Starting a Company in India | Know about Foreing Company and Domestic Company in India | Incporporation, Compliances and Tax Rates

Why India

• One of the world’s fastest-growing economies, ranked at number 5
• India attracted the highest ever FDI inflow of $83.57 bn during financial year 2021-22
• Largest youth population in the world
• Ease of Doing business: India jumps 79 positions from 142nd (2014) to 63rd (2019) in ‘World Bank’s Ease of Doing Business Ranking 2020’
• India ranks #1 in the Central & Southern Asia Region
• India ranks 3rd amongst the Lower Middle-Income Economy Group
• Centre of global maritime trade to move from the Pacific to the Indian Ocean Region. India and China will be the largest manufacturing hubs of the world by 2030.

Foreign Direct Investment (FDI)

Department for promotion of Industry and Internal Trade (DPIIT) is the nodal agency to formulate Foreign Direct Investment (FDI) policy in India. However Few sectors are in prohibited list – such as Gambling, betting, atomic energy, railways, and tobacco.  Government approval is required for investments in all sectors (including allowed sectors) for cases investments coming from countries which share Land Border with India. In Other words the approval of government is required in all cases where investment is coming from countries such as Pakistan, China, Nepal, Mynmar Bhutan ,Bangladesh, Sri-Langa, Hong-Kong etc

Business in India can either be started as foreign company itself or business themselves can also register as Indian entity.

Indian Entity		Foreign Entity
Joint Venture / Wholly owned subsidiary Company	Private Limited Company	Liaison Office
	Public Limited company	Branch Office
	Limited Liability Partnership	Project Office

 

Indian entity

The Company will get the status of Indian company and all Indian regulations will apply.  (Income Tax, Goods and Services Tax (GST), Company Law, all other labour and commercial law etc.).

Joint venture

• A foreign entity elects  local partner in India with whom it wishes to enter a joint venture to operate its business in India. A Letter of Intent (LOI) or Memorandum of Understanding (MOU) is signed between the foreign entity and the local partner, which will state the basis and all terms and conditions of the joint venture agreement. The joint venture agreement should contain all the business terms, and it must be consistent with regional and international law.

Wholly owned subsidiary

• A foreign company can invest 100% FDI in an Indian company through the automatic route in allowed sectors. When a foreign entity invests 100% FDI in an Indian company, the Indian company will become a wholly owned subsidiary of the foreign entity/company.

Incorporation process

• Name Approval Application
• Digital Signature of Directors
• Company Registration
• Reporting to RBI

Statement of comparison between different business entities in India

Particulars	Private Limited Company	Public Limited Company	Limited Liability Partnership
Applicable Law	The Companies Act, 2013	The Companies Act, 2013	Limited Liability Partnership Act, 2008
Number of Owners	Minimum 2 shareholders	Minimum 7 shareholders	Minimum 2 Partners
Resident	At-least 1 director / designated partner to be resident in India.
Separate Legal Entity	Yes	Yes	Yes
Statutory Audit	Mandatory	Mandatory	Applicable above a threshold
Ownership Transfer	Yes	Yes	Yes
Perpetual existence	Yes	Yes	Yes
Taxation Rates	25%	25%	30%

 

Private Limited Company

A private limited Company is an entity which is separate from its member/ shareholders. It is Formed on the basis of perpetual succession meaning thereby it does not have defined termination and meant to be indefinitely. Liability of a member is limited to its share.

Capital Instruments / Investment options

• Equity share capital
• Compulsorily convertible preference shares
• Compulsorily convertible debentures
• Convertible notes

Features

• Separate legal entity
• No minimum capital requirements
• Limited liability

Repatriation

Dividends on payment of applicable taxes without the permission of RBI can be repatriated.

Public Limited Company

Public limited Company is extended version of Private Limited company. Number of complies increases in public limited company.  As the Name suggests public limited companies can also list their business on stock exchanges. The Minimum number of shareholders should be 7 to Incorporate a public limited company.

