Legal & Taxation compliances to be followed by IT startup companies entering India

Introduction: With the rise of foreign IT companies establishing subsidiaries in India, it’s essential to understand the legal and taxation compliances they must adhere to. From incorporation under the Companies Act, 2013, to FEMA regulations, income tax filings, transfer pricing, GST, and Softex Form requirements, navigating the regulatory landscape is crucial for startups entering the Indian market.

There are numerous reasons for setting up of foreign IT companies in India:

1) Access to major market in India

2) Availability of skilled manpower at reasonable rates

3) Tax friendly regulations for foreign companies in India

4) Ease of doing business in India

5) And many more reasons

In this article, we are going to discuss the compliances to be followed by such subsidiary companies in India. In typical scenarios, foreign companies bring investments from abroad & set up a subsidiary company in India wherein 100% shareholding is held by such foreign company (herein referred to as ‘Holding Company’)

Such subsidiary company has to go through the following stages

1) Setting up of Company in India

Companies in India are set up under Companies Act, 2013 wherein all the documentations have to be submitted on the website of ROC.
Steps for Incorporation of Company

1. Name reservation of Company

2. Filing of the following documents within 15 days of approval of name

a. Memorandum of Association (MOA) & Articles of Association (AOA) alongwith other apostilled documents of foreign company are submitted online

b. Consent of Directors to act as Director of the company

c. Registered office address proof i.e. Rent agreement, Water bill/telephone bill

d. Foreign companies Apostilled documents

e. Passport & address proof of proposed directors

3. Obtaining Certificate of Incorporation, PAN & TAN of the Company

2) FEMA regulations

Filing of FCGPR form with RBI- within 30 days of allotment of shares, FCGPR has to be filed with ROC

Filing of FLA return – FLA return is the annual return for foreign assets & liabilities, FLA return has to filed on or before 15th July of each year.

3) Income Tax regulations

1) Filing of Income Tax return- Yearly annual Income Tax return has to be filed on or before 31st October of the succeeding year.

2) Tax audit of the Company- Tax audit Form 3CD has to be filed by the Company if its gross turnover or sales exceed INR 1 Cr in the financial year.

3) Transfer pricing study & Audit of the Company- An Inter-Company agreement has to be drafted between Holding & Subsidiary Company for the services that will be provided. This agreement shall specify the terms & conditions for the provision of services. Service fee shall also be decided in this agreement.

Here Transfer pricing regulations of Income Tax comes into play. Since both the company are related parties as per Income Tax Act, 1961. Transfer pricing regulations needs to be followed by the India Company.

Under Transfer Pricing rules, it is important to determine the price at which services are provided by Indian Company to Foreign Company. Such price should be similar to that if the services are provided to unrelated party.

4) Goods & Service Tax (‘GST’) regulations-

Foreign companies that are engaged in the supply of goods or services in India are required to register for GST. Letter of Undertaking (‘LUT’) can be applied on GST portal for not charging the GST.

5) Filing of Softex Form-

Any person who is engaged in the business of export of Software outside India is liable to file Softex Form.

Conclusion: Entering the Indian market offers numerous opportunities for foreign IT companies, but it also comes with a range of legal and taxation compliances. From setting up the company under the Companies Act to fulfilling FEMA, income tax, GST, and Softex Form requirements, ensuring compliance is essential for smooth operations and avoiding legal issues. By understanding and adhering to these regulations, IT startups can establish a strong foundation in the Indian market and drive growth effectively.

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