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.

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?"

Foreign Director may Authorise any Resident Director or Professional to Intimate MCA by filing DIR -11

19 th January, 2015 MCA has notified Companies (Companies (Appointment and Qualification of Directors) Amendment Rules, 2015 in Rule 16.

Amendments have been made in Rule 16, Now Foreign Director may Authorise at the time of Resigning  any professional or Resident Director to file DIR 11.

Amendment has been made by adding the following words to Rule 16:
 
"Provided that in case a company has already filed Form DIR-12 with the Registrar under rule 15, a foreign director of such company resigning from his office may authorise in writing a practising Chartered Accountant/  Cost Accountant or Company Secretaries or any other resident director of the company to sign Form DIR-11 and file the same on his behalf intimating the reasons for the resignation "

MCA Introduced AOC-5 For Notice of Address at which books of account are maintained

MCA has introduced AOC -5 on 17 Jan, 2015 which is required to intimate MCA address of a place where company maintains Books of Accounts if it is other than registered office of the company.

This time there is change in TAX AUDIT FORM -3CD. A New Column 11 B is introduced for reporting of Address at which the books of accounts are kept. Now MCA Introduced this Form AOC -5 for reporting of address where books of accounts maintained if otherwise than at registered office of the company.

NOW EVERY COMPANY MUST FILE AOC-5 WHERE BOOKS OF ACCOUNTS ARE MAINTAINED AT A PLACE OTHER THAN REGISTERED OFFICE.

If there is any change in the place of keeping all or any of the books of account in India besides the registered office then, the company shall, within seven days of passing the Board Resolution, file this form giving full address of that other place in form AOC-5.

Section-128  : Every company shall prepare and keep at its registered office Including that of its branch office or offices, if any, all books of account and other relevant books and papers and financial statement for every financial year with respect to :

ü  all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;

ü  all sales and purchases of goods by the company;

ü   the assets and liabilities of the company; and

ü  in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilization of material or labor or other items of cost as may be prescribed by the Central Government, provided the Central Government so directs to any such class of companies or any particular company.

 Provided that all or any of the books of account aforesaid and other relevant papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full address of that other place in form AOC-5.

Attachments to AOC -5

·         Copy of Board  resolution wherein a decision regarding address at which books of accounts are to be maintained has been taken is to be attached.

·         Any other information i.e address proof if rented or owned as per the case applicable

Filing Fee Of AOC -5 :

Filing fee as per  Companies (Registration of offices and Fees) Rules, 2014

Normal Fee

Company having Nominal Share Capital                                               Fee applicable

 Less than Rs. One Lac                                                                     Rs.200 per document

 Above Rs. One lac but less than Rs. Five Lac                                     Rs.300 per document

 Above Rs.Five lac but less than Rs. Twenty Five Lacs                         Rs.400 per document

 Above Rs.Twenty Five lacs but less than Rs. One Crore                      Rs. 500 per document

 Above Rs.One Crore                                                                         Rs. 600 per document

Additional fee applicable as per other forms for delay in filing

WORKS CONTRACT SERVICES TAXABLE AND EXEMPTED UNDER SERVICE TAX ACT

DETERMINATION OF VALUE OF SERVICE PORTION IN THE EXECUTION OF A WORKS CONTRACT.

Notification No. 24/2012-S.T., dated 6-6-2012 read with Rule 2A Subject to the provisions of section 67 and 66E(h) of the act

