Legal Risks and Exposure for Japanese Businesses in India

ACN NEWS On Feb 9, 2021

By ROHIT KOCHHAR, FOUNDING MEMBER & MANAGING PARTNER, KOCHHAR & CO.

India is currently ranked 63^rd in the global “Ease of Doing Business” index for 2019 issued by the World Bank. The complex framework of Indian laws coupled with a lack of certainty and uniformity in their implementation makes doing business in India challenging for Japanese companies who are typically conservative and traditionally risk-averse.

Over the years, the Indian Government has taken numerous steps to liberalize the economy and introduce new reforms to promote an investment-friendly environment for Japanese and other foreign investors. The warm and cordial ties between India and Japan have also added heft to a closer economic partnership between our respective countries.

While the economic, legal, and policy reforms are encouraging, as a law firm that regularly advises Japanese investors, we find that India continues to be a difficult terrain due to a multitude of challenges. These include problems regularly faced by Japanese companies relating to corruption (especially at the lower rungs of local police stations and government departments), taxation (both direct and indirect), labour laws, intellectual property rights, land acquisition as well as contract enforcement.

As a lawyer representing Japanese corporations over the last 30 years, for me, one of the most distressing issues has been the harassment of some of the reputed clients have had to face at the hands of the Indian police.

In certain cases, in purely civil disputes, criminal complaints were mischievously filed by Indian parties, and Japanese expatriates had to suffer the ordeal of being summoned, intimidated, and questioned by the local police.

Conversely, in other cases, where Japanese companies were blatantly cheated and defrauded, even specialized agencies such as the Economic Offences Wing, took no action for months together. Unpalatable experiences such as these with law enforcement agencies shake the confidence of Japanese investors, making them feel that rule of law is absent in India. In my opinion, there is a dire need for the Indian Government to professionalize the Indian police force, injecting into the system, efficiency, honesty, and reliability.

Land acquisition in our country remains complex, and India was ranked as low as 154 among 190 nations surveyed by the World Bank in 2019 for registration of property ownership. Illustratively, the dedicated freight corridor railways project, which is primarily funded by JICA, has run into major hurdles with more than 5,000 court and arbitration cases filed in relation to land acquisition. This has increased the land acquisition cost for the project by 75% (from USD 115 million to USD 200 million approximately).

Likewise, India ranks in the lowest quadrant of countries with respect to enforcing contracts. According to a World Bank survey of 2019, it takes on an average 1,445 days for a dispute to be resolved in India, as opposed to 165 days in Singapore. Lack of faith in the Indian judicial system has, to some extent, had a deleterious effect on Japanese investments in India.

The myriad of employment laws in India (both at the Central and State level) present another set of challenges for Japanese corporations, including an increased burden of compliances. The termination of services of employees at the lower level of the organizational hierarchy (i.e. ‘workman’) can be troublesome with trade unions usually taking aggressive positions, and protracted litigation in labour courts.

One welcome step however is that the Government of India has recently consolidated 29 central legislations into 4 new labour codes in an attempt to overhaul the employment laws and address the concerns of various stakeholders.

India’s tax structure too, is complex, with a plethora of laws prescribing direct and indirect taxes including GST. Although some efforts have been made to simplify income tax provisions impacting foreign companies, the expanded definition of ‘business connection in India’ by introducing a new concept of ‘Significant Economic Presence’ requires greater clarity to be provided to foreign investors.

A new tax called “Equalisation Levy” introduced by the Finance Act 2020 on non-resident e-commerce operators engaged in e-commerce supply or services is also causing concerns for this rapidly expanding sector. On GST, though it has been more than 3 years since its introduction, the procedures are yet to be fully streamlined, and many grey areas remain in the interpretation of GST regulations. One relevant issue for Japanese subsidiaries is whether the services provided by them to their parent in Japan would be considered a zero-rated export service or a taxable supply, liable for payment of GST. Lack of certainty in the quantum of taxes is an obstacle for Japanese investors in the proper financial planning of their Indian operations.

On the bright side, these challenges have not deterred Japanese companies to persevere their business plans for India, and for the last five years, India has been consistently rated by JBIC as one of the most attractive investment destinations for Japanese manufacturing companies. India’s large customer base and relatively low manufacturing costs hold much promise for Japanese companies doing business in India. If the Indian Government continues to pro-actively engage with and address the concerns of Japanese investors, India could eventually well overtake China in attracting large scale and long-term investments from Japan.

About Kochhar & Co.

Kochhar & Co. is the preferred law firm for MNCs from North America, Europe, and Japan including 75 of the Global Fortune 500 corporations. Interestingly, the firm’s first MNC corporate client was the Japanese conglomerate, Panasonic, which was then known as Matsushita Electric. With more than 200 lawyers, Kochhar & Co. is one of the leading and largest corporate law firms in India. Kochhar & Co. enjoys the distinction of being the only law firm with a full-service presence in the six prominent cities of India namely: New Delhi, Mumbai, Bangalore, Chennai, Gurgaon, and Hyderabad. The firm also has an international footprint with overseas offices in Dubai, Singapore, and Chicago. In Dubai, the firm is the only Indian law firm, which is licensed to practice local UAE law.