Establishing a business in India
A Q&A guide to establishing a business in India, including an introduction to the legal system; the available business vehicles and their applicable formalities; corporate governance structures and requirements; foreign investment incentives and restrictions; currency regulations; and tax and employment issues.
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The main forms of business vehicles in India are:
Private limited companies.
Public limited companies (which can be listed or unlisted).
Limited liability partnerships (LLPs), which were introduced in 2008 and are gaining popularity for tax efficiency reasons.
Sole proprietorships (mostly used by small businesses run by an individual who wants to avoid the formalities of company law).
Traditional business vehicles (such as Hindu undivided families), which are not relevant to foreign investors.
Business vehicles are governed by the following Acts:
Companies: Companies Act 2013.
LLPs: Limited Liability Partnership Act 2008 (LLP Act).
General partnerships: Indian Partnership Act 1932.
The key differences between private and public limited companies are as follows:
A private limited company cannot have more than 200 shareholders, whereas a public limited company can.
The shares of a private limited company are not freely transferable, whereas the shares of a public limited company are freely transferable (subject to any shareholders' agreement).
A private limited company cannot raise capital from the public, whereas a public limited company can.
A private limited company has more flexibility for structuring its share capital and conducting its operations. For example, a private limited company can issue classes of shares other than equity and preference shares, and enjoys more flexibility for issuing shares with disproportionate rights.
Most decisions of a private limited company can be taken at board level without having to seek specific approvals from shareholders or statutory authorities.
Private limited companies are not subject to restrictions on share buy-backs and on providing financial assistance for the purchase of their own shares, subject to certain conditions.
The key differences between private or public limited companies and LLPs are as follows:
An LLP is not liable to dividend distribution tax (DDT). By contrast, private and public limited companies must pay DDT each time they distribute dividends.
An LLP has more flexibility in conducting its operations and taking decisions. Decision-making is governed by the agreement between the partners rather than legal provisions, as is the case with limited companies, which must comply with certain procedures and majority voting rules.
An LLP must have at least two designated partners who are personally liable for any failure to comply with the provisions of the LLP Act, which may lead to the imposition of penalties. They are also liable in certain cases for the debts and liabilities of the LLP. This may be a deterrent for certain owners.
Establishing a presence from abroad
A foreign company can establish a business presence in India by incorporating a private limited company, a public limited company or a limited liability partnership (LLP) in India. Most business sectors are open to foreign investment.
Where a foreign company wants to have complete control over all aspects of the business in India and intends to be in India for the long term, a wholly-owned subsidiary is recommended. However, a foreign company intending to operate in a sector where a 100% foreign investment is not permissible (for example, in the broadcasting sector or the print media sector) will need to form a joint venture with an Indian party.
Companies and LLPs must have at least one Indian resident individual director or designated partner, as the case may be.
A subsidiary or LLP will be treated as a foreign entity for the purposes of any downstream investments it makes in India in any of the following cases:
A foreign entity sets up a wholly-owned subsidiary.
More than 50% of the Indian subsidiary's capital (if the subsidiary is not wholly owned by the foreign company) is not owned by Indian citizens and residents.
More than 50% of the Indian LLP's capital is not contributed by Indian citizens and residents
Indian citizens and residents are not entitled to a majority of the profits of the LLP.
For example, if such an Indian subsidiary sets up a joint venture or a subsidiary in India, this will be considered as a foreign investment. Therefore, the foreign exchange control/management laws will apply, with the following consequences:
There will be an impact on the price at which shares can be purchased and sold.
Prohibitions may apply on investing in certain sectors (see Question 20).
Funds for any downstream investments will need to be sourced from overseas.
Reporting requirements will apply to each downstream investment,in addition to other compliance requirements relating to foreign investments.
A foreign company can trade directly in India without establishing a presence in India by:
Appointing an agent or distributor in India.
Entering into franchise agreements.
Supplying goods or services directly to Indian customers.
Setting up a branch, liaison office or project office.
Generally, direct trading does not require any approvals or licences. However, depending on the nature of the goods supplied, the foreign manufacturer will need to register its manufacturing premises with the local authorities (for example, in the case of drug manufacturing). Similarly, where food items are supplied, the local food safety laws will apply and the manufacturer will be jointly and severally liable with its agent for non-compliance with local laws.
A foreign company that sets up a branch in India must both:
Obtain the prior approval of the Reserve Bank of India.