DIVISIBLE WORKS CONTRACT	INDIVISIBLE WORKS CONTRACT
In case indivisible works contract Value of service portion in the execution of a works contract shall be determine in the following manner:-	In case indivisible works contract Value of service portion in the execution of a works contract shall be determine in the following manner:-
A) Gross amount charged (excluding VAT and Sales Tax) paid or payable B) LESS Value of property in goods transferred in the execution of the said works contract (Value of property = value taken on which VAT and Sales tax paid or payable)	(A)  in case of original works, service tax shall be  payable on forty per cent. of the total amount charged for the works contract;             (B) in case of works contract, not covered under sub-clause (A), including repair or maintenance, reconditioning or restoration, or finishing servicing of any goods, installation of electrical  fittings of an immovable property etc. service tax shall be payable on seventy percent. of the total amount charged for the works contract;
Value of works contract service shall include, -       (i)   service, labour & other similar charges       (ii)  charges for planning, designing and     architect’s fees;       (iii) hire charges for machinery and tools (iv) cost of consumables and cost of establishment of the contractor relatable to supply of labour and services;       (v)profit earned by the service provider relatable to supply of labour and services;	For the purposes of this rule,- (a)   “original works” means-         (i) all new constructions; and additions/ alterations to on land that are required to make them workable; (ii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;  (d)  “total amount” gross amount charged for the works contract Add:- fair market value of all goods and services supplied in relation to works contract, whether Less: the amount charged for such goods or services and VAT or sales tax paid or payable

         

CENVAT As per CENVAT Credit Rules, 2004 , CENVAT on Capital Goods and input services shall be available except duties or cess paid on any inputs ( Goods or Material Consumed ) , used in or in relation to the said works contract

WORK CONTRACT SERVICES EXEMPT FROM SERVICE TAX

Notification No.  25/2012-Service Tax dated 20^th June, 2012

12. Services provided to the Government, a local authority or a governmental authority by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of

(a)    a civil structure meant predominantly for  use other than for business or profession;

(b)   a historical monument, archaeological site or remains of national importance

(c)    a structure meant predominantly for use  as  an educational, a clinical, or  cultural establishment; 

(d)   canal, dam or other irrigation works; pipeline, conduit water supply or water treatment or sewerage treatment or disposal; or

(e)    a residential complex predominantly meant for self-use or the use of their employees

13.  Services provided by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of

(a)       a road, bridge, tunnel, or terminal for road transportation for use by general public;

(b)      a civil structure or  any other original works pertaining to a National scheme

(c)       a building owned meant predominantly for religious use by general public;

(d)      a pollution control or effluent treatment plant or a structure meant for burial or cremation of deceased;

14. Services by way of construction, erection, commissioning, or installation of original works pertaining to,-

(a)    an airport, port or railways, including monorail or metro;

(b)   a single residential unit

(c)    low- cost houses up to a carpet area of 60 square metres per house in a housing project approved Government of India;

(d)   post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e)    mechanised food grain handling system, machinery or equipment for units  processing  agricultural produce as food stuff excluding alcoholic beverages;

29. Services by the sub-contractor providing services by way of works contract to another contractor    providing  works contract services which are exempt

Contributed BY CA RAHUL SINGHAL

Monthly Obligations for January, 2015

Date	Statutory Act	Applicable Form	Obligation
06/01/2015	Service Tax	Challan No.GAR-7	Payment of Service Tax for quarter ending Dec,14 by individuals, proprietary and partnership firms, and for the month ending Dec,14 by companies
07/01/2015	Income Tax	Challan 281	Payment of TDS for month of December
07/01/2015	Income Tax	F.No. 15G, 15H, 27C	Submission of forms received in Dec,14 to IT Commissioner.
10/01/2015	Excise	ER-1	Return for Non SSI assessees for December.
10/01/2015	Excise	ER-6	Return by units paying duty >1 crore (CENVAT +PLA) for December.
10/01/2015	Excise	ER-2	Return for EOUs for December.
15/01/2015	DVAT	DVAT 20	Deposit of DVAT TDS for December.
15/01/2015	Provident Fund	E Challan Cum Return	E-Payment of PF for Dec,14 (Cheques to be cleared by 20th)
15/01/2015	Income Tax	Return No. 24Q, 26Q, 27EQ & 27Q	TDS returns for December quarter for non-govt. deductors & TCS returns for all deductors
21/01/2015	ESI	ESI Challan	Payment of ESI for December.
21/01/2015	DVAT	DVAT 20 & Central	Deposit of VAT and CST for December (tax period being a month), and also by quarterly dealers liable to pay tax above 1 lac in previous FY or in current FY, and for quarter ending December
22/01/2015	DVAT	DVAT 43	Issue of DVAT Certificate for deduction made in December.
25/01/2015	DVAT	Form 16 and CST 1	E Return of VAT for month/quarter ended December.
28/01/2015	DVAT	Form 16 & 1/Form 17 & Ack.	Physical Return of VAT and CST for December month/ quarter.
28/01/2015	DVAT	DVAT 48	Return of TDS for December quarter in DVAT 48
31/01/2015	Income Tax	Form 16A/27D	Issue of TDS/TCS certificates for quarter ended December

