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Doing Business in India

2013

How
How to
to register
register aa company
company
in
in India
India

Chindia chamber of commerce and industry


jan 2013

INDEX
India and its Culture
P3

Country Overview
P4
Business Culture
P7
Employing People
P10
Entry and Residence
P13

Choosing a Business Format


P15

Liaison Office
P16
Branch
P22
Company Limited by Shares
2
P28

India:
The country and its Culture

India: Country Overview


Classical Indian culture was formed under a series of civilizations in the last three
thousand years BC; the Gupta dynasty in the 4th to 6th centuries AD saw a flowering
of Indian science, art, and culture. The Delhi Sultanate in the 10th and 11th centuries
followed a Moorish invasion; later the Mughal dynasty ruled India from 1500 to
1800.European powers began to infiltrate India from the 17th century onwards,
initially for trading purposes. The British East India Company ran what amounted to
its own government in India during the 18th century and the first part of the 19th
century. By degrees Britain became the dominant power in India, and by the middle
of the 19th century India was counted as a part of the British Empire. A (mostly) nonviolent independence movement led by Gandhi and Nehru brought about the
creation of a separate, independent Indian state in 1947, although a substantial part
of the peninsula became Pakistan. Wars between India and Pakistan led to the
eventual creation of Bangladesh out of what had been East Pakistan. Both India and
Pakistan have nuclear weapons.

India: Country Overview


The climate of India varies from tropical in the south to temperate in the hillier north.
India has rich agricultural resources, and its mineral reserves include coal, iron ore,
manganese, mica, bauxite, rare earth elements, titanium ore, chromite, natural gas,
diamonds, petroleum and limestone. The population is approximately 1.2 billion,
second only to China, and is growing at 1.34% per year. The two largest cities are
Delhi, the political capital, with 22m inhabitants, and Mumbai (Bombay), the
commercial capital, with 20m inhabitants. There are twenty official languages in
India, testifying to its fragmented past; Hindi is the most widely spoken, being used
by 41% of the population. For political, economic and commercial communication,
English is very widely used. Literacy is only 61%, largely due to the exclusion of
women from formal education in many regions. India is a federal republic divided
into 28 states and seven union territories. There is a bicameral parliament. The
president and vice-president are elected by the members of the legislature; but real
power resides with the Prime Minister, who is elected by the members of the largest
political party. Currently the prime minister is Manmohan Singh and he has been in
power since 2004.

India: Country Overview


The legal system is based on English common law and precedents play a large part
in the judicial process, as they do in other common law countries. There is a
Supreme Court; justices are appointed by the president and remain in office until
they reach the age of 65.India's economy was held back for a long time by
protectionist, autarkic tendencies verging on cronyism. Liberalization began in the
1990s and large parts of the economy can now be described as open. Although
agriculture is still the dominant sector, incentive policies have underpinned the
growth of IT and other technology-based industries. Outsourcing has been a major
growth sector. Growth has averaged 7% for the last ten years, and the economy
bounced back strongly from the financial crisis to clock up 10% growth in 2010. The
deficit was on the high side at 6.8% in 2010 and inflation has been a problem. With
low GDP per head of only USD3,400 there is ample scope for further rapid growth.
The currency is the Indian rupee. Currently, 1 Indian rupee = 0.022104 US dollars
(45 rupees to the dollar).

India: Business Culture


The key to understanding Indian business culture is hierarchy, as a result of the
caste system, in which every person knows his or her place to a degree which is
surprising and even offensive to egalitarian Westerners. Although some evening out
of the caste system has taken place, you should not over-estimate that. In a typical
Indian organization, many tasks can only be performed by people of the appropriate
caste; boss figures, who normally come from a higher caste, will not consider tasks
that are reserved to lower caste members. It would be inappropriate, therefore, for a
manager to make coffee for subordinates or move a table. Unsurprisingly, this can
lead to inflexibility and delay. The role of a manager is as prescriptive as the role of a
cleaner: bosses must manage, and must do so in an authoritarian and complete
manner. If working with Indian staff, very little should be left to the discretion or
initiative of underlings. If you don't make it precisely clear what you want, the result
will be confusion, and inaction.
In India guests are treated with utmost respect and courtesy. International travelers
can expect to enjoy the Indian hospitality. At the same time culturally and as a mark
of politeness, Indians have difficulty in saying no, this could be a stumbling block in
negotiations and in closing contracts. The notion of time, time management,
punctuality is still an anathema in India. It is more to do with the mindset and
ingrained in the Indian culture. It would not be surprising if meetings are postponed,
re scheduled, cancelled or organized at a very short notice. Bureaucratic hurdles and
a laidback approach to work in the government circles could result in delays in
processing, overload of paperwork and a general lack of confidence in the system.
Therefore immense patience is very much necessary for any business transaction in
India.
.