Register with the Registrar of Companies and file information including:
detailed information on the foreign company's directors and secretaries;
financial statements of the foreign company's business operations in India;
details of any related party transactions;
audited statements relating to the Indian business; and
A foreign company doing e-commerce in India must register with the Registrar of Companies, regardless of whether any of its servers are located in India, as it is deemed to have a place of business in India (as in the case of a branch).
Foreign companies setting up a liaison office or a project office are also subject to approval and registration requirements.
A foreign entity's India source income is taxable in India. Additionally, a foreign entity may, under certain circumstances, be deemed to have a permanent establishment in India for tax purposes, in which case its worldwide income attributable to its Indian operations may become taxable in India.
In certain situations, a foreign entity may have to register with the Indian service tax authorities and charge service tax on the provision of any services to Indian customers (and deposit the tax levied with the service tax authorities). Where making payments to Indian vendors, a foreign entity may need to withhold taxes at source, in which case the foreign entity will need to register with the income tax authorities and deposit the taxes withheld. When receiving payments from India that are taxed at source, a foreign entity will need to obtain a permanent account number and register with the income tax authorities. Failure to do so may lead to the imposition of higher withholding tax rates. Annual income tax returns may also need to be filed.
Therefore, even when trading directly, it is critical to:
Undertake proper tax structuring and planning.
Review any relevant double taxation avoidance agreements between India and the country of incorporation and residence of the foreign company.
Setting up a general partnership requires a partnership agreement, which need not be in writing. General partnerships are regulated by the Indian Partnership Act 1932 (Partnership Act).
General partnerships can be registered with the Registrar of Firms or unregistered. However, when a partnership is not registered, a partner cannot bring claims against the partnership or any other partner to enforce rights arising from the partnership contract or the Partnership Act. Additionally, the partnership cannot bring claims against third parties to enforce rights arising from contracts. Therefore, in practice, almost all partnerships are registered.
Partners are jointly and severally liable with all the other partners for all the acts of the partnership.
Assets acquired from monies belonging to the partnership are deemed to be held by the partnership.
A general partnership is not treated as a separate legal entity other than for tax purposes.
Limited liability partnerships (LLPs)
To set up an LLP, the partners must subscribe their names on an incorporation document and file it with the Registrar of Companies. Each LLP must have at least two designated partners who are individuals and are personally liable for the LLP's non-compliance with the Limited Liability Partnership Act 2008. At least one designated partner must be a resident of India.
LLPs are recognised as separate legal entities and can acquire and hold assets in their own name.
The liability of an LLP's partners is limited to their contributions to the partnership. Partners are not personally liable for the:
Obligations of the partnership.
Wrongful acts or omissions of other partners.
However, the partners' liability is unlimited in the case of fraud.
Setting up a joint venture
Joint ventures are usually set up as private or public limited companies, and sometimes as limited liability partnerships. Joint ventures with unincorporated entities are not common and not advisable since they have adverse tax consequences.
To set up a joint venture, it is recommended that the following steps are taken:
Due diligence of the proposed Indian partner
Drafting of a shareholders' agreement or a partnership agreement, as the case may be
Incorporation of a new business vehicle, incorporating the key terms of the shareholders' or partnership agreement in the charter documents of that vehicle (such as the articles of association)
Subscription to the business vehicle's shares or partnership interest.
Reporting the receipt of funds and the issuance of shares to the Reserve Bank of India.
Joint venture/shareholders' agreements
Joint venture/shareholders' agreements are almost always concluded and are quite detailed. It is recommended that those agreements include the following provisions:
Allocation of rights and obligations of the parties.
Quorum requirements for board and shareholders' meetings.
Restrictions on transfers of shares, including right of first refusal on the transfer of any shares.
Funding clauses (that is, how the business vehicle will be funded (whether equity or debt) and who will provide the funds).
Relevant goals and objectives of the venture, linked to the business plan.
Any veto rights or special majorities required for taking decisions.
Deadlock resolution clauses where a party exercises any veto rights.
Definitions of breach and material breach, and their consequences.
Ownership of IP developed by the new business vehicle.
Liquidated damages clauses (to enable the recovery of losses arising from a breach where the losses would be impossible or difficult to prove).
Arbitration provisions and, ideally, the selection of the arbitrator and alternative arbitrators.
Ability to seek injunctive relief before the competent courts.
Confidentiality of information.
