BUSINESS SET-UP IN INDIA
PREVAILING TYPES OF BUSINESS ENTITY IN INDIA
All across India, there are varied types of Business Entities, designed for different situations, as stated below:
- Sole Proprietorship
- Partnership Firm
- Limited Liability Partnership
- Private Limited Company (as defined u/s 2(68) of Companies Act 2013)
- One Person Company (as defined u/s 2(62) of Companies Act 2013)
- Public Limited Company (as defined u/s 2(71) of Companies Act 2013)
- Hindu Undivided Family
In addition to the above-stated legal entities, the following types of entities can be incorporated by foreign investors/companies for the establishment of their business in India:
- Wholly owned Subsidiary Company
- Joint Venture Company
- Liaison Office/Representative Office
- Project Office
- Branch Office
SETTING UP OF BUSINESS IN INDIA
A Foreign Company, who is planning to set up its business operations in India, has following options, i.e., either directly or indirectly.
As An Indian Company
Foreign equity in Indian companies can be up to 100% depending on the demand of the investor and subject to equity caps in respect to the area of activities under the Foreign Direct Investment (FDI) policy. For Registration and Incorporation as an Indian Company, application has to be filed with ROC.
A foreign investor/company can establish:
- Joint Venture Company (strategic partnership with Indian Partners); or
- Wholly Owned Subsidiary of foreign company, subject to prior confirmation from Foreign Investment Promotion Board (FIPB).
The formation/incorporation of Company in India shall be as per the terms and conditions of Indian Companies Act, as amended in 2020, along with rules of Foreign Exchange Management Act (FEMA) Regulations.
*FEMA elaborates procedures for the foreign entities to invest in India. Foreign Investments are elucidated in different routes by Government of India:
- Automatic Route (list of activities is attached as Annexure-1): Businesses falling under the Automatic Route can incorporate without intervention of Government, subject to attainment of prescribed parameters in certain industries. RBI accords automatic approval to all such cases.
- Government Approval Route: Approval from Foreign Investment Promotion Board (FIPB) is appropriate in all other cases.
I. COMPLIANCES AS PER FOREIGN EXCHANGE MANAGEMENT ACT (FEMA) REGULATIONS
- At the time of receiving consideration of shares from the non-resident:
Prescribed form is required to be filed with the RBI, ROC by the Indian Company on receiving consideration for issue of Shares to the Non-Resident.
- At the time of allotment of shares/subscriptions of Memorandum of Association (MOA):
Intimation is required to be filed with the RBI, ROC by the Indian company after allotment of shares to the Non-Resident along with the Certificates by Practicing Professionals in India.
II. COMPLIANCES AS PER INDIAN COMPANIES ACT TO INCORPORATE PRIVATE LIMITED COMPANY IN INDIA
DIGITAL SIGNATURES CERTIFICATE (Documents required for making DSC is attached herewith as Annexure-3)
The First stage of Incorporation is to make application for Digital Signature certificate for all the directors of the proposed company.
1. The digital signature shall be valid for 2 years. There is no limit in number for signing the E-Form (s).
2. After two years, minimum one director must renew their digital signature.
OBTAINING DIRECTORS IDENTIFICATION NUMBER (DIN) (information/documents required for obtaining DIN is attached herewith as Annexure-4)
The Second stage of Incorporation of Private Limited Company is to apply for Director Identification Number (DIN) for the proposed Directors of the Company. Each individual has to apply for DIN separately in E-Form DIN-1. The DIN-1 form has to be signed by practicing professional.
1. As per Companies Act, 2013, minimum Two Directors are required to form a private limited company, out of them one must be resident in India in the previous year.
2. Only Individual can be appointed as Director.
APPLICATION FOR NAME APPROVAL OF THE PROPOSED COMPANY WITH THE ROC (Details/information required for application for reservation of name of the proposed Private Limited Company is attached herewith as Annexure-5)
The third stage of Incorporation of Private Limited Company is the name approval of the proposed Company. E-Form INC-1 has to be filed with Registrar of Companies (ROC) for name approval of the Company. E-Form INC-1 has to be digitally signed by applicant.
1. Maximum six names in order of preference may be given in the E-Form INC-1.
2. Significance of Name(s) must be given.
3. Whether the proposed name(s) are based on a registered trade mark or is the subject matter of an application pending for registration under the Trademarks Act. If yes, furnish particulars of trade mark or application.
4. The name of a private company should end with the words “Private Limited”.
5. If the name of company would contain any word/expression which is a part of name of any other body corporate then a No-objection Certificate (“NOC”) by way of Board resolution for use of such name would be required.
