Business environment in India

Political environment:

India is a democratic country and has a high number of franchise rights. It also has a high number of political parties taking part in elections. Approximately 26 candidates took part in election camping in 1996 competing for 543 constituency seats and nearly 600 million people voted for them.

There are various levels at which the elections are held. State level elections are held to elect the state government and national level elections are held to elect a national government. Other then state and national level elections village, city and town level elections are also held.

Various political issues arise in India at various national and regional levels. Some political parties demand cultural rights, while some demand independence of there culture from political issues. Some states demand government independence while some unions demand to be separated from India.

India is still a democratic country even though there are many unresolved political problems in India.

There are 28 states and 7 union territories in India. The legal system of India is based on the English Common Law; reviews of judicial legislatives act; personal law code which are different for Hindus, Muslims and Christians.

The President of India is elected every five years by the elected members of both houses of parliament and state legislatures. The Vice president is also elected for a time of five years by both houses of parliament. Smt. Pratibha Patil is the current president of India and the vice president is Mr Hamid Ansari.

The Prime Minister is elected by the members of parliament which won the national level elections .The current Prime minister of India is Mr. Manmohan Singh. The president appoints cabinet members recommended by the Prime Minister.

Rajya Sabha consists of approximately 250 members out of which 12 are elected by the president. All the members elected are appointed to serve for six years only. The Lok Sabha consists of 545 members out of which 2 are elected by the president and rest 543 elected by votes. The Sansad Bhavan consists of members from both Rajya Sabha and Lok Sabha.

There are many political parties in India like AIADMK lead by J. Jayalalithaa, AITC by Mamta Banerjee, BSP by Kumari Mayawati, DMK by M. Karunanidhi, Indian National Congress By Sonia Gandhi, BJP by Rajnath Singh and many more. Out of which The Indian National Congress and Bharatiya Janata Party (BJP) are the two major political parties.

Tax in India:

The finance ministry is in charge of administering and regulating the taxation in India under the control of Indian government. As tax is the main source of income for the government different types of taxes are levied on the public by the government.

Following are the types of taxes levied by the government on the public.

Direct Taxes

Personal Income Tax

Tax on Corporate Income

Tax Incentives

Capital Gains Tax

Indirect Taxes

Securities Transaction Tax

Service Tax

Excise Duty

Customs Duty

Taxes Levied by State Governments and Local Bodies

Other Taxes

Sales Tax or Value Added Tax [1]

Corporate Tax

The corporate tax is charged on the profits earned by the company and associations. The rate for corporate tax depends, if the profit is passed to the shareholders or not.

The corporate tax rate in India is at stated value to the rate of other countries. Tax rate for any company depends upon its country of origin. Companies which are domicile to India are applied a flat tax rate of 30%. But depending upon the factors and number of consideration the tax rate is determined for a foreign company. Domicile companies are taxed on the basis of there global income, where as for a foreign company they are taxed depending upon there income earned in India. The taxable income for any foreign company is from dividends earned, income earned by selling the equity shares of the company, any capital asset income, any interest gains, etc.

Income tax rates for a foreign company:

  • Tax rate for dividends is 20% for any foreign company with non-treaty and 15% for any company with treaty based in U.S.
  • Tax for interest rates is 20% for any foreign company with non-treaty and 15% for any company with treaty based in U.S.
  • Tax for royalties is 30% for any foreign company with non-treaty and 20% for any company with treaty based in U.S.
  • Tax for services on technology basis is 30% for any foreign company with non-treaty and 20% for any company with treaty based in U.S.
  • Tax for incomes or gains from other source is 55% for any foreign company with non-treaty and 55% for any company with treaty based in U.S.
  • If the holdings of the company is minimum then care must be taken while levying tax rates on inter corporate.
  • While levying any tax care must be taken of the tax treaties that India has signed with the various countries.

Tax rebaits in India:

  • There are special provisions for the tax applicable to any venture capital company or funds.
  • Long term capital gains are subjected to low tax rate.
  • The non residents of India (NRI's) are subjected to a specular tax provision.

Custom Duty

Customs duty is a tax levied by government on all items imported or exported from the country. It is a kind of revenue for the government of India. The rate for the duty on goods and service is levied under the Custom Tariff Act, 1975.