Operation of bank accounts and authorised signatories.
Appointment of accountants and auditors.
The parties should ensure that clauses of the agreement are not against the public policy of India, or these may otherwise be challenged at the enforcement stage.
Trusts are available and recognised in India. However, foreign investments in trusts are only permissible for setting up and operating:
Venture capital funds.
Private equity funds.
Real estate investment trusts.
A few other limited investment vehicles.
The answers to the following questions relate to private limited liability companies (or their equivalent).
Forming a private company
Private limited companies are most often used for setting up a wholly-owned subsidiary or a joint venture in India. Private limited companies are governed by the Companies Act 2013 and the rules and regulations issued under that Act. The Ministry of Corporate Affairs (MCA) regulates the operation of all private and public limited companies. The Registrar of Companies also has certain powers for the regulation of these companies. Foreign investment in private and public limited companies is regulated by the Reserve Bank of India (RBI),under the provisions of the Foreign Exchange Management Act 1999.
For more information on the Registrar of Companies and the RBI see box: The regulatory authorities.
Tailor-made or shelf companies
Companies are usually tailor-made, depending on the nature of the company's business and the number of shareholders. Shelf companies are not usually used due to the necessity to conduct due diligence, and to contingent liability issues.
The incorporation of a company is a straightforward process. Most documents must be filed online. To incorporate a company, the following steps must be followed:
Apply for a digital signature for all or any one of the proposed directors to enable the signing and filing of the electronic application forms for incorporation.
Apply for a director identification number for all the proposed directors.
Finalise the main objects of the proposed company and the amount of authorised share capital.
Reserve a name for the proposed company on form INC-1 (after checking for any conflicting names in the database of the MCA and the Trade Marks Registry)and pay filing fees of INR1,000.
File the application for incorporation on form INC-7 within 60 days from receipt of the name approval, along with various documents, including the:
memorandum and articles of association;
declarations from professionals associated with the incorporation; and
certain declarations from the first directors.
As an alternative, the applicant can use form INC-32, which enables the filing of various applications together (for example, applications for allotment of the director identification numbers, for reservation of the company's name and for incorporation of a new company can be filed together through this form).
A certificate of incorporation is issued when the Registrar of Companies finds that all documents are in order.
Other fees that are payable for incorporation are:
Filing fees for various forms and documents.
Stamp duties payable on stamping of the memorandum and articles of association, and certain other prescribed documents.
For example, for a company to be incorporated with a share capital of INR500,000, the fees will amount to about INR1,300. In the case of a share capital of INR1 million, the fees will amount to about INR2,250.
Generally, the entire incorporation process can be completed within one to seven days.
The main constitutional documents of a company are the:
Memorandum of association.
Articles of association.
These are customised to suit the requirements of the company and its shareholders. However, model forms prescribed under the Companies Act 2013 can also be used.
The memorandum and articles of association are public documents. Anyone can access a copy of these documents on the MCA's website against payment of a fee.
The company's board must present the company's financial statements to the shareholders for approval at each annual general meeting. The financial statements must then be filed with the Registrar of Companies within 30 days of such meeting.
The branch office of a foreign company must file with the Registrar of Companies both:
An annual activity certificate from a chartered accountant on or before 31 March.
The audited balance sheet on or before 30 September.
If the branch's annual accounts are finalised with reference to a date other than 31 March, the certificate, audited balance sheet must be submitted within six months from the end of the relevant financial year to the designated Authorised Dealer Category I bank. Copies of these documents must be filed with the Directorate General of Income Tax (International Taxation) in New Delhi along with the audited financial statements (including receipt and payment account).
A company must:
Provide details of its registered office to the Registrar of Companies within 30 days of incorporation.
Paint or affix its name and the address of its registered office outside every office or place of business, in a conspicuous position, in legible letters, in the English language and in the language that is in general use in that locality.
Additionally, a company must provide the following information on all business letters, billheads, notices and other official publications:
Address of its registered office.
Corporate identity number.
Fax number, if any.
Website address, if any.
A company must also have its name engraved in legible characters on its seal(if any). Any change of registered office address must be notified to the Registrar of Companies within 15 days of the change.
One-person companies are subject to the same disclosure requirements.
A company must specify at the end of its name whether it is a private or public company (that is, it must either state "private limited" or "limited").
