Which legal structure companies have for making a foreign investment in India?
Direct Foreign Investment is allowed in most Indian sectors for most of foreign companies (except for border countries). Majority of restrictions belong to strategic sectors like defence, energy, lottery, real state, etc. in which a previous approval from the Government is required.
There are several ways to invest in India and start a business. Investors can establish an incorporated company in India or maintain the foreign status.
Some of the most usual legal structures, companies may use of the parent company as main body, establishing a branch office, a liaison office or a project office. It is possible to operate under the legal structure of a foreign company with all of them. Otherwise, investor can opt for an incorporated company in India by creating a new subsidiary (Wholly Owned Subsidiary Company) or a Joint Venture.
Can the profits be repatriated?
All the profits, investments or royalties can be repatriated upon payment of taxes.
Royalties are subject to a withholding tax (TDS-Tax Deducted at Source) in India which can be recovered by the parent company if there is a Double Taxation Agreement with its country. (Spain, France, Germany, Holland, UK, etc.)
Which is the process to form a company in India?
Registration of a company in India has been simplified since the establishment of the SPICE system which enables the digital submission of documents. However, this process is more complicated for foreign investors who need to apostille many documents and submit them stepwise.
Some of the documents can be signed digitally. Directors of the Company must obtain its digital sign (DSC) with an authorized provider.
Once digital signature has been obtained, directors of the company must be registered in the Register of Directors and obtain their DIN identification number.
Should the company name show which is its main activity?
No, it’s not necessary anymore. But there are restrictions in the usage of some words in the name of a company.
Can any person be the director of a company?
Yes, unless it's a disqualified director. At least one of the directors must be a tax resident in India (residing more than 182 days in the country within a fiscal year)
What documents are needed to establish a company?
The following documents (signed and apostilled) are required for establishing a company:
Proof of residence of the investor.
Copy of an invoice or receipt showing the mentioned address.
Non-Objection Certificate of the owner of the facility used as registered office.
PAN Undertaking of the proposed directors (document expressing intention to obtain a tax identification number in Indian)
List of interests of the directors in other companies.
Resolution of the Board of Directors of the investing company.
Certificate of incorporation of the new investing company.
Are there restrictions to the approval of investments from specific foreign companies?
Apart from restricted sectors, foreign companies are free to invest under automatic route. A Liaison Office it’s not considered an investment in India but an extension of the parent company, so it should meet several conditions. In this case, foreign company must prove that it has made profits over the last five financial years and its net value is not below 100.000 USD.
Is mandatory to audit the company financials?
Yes, irrespectively of size or turnover of a company; it must be audited. Auditor must be appointed within 30 days from the company registration for a period of five years (except if quitting).
Board of Directors
Companies must have at least two directors, and at least one of them must reside in India. Minimum quorum for a Directors’ Board Meeting are two directors. Online meetings are allowed. In such case meetings must be recorded
Annual General Meeting
Board of Directors must meet at least once a year to approve the annual accounts, etc. Meeting must take place within 9 months from the financial year close. In normal conditions it should be conducted in Registered Office only.
How long must the account records must be kept?
Book of Accounts (physical or virtual) must be kept for a period of eight years.
Is it mandatory to have a company secretary?
Those companies whose turnover exceed 50 million INR should hire a Company Secretary in the company role.
Other companies can hire a Company Secretary to carry out those tasks that are intended to be done just by them.
CSs main functions are the supervision of procedures in the different administration levels of the company in order to ensure their correctness.
How does India regulate Foreign Investment?
Foreign Investment is regulated by the Foreign Exchange Management Act and Reserve Bank of India (RBI) regulations, as well as by the Department for Promotion of Industry and International Trade (DPIIT).
How do I transfer funds to an Indian subsidiary?
This is one of the most important and sensitive points in the management of an Indian subsidiary.
Company can freely fund the subsidiary by increasing its share capital through a “special resolution” and its subsequent alteration of Memorandum of Articles. Alternatively External Commercial Borrowings can be used to fund subsidiary subject to RBI rules and regulations.
