Accounting is the most significant aspect that a company or organization considers before contemplating expansion into a new market. India is one of the fastest-growing economies in the world (with estimated GDP growth of around 7%) and the most lucrative investment destination. It has brought radical reforms in most of its business-related laws & procedures in the last 5 years to suit the global & local requirements (Ex.- Companies Act, International taxation laws, FEMA & FDI laws, GST laws, IPR Acts) for which different new compliance requirement emerged. To fulfill these new requirements, there is a complete dependency on the accounts and finance, as it requires accurate financial numbers to be reported.
It should always be kept in mind that maintaining books of accounts of multiple entities spread across different locations, and consolidating them for a cohesive presentation is not always simple and straightforward, given the different currencies they deal with, and conflicting accounting standards, different practices, rules, and regulations. Therefore, any corporates coming in India must consider these matters beforehand while deciding on its finance and accounting functional teams.
The foreign companies planning a subsidiary in India face challenges in decoding the business requirements and its compliance needs as per Indian business laws. They are also challenged to determine the chart of accounts for bookkeeping & its reporting alignment with its mother company; appropriate accounting software to be used for fulfilling its various reporting and compliance requirements, and different local regulations like Indian accounting standards, etc. For instance, IFRS, US GAAP, and IND AS, there is no single universally accepted reporting standard. Regulations related to accounting, legal matters, taxation, etc., also vary from its origin country, which impacts accounting and even the profitability of a company operating in India. With emerging new complex business realities, there are frequent changes in these regulations that must be incorporated to stay on the right side of the law. It is extremely important to keep track of the changes in regulations to ensure that the financial statements of a corporation that’s spread out in different geographies are in proper order.
Initially, in most cases, an Indian subsidiary is formed without appropriately assessing its working capital requirements for starting years, and consequently, the cash flow remains a major challenge. The subsidiary also faces challenges regarding fixing the price of goods and services sold between the related entities as per transfer pricing (TP) regulations in India, within a group of entities. For instance, if a foreign company sells goods or services to the Indian subsidiary company, the consideration for those goods/services paid by the subsidiary to the mother company is under the regulation of TP. TP results in the setting of prices among associate enterprises within a group and can be used as a profit allocation method to attribute a company’s net profit (or loss) before calculating the tax to countries where it does business. Thus, appropriate accounting from the perspective of TP and intercompany cost allocations is highly desirable for corporates who are involved in regular financial transactions with global subsidiaries.
Another major challenge that a subsidiary of a foreign company faces concerns withholding taxes deducted on certain services taken from its mother/group company. The mother company does not want to take the impact of withholding taxes and always wishes to get the amount in full against their services rendered to its subsidiary company in India.
Consequently, if any service income of a foreign mother/group on which Indian subsidiary is required to deduct withholding taxes in India, then the mother/group company is required to do compliances (in few cases) in respect to the filing of its tax return in India and TP compliances in some cases.
For the last 20 years, Maier+Vidorno has been addressing these business needs of overseas companies. Our Financial Experts manage Accounting & Taxation of many foreign companies in different industries in India. We have also successfully integrated their systems to be GST ready. We also offer support services in areas of sales service, Financial Due Diligence, accounting, and HR consulting. Contact us to know more.