Dhrub Thakur | Company Secretary – Head Legal Compliance | Maier+Vidorno
Updated in September 2017
Doing business in India is not easy. There are many complexities involved – especially when you set up your business.
India has opened itself up to foreign companies in recent years and the GDP growth projections now stand at 7% in 2017-18 and 7.7% in 2018 as per the data released by International Monetary Fund (IMF)-19. These figures make India an attractive destination for international investment – especially now that economic reforms such as GST (Goods and Service Tax) & demonetisation have shown the serious commitment of the country to tackle corruption and bureaucracy. Many foreign firms already working with distributors, are looking to establish their own business entity in India, and need to plan their expanded market entry carefully.
For some companies the best thing is to “dip a toe in the water” before forming a company. For them we recommend our business incubator (this works like US PEO services or personnel leasing in Germany or Sweden).
For many firms, finding a business partner – a Joint Venture, Merger or Acquisition – may be the right approach. For many companies, the best approach may be to incorporate their own company in India because foreign subsidiary company is treated at par to the domestic companies so far as taxation is concerned. Also the Government of India has taken many steps in the recent past for ease of doing business in India including simplification of company registration process.
For a review of all the basic market entry options for India please read our very popular article sales in India – what is my best India market-entry strategy?
In this article we will focus on the market entry options available to foreign companies who want to set up their own business in India. We take you through each option to enable you to have basic understanding and to take appropriate decision regarding entry route in India.
Foreign Companies are allowed India market entry in the following ways:
- Incorporation of a Private Limited Company
- Setting up of a Liaison office
- Setting up of a Branch office
- Setting up of a Project office
- Incorporation of a Limited Liability Partnership
- Incorporation of a Private Limited Company is a popular way for foreign companies to begin business in India. Automatic approval to enter into the Indian market is available for most industry sectors – although, a few require approval from the Government of India. A newly incorporated company (subsidiary) can do any legal business in India including trading, service, consulting or manufacturing. For income tax purpose, subsidiaries are treated at par with domestic companies.
- A Liaison office (LO) is also called Representative office and can be set up in India with the approval of the Reserve Bank of India (RBI) and requires registration with the Registrar of Companies (ROC). The initial approval is given for three years only and is subject to further extension. An LO is not allowed to render any kind of commercial activities and earn money in India. This can be considered as a window to do market research in India and to represent the parent company for import, export and business collaboration
- Foreign companies can also set up a Branch office (BO) in India with the approval of the RBI, by registering with the ROC and by doing other business registrations. A BO can perform all the tasks that are permissible for a Liaison office, and in addition they can provide consultancy or technical assistance on their products or services in India. They can import and export goods as well as act as a buying or selling agent in India. But, the Branch Office cannot carry out production or processing of products in India either directly or indirectly; and while a foreign company’s Branch Office can buy property in India, it cannot lease or rent that property out. The Indian Tax Authority treats a BO as a foreign company and imposes a higher tax on the income than that for an Incorporated Subsidiary Company.
- The RBI has granted general permission for foreign companies to establish a Project Office in India, subject to the condition that they have secured a contract from an Indian company /entity and;
- Project is funded directly by inward remittance from abroad or
- Project is funded by a bilateral/multilateral financing agency or
- Project has been cleared by an appropriate authority or
- Company awarding the contract has been granted a term loan by a public financial institution or bank for the project.
If any of the above conditions are not met, then the specific approval of the RBI is required. This entity is also treated as a foreign company and the tax imposed is higher than on the incorporated company. This entity requires registration with ROC as well as other business registration applicable on this. As this is evident by name itself, a Project Office is limited to execution of a project and after the closure of that project this is required to be closed. Profits earned by a Project Office can be repatriated freely after completion of the project – subject to the payment of taxes in India and the fulfilment of other condition.
- The Limited Liability Partnership (LLP) is a new concept in India. This is a partnership firm with limited liability. Foreign investment is allowed in the form of LLP under the automatic route subject to condition that the Company having FDI is engaged in the sector where 100% FDI is permitted under automatic route. This requires registration with the ROC. Provision related to having local designated partner has also been relaxed recently by Government of India. Thus a foreign company can also be a designated partner of LLP. External Commercial Borrowing (ECB) is also allowed to LLP therefore LLP is being attractive entry route for foreign company in India.
The Indian Government has done a lot to make the processes easier for a foreign company to set up their own business in India, but there is a lot more to do. M+V can help you research the market and work out where to be – understanding where your customers are and how to set up your distribution network. We can also help you hire the right staff and get all the registrations. Our teams can also handle all your accounts, logistics and payroll, your after sales support and even help you sell online.