5 Things to ponder upon before Setting up Business in India
India is a world’s largest democracy and also a land of opportunities with fast growing young population. India has always been an intriguing market for the overseas businesses and investors.
Recent efforts by the Indian Government to make India more investment friendly in terms of improving the ease of doing business, initiating Digital revolution, liberalizing labour laws and Foreign Exchange Regulations have improved India’s image globally and resulted in increased Foreign Direct Investment in India.
Indian Market has become more lucrative and accessible to foreign investors, businesses and organizations interested in expanding their products, services, and missions in the Indo-Pacific Region. Over the years, India has become the hub of the modern offshore IT and Business Process Outsourcing (BPO) industry. The recent article by Morgan & Stanley brings out the growth prospects for India by 2030 and terms it as India’s decade. Do read the publication ‘India’s Impending Economic Boom’ https://www.morganstanley.com/ideas/investment-opportunities-in-india
As a lot of overseas individuals and entities are interested in business set up in India as their back offices or cost centers or Research & Development centers, we have tried to list out the Five (5) most key considerations before starting any business in India.
1. Entity Structure –
The process of setting up a business in India has become easier and faster over the years, thanks to the efforts put in by the Indian government as a part of Ease of Doing Business mission.
Before starting any business, it is essential to understand the various nitty-gritties involved starting from the objective of the business and aligning it by choosing the right entity structure. Before entering the dynamic Indian market, it is important that business owners choose the appropriate structure to form a company in India, to operate successfully in the Indian business environment. Different options of entity structures exist in India:
- Limited Liability Company commonly incorporated as a Private Limited Company or a Public Limited Company.
- Limited Liability Partnership (LLP)
- Non-Profit Organisation (NPO) incorporated as a Trust, Section 8 Company or a Society
- Liaison/Project/Branch office
Click here to check out our product page SimplySet-up which has more details on the set-up options.
The most prevalent entity structure set up by Non-residents is a Private Limited company set up as a wholly owned subsidiary of the overseas parent entity. This allows the control of ownership and management to the founders. While the other forms of entity structure also exist but they are relatively less prevalent when compared to a Private Limited company.
LLP’s may be an ideal investment vehicle for smaller businesses in India. NPO’s are more suited to do work in the social sector. Foreign Companies which require a physical presence to conduct business in India without establishing a separate legal entity may set up a Branch Office, Liaison Office or a Project office based on the business objective.
2. Investment Regulations:
The Government of India has put in place a policy framework on Foreign Direct Investment (FDI), which is transparent, predictable and easily comprehensible. Foreign investment implies investment made by a person resident outside India on a repatriable basis in capital instruments of an Indian company or to the capital of LLP.
Investments can be made by Non-residents in Indian companies through various modes as in equity shares/fully, compulsorily and mandatorily convertible debentures/fully, compulsorily and mandatorily convertible preference shares which are considered as FDI for the issuance of which, regulations as prescribed under Foreign Exchange Management Act, 1999 (FEMA) must be followed. Foreign Investment is an LLP shall mean capital contribution or acquisition or transfer of profit share.
FDI investments can be made either through the automatic route or the government route. Investments falling under automatic route, do not require prior permission from the Reserve Bank of India (RBI) or the Department. However, in case of government route, prior approval is required either from DPIIT/RBI.
The kind of approval required depends on the sectors in which the business is investing in. There are also certain sector-wise caps on FDI investments. Most sectors are, however, are eligible for FDI investment under the automatic route.
Investment regulations also cover entry conditions on foreign investment, the cap on investments, the sectoral laws, regulations, rules, security conditions, and state/local laws/regulations. The Investment regulations have considerably eased over a period of time making it easy for companies to adhere.
You may click here to check the effective Foreign Trade Policy.
3. Compliance & Regulatory framework-
In India, businesses are governed by varied laws and regulations e.g the Companies Act, 2013, Limited Liability Act, 2008, Foreign Exchange Regulation Act, 1999 (FEMA), Employment & Establishment related Laws, Industry specific Laws and Environment Protection laws to name a few. The major challenges faced by the businesses are
- to identify the laws and regulations applicable to their business amongst the plethora of the Acts, rules and regulations introduced in India.
- to ensure compliance under all these applicable laws and regulations.
- to keep a track with ever evolving nature of these law and regulations.
The Companies Act, 2013 regulates the formation and functioning of corporations or companies incorporated in India and the LLP Act make provisions for the formation and regulation of Limited Liability Partnerships. Foreign Exchange Management Act consolidates and amends laws regulating foreign exchange in India. The establishment & Employment related laws mainly cover social welfare legislation enacted with the objective of protecting the interest of the employees and providing certain benefits to them and regulating the operations of establishments. Before commencing any business, various Licences & Registrations under the above laws would be mandatory to obtain.
To keep the business in good standing, compliance with the regulatory laws is mandatory. Though the task is not easy for the entities, there is no escape from that. Relentless and regulatory changes are meant to happen which can be managed with the help of professional guidance and support.
4. Tax considerations –
Tax regime in India is broadly divided into Direct Tax and Indirect Taxes. The difference comes in the way these taxes are implemented. Direct taxes are levied directly on an entity or an individual and cannot be transferred onto anyone else. Indirect Taxes are those taxes that are levied on goods or services.
Corporate tax is the tax that is paid by companies from the revenue they earn. The corporate tax rate varies between 25% to 40% based on the turnover and the type of the company. There is also surcharge component on the corporates. The domestic companies also have an option of reduced tax rate on satisfaction of certain conditions specified. The Minimum Alternative Tax & the Dividend Distribution Tax also have to be taken into consideration while taking the decision of business set up & the entity structure to opt for.
On the other hand, LLPs are required to pay tax 30% flat tax rate. Additionally, Health and Education cess is at the rate of 4%. Surcharge of 12% will be levied only if the taxable income exceeds Rs. 1 crore. Alternative Minimum Tax for LLPs is at the rate of 18.5% but there is no Dividend Distribution Tax.
Foreign Company operating through its Branch office, Project Office or Liaison Office will be taxed at a Flat Tax rate 40%. Additionally, they would be levied surcharge and cess as well.
5. Location –
Choosing the right location is the key to successful operations and overall growth. It is important to consider the demographics, the availability of skilled resources, cost, the incentives and concessions offered by the respective state government before choosing the location. For example IT & ITES enabled services may find it more apt to set up their entity in a location where there is availability of tech talent. Therefore, based on the business objective, the decisions have to be taken.
We understand that business set up in a foreign land is not an easy decision to make. It is obvious to have multiple questions like how to start, which form of set-up to go with, what are the legal formalities involved, what kind of registrations to procure, how to safeguard the interest of various stake holders etc., and the most important is to find a right business set-up consultant who can guide and handhold you at every step so that the process is absolutely smooth & hassle free.
SimplySet-up’s expert team as a business set-up consultant can provide all the assistance in finding answers to all the above-mentioned considerations and setting a business in India.
The content of this document has been developed based on relevant information and is purely for private circulation. Though the authors have made utmost efforts to provide authentic information, however, the authors expressly disclaim all and any liability to any person who has read this document, or otherwise, in respect of anything, and consequences of anything done or omitted to be done by any such person in reliance upon the contents of this document.