India-SA business relations set to soar despite some challenges in both directions

Indian companies expanding into SA perceive the country to be an excellent investment destination and a “gateway” to Africa and African investment. But crime, health and safety issues and the perceived high corporate and individual tax rates are seen as business challenges. For SA companies moving into India, they see that country as a highly rewarding investment opportunity but the social and cultural issues related to doing business there are problematic.

These are some of the findings of the PricewaterhouseCoopers’ Trade winds - Setting sail for investment opportunities in South Africa and India survey, the first conducted by the newly established PwC India-Africa Desk, established to serve a growing need amongst investors considering both India and SA as viable investment destinations.

Troopti Naik, PwC Leader India-SA, says that India is now the world’s 12th largest economy and the third largest in terms of purchasing power parity. “Economic reforms have transformed it into one of the fastest growing economies in the world and global superpower status will probably be achieved within the next decade. During the financial year 2006-2007,

India’s GDP grew at an estimated 9.4% on top of growth of 9.0% in the previous year.

“Its economic growth can be attributed to a government policy of deregulation, which commenced in earnest in the early 1990s. Policy-makers have shifted focus to factors that can drive economic output such as capital accumulation, technical progress, improvements in the quality of the labour force, freedom from regulatory interference and increases in personal incentives. There is presently an infrastructure development boom which would attract companies from all over, including SA. In the other direction, Indian companies are establishing themselves in SA because of our buoyant economic growth, low barriers to entry, 2010 potential and our appeal as another emerging market.”

For inbound companies (from India, coming here) the survey indicates that the Eskom energy crisis and obtaining work permits are also significant challenges. 57% of survey respondents felt that the tax regime in SA did not pose a real challenge to their company and regarded SA to be in line with global tax systems. However, many felt that the personal tax rate was too high compared to the benefits being received.

The majority of respondents utilised a branch when establishing operations in SA. They felt their operations were fully compliant with all tax and regulatory aspects and they had well-structured internal control mechanisms and/or well documented tax risk control policies in place. Respondents found SA exchange controls to be burdensome.

Sixty two percent of the inbound respondents utilised the services of auditing firms when seeking advice on investment into SA.
For outbound companies (those in SA moving into India) India is viewed as an excellent investment opportunity but to overcome social and cultural challenges and to perhaps benefit from lower corporate tax rates for local businesses, the majority of the respondents used or were considering the use of a joint venture with an Indian enterprise.

Obtaining work permits and lack of infrastructure and support services posed the next greatest challenges to outbound businesses. The majority of survey participants found the corporate tax regime in India to be complex and rigid and the foreign corporate tax rate exceeded 40%. Despite the taxation complexities, most SA respondents did not have a comprehensive tax risk control policy. Most utilised the services of auditing firms when seeking advice on investments into India.

Naik says that all of the participants surveyed were interested in obtaining assistance from a dedicated India-SA team with experience in advising on both inbound and outbound investment. “Advice on mergers and acquisitions, expatriate tax and work permits were areas where respondents indicated the greatest degree of interest.”

Indian respondents in the survey included Bank of Baroda, ICICI Bank, Mahindra and Mahindra, Ranbaxy Pharmaceuticals, Satyam Computer Services, State Bank of India, Tata Steel and ZEE TV.