How are loans regulated (ECB)?
Reserve Bank of India (RBI) establishes the conditions and eligible purposes to apply a foreign currency loan. Few years ago, companies could only be financed by foreign banks for investment projects. Nowadays, companies are allowed to receive loans for working capital. Those are subject to heavier restrictions regarding interest rates, average maturity period, etc.
Is it mandatory to report about foreign investment?
Indian company funded by foreign investments must report it to the Reserve Bank of India within 30 days.
Documents to be filed are FC-GPR in the case of general reception of funds or FC-TRS whenever investment is received in foreign currency.
Which are considered associated companies?
Indian laws considers that two companies are associated when one of them controls its management directly, indirectly or through an intermediary.
How are transactions between associated companies regulated?
Domestic and international operations between associated companies must obey price transfer rules (maintaining the Arm’s Length Price). Related companies must keep their records and undergo price transfer audit if it is higher than 10 million rupees.
What is considered Arm’s Length Price?
It is a fair market price. It could be the price fixed if the same operation is carried out between a non-related company. The transfer’s price can be calculated by using a price comparable to another company, the resale price method, calculating the selling price as cost plus profit, calculating the operating margin, etc.
Which are the main taxes in India?
The establishment of the Good and Services Tax (GST) in 2017 meant a huge reform in the Indian the taxation system. GST superseded a huge amount of indirect taxes levied by different public bodies. GST taxes the value addition of the products, since taxes borne are deductible from those passed on.
As in other countries, imported goods are subject to customs duties. India has preferential treatments with some countries, mainly in South East Asia, but not with the European Union.
As far as direct taxes concern, Income Tax levies incomes of corporates and individuals. Tax rates were reduced in 2019 setting Income Tax for companies between 25% and 35%.
The Indian fiscal year starts the first of April and ends the 31th of march.
Are all goods and services subject to the GST?
Yes. It taxes most of goods and services. There are just few exceptions that are subject to special taxes, mainly alcohol, electricity and gas.
Do they exist several GST types?
The GST is charged both at a national level and at state level. When a good or service is imported or bought outside the same state, the GST is charged by the Central Government (IGST – Integrated GST). If the sale is carried out within the same state, the tax is charged 50% by the state (SGST) and 50% by the Central Government (CGST).
Can the different taxes be offset?
There are compensation norms which must be taken into account. Taxes levied at national level (IGST, CGST) are freely offset with others. However, those charged by a state cannot be offset with taxes from another state.
Are there more than one tax rate?
Yes. There are five tax rates. 0%, 5%, 12%, 18% y 28%. The lowest ones (0% and 5%) are charged on basic commodities, (food and medicines). 18% rate is the general rate and 28% is charged on luxury goods like tobacco or upmarket cars.
Is it mandatory to audit the tax filings of a company?
Yes, it is. One of the corporation’s responsibilities is the taxes’ audit filings by the Statutory Auditor.
Is there a minimum tax on the profits?
India has recently added a Minimum Alternate Tax. It prevents companies from using tax exemptions, compensations, etc. to lower its tax rate below an established minimum. The MAT is 15% and it can be offset in the subsequent years.
Are there export incentives?
India is member of the World Trade Organization (WTO), so its incentives for exportation are subject to specific limits.
Despite being a developing country, it has incentives like the Duty Drawback, the Merchandise Export Incentive Scheme (MEIS) and the Service Export Incentive Scheme (SEIS).
Some of those incentives are replaced on 1st Jan 2021 by RoDTEP Scheme.
Are there import duty remission schemes?
There are schemes allowing imports under preferential schemes for components linked to a future export (for example, the Inward Processing Relief)
The Central Government has recently launched “bonded manufacturing scheme” for exporters. Companies can import under this scheme inputs free of duty which will be used to manufacture a exported good.
There are available schemes for duty free capital goods’ imports.
Does it exist Free Trade Zones?
India accounts with many Special Economic Zones since 2000. They were developed to attract investment by using tax incentives into specific locations.
These special zones have lost part of the incentives through the years and mostly after introducing the MAT. Although the scheme for new SEZ creation finished in 2020, the existing ones are still operational.
