Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Friday, January 23, 2015

Introductory Guide for Foreign Companies to do Business in India

Entry Strategies

Once your business has decided to invest in India, the next decision is determining the appropriate mode of entering the country. Some important entry strategies are:

  • Exporting
  • Licensing and Franchising
  • Management Contracting
  • Turnkey Contracts 
  • Fully Owned Manufacturing Facilities
  • Assembly Operations
  • Joint ventures
  • Mergers & Acquisitions
  • Strategic Alliance

To test the Indian market without investing large amounts from the beginning itself, it is advisable to open a Liaison Office or a Branch Office.

Liaison Office (LO)

Liaison office acts as a channel of communication between the head office and entities in India. It cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to:

·       Collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers.
·         Promote export/import from/to India
·         Facilitate technical/financial collaboration between parent company and companies in India.
·         Approval for establishing a Liaison Office in India is granted by Reserve Bank of India (RBI).

It is not permitted to: 
·         Earn any income; 
·         Undertake any industrial, trading or commercial activity; 
·         Enter into any agreement on behalf of the head office; 
·         Borrow or lend money for any commercial activity; 
·    Charge any fee or commission or otherwise earn any income, in respect of liaison activities carried on in India.

As the liaison office does not earn any income, the expenses at liaison office are met out of the funds received by Head Office from time to time through authorized banking channels.

Branch Office (BO)

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 technical support to the products supplied by the parent/ group companies.
·       It is not allowed to engage in retail activities or carry out manufacturing or processing activities, directly or indirectly.

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.

Reserve Bank has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to some specific conditions.

Important Considerations for Setting Up of Liaison or Branch Office

Foreign entities desirous of setting up a Liaison Office or Branch Office are required to submit their application in Form FNC along with the documents mentioned therein to Foreign Investment Division, Foreign Exchange Department, Reserve Bank of India, Central Office, Mumbai through an Authorised Dealer bank. The applications from such entities in Form FNC will be considered by the Reserve Bank under two routes viz. Reserve Bank Route and Government Route.

Reserve Bank of India considers the track record of the applicant company, existing trade relations with India, the activity of the company proposing to set up office in India as well as the financial position of the company while scrutinizing the application.

Permission to set up Liaison Offices is initially granted for a period of 3 years and may be extended from time to time. The Branch/Liaison Offices established will be allotted a Unique Identification Number (UIN) and shall also obtain Permanent Account Number (PAN) from the Income Tax Authorities on setting up the offices in India.

The lead time in general for processing approval by RBI, Ministries of Finance, Corporate Affairs and Tax Department, etc. typically ranges from two to three months, depending on the inflow of information. 

Project Office (PO) 

Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. The central bank of the country, Reserve Bank of India (RBI), has now granted general permission to foreign entities to establish Project Offices subject to the following conditions.
         i.            the project is funded directly by inward remittance from abroad; or
       ii.            the project is funded by a bilateral or multilateral International Financing Agency; or
      iii.            the project has been cleared by an appropriate authority; or
     iv.            a company or entity in India awarding the contract has been granted Term Loan by a Public Financial Institution or a bank in India for the project.

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.

Local Associate

Instead of opening a Liaison or Branch Office in India, you can also enter India by building a good relationship with a local associate, who can carry out all the functions of BO/LO like conducting market research, acting as a purchasing agent or providing technical support at a much lower cost. A formal agreement or Memorandum of Understanding with the Local Associate may be sufficient.

Company under the Companies Act, 2013

A company registered under the Companies Act, 2013 has a separate legal entity from the members who constitute it. The company is owned by its members or shareholders, who also appoint the Board of Directors. At the time of incorporation, names of the initial shareholders, first directors, registered office and the objectives for which the company is being formed are communicated to the Registrar of Companies.

You can choose from the different forms of companies viz. Private Limited, Public or One Person Company depending on the number of shareholders and restriction on transferability of shares.

The capital contribution for the company must be brought into India by transfer from a foreign bank account through normal banking channel.

