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SETTING UP BUSINESS IN INDIA
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General Aspects The Indian economy is the world’s Fifth-largest by nominal GDP and third-largest by purchasing power parity (PPP). Indian economy is characterised as a developing market economy. The long-term growth perspective of the Indian economy remains positive due to its young population and corresponding low dependency ratio, healthy savings and investment rates, and is increasing integration into the global economy. Nearly 60% of India’s GDP is driven by domestic private consumption and continues to remain the world’s sixth-largest consumer market. India has free trade agreements with several nations, including ASEAN, SAFTA, Mercosur, South Korea, Japan and few others which are in effect or under negotiating stage.
Legal Forms of Business Entities Legal form
Feature
Public Limited Company
Minimum 7 Members are required to start public limited company • in India and no restrictions on maximum number of members as per the provisions of the Companies Act, 2013. The public limited companies have more statutory compliances as compared to • private company. Shares are offered to the general public at large i.e. anyone can invest in a public limited company. Hence, improves capital of the company.
Public Limited Company can be incorporated by the Foreign promoter if the number of investors in the venture would be more than 7 in numbers. Minimum of 3 Directors are required to start a Public Limited Company.
Private Limited Company
Private Limited company is a type of company which offers limited • liability with restrictions on ownership. Minimum 2 members are required to start private limited company in India. The liability of • the members is limited to the amount invested in the shares of company. Private companies cannot freely transfer their shares to the public. Since private companies do not freely transfer their shares and involve limited interest by members, the law has granted them several exemptions that public companies do not enjoy.
Private companies cannot freely transfer shares to the public. Private company find it more difficult than public companies to access external financial support.
Wholly Owned Subsidiary Company
When foreign company makes 100% FDI (Foreign Direct • Investment) in India through an automatic route, the Indian company becomes the Wholly Owned Subsidiary of that Foreign • Company. It is treated as Domestic Company under Tax Law and is eligible for all exemptions, deduction benefits as applicable to any other Indian Company. Funding can be made in the form of share • capital and Loan.
Minimum of 2 Directors are required to start a wholly owned subsidiary company in India. Companies Act, 2013 permits NRIs, PIOs, Foreign Nationals, and Foreign Residents to act as a director of an Indian Company. To become a director of an Indian company, the person must first obtain a Director Identification Number (DIN) after obtaining Digital Signature Certificate.
Remarks
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LLP (Limited Liability Partnership)
• LLP form is a form of business model which: (i) is organized and operates on the basis of an agreement. (ii) provides flexibility without imposing detailed legal and • procedural requirements (iii) enables professional/technical expertise and initiative to combine with financial risk taking capacity in an innovative and • efficient manner The LLP can continue its existence irrespective of changes in partners. It is capable of entering into contracts and holding property in its own name.
LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the flexibility of a partnership. The LLP is a separate legal entity, is liable to the full extent of its assets but liability of the partners is limited to their agreed contribution in the LLP. Foreign Nationals can be a Partner in a LLP. A person can be admitted as a partner as per the LLP Agreement.
Partnership under Partnership Act, 1932
There should be at least two persons to form a partnership firm • in India. Partnership is formed by an agreement-oral or writtenamong the partners. Partnership deed is charter of the firm and it describe its scope. The partnership firm can be registered with the • Registrar of Firm.
Legal formalities associated with formation are minimal, hence it is relatively ease to form. The registration of a partnership is desirable, but not obligatory. Foreign Nationals cannot form Partnership in India.
Joint Venture
A joint venture is a business entity created by two or more parties, • generally characterized by shared ownership, shared returns and risks, and shared governance. The parties to a joint venture, i.e. • the co-venturers, generally execute a written agreement between them. This agreement states details like their obligations, profit/ loss sharing ratios, their rights and liabilities, etc.
A joint venture is only a temporary arrangement between two or more parties In sectors where 100 percent FDI is not allowed in India, a joint venture is the best medium.