A foreign company doing business in India must also comply with the above requirements if it has an office in India. If the liability of the foreign company's members is limited, this must be indicated outside every office and on the company's documents (such as letterheads).
The Central Government can require companies to provide information and statistics regarding the company's constitution or working.
Companies execute contracts or deeds in writing by authorising a key managerial person or 'company officers to sign on their behalf. Shareholder approval is required for contracts relating to certain types of transactions. To verify that the applicable formalities have been complied with, the counterparty usually asks for representations and/or certified true copies of the board or shareholders' resolutions.
Certain contracts must also be registered with the Registrar of Companies (for example, contracts relating to the appointment of a managing director).
Further, all contracts must be any of the following:
Printed on special paper known as "stamp paper".
Franked with the correct amount of stamp duty.
Supported by electronic payment receipts of stamp duty.
Stamp duty is a tax payable on the execution of contracts. In the case of failure to pay stamp duty, a contract is not admissible in evidence until the stamp duty and a penalty are paid. Contracts relating to immovable property transactions must also be registered with the competent sub-registrar of assurances.
A private limited company must have at least two members and cannot have more than 200 members. A public limited company must have at least seven members and can have an unlimited number of members.
One-person companies (OPCs) have recently been introduced. An OPC can be formed by a single member, who must be a natural person and an Indian resident and citizen. OPCs benefit from certain derogations from the provisions of the Companies Act 2013.For example, an OPC can have only one director. The single member incorporating the OPC can nominate another person to take over the company in the event of the member's death or incapacity to contract. The prior written consent of the other person must be obtained and filed with the Registrar of Companies at the time of incorporation of the OPC. An OPC must indicate that it is an OPC in all places where the name of the OPC is used.
Minimum capital requirements
The general minimum share capital requirements have been discontinued. However, minimum share capital requirements apply to:
Companies in certain sectors (such as the financial services sector).
Companies with foreign capital engaged in certain sectors (such as multi-brand retail trading, non-banking financial services and so on).
There are restrictions on the transfer of shares in private companies. To transfer shares, an instrument of transfer, duly stamped, dated and executed must be sent to the company along with the related share certificates, to seek approval from the board. Typically, the articles of association or a 'shareholders' agreement contain several restrictions and conditions to share transfers (including the creation of any encumbrances on the shares), such as:
Pre-emption rights of shareholders.
Deed of adherence to be signed by the incoming shareholder.
Restrictions on transfers to competitors.
New shares must first be offered to the existing shareholders in proportion to their paid-up share capital, unless a special resolution allows the offer to be made to other persons. A special resolution is one where the votes cast in favour of the resolution are three times the votes cast against the resolution.
Shareholders and voting rights
Oppression and mismanagement
Minority shareholders have statutory protections in the case of oppression and of mismanagement of the company. At least 100 shareholders or shareholders representing one-tenth of the total number of shareholders, whichever is the lesser, can protect their rights by filing a complaint with the National Company Law Tribunal, claiming that the affairs of a company are being conducted in a manner prejudicial to their interests. These shareholders can seek reliefs such as:
Regulation of the conduct of the company's affairs.
Purchase of their shares.
Restrictions on the transfer or allotment of shares.
Termination, modification or setting-aside of agreements between the company and its directors or managers.
Variation of rights
Where the company attempts to vary the rights of minority shareholders, holding at least one-tenth of the paid-up share capital of the company, these minority shareholders can apply to the competent authorities to challenge the attempted variation.
A class action law suit can be brought if not less than 100 shareholders, or such percentage of a company's shareholders as may be prescribed, are of the opinion that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or the company's shareholders. A class action can be initiated to claim damages against the company's directors, auditors and consultants.
The law allows the incorporation of entrenchment provisions in the articles of association of a company. Under these provisions, certain rights/provisions stated in the articles of association cannot be amended or varied without complying with procedures that may be more onerous than simply procuring a majority vote. Minority shareholders can avail themselves of the benefit of entrenchment provisions to protect their rights that could have otherwise been amended or varied by the majority shareholders.
Minority shareholders can protect their interests by entering into shareholders' agreements with majority shareholders and the company.
Liability of shareholders
In limited companies, the liability of shareholders is limited to the amount unpaid on their shares. However, any person (including a shareholder) who authorises the issuance of a prospectus with knowledge of any untrue or misleading statements (and in certain other circumstances) can become liable for damages and face criminal actions. Companies can also be incorporated as unlimited liability companies.
