On the face of it, expanding operations in one of the world’s fastest-growing countries should be a no-brainer, but for bearings maker Timken India, there may be easier places to do business.

Sanjay Koul, managing director, told investors last year that the Ohio-based parent company could instead look at other countries “where there is less of tax terrorism” and “where they can have ease of doing business”.

Since then, the company has been hit with an unexpected Rs250mn ($2.9mn) tax demand, which it is contesting.

For Timken, there are still good reasons to be in India, and Koul said “India is a great place to source”. But when asked about further investments in the country, he said: “Obviously, we want to carefully invest so that we get the best bang for the buck.”

The experience of a company that has been in India for about three decades, employs more than 1,200 staff and has operations in several Indian states speaks to authorities’ challenge as economic growth slows.

Investors have long urged India to reduce red tape, relax labour laws and simplify taxation and compliance, arguing that reform, particularly of taxation, could stimulate investment and create jobs.

At a time when Prime Minister Narendra Modi has wooed global investors such as Apple and wants to establish India as a global manufacturing hub to rival China, it has become a matter of pressing importance.

Modi’s chief economic adviser V Anantha Nageswaran has urged central and state governments to “get out of the way” and to start “rolling back regulation significantly” or face a “high risk of economic growth stagnation”.

With growth forecast at 6.5 per cent for the current fiscal year, down from 9.2 per cent in 2023-24, finance minister Nirmala Sitharaman in February used this year’s budget to announce a review of business rules, certifications, licences and compliances as well as the creation of an investment friendliness index of states.

Just before his appointment as governor of India’s central bank, former revenue secretary Sanjay Malhotra in December warned government tax officers that they should “not kill the golden goose” with their demands.

Already, many blame falling investment on red tape and erratic enforcement of taxation. Net foreign investment flows fell to about $1.2bn during April to December, from $7.8bn during the same period in the previous year, according to the central bank’s February economic bulletin.

Under Modi, India has eased company registrations, consolidated labour codes and digitised tax processes, all with the aim of making life easier for business.

Still “nobody is going to consider India an easy country to do business in, there is still a lot of capriciousness in the implementation of rules and regulation”, said Nirmalya Kumar, professor at Singapore Management University. It remained difficult to set up and exit a business and fire people, the former Tata Sons executive said.

Several regulations dated back to the early days of independence from Britain, said Ajay Shriram, chair of the Ease of Doing Business task force at the Confederation of Indian Industry. Although seldom enforced, he said that the Factories Act of 1948 can result in jail terms for business owners for minor violations — including not whitewashing toilets.

A landmark national goods and services tax reform in 2017 did simplify taxation, but many companies fall foul of India’s tax system and are sucked into marathon legal disputes. Taxes are levied at three levels — central, state and local — and can be interpreted in a vague and contradictory fashion.

In February, in the High Court of Mumbai, a lawyer for Volkswagen’s Indian arm argued that a $1.4bn tax demand made on the company last year over an alleged misclassification in the importation of car parts was a “matter of life and death” for a carmaker that employs 4,500 people.

In August, Indian technology services giant Infosys was hit with a $4bn retrospective tax notice. South Korean carmaker Kia is also fighting tax demands.

In February, Sitharaman put forward a bill in parliament, proposing cutting half of the 500,000 words in the 1961 income tax manual in an aim to reduce disputes. Disputed tax demands totalled Rs13.4tn as of March 2024, according to the finance ministry.

Alcoholic beverage companies, including Diageo, Pernod Ricard and Heineken’s Indian businesses have been targeted in raids and embroiled in tax and licence disputes amid an ever-shifting patchwork of regulation, in a country where booze is seen as taboo by many and a cash cow by states that retain control over liquor taxation.

While recent government announcements meant to remove bottlenecks “will help”, Kumar said, taxation “is quite complicated for people to figure out, the legal system still takes a long time for disputes to get resolved”.

An unwieldy bureaucracy, characterised by overlapping offices and opaque approvals, makes change difficult.

“A lot of it is like Yes Minister,” said a senior executive at a major Mumbai-based business conglomerate, referring to the classic British satirical show where civil servants thwart attempts at reform while senior officials “end up getting frustrated because the hydra has grown too much”.  

In this context, many businesses see China’s centralised system as more attractive.

“If you set up a factory in China you get everything right up there, signed, sealed and delivered up front with a lot of land, with all the connections given, road access given and the only job is to set up the factory,” said a top executive at a major Indian company.

In India, “they just let it meander, rather than somebody taking charge”.