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.
Taxation
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?"