The statutory quorum requirements are as follows, unless the company's articles of association provide for a higher quorum:
In a private company, two members must be personally present.
In a public company:
five members must be personally present if the total number of members at the date of the meeting does not exceed 1,000;
15 members must be personally present if the total number of members at the date of the meeting is between 1,000 and 5,000;
30 members must be personally present if the total number of members at the date of the meeting exceeds 5,000.
If the voting takes place by a show of hands, each member has one vote. If the voting takes place by a poll, each member has votes in proportion to their shareholding.
Preference shareholders can only vote on matters that directly affect their rights. Therefore, from a control and management perspective, it is advisable to subscribe to equity shares or to a mix of equity and preference shares.
Where shares with disproportionate rights have been issued, the voting rights will correspond to the terms of the issue. In the case of a public company, specific rules apply to the issue of shares with disproportionate rights.
The articles of association can provide that no member can exercise voting rights in respect of any shares on which any calls or other sums payable by them have not been paid, or in regard to which the company has exercised a right of lien.
A proxy cannot speak at a meeting or vote by show of hands, but can only vote on a poll.
The articles of association of a private company can derogate from the above rules.
Decisions concerning various matters require a special resolution. Decisions that require a special resolution include:
Selling, leasing or disposing of the whole or substantially the whole of an undertaking of a company.
Borrowing monies (apart from temporary loans) in excess of a company's paid-up share capital and free reserves.
Issuing shares on a preferential allotment basis.
Amending a company's memorandum and articles of association.
Changing the company's registered office (outside the limits of a city, town or village).
However, private companies may be exempt from the requirement to pass a special resolution in certain cases.
Voting majorities can be disapplied to protect a minority shareholder if the National Company Law Tribunal (NCLT) issues an order to protect the minority shareholders against oppression or mismanagement (see Question 15, Oppression and mismanagement). For example, the NCLT can order that contracts entered into by the company be terminated or modified, that the managing director, manager or any of the company's directors be removed, and so on.
Various sector-specific laws impose conditions and restrictions on establishing a business. Certain sectors (such as insurance, banking, media, telecom and defence) are heavily regulated and are subject to various requirements such as:
Minimum capital requirements.
Control to be vested with Indian citizens and residents.
Specific licences to be obtained from sector regulators.
The atomic energy and the railway sectors are not open to the private sector (subject to a few exceptions).
Foreign investment restrictions
Almost all sectors are open to foreign investment. However, foreign investment is prohibited in a few sectors and businesses, including:
Lottery business, gambling and betting (including casinos).
Manufacturing of cigars, cigarettes and of tobacco or tobacco substitutes.
Agricultural sector other than floriculture, horticulture, cultivation of vegetables and mushrooms (among others) under controlled conditions.
Railway operations (subject to limited exceptions).
Real estate (subject to limited exceptions).
Construction of farm houses.
Trading in transferable development rights.
Additionally, certain conditions and restrictions may apply in certain sectors where foreign investment is permitted, including the following:
Private security agencies.
Multi-brand retail trading.
Restrictions include minimum capital requirements, domestic sourcing requirements and the requirement that control be vested with Indian citizens and residents.
All foreign investments must be reported to the Reserve Bank of India (RBI). Any shares or securities issued to foreign investors must comply with the RBI's pricing guidelines.
There are exchange control and currency regulations under the Foreign Exchange Management Act 1999, and the various rules and regulations issued under that Act. These regulations are regularly reviewed and amended. Most amendments aim to liberalise foreign investment and to remove restrictions. Most aspects of these regulations are covered in Questions 19 and 20.
There are certain restrictions on foreign ownership and occupation of real estate. Foreign investment in real estate business, the construction of farm houses and trading in transferable development rights is not permitted. However, this prohibition does not apply to the:
Development and construction of townships.
residential and commercial premises;
roads and bridges;
recreational facilities; and
city and regional-level infrastructure.
Further, income arising from the lease of real estate does not amount to real estate business. Foreign investment in real estate investment trusts that are registered with the Securities and Exchange Board of India is also permitted. Certain conditions apply, such as:
Lock-in periods before the sale of investment.
Sale limited to that of developed plots to end-customers.
A foreign entity can only occupy real estate if the following conditions are met:
The entity is doing business in India in accordance with exchange control regulations.
The entity has a company, branch or other permissible office.
The real estate is being used for the purposes of an authorised business.