India: Business Culture


Handshakes are normal when meeting people, but it is also possible to use the
'namaste', in which the palms of the hands are brought together at chest level with a
slight inclination of the head. People should normally be addressed by their titles (Dr,
Professor, Minister), with or without their personal names. Business cards are de
rigeur on first meeting with an Indian businessperson. Although women have a lowly
place in many Indian communities, they are perfectly well accepted in business
situations, where apparent rank will count for more than gender. Meetings should be
well prepared, and should be conducted in a way that recognizes the relative
seniority of the people present. If a senior manager is absent from a meeting without
obvious cause, this can be taken as a sign that nothing much is to be expected from
that meeting. During meetings, and other Indian business encounters, be prepared
for a much higher level of chit-chat than in an equivalent Western situation. It is
normal for an Indian to break off a meeting to take a personal phone call or socialize
with colleagues.
In Indian work-culture, people do not accept change easily; lot of resistance is
encountered in order to implement change.

India: Business Culture


While it may be difficult at first to understand the relative positions of individuals in
the group with which you are negotiating or dealing, there are some pointers. It is
highly probable that the members of a team will enter a room in the order of their
relative importance, especially in the presence of a foreigner; and junior members of
the team will constantly defer to their seniors in conversation and in bodily behavior.
As in most Asian civilizations, confrontational tactics are not likely to be successful.
There is also a bias against direct speaking: if an Indian uses phrases such as 'we'll
see' you can probably take that as a 'no'. It is normal to give gifts to Indians during a
negotiation process; they should be wrapped and will not be opened during a
meeting. Black or white wrapping paper should not be used; and one should avoid
alcohol or foodstuffs unless you are sure of the religion of the recipient.
.In India, Companies follow the hierarchical system and decision making is usually
from the top to bottom. It could at times be time consuming, International
companies show respect to this. The relationship between the boss and subordinates
is believed to be more formal and hierarchical in India.

India: Employing People


Despite a considerable body of law relating to employment, in practice it is quick and
easy to find and hire staff in India, although there are certain sectors, such as
outsourcing, where rapid growth has led to shortages. Overall statistics on
employment and unemployment are next to useless, such is the regional and
sectoral diversity of this enormous country. Generally speaking, there is a large pool
of available labor for office staff for managerial, supervisory, technical and clerical
roles. Wage rates are generally very low compared with Western levels, although in
certain specializations they may be comparable. Recruitment agencies flourish, and
may well be the best first port of call for an intending employer. It is potentially
misleading to quote figures, but an average office worker might expect to receive an
annual salary equivalent to USD6,000; graduates would expect more; and it would
be less in country areas. A 'dearness' or cost-of-living allowance can add significantly
to the cost of lower-paid workers. Almost all educated Indians (a minority of the
population) speak English to an acceptable level. The Indian constitution allows both
the central government and state governments to legislate on employment matters,
leading to potential confusion as to applicable law in a given situation. Business
practices also vary widely between regions.

10

India: Employing People


Some of the more important federal laws governing employment are as follows: The
Workmen's Compensation Act, 1923, providing compensation for industrial accidents and
occupational diseases. The Payment of Wages Act, 1936, and the Minimum Wages Act, 1948,
requiring timely payment of wages, and setting up sectoral bodies to determine minimum
wage. The Industrial Disputes Act, 1947, allowing reinstatement of workers by a court; there
are grievance procedures; and establishments with more than 100 workers must establish
codes of working conditions. A business employing more than 50 people needs government
permission to make anyone redundant. The Industrial Employment (Standing Orders) Act,
1959, requiring some types of plant to define conditions of employment. The Maternity Benefit
Act, 1961, doing what it says on the tin. The Payment of Gratuity Act, 1972, requiring
employers to pay a 'gratuity' to some low-paid workers on termination. The Equal
Remuneration Act, 1976, establishing equality in remuneration for men and women. The Child
Labor (Prohibition and Regulation) Act, 1986, regulating child labor. The Trade Unions Act, 1926
providing for the registration of trade unions, but there is no requirement for employers to
consult or involve them. Only 2% of the work-force is unionized. The Employees Provident Fund
Act applies to establishments with more than 20 workers; 12% of pay up to Rupees 6,500 per
month is applied to pension provision.
Working hours: Maternity leave of 12 weeks is provided under the Maternity Benefit Act,
1961.The Industrial Employment (Standing Orders) Act, 1946 requires industrial establishments
with 100 (number may vary by state) or more employees to establish standing orders that
specify working conditions (hours, shifts, annual leave, sick pay, termination rules, etc.). These
orders must meet minimum state standards and may be changed only with the consent of the
workers or the trade unions and only to augment benefits.
Health insurance: The Employees Compensation Act, 1923 provides compensation for
industrial accidents and occupational diseases resulting in disability and death. The minimum
11
compensation payable by the

India: Employing People


Under the Factories Act, 1948, a six-day 48-hour working week is normal; but in
practice office employees work a five-day week of 37-38 hours. Work past nine hours
a day counts as overtime, usually at double pay. There is no statutory requirement
for a written contract, but there are statutory norms which apply in the absence of a
contract. There are laws requiring sik pay, maternity leave, bonuses and other
benefits for workers, but they are not universally applied.
Labor-management relations
With some exceptions, India has company unions rather than trade unions. These
are often affiliated with national labor organizations. Various trade unions are
promoted by political parties.
In manufacturing and other companies, prior discussions between management and
labor leaders often help to forestall strikes. When strikes or disputes occur, they are
usually settled by
negotiation or through conciliation boards. It is common practice in many foreignowned
manufacturing companies to avert strikes by employing a labor welfare officer to act
as a gobetween for labor and management. By law, manufacturing companies with 500 or
more workers must have one or more welfare officers who act as personnel
manager, legal adviser on labor law and promote relations between factory
management and workers.