APPOINTMENT, REMOVAL, RESIGNATION OF AUDITOR AND INTIMATION TO MCA

The Companies Act 2013 has introduced many changes including Change in Auditor, appointment, re-appointment and information of the same with MCA. Earlier Auditor was filing 23B for appointment or re-appointment of the auditor, now burden of intimation to the MCA is shifted from Auditor to Companies. Every Company has to file ADT-1 within 15 days of the appointment of the auditor. MCA has introduced New Forms in their rules for Change in Auditor / Auditors :

- ADT-1 Appointment of Auditor within 15 Days of appointment / reappointment.

-  ADT – 2  Application to Central Government for removal of Auditor

- ADT-3 Resignation of Auditor to be filed by the Auditor within 30days of the resignation.  As per Rule 8 the Auditor has to inform MCA in ADT -3 giving reason for resignation and other facts relevant to the resignation. If the auditor does not file the ADT-3 and there is a fine of  Rs. 50000 to Rs. 500000/-

- ADT-4 Information by the Auditor to Central Government about fraudulent activities of the company.

  Section 139 and 140 read with Rule3 to Rule 8 provide for appointment, reappointment and removal of the auditor as per Companies Act 2013

·         Section 139(1)  -  General Provisions for appointment of Auditor.

·         Section 139(2)  - Listed & Specified Companies - No listed company and a company belonging to such class or classes of companies as may be prescribed, shall appoint or re-appoint

a)      an individual as auditor for more than one term of five consecutive years       and

b)      an audit firm as auditor for more than two terms of five consecutive years:

·         Sec 139(3)- Rotation of Auditor

·         Sec 139(4)- Manner of Rotation of Auditors Appointed u/s 139(2)

·         Sec 139(5) Appointment of Auditor- In case of Companies owned or controlled by Govt.

·         Sec 139(6) Appointment of First Auditors by BOD

·         Sec 139(7) Appointment of First Auditor In case of Companies owned or controlled by Govt.

·         Sec 139(8)Casual Vacancy

·         Sec 139(9) Reappointment of Auditor

·         Sec 139(10) Suo Motu Appointment of Existing Auditor

·         Sec 139(11) Appointment of Auditor by Audit Committee 

·         Sec 140(1) Removal of Auditor before the Expiry of his Term

·         Sec 140(2) Intimation of the resignation to the Registrar by the Auditor

·         Sec 140(3) Penalty for Non- Filing of Form by Auditor

·         Sec 140(4) Special Notice

·         Sec 140(5) Removal of Auditor by Tribunal

Also Given

DRAFT FOR NOTICE OF EXTRAORDINARY GENERAL MEETING  SPECIAL BUSINESS -  Appointment of Statutory Auditors to fill casual vacancy

Explanatory Statement under Section 102(1) of the Companies Act, 2013.

ADT-1, ADT-2, ADT-3 and ADT-4

Contributed by

Ms. Pooja Aggarwal

CA Finalist

Article Assistant

Sandeep Ahuja & Co.

Delhi Office