A foreign business entity can act as the founder of the Indian company which will be fully owned (100% shareholding) by foreign citizens or companies. A foreign citizen can act as Director of such company. It is also possible to have a company with only foreign citizens as Directors. However, the Companies Act, 2013 requires every company to have at least one Director who has stayed in India for a total period of at least 182 days in the previous calendar year. Such a resident Director need not be a citizen of India and can be a citizen of any other country. However, for the sake of convenience, many foreign owned companies have an Indian shareholder and Director. Such Indian shareholder and Director is normally a professional with no investment in the company and holding only one token share of Rs. 10.

Sandeep Ahuja & Co. helps in setting up Companies, Branch Offices, Project Offices and Liaison Offices. It also has a team of Professionals who understand the Indian compliances in-depth and are competent to act as Professional Directors.

Sources of Financing

Local and Foreign Funding

An Indian company owned by foreign entities can borrow funds from banks and financial institutions in India or abroad by complying with the Reserve Bank of India (RBI) guidelines for the same.

The maximum amount of External Commercial Borrowing (ECB) which can be raised by a company other than those in the hotel, hospital and software sectors is US $ 750 million during a financial year. The limit for hotels, hospitals and software sector is US $ 200 million. ECB up to US $ 20 million in a financial year should be with minimum average maturity of three years. Borrowings beyond US $ 20 million should have minimum average maturity of five years. External Borrowings within these limits do not require any permission from any government authority.

ECB funds should be used mainly for import of capital goods, new projects and modernization/expansion of existing production units. These funds should not be used for the acquiring land.

Bank Accounts 

Ordinary Non-Resident Rupee (NRO) Account: NRO account does not require RBI approval. Funds kept in this account should be used for incurring expenses in Indian Rupees. They may be in the form of current, savings, recurring or fixed deposit accounts. Balances in these accounts are eligible for remittance abroad subject to some limits.

Non-Resident External Rupee (NRE) Account: Balance in NRE account can be freely repatriated outside India along with interest accrued without RBI approval. These are strictly for the use of Non-Resident Indians and companies or entities owned by them.

Exchange Earners’ Foreign Currency (EEFC) Account: Businesses that earn foreign exchange are allowed t maintain such accounts.


Income Tax

All incomes earned or received in India by any entity are subject to Income Tax. The rates and manner of computing Income Tax vary according to the nature of entity viz. individual, partnership firm, Indian company, Foreign company, etc.

A PAN (Permanent Account Number) has to be applied for with the Income Tax Department for registration in their records. Having a PAN is a mandatory requirement to carry out business as opening of bank accounts as well as registration with various other government authorities requires quoting of the Permanent Account Number in the applications.

Further, your business may also be required to obtain a TAN (Tax Deductor’s Account Number) from the Income Tax Department for compliance with laws relating to certain business payments. 

Service Tax, Excise & Customs

Service Tax is collected by the Service Provider from the Service Receiver and paid periodically to the government. If your business provides services over Rs. 1 million in a financial year, it is mandatory to get a Service Tax registration. Certain Service Receivers may also be required to obtain such registration irrespective of the amount of service turnover in a financial year.

Excise is a tax liable to be paid by manufacturing businesses on removal of goods from their factory or warehouse. Excise Registration is obtained from the Central Board of Excise & Customs.

Customs Duty is a tax levied on import and export of goods. 

Sales Tax

Sales Tax is levied on sale of goods. The rates at which the goods are taxed vary from state to state and depend on the type of product being sold.

Registration under Sales Tax is mandatory if your business plans to sell goods from one state in India to another.

Other Taxes & Legal Compliances

Other taxes applicable to your business may be Wealth Tax, Stamp Duty, Professional Tax, Property Tax, Octroi, etc.

Your business may also attract requirement of compliances relating to various other laws in the ambit of Labor Laws, etc.

Sandeep Ahuja & Co. provides services to take care of all tax related registrations and compliances that your business may require in India. You may contact any of our Partners or Offices at any time for any help in this regard.

For more details, refer to our Publication "How to Do Business in India?"

No comments:

Post a Comment