Sponsored
INTRODUCTION
Investment into India is booming. India has made its mark on the world map with the rapidly rising growth rate, notable human resources, technology advancement, government support and the ease of doing business. As a result of India’s focus on development, the Ministry of Finance has considerably relaxed various sectoral caps for FDI Investment thereby opening the door wide open to foreign players.
When an organization decides to enter a new market, the best choice of entry mode is included in the expansion strategy of the company. It helps the foreign entities to set their goals, resources, and frame policies accordingly.
In this article, we assess and compare several ways for foreign entities to enter into Indian market such as Liaison office, Project office, Branch office, Private limited company, etc.
OPTIONS AVAILABLE & SUITABILITY
| OPTIONS AVAIL-ABLE | AS AN INDIAN COMPANY | AS A FOREIGN COMPANY | ||
| WHOLLY OWNED SUBSIDIARY | JOINT VENTURE | BRANCH OFFICE | LIAISON OFFICE | |
| Meaning | An entity which is incorporated outside India, makes 100% FDI as per Indian FDI policy, the Indian company incorporated (either Private Limited or Public Limited) for this purpose is said to be wholly owned subsidiary of that foreign entity. | A JV is a tactical partnership where two or more entities agree to put in capital and/or goods, services to a commercial project. | The branch office serves as an extension to the head office of companies incorporated outside India and carries on the same business and activity as that of its parent company. | Liaison Office acts as representative office and acts as a channel of communication between the Foreign parent company (Head Office) and Indian companies. |
| Suitability | When purpose is to carry out activities of manufacturing, marketing, selling, etc. in Indian market on behalf of Foreign parent company.
More tax efficient compared to other options |
In sectors where 100% FDI is not allowed in India, a JV is the best medium, offering a low risk option for companies wanting to enter into the vibrant Indian market. | When purpose is to establish presence in India to render services or sell products manufactured by foreign entity. It cannot undertake manufacturing activity | When purpose is to promote collaborations or act as communication channel between parent foreign company and companies in India |
The above 4 entities as modes of investment in India is explained in detail below:
| OPTIONS | WHOLLY OWNED SUBSIDIARY/ JOINT VENTURE | BRANCH OFFICE | LIAISON OFFICE | ||
| BASIS | |||||
| Legal Status | Distinct and legal entity, recognised by the law as a legal person with rights and liability. | A simple form of structure having no separate legal standing of its own. | A simple form of structure having no separate legal standing of its own. | ||
| FEATURES : ADVANTAGES / DISADVANTAGES | |||||
| 1. Liability | Limited | Unlimited | Unlimited | ||
| 2. Compliance Cost | High | Low | Low | ||
| 3. Tax Rate | Lower | Higher | NA | ||
| 4. Dividend Distribution Tax | √ | x | x | ||
| 5. Income Accrual | √ | √ | x | ||
| 6. Borrowings in India | √ | x | x | ||
| 7. Expansions | √ | x | x | ||
| 8. Future Collabo-rations | √ (With Indian Entities) |
x | x | ||
| 9. Reporting of Global Accounts | x | √ | √ | ||
| CRITERIA FOR SET-UP : (OF PARENT COMPANY) | |||||
| Profit making track record | No requirement of track record | For immediately preceding 5 FY’s in the home country | For immediately preceding 3 FY’s in the home country | ||
| Net Worth | NA | ≥ 1,00,000 USD | ≥ 50,000 USD | ||
| Authorised Personnel | Compulsory to have an Indian Executive Director on board. | Indian person to represent before RBI and ROC | Indian person to represent before RBI and ROC | ||
| Time limit for set-up | <1 month | 3-4 months
(RBI permission takes time) |
3-4 months
(RBI permission takes time) |
||
| Time limit of Approval | At will – till Code cides to shut down it so perations | 3 Years
(Extension is possible) |
3 Years
(Extension is possible) |
||
| Permitted Incomes | All Incomes arising out of business in India | Income generated from permitted activities | No income accrual in India | ||
| Borrowings |
|
|
|
||
| Liabilities of the entity | Limited to the extent of its shareholding in the WOS/JV. The assets of the parent company are not subject to any attachments | Unlimited, the assets of Parent Co are at risk of attachment in case the liabilities of the BO exceeds its assets | Unlimited, the assets of Parent Co are at risk of attachment for the expenses incurred by the LO | ||