There are general restrictions and requirements on the appointment of directors. To be appointed as a director, a person must not:
Be of unsound mind under an order issued by a competent court.
Be an undischarged insolvent.
Have a pending application for being adjudicated an insolvent.
Have been convicted by a court of any offence, involving moral turpitude or otherwise, and sentenced to imprisonment for not less than six months, where less than five years has elapsed from the date of expiry of the sentence.
Have been convicted of any offence and sentenced to imprisonment for a period of seven years or more.
Be disqualified from being appointed as a director under an order of a court or tribunal.
Be in default for paying calls in respect of shares held by him or her, whether alone or jointly with others, and six months or more have elapsed from the last day for the payment of the call.
Have been convicted of an offence dealing with related party transactions at any time within the last five years.
To be eligible, a person must also have a director identification number.
Additionally, a company director cannot be re-appointed as director of that company or any other company if, within the last five years, the company:
Did not file financial statements or annual returns for any continuous period of three financial years.
Failed, for a continuous period of one year or more, to:
repay deposits or interest on them;
redeem debentures or pay interest on them; or
pay any dividend declared.
A private company can provide for additional restrictions as it may deem appropriate.
All companies must have at least one director who has stayed in India for a minimum of 182 days in the previous calendar year.
At least one-third of the directors of a public listed company must be independent directors.
Indian companies have a unitary board structure.
Number of directors or members
A private limited company must have at least two directors. A public limited company must have at least three directors. A one-person company can have only one director.
The maximum number of directors is 15, unless a special resolution is passed to increase the maximum limit. Certain types of companies must have at least one female director.
Employees do not have a statutory right to representation on the board.
Reregistering as a public company
A company can alter its charter documents and after seeking approval of the Registrar of Companies, convert into a public limited company. The Registrar of Companies will then issue a new certificate of incorporation. A public company must have a minimum of seven shareholders.
See Question 13.
Net asset requirements apply to companies wishing to list securities on a stock exchange. Under the listing requirements, at least 25% of a company's share capital must be held by members of the public, subject to certain exceptions.
Public companies and public listed companies are more heavily regulated than private companies. They must comply with various additional procedural formalities under the Companies Act 2013 and the listing regulations. All public listed companies are also governed by various regulations issued by the Securities and Exchange Board of India (for example, on insider trading and on the substantial acquisition of shares or control).
The main direct taxes that businesses are subject to are:
Corporate tax/income tax, which is levied on business income.
Dividend distribution tax, which is levied on the distribution of dividends (and on buy-backs of shares in certain cases).
Minimum alternative tax, which applies on book profits if the total income of a company is less than 30% of its book profits.
Capital gains tax, which applies to gains made from the transfer of capital assets.
There are also specific circumstances where companies may be subject to taxes. For example, where a company issues shares for a consideration exceeding their fair market value, the difference will be taxed as company income, subject to certain exemptions available for certified start-up companies.
Additionally, businesses must withhold tax on payments that exceed a certain threshold, and deposit the tax withheld with the tax authorities.
The main indirect taxes that businesses are subject to are:
Value added tax, which is levied on the purchase of goods and on certain specified transactions.
Service tax, which is levied on the purchase of services.
Customs duties, which apply to imports.
Excise duty, which applies to manufacturing activities.
Central sales tax, which is levied on inter-state movements of goods.
Octroi duty, which is levied on the entry of goods in local areas.
Property tax, which applies to property ownership.
Stamp duty, which is levied on the execution of instruments such as contracts, share certificates and share transfer forms.
Tax payment and filing requirements
Businesses must file a tax return and pay income tax for each financial year. The financial year for tax purposes commences on 1 April and ends on 31 March. Taxes are paid in the assessment year (that is, the year following the year in which income is earned). Advance tax is payable on prescribed dates, based on estimated income.
Indirect taxes are paid as part of the invoices issued by the vendor. The vendor company must deposit the taxes Collected with the tax authorities at prescribed intervals. Service tax on the purchase of certain prescribed services (such as legal services) is payable on a reverse charge basis (that is, the purchaser of the service must deposit the tax with the tax authorities).
An entity incorporated in India becomes a tax resident of India. Additionally, a foreign entity can be deemed to be an Indian resident if the key management and commercial decisions necessary for the conduct of its business as a whole are in substance made in India.
A non-resident business/entity is liable to pay tax in India on income that:
Is received or deemed to be received in India.