Limited Liability Partnership (LLP)

LLP can also be referred to as Semi-Private Limited Company and Semi Partnership Firm.  LLP agreement is the charter document for the functioning of LLP, it contains all the rules , regulations , Terms and Condition of the partnership. It also defines the roles and responsibility of the partners, profit sharing ratio and remuneration allowability.

Repatriation: The Capital contribution can be repatriated without any statutory thresholds by LLP.  Further there are no buy-back equivalent tax on the distributions made.

Foreign entity

A foreign company can register a liaison office, project office or branch office in India to carry on its operations in India. However, opening these offices requires the prior approval the Reserve Bank of India (RBI) or government.

Liaison office

• A foreign company can establish a liaison office for all liaison activities in India. The parent company (foreign company) will meet all the expenses of a liaison office through foreign remittance.

Prior approval of RBI required, RBI will issue Unique Identification Number.

Profit making records in their own home country for minimum 3 immediate previous year. Net Value should be minimum 50,000 USD to set up their business in India. Entities planning to start by liaison office must obtain Permanent Account Number (PAN) from The Income Tax Department.

A liaison office can undertake the below activities only:

• Representing the parent company in India.
• Promoting export or import in India.
• Promoting financial or technical collaborations on the group or parent company’s behalf
• Coordinating communications between the parent or group companies and Indian entities.

However, liaison office cannot undertake any business activity and earn any income in India. Therefore, the repatriation of profits is not applicable.

Branch office (BO)

• A foreign company can establish a branch office in India. To establish a branch office, the foreign company must be a large business and provide proof of profitability. BO’s are permitted to represent the parent company and engage in export/ import of goods.

Activities Permitted for BO’s:

• Export/import of goods.
• Rendering professional or consultancy services (other than practice of legal profession in any matter).
• Carrying out research work in which the parent company is engaged.
• Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
• Representing the parent company in India and acting as buying/ selling agent in India.
• Rendering services in Information Technology and development of software in India.
• Rendering technical support to the products supplied by parent/group companies.
• Representing a foreign airline/shipping company.

To register a branch office in India Foreign entity should be a profit making track record during the immediately preceding five financial years in the home country and net worth of not less than USD 100,000 or its equivalent.

Project office

• A foreign company can establish a project office in India to execute projects awarded to them by an Indian Company. However, to establish such a project office, the foreign company may be required to obtain approval from the Reserve Bank of India (RBI).

All new entities setting-up an LO/BO/PO in India should submit a report to the director general of police (DGP) of concerned state within five working days of it being functional.

Compliances of Indian Company

Post Incorporation compliances or activities to be carried out

• Appointment of auditor within 30 days of incorporation
• Commencement of business: The Company has to file a form evidencing the receipt of initial subscription in company to registrar of the companies within 180 days from the date of incorporation.
• Reporting to RBI – The details of investments received has to be reported to RBI within 30 days of allotment of shares.

Monthly compliances

• Monthly Payment of withholding taxes (TDS)
• Monthly filing of GST returns

Quarterly compliances

• Filing of return for Tax deducted (withholding taxes) during the Quarter.

Annual Compliances

• Financials Statement
• Audit of Financial Statement
• Filing of Annual Audited financial statement along with the directors report to the Registrar of the Companies.
• Filing annual return of Foreign Liability and Asset (FLA) with RBI

Taxation

Direct Tax

For	Tax Rate  ( Excluding surcharge)
Tax rate on Domestic Companies	25%
Tax rate on Foreign Companies	40%
Concessional Rates	15% if new manufacturing is setup subject to fulfillment of certain conditions.

 

Indirect Tax

Goods and Service Tax is the Indirect tax applicable on sale of goods or provision of services. General rate applicable on services is 18% and the general slab rate,

GST Rate	Applicable on
0%	Necessity goods, health, and education services
3%	Applicable on precious metals / Jewellary
5%	Reduced rate
12%	Standard Rate -1
18%	Standard Rate -2
28%	Luxury Goods

 

Apart from the above Compensation Cess is also leviable on certain products such as motor vehicle or tobacco products.

 

 

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