Which are the advantages of the SEZs?
Main advantages of SEZ are exemption of the corporate income tax (although they are subject to MAT) and the GST. Moreover, goods inside the SEZ are considered “outside of the Indian territory” and therefore are exempted to pay importduties. Those dealers supplying to SEZ companies are actually exporting, so their sales does not include GST and can claim export benefits.
Furthermore, SEZs are provided of modern infrastructure and high-quality supplies are guaranteed.
Companies located in SEZ can maintain bank accounts in a foreign currency to avoid continuous exchange rate fluctuations.
Are there investment incentives?
India has many national and regional schemes promoting foreign investment in strategic sectors. All state governments have ambitious plans for the development of the regional industries, promoting investment in different ways.
Some ministries have their own programs for the development of preferential sectors, such us agrifood, renewable energies, IT ...
There are also important tax advantages linked to R&D or Start-ups establishment.
Is there any regulation on wages and salaries?
Indian labour laws are generally very old. The Minimum Wage Act date from 1948 and fixes the minimum wages to be paid. Despite being old, they are updated on a regular basis.
Are there extra pay?
There is a similar payment to the “extra pay” called Bonus and its governed by the Bonus Act. It is mandatory to make a Bonus payment of a basic month’s salary to low income’s workers, although companies normally make an extra payment to all their workers. It is becoming usual for companies to fix the bonus’ quantity in the work contract so as to avoid annual negotiations.
Is there a social security system?
India does not have a Social Security System that implies health, unemployment and retirement coverage (like in Spain or other countries). There is a coverage called Provident Fund in which the employer and employee must contribute equally and that can be recovered under specific circumstances.
The PF is 12% of a worker’s salary. It Is mandatory for companies with more than 20 employees and voluntary for small companies. Currently, the maximum contribution is 1.800 Rupees (22 Euros per month) by the company and therefore, by the worker as well.
Is there an agreement with the Spanish Social Security?
India has agreements with 18 countries but not with Spain (2020).
Are there minimum infrastructure’s requirements in the company to ensure the working conditions?
Indian norms regarding regard this topic are less restrictive than in Western countries. For example, a company must have a canteen when it reaches 250 workers, a changing room at 150, or a first aid kit at 50.
Is there maternity leave?
The number of women participating in Indian workforce is increasing little by little Firms with more than 10 workers must form a committee to deal with complaints about discrimination or sexual harassment. Women have the right to enjoy maternity leave for a period ranging from 12 to 26 weeks. Likewise, women can exclusively work during daytime schedule.
Are there vactions?
Indian workers have three kind of holidays. The first one is national festivities. Four of them are mandatory for every company and the others can be chosen from a large number of vacation days according to each company preferences. Those days are commonly nine.
On the other hand, there are also two kind of “leave” days. Casual leaves belong to personal matters, and they normally last less than 3 days. Leve days are commonly 12 and cannot be replaced by a payment if not used.
Privilege leaves are what we purely know as vacation days. They are around 15 days and can be paid if not enjoyed by the worker.
Is it necessary a Visa to travel to India?
Yes. There are different kind of visas to travel to India. The ones used for business trips are called Business Visa and last till 2 years.
Since 2019 you can easily ask for a e-business visa online without having to send the passport to the Indian Embassy.
Those people that need to stay in the country for more than 180 days have to register in the FRRO - Foreigner Registration in India.
After 182 days in India within a fiscal year a person become a tax Indian citizen.
Those people that wish to be hired by an Indian company must get an Employment Visa or a working permit from the Indian Ambassy. They are normally granted on a limited basis to qualified professionals who will perform a specific job for which there are no qualified personnel in India. The amount of information required is significant, so the estimated period of elaboration will be a month.
It is required a significant amount of information to fulfil the process so the estimated period of time for its completion is a month.
Is it mandatory to get vaccinated?
There is no obligation to provide a vaccination card upon arrival in the country. Each country authorities may suggest different vaccines although there are no infectious diseases requiring inoculation.