12

India: Entry and Residence


Foreign nationals (except citizens of the countries of Nepal and Bhutan) require a
valid passport or travel document and a valid visa to enter India. The Indian embassy
or consulate in your country of residence will issue a visa. Tourist visas last for up to
six months and their holders have no right to work in India; they are not extensible.
Transit visa allow a stay of up to 15 days while en route to another destination.
Business visas lasts for between three months and five years; an invitation letter
from a resident Indian company is required, plus a request letter from the
individual's company. They can be single- or multiple-entry. Employment visas (work
permits) are necessary to live and work in India, and are usually obtained by the
prospective employer, but the rules are not clear. It usually takes about three
months to obtain a work permit and they allow the issuance of an annual 'stay
permit'. Student visas are issued on request by an Indian educational institution.
Medical visas permit an individual to enter India for medical treatment and last for
up to one year; they are extensible.

13

India: Entry and Residence


The Ministry of Foreign Affairs is responsible for the issuance of work permits
(employment visas) under the Foreigners Act. They are normally necessary for
foreigners, although people with Indian ancestry may be exempted from the need for
a visa. The family members of an individual holding a work permit are also permitted
to work. Indian Consulates issue work permits and visas prior to arrival. Normally a
foreigner employed by a foreign or Indian establishment will require an Employment
Visa, although if only short visits are being made a Business Visa may be sufficient.
The local Foreigners Regional Registration Office (FRRO), an agency of the Home
Ministry, is responsible for registering the visas of foreigners employed by liaison
offices in India and for supervision of the individuals during their stay. Registration
with the police is required within 14 days of arrival in India (which may or may not be
the same as registration with the FRRO in a given region). Documents required
include a registration form in quadruplicate and a registration permit booklet, copies
of passport and visa, a copy of the employment contract, copies of a letter of
recommendation from the parent company, six passport photos. On-citizens of
Indian origin may take advantage of the 'Persons Of Indian Origin' or 'Overseas
Citizenship Of India' schemes, under which PIO or OCI cards are issued permitting
long-term residence in India, without obtaining Indian citizenship as such.

14

India:
Choosing a Business Format

15

Types of Business Format


The following are the main types of business format used in India:- Liaison OfficeBranch- Company Limited by Shares
- Project Office- Limited Liability Partnership- General Partnership- Sole
Partnership- Cooperative Society. Most international businesses are conducted
using the first five.

16

Summary for a Liaison Office


The liaison office is often the initial route chosen by a foreign company interested in
the Indian market. A liaison office will not be taxable in India provided that it limits its
activities to representing its parent, and carrying out promotional and, indeed,
'liaison' activities on behalf of its parent. Companies without a significant profits
record and/or a reasonable amount of capital may find it hard to get permission for a
liaison office. The Reserve Bank of India, the apex bank grants permission to open a
Liaison office. The entire process, can take anywhere from a few weeks to a few
months depending on the industry and Indias relations with the nationality of the
parent company. The RBI involves the Ministry of Finance, the Ministry of External
Affairs and the Interior Ministry, and only after they have given permission will the
RBI issue a letter of 'no objection' allowing the office to be opened. This process will
typically take two to three months if there are no problems. Welcome to the world of
Indian bureaucracy! A liaison office is required to file annual audited financial
statements with the RBI and the Registrar of Companies; tax returns also have to be
filed, even though no tax is going to be due. Liaison offices can hire local and foreign
staff. Normally a foreigner employed by a liaison office will require an Employment
Visa, although if only short visits are being made a Business Visa may be sufficient. If
a liaison office receives no income, then nominally it will not have to pay tax. If,
however, income is attributed to the office, tax will be due at 40% plus surcharges
and education 'cess' (totaling 42.23%).There are a number of ways in which a liaison
office may be found liable to pay corporate tax. The most basic situation is one in
which the liaison office is deemed to be a 'business connection' of its foreign parent,
which effectively constitutes it as a permanent establishment, leading to an
apportionment of the parent company's income to its Indian activities.
17

Summary for a Branch Office


Branch offices can be set up in India both by foreign companies and by existing
domestic companies. Domestic companies simply need to pass a Board resolution;
foreign companies must undertake an approval process with the Reserve Bank of
India. Once permission has been obtained, the branch office can then register with
the tax and customs authorities, obtaining a PAN (permanent account number) and a
TAN (tax collection number). Visas for foreign staff can now be issued and bank
accounts opened. Branch offices are restricted to trading activities and are not
permitted to engage in manufacturing, although it is permissible to employ Indian
sub-contractors for production purposes. Branch offices may remit their profits
outside India, net of applicable Indian taxes and subject to RBI guidelines. They need
not retain any profits as reserves in India. In certain cases, where income is deemed
to have originated in India and such income includes royalties, fees for technical
services, interest and capital gains, branch offices may repatriate profits to their
Head Office without obtaining prior approval from RBI.A branch office is required to
file annual audited financial statements with the RBI and the Registrar of Companies;
tax returns also have to be filed, even if no tax is going to be due. Branch offices can
hire local and foreign staff. Normally a foreigner employed by a branch office will
require an Employment Visa, although if only short visits are being made a Business
Visa may be sufficient. If a branch office receives no income, then nominally it will
not have to pay tax. If, however, income is attributed to the office, tax will be due at
40% plus surcharges and education 'cess' (totalling 42.23%).