Accrues or arises in India, or deemed to accrue or arise in India.
However, exemptions may be available under the double taxation avoidance agreements that India has entered into with various countries. For example, the business income of a foreign entity/business that has no permanent establishment in India is not taxable in India under several treaties. On the other hand, a non-resident that is deemed to have a permanent establishment in India runs the risk of having its worldwide income taxable in India if to the extent such income is attributable to its Indian operations or a permanent establishment. The term "permanent establishment" is not defined in the Income-tax Act 1961, but has been defined in various treaties. Generally, the number of employees is not a determining factor when assessing whether a business has a permanent establishment in India. However, in certain circumstances, having even one employee or a dependent agent in India can be deemed to constitute a permanent establishment in India.
Most treaties provide that royalty income earned in India will be taxable in India and will be subject to withholding tax.
Additionally, a non-tax resident becomes liable to pay tax in India when it has withheld taxes from payments made to Indian residents, as it must deposit such tax with the Indian tax authorities. A non-resident may also become liable to pay tax in India in the case of a transfer of assets deemed to be located in India. For example, if a foreign entity sells shares of another foreign company that derives its value substantially from assets located in India, these shares will be deemed to be located in India and gains on their transfer will therefore be taxable in India (subject to certain conditions and exceptions).
There were no specific thin capitalisation rules under Indian law until recently. However, thin-capitalisation provisions have been introduced in the Finance Bill 2017 on 1 February 2017. Under the proposal, one entity cannot make interest payments to another related entity beyond 30% of the paying entity's earnings before interest, taxes, depreciation and amortisation, or will otherwise be disallowed. This provision is to take effect from 1 April 2018 and will only be applicable where the interest expenditure exceeds INR10 million.
Additionally, under the general anti-avoidance provisions of the Income-tax Act, 1961 which will come into force in April 2017, the tax authorities will have the power to re-characterise debt as equity in the case of transactions constituting tax avoidance arrangements. Therefore, companies that use debt financing rather than equity financing without any commercial justification are likely to be questioned by the tax authorities.
Transfer pricing is a well-established concept under Indian laws. The Income-tax Act, 1961 contains detailed transfer pricing provisions. These provisions require associated enterprises to transact at arm's length, and to calculate the arm's length price on the basis of one of the various prescribed methods, such as the:
Comparable uncontrolled price method.
Resale price method.
Cost plus method.
Profit split method.
Transaction net margin method.
Under safe harbour rules, certain eligible entities can request the tax authorities to accept a transfer price declared by an entity. Similarly, there are provisions for entering into advance pricing agreements.
International transactions reports must be filed with the tax authorities each year.Under a recent amendment that will enter into force in April 2017, any Indian resident entity that is part of an international group, and has a non-resident parent, will need to provide detailed information to the tax authorities in the prescribed format regarding the following matters (among others):
Amount of revenue.
Profit or loss.
Amount of tax paid.
The transfer pricing provisions also apply to certain specified domestic transactions.
Grants and tax incentives
Various tax incentives and exemptions are available. These incentives and exemptions aim to encourage innovation, exports, the development of certain remote regions of India, and the development of certain specific industrial sectors. For example:
A company or a limited liability partnership incorporated after 1 April 2016, but before 1 April 2019, may be granted a three-year tax holiday if:
it is engaged in a business that involves innovation, development, the deployment or commercialisation of new products, or processes or services driven by technology or IP;
its turnover does not exceed approximately US$4 million; and
it holds a certificate of eligibility from the prescribed authority.
Various states in India provide exemptions from the payment of stamp duties to companies operating in the information technology sector.
Companies set up in special economic zones have been granted tax holidays for exporting goods and services.
Rental income of a real estate investment trust, registered with the Securities and Exchange Board of India (SEBI), and generated through leasing of real estate assets owned by the trust is not taxable.
Capital gains earned by investment funds registered with the SEBI are not taxable.
Additional depreciation on new plant and machinery installed by entities in the power transmission business is available.
Royalty income earned from the licensing of patents developed in India is taxed at 10%.
Agricultural income is not taxable.
Income tax exemptions are available to industrial undertakings set up in the north eastern region of India.
Industries in certain sectors (such as mineral oils, natural gas, developing and building affordable housing projects) are eligible for tax incentives.
Industries hiring additional employees are eligible for tax deductions.