Liaison Office/ Représentative Office
Prior Approval of Reserve Bank of India (RBI) is required to setup a • liaison office in India. As Liaison office cannot enter any commercial activity directly or indirectly. Its role is limited to collecting • information about possible market opportunities and providing information about the company and its products to prospective Indian customers. •
Initial Permission is granted for Three Years which could be subsequently extended by the RBI. A Liaison office is required to register itself with the Registrar of Companies (ROC) and to comply with certain procedural formalities, as prescribed under the Companies Act, 2013. Liaison Office has advantages like easy operations, less formalities and simple closer procedure. Transfer of assets by branch/ liaison offices to subsidiaries or other liaison/branch offices are allowed subject to prior approval of RBI.
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Project Office
Foreign Companies planning to execute specific projects in India • can set up temporary project/site offices in India for carrying out activities only relating to that project. The Government of India has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project.
Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
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Sole Proprietorship Firm
Sole proprietorships begin automatically when a person decides • to open a business. There are no documents to file to begin a sole proprietorship. • •
Sole proprietor have full control over every aspect of their business, whereas partnerships and corporations have to vote on important firm/company issues. Any profits from the business are just added to the owner’s income for taxation purposes. Foreign Nationals can not form proprietorship Firm in India.
One Person Company (OPC)
ne person company as a company that has only one person as • its member. OPC is classified as Private company for all the legal purposes, All the provisions related to the private company are applicable to an OPC, unless otherwise expressly excluded. An OPC • can be formed under any of the below categories: • Company limited by guarantee; • Company limited by shares
Only natural persons who are Indian citizens and residents are eligible to form a one person company in India. The same condition applies to nominees of OPCs. One Person company has lower compliance as compared to a Private Limited Company.
Branch Office
Foreign companies engaged in manufacturing and trading activities • abroad are allowed to set up Branch Offices in India for the following purposes: • • Export/Import of goods. • Rendering professional or consultancy services. • Carrying out research work, in which the parent company is • engaged. • Promoting technical or financial collaborations between Indian companies and parent or overseas group company. • Representing the parent company in India and acting as buying/ selling agents in India. • Rendering services in Information Technology and development of software in India. • Rendering technical support to the products supplied by the parent/ group companies. • Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines. For income tax purposes branch is treated as extension of Foreign Company and on income attributable to business in India is taxable as same of a Foreign Company. Transactions between Branch and Head Office are subject to Transfer Pricing Regulations.
PAN
This is a 10-digit alpha-numeric unique identifying number issued • by Income Tax Department and is essential for all those wishing to work in India and to obtain a residence permit. •
Entities working in India require a Permanent Account Number (PAN). PAN card is a mandatory requirement for all tax-paying individuals, partnerships, companies, etc. It also serves as an identity proof for a number of purposes.
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Residence Permit A Business Visa with multiple entry facility can be granted for A Business Visa is strictly given to those who would like to and Business Visa a period up to five years or for a shorter duration as per the make a business-related trip to India such as making sales requirement. A stay stipulation of a maximum period of six months or establishing on behalf of a company outside of India. will be prescribed for each visit by the concerned Indian Mission keeping in view the nature of the business activity for which such Business Visa is granted. Indian Missions can grant Business Visa with 10 years validity and multiple entry facility to the nationals of the United States of America. This visa should be issued with the stipulation that the stay in India during each visit shall not exceed six months. Relevant documents to be submitted alongwith application for a Business Visa
(i) The foreign national must have a valid travel document and a re-entry permit, if required under the law of the country concerned. (ii) Proof of financial standing and expertise in the field of intended business. (iii) Documents/ papers pertaining to proposed business activity such as the registration of the company under the Companies Act, proof of registration of the firm with the State Industries Department or the Export Promotion Council concerned or any recognised promotional body in the relevant field of industry or trade etc.