Objectives of Custom Duties:

To conserve foreign exchange by limiting the import

To prevent competition for the Indian companies

Government, in order to achieve the objectives has restricted import and export of certain items

Custom duty is applicable to:


Any goods and service brought into India from foreign land is subjected to import tax in India. Recently, importers were relived from paying duty on any goods brought into India which in turn will contribute to the export goods as it is subjected to special duty exemption.

About 4200 items have been listed under the input and out put norms, which will be used to formulate and decide upon the quantity of the goods to be imported duty free which will then contribute to the export of other item. The new scheme known as Export Promotion Capital Good Scheme (EPCG) helps in reduction of duty on the import of capital goods. Under EPCG any item imported for tourism, hospitality or any other related sector is exempted from any kind of import duty.

There is also some basic duty for import in India, the minimum basic duty is zero applicable to only import of few items and the maximum duty imposed on import of product is 65%. Other then import tax in India there are also other duties applicable like excise duty, regulatory duty and countervailing duty. The tax imposed in India on import of luxurious items can be high as 150%.

Other then import tax, tariffs are also levied on the import of goods from other countries. The custom officials charge the tariff on imported goods as it lands on the dock. The reason for levying tariff is to hinder the competence of foreign and domestic companies through protective tariff and revenue tariff. Government in order to earn revenue applies a certain set rate of revenue tariff to the importer. Under protective tariff the importer of a certain good has to pay high price for the imported good which can be available in market at a less price.

Ad valorem tariff and specific tariff are two kinds of tariff applicable to imported goods. There is a pre determined price rate for the goods to be imported under the ad valorem tariff. It gives the advantage to earn more on imports with the increase of price of the product. Under specific tariff the payment of money is fixed for importing the product. It is the Customs act which provides as an outline to tariff application and customs valuation by formulating rules. The tariff act provides with the entire rate for tariff and other duties.


All the goods going out of India are subjected to export duty. It is applied to limit the export of specific goods. Currently only limited items are subjected to duty such as leather and skin.


In order to carry out the provisions act the Central Excise and Customs Board has been given the power to regulate and change the acts. The provision rules prevail if there are any problems relating to rules and regulation. Many regulations were framed in 1984 in order to maintain the rules of act such as Customs House Agents Licensing Regulations.

In case of emergency the power to increase or decrease the rate of duties on import or export lies with the central government. The increase in such duties should be place in the parliament of India. If the notification for increase of duty is not validated within 15 days of time then it is not considered to be valid.

Indian Economic:

After the independence the Indian economy has made a vast growth. During its independence in 1947 India was facing vast problems of poverty and violence affecting its economy. The economy has started to grow science 19th century with development in industrial sector too. Before independence agriculture has been a main source of income for both peoples and country.

India has a diversified economy as it a large county and has various industrial sectors such cotton, textile, agriculture, service and also the manufacturing sector. Agriculture still forms a great part of income for Indian economy, as around 06 % of population is dependent on agriculture.

Recently there has been a great growth in service sector in India and it has become a hub for the public outsourcing providing service to worlds major economies such as U.K and U.S. providing technical support and customer service are the primary outsourcing are major section for India.

The government controls and regulates the economy of India, but still there is a great gap between the rich and poor people in India. India is the 12th largest economy in the world, ranked by using U.S dollars as the base of foreign exchange.

Due to high level of skills among the IT professionals of India, there has been a high demand for them in the world. And many of the IT personals have been seen rendering there services to international market. Other then IT section India is also making progress in shipping, aviation, tourism, telecommunication and other.

India is trying hard to develop its economy despite of it control over the areas like foreign direct investment, foreign trade and private sector. Even though there were many problems of privatizing the government owned industries, it is still a steady process.

There is one major challenge for the government of India and it is to remove the inequality between the people. Even after its independence India still faces problem of poverty among its people. Even after reduction in poverty level in India around 27% of people leave below the poverty line. There is a great threat of increase in poverty with increasing birth rates.

Currently government of India has reduced the foreign trade restrictions and control over investments in India. Sectors such as telecommunication have a high investment level permitted by government.

