Despite the global slowdown, India is one of the fastest growing economy of the world, which makes it one of the most preferred investment destination across the globe. India is also the world’s largest sourcing destination for the information technology (IT) industry. India’s cost competitiveness in providing IT services, which is approximately 3-4 times cheaper than the US, continues to be the mainstay of its Unique Selling Proposition (USP) in the global sourcing market.
In this article we will discuss some of the basic issues, which are required to be known while doing software business in India.
ESTABLISHING A PRESENCE:
Any person wishing to start IT business may choose any of the following entity for starting his business:
Unincorporated Body: Unincorporated body means which does not enjoy separate legal entity.
- Sole Proprietorship
- Partnership Firm
Incorporated Body: Incorporated body means a body which is duly registered under an Act of parliament, having perpetual succession and separate legal entity.
♣ Company:
- Private Limited Company
- Public Limited Company
♣ Limited Liability Partnership
The choice of legal entity depends on various factors like scale of operations, taxation issues, foreign investment, investment amount etc. However, it is advisable to form an incorporated entity because of its variety of features and some of the tender requirements. In India, hardly it takes two to ten working days to incorporate a Company, as the government is taking various steps for ease of doing business in India.
It is pertinent to note here that in case of foreign entity other entry options are also available, instead of floating JV or WOS. Foreign entity may establish its presence through setting up a Branch office or Project office or Liaison office in India also, such offices may be set up in accordance with the applicable guidelines of the RBI.
Setting up a liaison office or Branch office in a sector in which 100% FDI is allowed under the automatic route requires the prior consent of the AD. For the remaining sectors, RBI grants its approval after consultation with the Ministry of Finance. A foreign company, subject to obtaining approval from the AD Bank , may set up a project office in India under the automatic route, which would be further subject to certain conditions.
BASIC REQUIREMENT FOR INCORPORATION OF COMPANY:
There must be at least two Directors, firstly they would be required to obtain DSC and DIN then they will have to decide a name and get it checked by some professional. Then incorporation documents along with charter documents are filed, which is now centralized process, on being satisfied with all the legal formalities the ROC will issue a certificate of incorporation to the Company.
TAX CONSIDERATIONS IN STRUCTURING INVESTMENTS
While investing in India, one has to consider various applicable taxes and accordingly structure its capital. On Equity dividend, Company is required to pay DDT at 15% rate. However, in the hands of investor such amount of dividend would be exempt subject to the ceiling limit of Rs. 1 Crore. Further, at the time of disinvestment capital gain provisions of Income Tax would be applicable.
Investment from abroad in India is also structured through various destinations situated abroad, with whom the India and the source Country has favorable tax treaty, for strategic and tax purpose, so as to give maximum benefits to the investor.
POST INCORPORATION COMPLIANCES:
Once Company is incorporated it has to adhere with the applicable requirements of applicable laws. Like it has to set up its registered office within specified time, it has to convene its first Board Meetings, it has to appoint auditor, it has to open bank accounts and has to apply for service tax/ VAT registration etc.
Basically, in India, software Companies are broadly classified into following categories:
Service or Consulting Based Software Company:
These Companies provide services relating to the business consulting, information technology, software engineering and outsourcing services to the clients.
Product or Development Based Software Company
These types of companies have a products or set of products which forms the major portion of the revenue.
APPLICABLE TAXES:
Broadly, there are two types of software:
Packaged Software: These are commonly known as canned software, branded software, shrink- wrap software, ready- made application software.
Customized Software: Customized software is specifically created for a particular customer to meet his specific needs in terms of coding, layout, reporting, etc.
Taxability of Software has always been a debatable issue. As per the present applicable tax regime, on software, service tax, VAT and excise duty is chargeable, depending upon the case. There are various instances, where due to unclear tax regime, Company has to pay service tax, VAT and excise duty as well on the same product.
Excise Duty: Though, software is an excisable goods, but due to the exemption notification from the government only customized software are chargeable to excise duty.
VAT: VAT is chargeable on sales. Any transfer of right to use software would fall within the ambit of VAT and hence, VAT would be levied on such transfer.
Service Tax: Service tax is chargeable on services provided. In software transactions, where right to use software is not transferred, that is to say where software Company is providing services to its client like, testing of software, contract for technical services etc. then in that case service tax would be levied.
Corporate Income Tax: Besides above taxes, the Company is required to pay corporate Income Tax on the profits earned by the Company.
INTELLECTUAL PROPERTY RIGHTS:
Software Companies has to deal in various intellectual properties, so as to avoid litigations at later stage, Company should go for IPR registration in its name.
Trademark: Trademark registration is required to protect your brand name. If you have registered trademark then except you no one else can use your brand name.
Copyright: Copyright Registration is required for your source codes. It protects unauthorized use of source codes.
Patent: Patent Registration is required for any new technology developed by your Company. It also protects unauthorized use of your technology developed. Software can be patented in combination with new hardware only. However, it is pertinent to note that patent of software in isolation and computer programme is not allowed in India.
OTHER REQUISITE AGREEMENTS:
Software License Agreements: Company is required to get prepared software license agreement so as to enable transfer of right to use software, in legal manner.
Employment Agreements: Company is also required to prepare employment agreements for the human resources, recruited by it.
Non Disclosure Agreements: Software Company is required to deal in various confidential information like source codes etc. So, to prevent misuse of such confidential information, Companies are required to enter into non disclosure agreements, as per their need.
The government is consistently working for ease of doing business in India. If the government successfully implement GST regime, then possibly taxation issues in software industry would get resolved, which would be a welcome step for Indian Software Industry.
The author is a Company Secretary from Delhi and can be contacted @ prempyaratiwari1@gmail.com/ 08430645653.
Author Bio
Dear Sir,
Pls update this article considering the GST Regime.