| PROCESS OF REGISTRATION: | |||||
| STEP – I | Obtain DIN for all Directors | Apply for DSC of Authorised Signatory | Apply for DSC of Authorised Signatory | ||
| STEP – II | Obtain DSC for all Directors | Filing of application with RBI through Authorised Dealer Bank (Form FNC) | Filing of application with RBI through Authorised Dealer Bank (Form FNC) | ||
| STEP – III | Application for Name Reservation | Verification of KYC from Banker of Parent Company | Verification of KYC from Banker of Parent Company | ||
| STEP – IV | Draft MOA & AOA | Approval of RBI for BO registration in India | Approval of RBI for LO registration in India | ||
| STEP – V | Subscription to the memorandum by the Shareholders | Registration of Branch Office with ROC | Registration of Liaison Office with ROC | ||
| STEP – VI | Submission of all the documents to ROC | Obtain registration under Shop and Establishment Act | Obtain registration under Shop and Establishment Act | ||
| STEP – VII | Receipt of Certificate of Incorporation | PAN, TAN, PT and Bank Account opening | PAN, TAN, PT and Bank Account opening | ||
| STEP – VIII | Apply for PAN, TAN, PT, GST, IEC and Bank Account | GST, IEC Registration | IEC Registration | ||
| STEP – IX | Submission of documents for FDI Compliance after subscription of Share Capital | ||||
| REGISTRATION REQUIREMENTS: (POST INCORPORATION) | |||||
| 1. PAN/TAN | √ | √ | √ | ||
| 2. GST | √ | √ | x | ||
| 3. Shop Establi-shment | √ | √ | √ | ||
| 4. Import / Export Code | √ | √ | √ | ||
| 5. ROC Regis-tration | √ | √ | √ | ||
| 6. Profession Tax | √ | √ | √ | ||
| Permitted Activities: | Any activities as stipulated in the “Object Clause” of the Memorandum of Association of the Indian Company subject to Indian laws and regulations. |
|
|
||
| ANNUAL COMPLIANCES: | |||||
| 1. Stat. Audit by CA | √ | √ | √ | ||
| 2. Tax Audit |
√ (If T/O exceeds INR 1Cr) |
√ (If T/O exceeds INR1Cr) |
NA | ||
| 3. Annual filings of audited accounts |
√ (Also Annual Return) |
√ (Incl. Global Accounts) |
√ (Incl. Global Accounts) |
||
| 4. Submit activity certificate | x | √ | √ | ||
| 5. TDS Returns | √ | √ | √ | ||
| 6. GST Returns | √ | √ | NA | ||
| 7. GST Audit | √ | √ | NA | ||
| 8. Annual IT Return | √ | √ | Filing of Form 49C with the IT department
No Income- No IT Return |
||
| 9. SFT Reporting | √ | √ | NA | ||
| 10. Others |
|
– | Filing of audited accounts with Directorate of Income Tax, New Delhi | ||
| TAXABILITY : | |||||
| Basis: | Tax Rate | Treated as Foreign Company and taxed as under: | No Income tax as there is no Income | ||
| Income < 1 Cr | 25.168% (As per Finance Act,2020) |
41.60% | |||
| Income < 10 Cr | 42.43% | ||||
| Income > 10 Cr | 43.68% | ||||
| Dividend to Parent Company | Dividend can be paid after deducting TDS @20% | Dividend paid to Parent Company is tax free | No dividend as there is no Income | ||
| Net Tax Cost to Parent Company | % Repat-riation of Profits | Tax Cost | Between
41.6% to 43.68% (As Above) |
NA | |
| 100% | 40.14% | ||||
| 50% | 32.65% | ||||
| 25% | 28.91% | ||||
| Transfer Pricing Provisions | Applicable, since the goods/ services are being transferred from Foreign Parent Company situated outside India to its Indian entity. Accordingly, Transfer Pricing Audit shall also be applicable. | NA | |||
| Repatriation of Funds to Parent Company |
|
Profits can be freely repatriated to Parent company subject to payment of applicable taxes in India | Only on closure of LO
|
||
| Note: Related party transactions are subject to Transfer Pricing Regulations | |||||
| CLOSURE OF ENTITY: | |||||
| 1. Winding up process | √
(Min. 6-8 months process) |
x | x | ||
| 2. Closure notice with RBI | √ | √ | √ | ||
PROJECT OFFICE
| BASIS | PARTICULARS |
| Meaning: | Foreign investors planning to execute specific projects in India that are linked to one-off contract can set up a temporary project site office in India to handle the contract.
It is essentially a branch office set up with the limited purpose for executing a specific project |
| Conditions: | The foreign entity has secured a contract from an Indian Company to execute a project in India and
Note: If the above criteria are not met, the foreign entity has to approach RBI to obtain approval |
Authors
CA Shreyans Dedhia, Partner I’d – [email protected]
CA Hardik Patel, Manager I’d – [email protected]
Ashish Raithatha, Consultant I’d – [email protected]
Sponsored
Kindly Refer to
Privacy Policy &
Complete Terms of Use and Disclaimer.
Author Bio