Due to economic reforms of India there is still hindrance for the foreign companies to come into India. Agricultural sector is still a sensitive area of Indian economy. Science the year 1997 the Indian economy has showed a growth rate more then 7% with a reduction of about 10% in poverty of India. In 2006 the GDP was about 9.6% and 9.0% in year 2007. The GDP was reduced to 7.4% in year 2008, with the increase in number of manufactures in the year end. As a result of highly educated personals India has shown a great increase in export of software and related services. The purchasing power parity of India was $ 1.27 trillion for year 2008 with a growth rate of 7.4%.


There has been significant growth in India's infrastructure specially relating to the transportation sector with the help of investment by both central and state government. There has also been private investment in this sector from with the country and abroad.

There has been reduction in growth of urban infrastructure with only few big projects in few selected cities. The airports and cities transportation system are the major focus in the India Infrastructure Report 2006, giving less importance to sewer management, drinking water, roads, health and drainage system.

With the help of the urban developer the government is trying to develop the urban infrastructure. A new policy frame work has been developed by the Indian government under Jawaharlal Nehru National Urban Renewal Mission which will help to develop the big infrastructure project on the basis of the Public Private Partnership (PPP). The main aim of PPP is to provide a quality and limited service backed by the government to ensure fair benefits to the stake holders.

India Infrastructure Finance Company and Viability Gap Fund scheme will finance the PPP infrastructure development. The management of the PPP programme highly depends upon the partners and the financial institutions.

Transport infrastructure-

Airways as being a part of transport is having lots of problems, there is a great need to improve the airways. There are many places in India where the air facilities needs to be replaced, and the place's where the replacements are taking place it is very slow process. In India the airways is highly taxed and a matter of shame for the country. New airports are being built in India and will be completed by 2010 providing better service to air transport.

The road ways in India is very bad and is also in need of great repairs. There are mostly narrow and single lane roads in India. In last five years the government has focused greatly on development of the roadways in India creating two lane and four lane roads for national road transport.

Social environment:

Demographic patterns and trends-

India ranks second in most populated country of the world and the population is still expected to rise. It is expected that by 2040 India will become the world's most populated country surpassing China.

More then 700 million people in India are under the age of 35, and about 550 million people are under the age of 25. Even with the high number of younger population, India still claims to be the second highest in home for the elder peoples.

India still faces the problem of poverty with people residing in rural areas on small farm lands with no technological development. Approximately 60% of the population resides in rural areas. Even with the reduction of rural population to urban cities there is still increase in the urban population.

The population in India is high but the land to develop infrastructures is limited. There has been a gradual increase in the middle class section in India's Population and is still expected to grow largely.

The population of India was around 1,080,264,388 in year 2005 which rose to around 1,166,079,217 in July 2009.

The median age for male is 25 years and for females its 26 years. There has been a significant growth in population growth rate by approx 1%, it was 1.4% in 2005 which rose to 1.548% in 2009. There is a decrease in both death and birth rate per 1000 of population. Currently the birth rate is 21.76 birth births per 1000 of population and death rate is 6.23 deaths per 1000 of population.

The average expected life of males is 67.46 years and average expected life for women is 72.61 years. The literacy rate for total population has increased by 1.5% of total population to 61%.


India is spiritual and philosophical land giving birth to many religions still existing in the world.

Majority of Indians are Hindus forming approximately 80% of the Indian population.

It is supposed to be originated approximately 5000 years ago giving birth to other religions in its later life. There are vast number of god and goddesses in India.

The two religions name Jainism and Buddhism originated in India in 500 BC. In present day around 0.7% of Indians are Buddhist and only 0.5% are Jains. These religions were popular back in those days of ancient era. The followers of Buddhist and Jainism spread in not only in India but other countries too. Due to passage of time these two religions have lost it charm and many new religions were formed in modern India.

In the begging of the 15th century a new religion was formed knows as Sikhs. They comprise of around 2% of Indian population. There were many attempts made by others to create a new religions of there own but not all attempts were successful. Emperor Akbar wanted to create his own religion knows as Din-E-Elahi but was not successful. There are other religions such as Lingayat in southern part of India who think of themselves as a different religion, but other people look them as Hindus. Attempt to change Hinduism were also made according to modern India.