18

Summary for a Company Limited


by Shares

Companies limited by shares are formed under the Companies Act 1956 and may be
public or private. This section is concerned only with private companies. Such a
company has a minimum share capital of INR100,000, must restrict the right to
transfer its shares, may not have more than 50 members and may not invite or
accept subscriptions to its shares from members of the public. Formation of a limited
company in India can be a lengthy and bureaucratic procedure. Once incorporation
has been completed, the company can then register with the tax and customs
authorities, obtaining a PAN (permanent account number) and a TAN (tax collection
number). Visas for foreign staff can now be issued and bank accounts opened. All
companies incorporated under the Companies Act must file audited accounts
annually with the Registrar of Companies. If turnover exceeds INR6m, a separate tax
audit must be carried out. Limited companies can hire local and foreign staff.
Normally a foreigner employed by a limited company will require an Employment
Visa, although if only short visits are being made a Business Visa may be sufficient.
Indian companies are taxed on the previous year's income. Thus, for resident
companies, income in the 2010/2011 financial year is assessed to tax in the
2011/2012 assessment year (beginning in April 2011) at 30% plus a 7.5% surcharge
plus 3% education 'cess' for a total of 33.22%.Companies with taxable income below
INR10m are exempt from the surcharge. No-resident companies are taxed at 40%
plus surcharge and 'cess' giving a total of 42.23%.

19

Summary for a Project Office


Foreign companies sometimes set up a temporary project office to undertake projects
in India awarded to the parent company. It is essentially a branch office set up for the
limited purpose of executing a specific project. Approval for project offices is generally
accorded for executing government supported construction projects or where the
projects are financed by Indian and international financial institutions and multilateral
organizations. In exceptional cases, approval is also given for private projects. Upon
completion of the project, project offices may remit outside Indian the surplus of the
project, after meeting tax liabilities.

20

Summary for a Limited Liability


Partnership

The Limited Liability Partnership (LLP) was introduced in India in 2010; the previous
General Partnership form was not much used since its members were too easily able
to escape their liabilities by dissolving the partnership. The LLP however has legal
personality while still preserving a limitation on liability for individual members.
There must be an LLP agreement which specifies the contributions of all members.
There must be at least one 'designated member' who has responsibility for
managerial and procedural aspects of the partnership. The LLP Agreement needs to
be filed with the Registrar of Companies, who must also verify availability of the
name of the LLP, and will issue a Certificate of Incorporation. An LLP must maintain
annual accounts reflecting a true and fair view of its affairs. A statement of accounts
and solvency must be filed with the Registrar of Companies every year. Limited
Liability Partnerships can hire local and foreign staff. Normally a foreigner employed
by an LLP will require an Employment Visa, although if only short visits are being
made a Business Visa may be sufficient. LLPs, like Indian companies, are taxed on
the previous year's income. Thus, income in the 2010/2011 financial year is assessed
to tax in the 2011/2012 assessment year (beginning in April 2011) at 30% plus a
7.5% surcharge plus 3% education 'cess' for a total of 33.22%.LLPs with taxable
income below INR10m are exempt from the surcharge. Profit remaining after tax is
distributed to members in proportion to their contributions or according to the LLP
Agreement and is not taxed further.

21

Liaison Office
-

Nature
Formation
Ongoing Formalities
Employing Staff
Taxation

22

Nature of a Liaison Office


The liaison office is often the initial route chosen by a foreign company interested in
the Indian market. A liaison office will not be taxable in India provided that it limits its
activities to representing its parent, and carrying out promotional and, indeed,
'liaison' activities on behalf of its parent. Permission must be obtained from the
Reserve Bank of India. A liaison office that earns revenue in India will be in breach of
its permission and may be taxed heavily. There have been a number of cases which
have determined the limits of permissible activity for a liaison office, some of them
yielding surprising results which might seem to contradict the law; so it is necessary
to be very careful and take local legal advice before following this route. Companies
without a significant profits record and/or a reasonable amount of capital may find it
hard to get permission for a liaison office.

23

Formation of a Liaison Office


The Reserve Bank of India, the apex bank grants permission to open a Liaison office.
The entire process, can take anywhere from a few weeks to a few months depending
on the industry and Indias relations with the nationality of the parent company.
Approval is generally granted for a period of one to three years, upon expiry of which
the foreign company can apply for a renewal. The following documents have to be
submitted to the Reserve Bank of India (RBI):Three copies of Form FNC1;A notarized
English version of the certificate of incorporation and the Statutes of the parent
company (Memorandum and Articles of Association);The applicant's latest audited
balance sheet; A letter from a senior official of the applicant stating the purpose of
the intended liaison office; A banker's reference; A letter or board minute from the
applicant authorizing the local representative; Proof of residence and passport copies
for the proposed personnel of the liaison office; A letter of request for the opening of
a 'QA22C' bank account (one that only permits incoming funds from abroad).The RBI
involves the Ministry of Finance, the Ministry of External Affairs and the Interior
Ministry, and only after they have given permission will the RBI issue a letter of 'no
objection' allowing the office to be opened. This process will typically take two to
three months if there are no problems. Welcome to the world of Indian bureaucracy!
Armed with the letter of 'no objection', the liaison office can then register with the
tax and customs authorities, obtaining a PAN (permanent account number) and a
TAN (tax collection number). Visas for foreign staff can now be issued and bank
accounts opened.

