Set Up Business in India
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Setting up a business in India starts with deciding a suitable structure in which your business will operate and while deciding so, you must keep a future perspective. These must be carefully assessed to meet your requirements. Whatever structure you choose, it should complement, be scalable and flexible to match your current and future business needs. The structures are:
Subsidiary - Subsidiary involves setting up of a new company in India, shareholding of which is owned or controlled by the foreign holding company. This structure gives a greater freedom to operate business in India and is chosen for long term business interest in India.
Liasoning Office - Liaison office registration in India is registered with purpose of understanding Indian market, work opportunities, promotions etc. The Liaison office helps develop strategies to grab business potential. The Liaison office is not allowed to make profit in India, it has to only make expense form remittances received form its foreign head office.
Branch Office - Branch Office Registration in India is governed and run in accordance with the guidelines of Reserve Bank of India. Branch office can undertake business operations in India. Branch office need to meet its all operational expenses from revenue generated from activities in India.
You can book an offline / online private consultancy session with us to understand things in greater details and take advise from our experts to help you choose a structure, following information will give you a food for thought.
WHY ESTABLISH IN INDIA
India to remain one of the fastest-growing economies in the world.
For the first time, India has crossed the $70 bn mark in FY 2019-20 and recorded total FDI inflow of $73.45 bn.
India has its largest ever adolescent and youth population. It will continue to have one of the youngest populations in the world till 2030.
Sectors such as Energy (24%), Roads (18%), Urban (17%) and Railways (12%) amount to around 71% of the projected infrastructure investments in India.
By 2030, it is estimated that around 42% of India’s population would be urbanised from 31% in 2011.
India jumps 79 positions from 142nd (2014) to 63rd (2019) in the World Bank's Ease of Doing Business Ranking 2020.
India jumps 4 positions and ranks 48th in the Global Innovation Index 2020 rankings.
Centre of global maritime trade to move from the Pacific to the Indian Ocean Region. India and China will be the largest manufacturing hubs of the world by 2030.
APPROACH OF INDIAN GOVERNMENT TOWARDS FOREIGN ENTERPRISE
Foreign Direct Investments (FDIs) are an important component of foreign capital since FDI infuses long term sustainable capital in the economy and contributes towards technology transfer, development of strategic sectors, greater innovation, competition and employment creation amongst other benefits.
Therefore, it has been the intent and objective of the Government of India to attract and promote FDI in order to supplement domestic capital, technology and skills for accelerated economic growth and development. FDI, as distinguished from Foreign Portfolio Investment, has the connotation of establishing a ‘lasting interest’ in an enterprise that is resident in an economy other than that of the investor.
FDI has been classified activity wise. While most of the activities are under automatic route, certain activities require approval from Foreign Investment Promotion Board (FIPB).
Companies across the globe have been moving a sizable chunk of their operations to India primarily due to cost saving, availability of skilled talent and capturing value in India’s growth. While there are other options available, the most prominent and popular way to establish business in India is through a subsidiary (a company incorporated under the provisions of Companies Act, 2013).
In India, taxation more or less follows federal structure with a very few exceptions of state specific taxes. With Introduction of Goods and Services Tax in the year 2017, the entire country follows one tax, drastically improving ease of doing business.
Locating your Office
Foreign companies willing to set up a business must evaluate the place where they wish to establish business operations in India based on employee skill sets, mobility of employees and infrastructure. While cities such as Bangalore, Chennai and Hyderabad are popular among IT and Life Sciences companies, cities such as Pune and Mysore have easy employee availability and lower mobility among employees. Cities such as Delhi, Gurugram and Mumbai are popular finance hubs. As an important practical consideration, in the initial phases of the subsidiary, the place of residence of a local prospective managing director may drive the decision of where to locate the subsidiary.
LEGAL ASPECTS FOR SUBSIDIARIES
While India has drastically improved on Ease of Doing Business Index, there is still a long way to go. Compliances are an important part of doing business in India and at times, a little complex.
Companies in India are governed according to the provisions of Companies Act, 2013. Among the type of companies, the most popular structure for subsidiaries is that of a private company which demand comparatively lower compliances but don’t offer opportunity to raise money through public issue unless converted to a public company. This is the most suitable structure for starting off with a subsidiary or a Joint venture.
Ownership and Management
Under this structure, a company can be set up with atleast two directors (managing the company’s business operations) and atleast two shareholders (having ownership of the company). Directors of the company need not be the shareholders. In case of wholly owned subsidiary, a nominal shareholding is given to fulfil the requirement of two shareholders for incorporation of a company.
From a practical perspective, to efficiently complete the process of company incorporation, we advise to have atleast one Indian Director on board. The holding company may, at any time in future may choose to alter the composition of the board of directors. In case the holding company wishes to appoint a local director only for the purpose of ease of setting up of a subsidiary company, we recommend entering into an explicit contract with the prospective director to this effect.
Considerations at incorporation
Authorised Capital - This is the maximum amount of investment that can be made in the company. This can be raised when need be, however will incur additional compliance cost. Higher initial authorised capital means higher government fees.
Memorandum and Articles of Association - These documents primarily define the objects of the business and lay down the bye laws for the company. A carefully drafted Articles of Association is very crucial for the holding company to exercise and retain control over the operations of the subsidiary company.
Considerations post incorporation
Separate Legal Entity - Indian subsidiary is a separate legal entity from the holding company. The operational relationship must be carefully documented and monitored in order to maintain the separate legal status of each company.
Transfer Pricing - The relationship between the Indian subsidiary and the holding company must be “arms-length” and the Income Tax authorities of both countries may scrutinize transfer pricing among the companies. The agreements are usually cost plus arrangements. To be arms length, such agreements must contain provisions normally found in such agreements such as how the scope of services will be specified, not just tax provisions.
Intellectual property - IP developed by the India subsidiary is usually assigned to the holding company since the subsidiary is only a captive service supplier. This should be backed by proper agreements including transfer pricing considerations.
Employee Benefits - Employee payments are usually broken in Basic Pay, Variable Pay and Allowances. This is done to reduce liability on account of a mandatory payment of 12% to provident fund (pension trust) calculated on basic pay, by both employer and employees. Companies tend to balance basic pay with allowances.
Companies Incorporated in India are considered domestic companies and are taxed at a lower rate of tax as compared to foreign companies. The tax rates applicable for F.Y. 2021-22 varies from 22% to 30% (depending on claims for exemptions and deductions) and surcharge of 7% to 12% (depending on net income during the year). There is an additional cess of 4% on the tax payable.
Dividends paid out by Indian subsidiaries to Holding Company are taxable in the hands of shareholders starting April 01, 2020. In cases where the dividends are paid to non-resident shareholders, tax is required to be deducted at 20% (plus applicable surcharge and cess) subject to tax treaty benefits where a lower rate, if applicable, can be availed. There are several countries where the tax treaties prescribe a much lower rate than the domestic rate of 20%.
While registration requirements differ from business to business and location where you are located, some of the common indicative registration requirements are:
Incorporation of Company Under Companies Act, 2013
Permanent Account Number (PAN)
Goods and Services Tax (GST)
Import Export Code (IEC)
Tax Deduction / Collection Number (TAN)
PF, ESI etc. under Labour Laws
Shops and Establishment Act
Since, ongoing compliance requirements are subject to change, you can write to us or call us for further details.
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