Indian employment laws apply to both:
Foreign employees working in India.
Employees from India working abroad.
The main laws regulating employment relationships are the:
Shops and Establishments Acts of various individual states.
Workmen's Compensation Act 1923.
Trade Unions Act 1926.
Industrial Disputes Act 1947.
Factories Act 1948.
Equal Remuneration Act 1948.
Minimum Wages Act 1948.
Employees Provident Funds and Miscellaneous Provisions Act 1952.
Contract Labour (Regulation and Abolition) Act 1970.
Maternity Benefit Act 1961.
Payment of Bonus Act 1965.
Payment of Gratuity Act 1972.
Sexual Harassment of Women at Work Place (Prevention, Prohibition and Redressal) Act 2013.
These laws apply to employees of Indian companies and establishments regardless of their nationalities or place of work, and regardless of the choice of law in the employment contract, subject to certain limited exceptions under the provident fund legislation.
Before entering into India, all foreign nationals must obtain a business visa,an employment visa or other appropriate visa (such as a conference visa) from the Indian consular post in their home jurisdiction. Visa applications can also be made online.
To obtain an employment visa, the following conditions must be met:
The applicant must be a highly skilled or qualified professional engaged or appointed by a company, organisation, industry or undertaking in India under a contract or an employment basis at a senior level and for a skilled position (such as a technical expert, senior executive, manager and so on).
The employee's salary must exceed US$25,000 per year.
The employment visa must be issued in the applicant's country of origin, or country of domicile if the applicant has been a permanent resident in that country for more than two years.
An employment visa cannot be granted for routine, ordinary or secretarial/clerical jobs and for jobs for which qualified Indians are available.
Foreign nationals holding a long-term visa (that is, for more than 180 days)must register with the Foreign Regional Registration Office within 14 days of their arrival in India. Employment visas are generally granted for a year or for the term of the contract of employment with the Indian company. They can generally be extended. The term of the visa starts running from the date of issuance, and not from the date of entry into the country.
Proposals for reform
There are several impending developments and proposals for reform, including the following:
All indirect taxes are proposed to be merged into a goods and service tax, which is aimed at simplifying the indirect tax regime and at reducing double taxation.
Various double taxation avoidance agreements have been renegotiated, and others are in the process of being renegotiated and amended, to plug loopholes that had led to abuse of treaty provisions.
The Companies (Amendment) Bill 2016 is pending before Parliament and aims to:
amend the provisions relating to structuring, disclosure and compliance requirements applicable to companies; and
simplify certain procedures relating to private placements.
The Foreign Investment Promotion Board is to be abolished, based on a proposal for further liberalisation of the foreign direct investment regime and for most sectors being open to foreign investment under an announcement of the Finance Minister made on 1 February 2017.
The regulatory authorities
Registrar of Companies
Main activities. The Registrar of Companies is responsible for registering companies, ensuring compliance with company law and maintaining companies' records.
Reserve Bank of India (RBI)
Main activities. The RBI is in charge of formulating, monitoring and implementing the monetary policy of India, regulating and supervising the financial system, issuing currency and managing foreign exchange in the country.
Securities and Exchange Board of India (SEBI)
Main activities. The SEBI is the Indian securities regulator and protects the interests of investors.
Foreign Investment Promotion Board
Description. This is the official website of the Foreign Investment Promotion Board.
Registrar of Companies
Description. This is the official website of the Registrar of Companies.
Reserve Bank of India (RBI)
Description. This is the official website of the RBI.
Gandhi & Associates
Professional qualifications. Advocate, Maharashtra and Goa; Solicitor, England and Wales (non-practising)
Areas of practice. Joint ventures; mergers and acquisitions; venture capital and private equity; tax structuring.
Non-professional qualifications. B Com, University of Mumbai
Advised a group of investors on a private equity transaction in the technology sector.
Advised a private equity fund on due diligence of an investee company.
Advised a limited partner on investing in a private equity fund.
Advised a company on the sale of its assets.
Advised a foreign company in the mobile application sector on tax structuring and setting up operations in India.
Advised a media and entertainment company on raising private equity funds.
Advising a sponsor on setting up a seed fund.
Languages. English, Hindi, Gujarati
Professional associations/memberships. American Bar Association (ABA); International Bar Association (IBA); Society of Indian Law Firms (SILF); Bar Council of Maharashtra and Goa; Law Society of England and Wales.