Transfer of Capital goods/ machineries and equipments
Transfer of Capital goods/ machineries and equipments enabling the approval of RBI, FEMA and also the custom duty under Import policy rules.
Organizational Questions Topic Registration with the relevant authority
Feature
Remarks
Registration
Authority
Company Partnership Firm
Registrar of Companies Registrar of Firms
Limited Liability Partnership Branch Office/ Project Office/ Liaison Office
Registrar of LLP Registrar of Companies
Trust
Registrar of Trust
Legal entities must be registered with the concerned authorities for their incorporation and commencement.
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Bank account
To Open a current bank account in India specified documents • are required like; Certificate of Incorporation, MOA, AOA, Board Resolution, Permanent account number (PAN) of entity. Etc. (in case of Company). Partnership deed, Identity and address proof • of beneficial owners, Partnership Letter, PAN of Entity, etc. (in case of Partnership Firm). LLP Deed agreement, LLP Letter, Passport- • size colour photograph of each of the authorised signatories, etc. (in case of LLP). Address proof of all the partners/ directors. The account holder would also be required to comply all the KYC norms.
Business Visa
Following are the documents required for applying the business It is mandatory to take a business visa for a foreigner to do work in India. visa in India: • Three copies of stamped and signed (by appropriate authority) undertaking letter from one of the directors of the company on company letterhead. • Papers proving the authenticity of business. • Permission papers from the Reserve Bank of India. • Approval papers from the Government of India (if a joint venture). • Three copies of Permanent Account Number (PAN) card or three copies of the application made for a PAN card.
In order to do business transactions, current accounts in banks is to be open for the day to day dealings in the business. Overdraft facilities are also available for current account holders. There are no restrictions applied on the deposits made into the current accounts opened at the bank’s home branch.
Employment Topic
Feature
Employment Visa
An Employment Visa is granted to foreigners desiring to come to An Employment visa is granted to a foreigner who is a highly India for the purpose of employment. skilled and/or qualified professional. Employment Visa shall not be granted – (i) for jobs for which qualified Indians are available and (ii) for routine, ordinary or secretarial/ clerical jobs. Employment visa is not granted to a citizen of Pakistan.
Remarks
Social system
There are several laws in India (The Employees Provident Funds And Miscellaneous Provisions Act, 1952, Payment of Gratuity Act, 1972, Employee’s Pension Scheme, 1995, Unorganized Workers’ Social Security Act, 2008) for the benefits and wellness of the employees which provides some indirect benefits to employer also by contributing by employer in Recognised Provident Fund their expenses will be allowed for deduction while computing profits for taxes from business and profession.
In India, both the employer and the employee are required to make contributions to Indian Social Security Fund, i.e. Provident Fund (PF) at the rate of 12 percent each of the prescribed salary subject to specified conditions under the Indian PF law.
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Taxation Union Government of India charges two types of taxes direct and indirect. There are few types of taxes which are the subject matter of State Government. Direct Taxes are charged on the net income/profit. Indirect Taxes are charged by Union Government on imports/production/sales/ services. These are not items of expense but added to the cost of production and recovered from the customers. Indian tax (financial) year starts from 1st April and ends on 31st March of the subsequent year. All tax assesses are required to follow financial year as their tax year but may have different accounting year. All the tax assesses are required to follow financial year as their tax year but may have different accounting year. All tax assesses are required to obtain unique tax identification number, called Permanent Account Number (PAN). All resident corporate tax assesses are supposed to file their tax returns by 30th September of every year even in the event of loss. Non-resident corporate are also required to file tax returns if they have business entity or office in India or have income from any Indian source, asset, business, etc., Tax rates in India are on the reducing trend.
