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
  • Borrowings allowed from financial institutions in India.
  • External Commercial Borrowings are subject to RBI approval
  • No Borrowings in India.
  • Expenses to be met from Income earned or funds received from HO
  • No Borrowings in India.
  • Expenses to be met from funds received from HO
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.
  • Export/Import of goods
  • Render services
  • Carry out research
  • Rendering technical support to the products supplied by parent company
  • Acting as a buying/selling agent in India
  • Representing parent company in India
  • Promoting Export/Imports from/to India
  • Acting as a communication channel
  • Promoting technical/ financial collaborations
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
  • Annual compliance with RBI in case of shares allotted to foreign persons (FLA return)
  • At least 1 meeting per quarter with at least 2 directors physically present together for approval of accounts
  • Minimum 1 shareholder meeting annually for approval of accounts and appointment of auditor
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
  • By way of dividend on deduction of TDS
  • By way of Royalty/ Fees for Technical fees (Tax efficient way)
  • By way of management fee (Tax efficient way)
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

  • The project is funded directly by inward remittance from abroad or
  • The project is funded by bilateral or multilateral international financing agency or
  • The project has been cleared by an appropriate authority or
  • The 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

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 – shreyans.dedhia@masd.co.in

CA Hardik Patel, Manager I’d – hardik.patel@masd.co.in

Ashish Raithatha, Consultant I’d – ashish.raithatha@masd.co.in

Author Bio

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