DRAFTING AND STAMPING OF MEMORANDUM & ARTICLES OF ASSOCIATION (“MOA AND AOA”)
The next step after name approval of the proposed Company is to prepare Memorandum of Association (MOA), Article of Association (AOA), Power of attorney (POA) in favour of practicing professional & Declaration in prescribed format by Practicing Professional and other related documents.
1. As per Companies Act, 2013 minimum 2 Shareholder/Promoters’ are required to form a private limited company.
INCORPORATION DOCUMENTS TO BE FILED WITH THE ROC
The next step is to file:
E form SPICE+ for MOA, AOA of the company
All these documents are required to be digitally signed by one proposed Director and practicing professional.
CERTIFICATE OF INCORPORATION
After filing the documents as mentioned in stage 5, the Registrar will review and issue Certificate of incorporation of the Company.
Mode of Indirect Presence – As an Unincorporated Entity:
A Foreign Company makes its indirect presence in India by establishing either of the following office(s):
- Liaison Office/ Representative Office. A liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison offices cannot undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote exports and imports from and to India and also facilitate technical and financial collaboration between the parent company and companies in India. Approval for establishing a liaison office in India must be granted by Reserve Bank of India (RBI).
- Project Office. Foreign Companies planning to execute specific projects in India can set up temporary project or site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions. Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
- Branch Office. Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
- Export/Import of goods
- Render professional or consultancy services
- Carry out research work, in which the parent company is engaged.
- Promote technical or financial collaborations between Indian companies and parent or overseas group company.
- Represent the parent company in India and acting as buying/selling agents in India.
- Render services in Information Technology and development of software in India.
- Render technical support to the products supplied by the parent/ group companies.
- Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing activities on its own but is permitted to subcontract these activities to an Indian manufacturer. Branch Offices established with the approval of RBI, may transfer profits outside India, net of applicable Indian taxes and subject to RBI guidelines. Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
Branch Office on “Stand Alone Basis” in SEZ: Reserve Bank has given general permission to foreign companies for establishing branch/unit in Special Economic Zones (SEZs) to undertake manufacturing and service activities. The general permission is subject to the following conditions:
- such units are functioning in those sectors where 100 per cent FDI is permitted;
- such units comply with part XI of the Companies Act,1956 (Section 592 to 602);
- such unit’s function on a stand-alone basis.
SEZ is a specifically delineated Tax Heaven / Duty Free Enclave and is deemed to be foreign territory for purposes to trade operations, duties and tariffs. Goods and services going into the SEZ area from DTA are treated as exports and goods coming from the SEZ area to DTA are to be treated as if these are being imported.
100% FDI is permitted under automatic route for setting up SEZs and Free Trade Warehousing Zones (FTWZ) subject to the SEZ Act, 2005 and the Foreign Trade Policy.
Corporate Tax Rates
The basic tax rate for an Indian company is 30% plus 3% Cess, results in 30.9%. Further, there is also a provision of Surcharge i.e. 7% on the amount of Income Tax if the total income exceeds 10 million Indian rupees (INR) and at 12% if income exceeds INR 100 million.
Foreign companies that have a Branch or Project Office in India are taxable at a higher basic rate of 40% which, with education tax, results in a rate of either 41.20%. Further, the Surcharge is 2% if income exceeds INR 10 million and 5% if income exceeds INR 100 million. A small reduction in the tax rate is being contemplated for 2016.
BENEFITS OF DOING BUSINESS IN INDIA
- Huge population – the large population of the company gives access to a huge market base. With the incoming of globalization, the country now has the capability to provide qualified and skilled workforce.
- Low Operation Cost– the operational cost of setting up a business in India is quite nominal. The cost of labour is quite less, also the latest tax schemes furthers the tax cutting process.
- Extensive Trade Networks– India has an extensive network for trade. over the time with emergence of bilateral free trade agreements and new tax regimes, trade in India has become less cumbersome.
- No language barriers– approximately 125 million people speak English in India, which is the most preferred language. This makes the operations even more convenient and hassle free.
- Startup Ecosystem– The Indian Government under its flagship project, “Startup India Movement” has introduced several reforms and policies to surge the FDI to promote business relationships with other countries. Major steps have been taken to substitute the outdated laws with new laws promoting growth of the nation.
- Progress coupled with Sustainability– due to the new emerging trends, the need for education has been understood which has ultimately uplifted the living standards of the population. The country has progressed but in a more efficient and sustainable way.