24

Ongoing Formalities for a Liaison


Office

A liaison office is required to file annual audited financial statements with the RBI
and the Registrar of Companies; tax returns also have to be filed, even though no tax
is going to be due.

25

Employing Staff for a Liaison Office


Liaison offices can hire local and foreign staff. The Ministry of Foreign Affairs is
responsible for the issuance of work permits (employment visas) under the
Foreigners Act. They are normally necessary for foreigners, although people with
Indian ancestry may be exempted from the need for a visa. Indian Consulates issue
work permits and visas prior to arrival. Normally a foreigner employed by a liaison
office will require an Employment Visa, although if only short visits are being made a
Business Visa may be sufficient. The local Foreigners Regional Registration Office
(FRRO), an agency of the Home Ministry, is responsible for registering the visas of
foreigners employed by liaison offices in India and for supervision of the individuals
during their stay. Registration with the police is required within 14 days of arrival in
India (which may or may not be the same as registration with the FRRO in a given
region). Documents required include a registration form in quadruplicate and a
registration permit booklet, copies of passport and visa, a copy of the employment
contract, copies of a letter of recommendation from the parent company, six
passport photos. Visas can be extended, through another set of bureaucratic
procedures.

26

Taxation of a Liaison Office


If a liaison office receives no income, then nominally it will not have to pay tax. If,
however, income is attributed to the office, tax will be due at 40% plus surcharges
and education 'cess' (totaling 42.23%). The Direct Taxes Code, which may or may not
come into force in April, 2012, would reduce the tax rate on non-resident business to
30%, but would impose a 15% branch profits tax, thus worsening the existing
position for foreign companies, since there is little scope to set foreign expenses
against the income attributed to a local operation. If a liaison office pays its staff, it
must comply with withholding tax and social security obligations. There are a
number of ways in which a liaison office may be found liable to pay corporate tax.
The most basic situation is one in which the liaison office is deemed to be a 'business
connection' of its foreign parent, which effectively constitutes it as a permanent
establishment, leading to an apportionment of the parent company's income to its
Indian activities. The governing legislation is section 9(1)(i) of the Income Tax Act,
and provided that the liaison office stays strictly within this wording, if will probably
be immune from taxation. But the authorities are quite aggressive in their
interpretation of the Act, and advance rulings may be advisable if there is any
danger that the liaison office can be associated with significant Indian-source
income, even though it does not pass through the bank accounts of the liaison office.
There are a number of relevant cases, including Angel Garment Ltd (287 ITR 341),
Motorola Inc. and Others v DCIT (95 ITD 269), Gutal Trading Est (278 ITR 643),
Western Union Financial Services Inc. (101 TTJ 56), IAC v Mitsui and Co Ltd (39 ITD
59) and UAE Exchange Centre LLC (268 ITR 9). Most of these support the immunity
of liaison offices from taxation, but the last one in particular is worrying.

27

Branch Office
-

Nature
Formation
Ongoing Formalities
Employing Staff
Taxation

28

Nature of a Branch Office


Branch offices can be set up in India both by foreign companies and by existing
domestic companies. It is expected that the branch office will carry on substantially
the same business and activity as is carried out by its Head Office. Domestic
companies simply need to pass a Board resolution; foreign companies must
undertake an approval process with the Reserve Bank of India. From a taxation
perspective, a branch of a foreign company is deemed to be a 'business connection'
of its parent, and thereby constitutes a taxable permanent establishment of the
foreign enterprise. There is only very limited deductibility of head office expenses.
For a domestic company, the financial results of a branch will be consolidated into
the profit and loss account of its parent. Foreign companies engaged in
manufacturing and trading activities abroad are allowed to set up branch offices in
India for the following purposes: Undertaking export or import of goods; Rendering
professional or consultancy services; Carrying out research work, in which the parent
company is engaged (provided that the results of the research work are made
available to Indian companies);Promoting technical or financial collaborations
between Indian companies and the parent or overseas group company; Representing
the parent company in India and acting as buying/selling agents in India; Rendering
services in information technology and development of software in India; Rendering
technical support to the products supplied by the parent/overseas group companies.
Branch offices are restricted to trading activities and are not permitted to engage in
manufacturing, although it is permissible to employ Indian sub-contractors for
production purposes.