Topic
Feature
Remarks
Corporate Tax
Corporate Tax is a direct tax levied on the net income or profit that The Companies having effective management corporate enterprises make from their businesses. The tax is imposed at or control in India would be deemed to be Indian Company. a specific rate as per the provisions of the Income Tax Act, 1961. Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act. While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India i.e. is being accrued or received in India. Foreign Companies/ Branch offices and Project offices are liable to pay tax at the rate of 40%. The following tax rates are applicable to the domestic companies: Domestic Company
Tax Rat
Where its total turnover/ gross receipts does not exceed Rs. 400 Crore in the F.Y 2019-20
25%
Where the company opted for Section 115BAA
22%
Separate taxation regimes exist for the taxation of specific industries or sectors like: •
Shipping businesses
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Exploration of mineral oils
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Operation of aircrafts
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Civil construction
Royalty received by Foreign Companies from Government or an Indian concern in pursuance of an agreement made with the Indian concern after Where the company opted for Section 115BAB 15% March 31, 1961, but before April 1, 1976, or fees Any other domestic company 30% for rendering technical services in pursuance of an agreement made after February 29, 1964 but The above tax rates shall be increased by a surcharge at the rate before April 1, 1976 and where such agreement of 7% (2% in case of foreign company) of such tax, where total has, in either case, been approved by the Central income exceeds one crore rupees but not exceeding ten crore Government shall be taxable at the rate of 50%. rupees and at the rate of 12% (5% in case of foreign company) of such tax, where total income exceeds ten crore rupees. However, the rate of surcharge in case of a company opting for taxability under Section 115BAA or Section 115BAB shall be 10% irrespective of amount of total income. The amount of income-tax and the applicable surcharge, shall be further increased by health and education cess calculated at the rate of 4% of such income-tax and surcharge.
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Indirect Tax
Features
Remarks
Goods and Service Tax (GST) is an Indirect Tax on the supply of goods • and services. The tax is levied at every point of sale. GST is levied at the point of consumption, hence this is a destination based tax. In the case • of intra-state sales, Central GST and State GST are charged. Inter-state sales are chargeable to Integrated GST. • Currently, there are three components of GST: i) Central Goods & Service Tax (CGST) which is collected by the Central Government. ii) State Goods & Service Tax (SGST) which is collected by State Government. iii) Integrated Goods & Service Tax
The GST is imposed at variable rates on variable items. Goods and services are divided into five different tax slabs for collection of tax - 0%, 5%, 12%, 18% and 28%. Some of the Products like; Petrol and petroleum products, alcoholic drinks, and electricity are not taxed under GST and instead are taxed separately by the individual state governments, as per the previous tax system.
Custom Duty
Customs Duty refers to the tax imposed on the goods when they are • transported across the international borders. Various types of custom duties are charged when goods are imported into India. These are divided • into:
Customs duties are computed on a specific or ad valorem basis. Such value is determined as per the rules laid down in the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007. There is an online portal “e-SANCHIT”, which enables registered persons to file their customs related documents online.
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Basic Customs Duty (BCD) Countervailing Duty (CVD) Additional Customs Duty or Special CVD Protective Duty Anti-dumping Duty Education Cess on Custom Duty
Remarks
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Note: Additional Customs Duty or Special CVD and Countervailing Duty (CVD) has been subsumed into Goods and services tax (GST).
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This guide has been prepared by Valuecent Consultancy Pvt. Ltd., an independent member of Antea Valuecent Consultancy Pvt. Ltd. 18A & 18B, Tower B3, Spaze I Tech Park, Sector 49, Sohna Road, Gurugram, India Tel.: +91-9999292228/+ 31 620839904 vikas@valuecent.com www.valuecent.in/index.php
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This publication is intended as general guide only. Accordingly, we recommend that readers seek appropriate professional advice regarding any particular problems that they encounter. This information should not be relied on as a substitute for such an advice. While all reasonable attempts have been made to ensure that the information contained herein is accurate, not Antea Alliance of Independent Firms neither its members accepts no responsibility for any errors or omission it may contain whether caused by negligence or otherwise, or forany losses, however caused, sustained by any person that relies upon it. © 2021 ANTEA