilateral, bilateral and regional level, India is also occupied in trade negotiation. It is interacting with international agencies like,
  • World Trade Organization (WTO),
  • The United National Conference on Trade & Development (UNCTAD),
  • The Economic and Social Commission for Asia and Pacific (ESCAP)
And also with other individual countries, groups or individuals.

Some of the major regional trading agreements that India has entered into include:
  • Agreement on South Asian Free Trade Area (ASAFTA),
  • Asia-Pacific Trade Agreement (APTA),
  • Framework Agreement on Comprehensive Economic Cooperation between ASEAN and India

Legal Aspects

Legal aspects are another part of any successful business setting. They reflect the policies and mind set of the Government of that particular country. While framing the basic aims and objectives of the company, the legal set up of the government must be considered. This is necessary for the healthy functioning of the organization to know the rights, responsibilities and challenges that you have to face during the business.

In India, the primary law that governs all legal aspects of a company is the Companies Act, 1956. It contains provisions regarding the formation of a company, powers and responsibilities of directors and managers of a company, rising of capital, holding company meetings, maintenance and audit of company accounts, investigation of the company, reconstruction and amalgamation of the company and even winding up of the company.

The Indian Contract Act, 1872 is another legislation that influences the transaction of the companies in India. It outlines the general principle relating to the formation of a company, the enforceability of contracts, rules governing the conditions for agreement and offer, types of contracts, including indemnity and guarantee. It also contains provisions for breach of contract.

The other major legislations associated in this aspect are:
  • The Industries (Development and Regulation) Act 1951
  • Trade Union Act
  • The competition Act, 2002
  • The Arbitration and Conciliation Act, 1996
  • The Foreign Exchange Management Act (FEMA), 1999
  • Laws relating to intellectual property rights
  • Laws relating to labor welfare

Doing Business Abroad

An integral part of any business or company is expansion and growing internationally. It is one of the objectives of the company to diversify its business across national borders and hence, increase the competition. Hence, the planning of the faculties, the manufacturing, financial flow, logistical systems are done considering the entire world as a single market.

A business that includes persons or firms of more than one country is considered as an overseas business. The economic reforms of India have opened new avenues for the development of global business. The first policy that defines the guidelines for overseas direct investment was issued in 1969.

These guidelines define the limit of Indian companies to participate in overseas trade and this has been revised and liberalized from time to time.

The aim of the guide is to maintain transparency in overseas investments and the most important legislation regarding this is the Foreign Exchange Management Act. This act changed the whole outlook of foreign exchange, particularly that of investments abroad. This act is held responsible for the shift of the emphasis from exchange regulation to exchange management.

Indian companies are entitled to invest directly outside India either by contributing to the capital or by subscription to the Memorandum of Association of a foreign entity. This includes setting up a Joint Venture (JV) or a Wholly Owned Subsidiary (WOS) abroad.

For investing abroad, Indian companies require resources. Under the Foreign Exchange Management Act (FEMA) and various other notifications issued by the Reserve Bank of India, the investments in overseas JV or WOS can be provided by one or more of the following sources:
  • Withdrawal of foreign exchange from an authorized dealer
  • External commercial borrowings and conversion of foreign exchange bond raised abroad
  • Capitalization of exports and other dues
  • American depository Receipts
  • Global Depository Receipt
In investing overseas, the Indian entrepreneurs can meet various risks. Hence, for their security it is necessary to provide them with a comprehensive insurance coverage, which will protect them from all risks. Thus, Export Credit Guarantee Corporation of India Limited (ECGC) was established under the Ministry of Commerce and Industry, India. ECGC provides all such insurances for overseas investment.

Further, Government of India has signed BIPA with 62 countries, out of which 50 BIPA are in force. The remaining agreements are in the process. Agreements have also been negotiated and finalized with other countries to provide security to overseas investment.

Besides, there is another important legislation, known as 'the Arbitration and Conciliation Act, 1956', which provides a legislative provision for solution to all the commercial disputes, without its recourse to the court of law.


India maintains a sound tax arrangement system. According to the provisions of the Indian Constitution, the power to levy tax and duties are uniformly circulated among the three tiers of Government. The primary taxes that the Union Government can levy are:
  • Income Tax, except the agricultural tax that the state government levy
  • Sales Tax
  • Service Tax
  • Custom duties
  • Central Excise
The Principal Taxes levied by the State Government are:
  • Sales tax, tax on intra-state sales of goods
  • State Excise, duty on the manufacture of alcohol
  • Land Revenue, tax levied on the lands used for agricultural and non-agricultural purpose
  • Stamp Duty, duty on transfer of property
  • Entertainment Duty
  • Tax on professions and callings
The Local Bodies can charge tax on:
  • Properties
  • Tax on various market areas
  • Tax on utilities, like water, drainage
  • Octroi, tax on the entry of goods for consumption or use within the local area
Because of the various economic reforms, the tax structure of India has undergone a drastic change. All the changes are in the line of liberal policy. The changes include:
  • Rationalization of the Tax Structure
  • Progressive reduction of Peak Rate Custom Duty
  • Diminution of Corporate Tax Rate
  • Customs duty aligned with ASEAN Levels
  • Widening of Tax Bases
  • Introduction of VAT or Value Added Tax
Tax policies in India also provide tax holidays in the form of concession for various types of investments. These include incentives to priority sectors and industries located in a special area or region. For those who are engaged in infrastructure, tax reduction is also available.

Closing or Changing A Business

Every Business, large or small is started with lots of dreams and hopes. But during its expansion, it is quite likely that the person is not being able to continue the business in a manner that gives him or her profit. Thus, it may become necessary for him to change the business, like from public company to private company and vice-versa.

The Companies Act 1956 states procedures and provisions for any such conversions. It may also be possible that the person has to wind up and close his business completely. The complete closure of a company means, closing down its various functional as well as non- functional areas also. A company can be closed down for various reasons, like:
  • Recession in the economy
  • Poor infrastructure
  • Use of obsolete techniques for production
  • Intense competition
  • Dissatisfaction among workers and trade workers
  • Labor management conflict
  • Lack of resource or fund to finance various activities of the organization
Although the change of business or winding up of business set up a negative experience for the Entrepreneur, but, it at least returns your investment. For detailed Information, please visit the National Portal of India: Business Section.

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