Other then Indian religions there are also some non-Indian religions in India. Islam is the largest non-India religion in India consisting of around 12% of the Indian Population. There are also Christians in India comprising of 2% of the population. It is believed that Christianity might have entered in India long before it arrived in Europe. Even with 0.01% of population of India Zoroastrians are known all over India.

There are also other religions in India such Judaism and Jews comprising around 0.01% of the population.

Technological environment:

In order to make India superpower in Information Technology sector government of India made a call to be the largest generators and exporters of software. A task force of IT software developers was set by the prime minister in the year 1998 under the control of Deputy Chairman of planning Commission.

In order to receive classified information from IT professionals in India and abroad a special website was created to host and receive suggestions. The world market share of electronics and software from India was less then 1% in year 2001-02 and the contribution of the IT industry GDP of India was about 1%. The ministry of IT took a lead role in order to achieve the target of software exports amounting to US $50 billion and hardware amounting to US $10 million for the year 2008.

Promotion of IT - governmental incentives:

In order to promote the Indian industries and to fully achieve the potential of IT entrepreneurs, the government of India has formed an IT ministry. The problems relating to IT sector were continuously identified and steps were taken to solve them. The IT sector is mostly dependent on the venture capitalist as a main source of finance and there is a shortage of such capital support.

The National Task Force was developed to test the strength of Indian IT industries. The suggestions made by the task force are constantly under consideration. Government in order develop IT sector has flexed the norms to attract any foreign direct investment.

The IT committee set up by the Ministry of IT consists of NRI professionals of US which will look upon:

  • IT development all over the world and to update IT policies of India to meet global demands which inturn will help attracting the investors and venture capitalists.
  • To create quality education in IT sector by promoting the Human Resource Development.
  • Try to promote Research and Development in sector by finding the growth areas and planning for the things to be done.

The most important asset for India today is the highly knowledgeable and skilled work force of IT professionals. World second largest English speaking professionals are available in India. There is more then four million technical work force in India. India has more the 1800 educational institutions training over 67,000 IT professionals every year. Indian government is also helping to train and develop human resources as it knows that knowledge is the only thing which is going to bring up the Indian economy.

Communication infrastructure-

The telecom network in India is one of the greatest in the world. The economic reforms in 1991 have change the way of economic growth of India. The new reforms in India aim at providing a greater competence and improved production and service efficiency to increase the investment and economic growth. The rules and regulations and service provided by the telecom industry is little complicated at present time.

The telecom sector in India uses fiber optics cable for communication science 1985. The telecom service before was limited to urban areas but now it is growing with the help of private and public sector. The mobile communication is used in almost all of the cities in India as a result of rapid growth in mobile service providers and reduction in cell phones calling rates.

The cell phone service was introduced in India in 1994 with service provided in four major metropolitan cities.

Currently India has 3.611 million internet hosts and 81 million users.

The Telecom Regulation Authority of India (T.R.A.I) has divided the Indian telecom infrastructure into various groups to ensure a flow of money and technology in the sector.

Radio service providers, national call operators, international call operators, mobile service providers, other service providers and V-SAT based service providers.

Climate of India:

India has a diversified climate as being a tropical country. The most common season is monsoon, but the time of rain varies as sometimes its early and sometimes late. Some parts of India have a hot and humid climate as some parts has a high level rain. India has normally 6 seasons year round named as summer, winter, monsoon, spring, early autumn and late autumn.

Even though there are 6 seasons but actually three seasons are considered as summer, winter and monsoon. The summer season starts from the month of March to June, and then the monsoon season starts from June to October and the winter season are from month of November to march. Even when the seasons are expected to start in the months mentioned above, it varies among the different parts of India. In northern region of India the monsoon sometimes starts form April to July and most of the days in winter it hot and sunny. Due to this reason people of India can enjoy any festival all the year round.

Clime in India is most unpredictable as the summers are dry and hot and sometimes the monsoon is early or late. Rajasthan has a hot climate all year round during days and even in nights. In northern part of India the temperature suddenly drops sometimes. In summers in India temperature can rise upto 50 degrees.


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