29

Formation of a Branch Office


The Reserve Bank of India, the apex bank grants permission to open a Liaison office.
The entire process, can take anywhere from a few weeks to a few months depending
on the industry and Indias relations with the nationality of the parent company.
Approval is generally granted for a period of one to three years, upon expiry of which
the foreign company can apply for a renewal. The following documents have to be
submitted to the Reserve Bank of India (RBI):Three copies of Form FNC1;A notarized
English version of the certificate of incorporation and the Statutes of the parent
company (Memorandum and Articles of Association);The applicant's latest audited
balance sheet; A letter from a senior official of the applicant stating the purpose of
the intended liaison office; A banker's reference; A letter or board minute from the
applicant authorizing the local representative; Proof of residence and passport copies
for the proposed personnel of the liaison office; A letter of request for the opening of
a 'QA22C' bank account (one that only permits incoming funds from abroad).The RBI
involves the Ministry of Finance, the Ministry of External Affairs and the Interior
Ministry, and only after they have given permission will the RBI issue a letter of 'no
objection' allowing the office to be opened. This process will typically take two to
three months if there are no problems. Welcome to the world of Indian bureaucracy!
Armed with the letter of 'no objection', the liaison office can then register with the
tax and customs authorities, obtaining a PAN (permanent account number) and a
TAN (tax collection number). Visas for foreign staff can now be issued and bank
accounts opened.

30

Ongoing Formalities for a Branch


Office

A liaison office is required to file annual audited financial statements with the RBI
and the Registrar of Companies; tax returns also have to be filed, even though no tax
is going to be due.

31

Employing Staff for a Branch Office


Liaison offices can hire local and foreign staff. The Ministry of Foreign Affairs is
responsible for the issuance of work permits (employment visas) under the
Foreigners Act. They are normally necessary for foreigners, although people with
Indian ancestry may be exempted from the need for a visa. Indian Consulates issue
work permits and visas prior to arrival. Normally a foreigner employed by a liaison
office will require an Employment Visa, although if only short visits are being made a
Business Visa may be sufficient. The local Foreigners Regional Registration Office
(FRRO), an agency of the Home Ministry, is responsible for registering the visas of
foreigners employed by liaison offices in India and for supervision of the individuals
during their stay. Registration with the police is required within 14 days of arrival in
India (which may or may not be the same as registration with the FRRO in a given
region). Documents required include a registration form in quadruplicate and a
registration permit booklet, copies of passport and visa, a copy of the employment
contract, copies of a letter of recommendation from the parent company, six
passport photos. Visas can be extended, through another set of bureaucratic
procedures.

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Taxation of a Branch Office


If a liaison office receives no income, then nominally it will not have to pay tax. If,
however, income is attributed to the office, tax will be due at 40% plus surcharges
and education 'cess' (totaling 42.23%). The Direct Taxes Code, which may or may not
come into force in April, 2012, would reduce the tax rate on non-resident business to
30%, but would impose a 15% branch profits tax, thus worsening the existing
position for foreign companies, since there is little scope to set foreign expenses
against the income attributed to a local operation. If a liaison office pays its staff, it
must comply with withholding tax and social security obligations. There are a
number of ways in which a liaison office may be found liable to pay corporate tax.
The most basic situation is one in which the liaison office is deemed to be a 'business
connection' of its foreign parent, which effectively constitutes it as a permanent
establishment, leading to an apportionment of the parent company's income to its
Indian activities. The governing legislation is section 9(1)(i) of the Income Tax Act,
and provided that the liaison office stays strictly within this wording, if will probably
be immune from taxation. But the authorities are quite aggressive in their
interpretation of the Act, and advance rulings may be advisable if there is any
danger that the liaison office can be associated with significant Indian-source
income, even though it does not pass through the bank accounts of the liaison office.
There are a number of relevant cases, including Angel Garment Ltd (287 ITR 341),
Motorola Inc and Others v DCIT (95 ITD 269), Gutal Trading Est (278 ITR 643),
Western Union Financial Services Inc (101 TTJ 56), IAC v Mitsui and Co Ltd (39 ITD 59)
and UAE Exchange Centre LLC (268 ITR 9). Most of these support the immunity of
liaison offices from taxation, but the last one in particular is worrying.

33

Company Limited by Shares


-

Nature
Formation
Ongoing Formalities
Employing Staff
Taxation

34

Nature of a Company Limited by


Shares

Companies limited by shares are formed under the Companies Act 1956 and may be
public or private. This section is concerned only with private companies. Such a
company has a minimum share capital of INR100,000, must restrict the right to
transfer its shares, may not have more than 50 members and may not invite or
accept subscriptions to its shares from members of the public. It is governed
according to its Memorandum and Articles of Association by a board of directors.
There must be at least two members and two directors. The liability of the
shareholders is limited to the amount of share capital subscribed by them.

35

Formation of a Company Limited


by Shares

Formation of a limited company in India can be a lengthy and bureaucratic


procedure. The key steps are as follows: Prospective directors should obtain DINs
(Director's Identification Number) from the Registrar of Companies; Selection of
name for the proposed company on Form 1A. Application is made to the Registrar of
Companies, giving six alternative proposed names. The approved name remains
available for six months. Filing of required documents with the Registrar of
Companies: Memorandum and Articles of Association; list of subscribers; e-Form 1;
Power of Attorney issued by the subscribers in favor of authorized person; e-Form 18
(location of registered office; e-Form 32 (particulars of Directors);Issuance of the
Certificate of Incorporation, normally within seven days of filing of documents;
business may then be commenced. Once incorporation has been completed, the
company can then register with the tax and customs authorities, obtaining a PAN
(permanent account number) and a TAN (tax collection number). Visas for foreign
staff can now be issued and bank accounts opened.

36

Ongoing Formalities for a Company


Limited by Shares
All companies incorporated under the Companies Act must file audited accounts
annually with the Registrar of Companies. If turnover exceeds INR6m, a separate tax
audit must be carried out.

37

Employing Staff for a Company Limited by


Shares
Limited companies can hire local and foreign staff. The Ministry of Foreign Affairs is
responsible for the issuance of work permits (employment visas) under the
Foreigners Act. They are normally necessary for foreigners, although people with
Indian ancestry may be exempted from the need for a visa. Indian Consulates issue
work permits and visas prior to arrival. Normally a foreigner employed by a limited
company will require an Employment Visa, although if only short visits are being
made a Business Visa may be sufficient. The local Foreigners Regional Registration
Office (FRRO), an agency of the Home Ministry, is responsible for registering the
visas of foreigners employed by limited companies in India and for supervision of the
individuals during their stay. Registration with the police is required within 14 days of
arrival in India (which may or may not be the same as registration with the FRRO in a
given region). Documents required include a registration form in quadruplicate and a
registration permit booklet, copies of passport and visa, a copy of the employment
contract, copies of a letter of recommendation from the parent company, six
passport photos. Visas can be extended, through another set of bureaucratic
procedures.

38

Taxation of a Company Limited by


Shares

Indian companies are taxed on the previous year's income. Thus, for resident
companies, income in the 2009/2010 financial year is assessed to tax in the
2010/2011 year, at a rate of 30% plus surcharge (10%) and education 'cess', for a
total of 33.99%.Income in the 2010/2011 financial year is assessed to tax in the
2011/2012 assessment year (beginning in April 2011) at 30% plus a 7.5% surcharge
plus 3% education 'cess' for a total of 33.22%.Companies with taxable income below
INR10m are exempt from the surcharge. Non-resident companies are taxed at 40%
plus surcharge and 'cess' giving a total of 42.23%.The Direct Taxes Code, which may
come into force in April 2012, would put in place a flat 30% rate of corporate income
tax for both resident and non-resident companies; but foreign-owned companies
would pay a 15% 'branch profits tax'. There is a Minimum Alternative Tax which
bears on companies declaring taxable profit of less than 10% of accounting profit, at
a rate of approximately 18%, increasing to approximately 18.5% in the current year,
and to 20% next year. Dividend distributions to shareholders are subject to a 15%
final withholding tax (plus surcharges).

39

Project Office
-

Nature
Formation
Ongoing Formalities
Employing Staff
Taxation

40

Nature of a Project Office


A foreign corporation, which has secured a contract from an Indian company to
execute a project in India, is allowed to establish a project office in India without
obtaining prior permission from RBI. Such offices can not undertake or carry on any
activity other than the activity relating and incidental to execution of the project. The
exchange control regulations prescribe certain additional requirements for setting up
project office sans its approval. The foreign corporation which sets up such a project
office is required to furnish a prescribed report to the concerned regional office of RBI
under whose jurisdiction the project office is set up. On completion of the project, the
PO has to be closed. It is completely treated as a foreign company in India and is
liable for project offices liabilities in India. A PO has relatively less compliances than a
subsidiary.

41

Formation of a Project Office


Reserve Bank has granted general permission to foreign companies to establish
Project Offices in India, provided they have secured a contract form an Indian
company to execute a project in India, and(a) the project is funded directly by inward
remittance from abroad; or(b) the project is funded by bilateral or multilateral
International Financing Agency; or(c) the project has been cleared by an appropriate
authority; or(d) a 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.
The RBI will provide approval and can grant general permission for foreign entities to
establish project offices, subject to certain conditions. These dictate that the foreign
investor has secured a contract from an Indian company to execute a project in
India. However, if the above criteria are not met, the foreign entity has to approach
RBI to obtain approval. If the parent entity is established in Pakistan, Bangladesh, Sri
Lanka, Afghanistan, Iran or China, such applications have to be forwarded to Central
Offices of the foreign exchange department of the Reserve Bank at Mumbai for
approval.
The general permission is granted by the Reserve bank of India Vide Notification No
FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open project offices in
India provided they have secured from an Indian company, a contract to execute a
project in India under the points mentioned above.

42

Ongoing Formalities for a Project


Office

Banks can open non-interest bearing foreign currency account for project offices in
India subject to the following:
A: The project office has been established in India, with the general/specific
permission of Reserve Bank, having the requisite approval from the concerned
project Sanctioning Authority,
B: The contract under which the project has been sanctioned, specifically provides
for payment in foreign currency.
C: Each project has only one foreign currency account.
D: The permissible debits to the account shall be payment of project related
expenditure and credits shall be foreign currency receipts from the project
sanctioning authority, and remittances from parent/group company abroad or
bilateral/multilateral international financing agency.
E: The foreign currency account has to be closed at the completion of the project.

43

Employing Staff for a Project Office


Project offices can hire local and foreign staff. The Ministry of Foreign Affairs is
responsible for the issuance of work permits (employment visas) under the
Foreigners Act. They are normally necessary for foreigners, although people with
Indian ancestry may be exempted from the need for a visa. Indian Consulates issue
work permits and visas prior to arrival. Normally a foreigner employed by a project
office will require an Employment Visa, although if only short visits are being made a
Business Visa may be sufficient. The local Foreigners Regional Registration Office
(FRRO), an agency of the Home Ministry, is responsible for registering the visas of
foreigners employed by project offices in India and for supervision of the individuals
during their stay. Registration with the police is required within 14 days of arrival in
India (which may or may not be the same as registration with the FRRO in a given
region). Documents required include a registration form in quadruplicate and a
registration permit booklet, copies of passport and visa, a copy of the employment
contract, copies of a letter of recommendation from the parent company, six
passport photos. Visas can be extended, through another set of bureaucratic
procedures.

44

Taxation of a Project Office


The project office is treated as an extension of the foreign corporation in India and is
taxed at the rate applicable to foreign corporations. The Income is attributable to
Indian operations taxable in India. Income is taxable at effective rate of 42.024% on
net income basis. Tax compliances are broadly similar to those applicable to
corporation. There is no tax on repatriation of profits to the head office and the
liability if any, could extend to the foreign company.
Profits attributable to PO ( Permanent Establishment (PE)) taxable on a net income
basis either in accordance with the provisions of the Indian tax laws or the India
China tax treaty; whichever is more beneficial. Deduction for executive and general
administrative expenses may be claimed to the extent of 5% of total income as per
the provisions of Indian tax laws.

45

Limited Liability Partnership


-

Nature
Formation
Ongoing Formalities
Employing Staff
Taxation

46

Nature of a Limited Liability


Partnership

The Limited Liability Partnership (LLP) was introduced in India in 2010; the previous
General Partnership form was not much used since its members were too easily able
to escape their liabilities by dissolving the partnership. The LLP however has legal
personality while still preserving a limitation on liability for individual members. A
minimum of two partners is required, but there is no maximum number. Unlike the
General Partnership, which was not open to foreigners, foreign individuals and
companies can be members of an LLP. Two persons, individual or corporate, are
required to be partners as a minimum. A corporate partner must nominate an
individual as a representative. Domestic or foreign individuals or companies may be
partners.

47

Formation of a Limited Liability


Partnership

Every partner must contribute towards an LLP in some manner; the value of nonmonetary contributions must be certified by a practicing accountant. The liability of
an individual partner is limited to their contribution. There must be an LLP
agreement which specifies the contributions of all members. There must be at least
one 'designated member' who has responsibility for managerial and procedural
aspects of the partnership. Each designated partner must obtain a DPIN (Designated
Partner Identification (Number) from the government, but an existing DIN (Director
Identification Number) will do instead. Various forms needing to be filed, including
those involved during incorporation, are electronic, and at least one of the
Designated Partners must therefore have a DSC (Digital Signature Certificate).The
LLP Agreement needs to be filed with the Registrar of Companies, who must also
verify availability of the name of the LLP, and will issue a Certificate of Incorporation.

48

Ongoing Formalities for a Limited Liability


Partnership
An LLP must maintain annual accounts reflecting a true and fair view of its affairs. A
statement of accounts and solvency must be filed with the Registrar of Companies
every year. Audit of the accounts is required only if the value of capital contributions
exceeds INR25 lakhs or annual turnover exceeds INR40 lakhs.

49

Employing Staff for a Limited Liability


Partnership
Limited Liability Partnerships can hire local and foreign staff. The Ministry of Foreign
Affairs is responsible for the issuance of work permits (employment visas) under the
Foreigners Act. They are normally necessary for foreigners, although people with
Indian ancestry may be exempted from the need for a visa. Indian Consulates issue
work permits and visas prior to arrival. Normally a foreigner employed by an LLP will
require an Employment Visa, although if only short visits are being made a Business
Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an
agency of the Home Ministry, is responsible for registering the visas of foreigners
employed by LLPs in India and for supervision of the individuals during their stay.
Registration with the police is required within 14 days of arrival in India (which may
or may not be the same as registration with the FRRO in a given region). Documents
required include a registration form in quadruplicate and a registration permit
booklet, copies of passport and visa, a copy of the employment contract, copies of a
letter of recommendation from the parent company, six passport photos.. Visas can
be extended, through another set of bureaucratic procedures.

50

Taxation of a Limited Liability


Partnership

LLPs, like Indian companies, are taxed on the previous year's income. Thus, income
in the 2009/2010 financial year is assessed to tax in the 2010/2011 year, at a rate of
30% plus surcharge (10%) and education 'cess', for a total of 33.99%.Income in the
2010/2011 financial year is assessed to tax in the 2011/2012 assessment year
(beginning in April 2011) at 30% plus a 7.5% surcharge plus 3% education 'cess' for
a total of 33.22%.LLPs with taxable income below INR10m are exempt from the
surcharge. The Direct Taxes Code, which may come into force in April 2012, would
put in place a flat 30% rate of corporate income tax for LLPs. The salaries and
expenses of members of the LLP are allowed as deductions from income before
taxation, subject to certain limits, but are taxed in the hands of the members. Profit
remaining after tax is distributed to members in proportion to their contributions or
according to the LLP Agreement and is not taxed further. In this respect, the LLP has
a tax advantage over the regular limited company, whose dividends are subject to
withholding tax.

51

Thank you !
For further information,
kindly contact us at:
Chindia Chamber of
Commerce and Industry
Email: admin@chindiachamber.org
Tel: +91-11-41014288
Address: D-38, Anand Niketan, New Delhi -110021,
Url: chindiachamber.org

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