FAQs ON BUSINESS INVESTMENT PROCEDURES IN INDIA
In what legal
forms a foreign company can set up its establishment in India?
BRANCH OFFICE
What are the procedures
for setting up a Branch Office in India by a foreign company?
What are the tax provisions for a branch office of a foreign company?
What are the other necessary procedures which a branch office must comply?
Can a branch
office repatriate profits?
How can a
branch office be closed?
LIAISON OFFICE / PROJECT OFFICE
How can one open a
liaison office /project office ?
What are the activities
that a project office/liaison office can undertake ?
CORPORATE ENTITY
What are the procedures for setting up wholly or partly owned subsidiary of a foreign company?
Which
industries qualify for the automatic
approval route?
What are the tax provisions for a subsidiary of a foreign company ?
What are the
limitations for distribution of profits by such a subsidiary ?
What are the advantages and disadvantages of each form of organization ?
What are the
procedures to be followed for investing in partnership/
proprietorship?
Are there any
special locations where it is advantageous to set up an establishment ?
What are the
differences between an Export Processing
Zone & a Technology Park?
Abbreviations used
NRI : Non Resident Indian
EOU : Export Oriented
Unit
EPZ : Export Processing
Zone
FIPB : Foreign Investment
Promotion Board
RBI : Reserve Bank of
India
ROC : Registrar of Companies
STP : Software Technology Park
EHTP : Electronic Hardware
Technology Park
In what legal forms a foreign company can set up its
establishment in India ?
A foreign company can
set up its shops in India in the form of
(i) Branch Office
(ii) Project Office
(iii) Liaison Office
(iv) Corporate Entity
which could be wholly or partly owned by the foreign company (FIPB route).
(v) Joint
Venture/Partnerships etc.
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BRANCH OFFICE
What are the
procedures for setting up a Branch Office in India by a foreign company ?
Branch Office
A foreign company requires approval
from Reserve Bank of India (RBI) for setting up of a Branch Office in India. The current
guidelines stipulate that a foreign company will be permitted to open Branch Office in
India for the following purposes only.
- Export/Import of goods
- Rendering professional or consultancy services
- Carrying out research work in which the parent company is
engaged.
- Promoting the technical or financial collaborations
between Indian companies and parents or overseas group companies.
- Representing the parent company in India and acting as
buying and selling agents in India.
- Rendering services in Information and Technology sector
and development of software in India
- Rendering technical support to the products supplied by
Parent/group companies.
- Foreign airlines / shipping companies.
As evident from above, the Branch Office
approval is restricted to certain specified activities. RBI may refuse to grant approval
if the proposed activities of the foreign company do not come within the ambit of the
activities specified above.
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What are the tax provisions for a branch office of a foreign
company ?
A Branch Office is considered a
permanent establishment of the resident company in India for tax purposes. The profits of
the Branch are taxable @ 48%. All expenditure relating to the business is allowed to be
deducted subject to certain restrictions as per Indian tax laws.
The branch engaged in the business of
exports of software in Export Processing Zones (EPZ) or as a 100% Export Oriented Unit
(EOU) is eligible for the tax holiday for a period of 10 consecutive years beginning with
the year in which the undertaking begins to manufacture or produce such computer software.
In no case, the profits shall continue to be exempted beyond the Assessment Year 2010-11.
A branch is not entitled to deduction
from export profits after the tax holiday period which are otherwise available to Indian
entities.
- The provisions of Minimum Alternative Tax (MAT) are
applicable to the branch which stipulate that the income tax payable by the Branch office
is at least 7.5% of its Books Profits as computed under the Act. (It may be noted that
the profits of the undertakings carrying out the activities as mentioned in (b) above
shall not be covered by such provision).
- The Branch would have to comply with the withholding tax
provisions of the Indian tax code which require the payers to withhold taxes at the time
of making payments of specified nature and file annual information returns.
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What are the other necessary procedures which a branch office
must comply ?
(a) The Branch would
have to get itself registered with the Registrar of Companies (ROC) within 30 days of
establishing place of business in India. It will be regarded as a foreign company and will
be required to file certain annual returns. It will also need to inform ROC of certain
changes as and when these are made.
(b) The Branch is
required to file annual audited accounts with the Registrar of Companies within nine
months of close of the accounting year.
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Can a branch office repatriate profits ?
The branch is allowed
to repatriate profits after settling its local tax liability to its parent company.
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How can a branch office be closed ?
Approvals have to be
obtained from RBI and income tax authorities for the closure of the Branch. RBI verifies
that the branch has paid all its dues to its creditors in India. The income tax
authorities require the branch to pay its income tax dues which it may have in India.
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LIAISON OFFICE / PROJECT OFFICE
How can one open a liaison office /project office ?
The project/liaison
office can be opened by a foreign company by following the procedure as mentioned for the
branch office above.
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What are the activities that a project office/liaison office
can undertake ?
A project office can
undertake activities relating to that particular project only for which approval is taken
from RBI/ Government of India..An application in Form FNC 5 is to be submitted with RBI.
A liaison office set
up in India can undertake only liaisoning activities in India. It cannot undertake any
trading activity. The application for permission shall be submitted in Form FNC 5. In case
the approval is granted, it will be for a initial period of 3 years; this period can be
extended further provided certain conditions are fulfilled.
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CORPORATE ENTITY
What are the
procedures for setting up wholly or partly owned subsidiary of a foreign company?
A foreign company can
establish its subsidiary Indian company. For this, a prior permission from Foreign
Investment Promotion Board (FIPB) would be required. If the proposal adheres to the
guidelines, it can get automatic approval. The scope of activities of a locally
incorporated entity would be defined by its charter of incorporation, i.e. Memorandum of
Association. Such a company would have the flexibility in its operations subject to the
FIPB approval.
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Which industries qualify for the automatic approval route?
Automatic approval can
be granted for foreign equity even upto 100 %. Different percent of foreign equity is
permitted under automatic approval route for various type of industries .
a) Equity upto 50% -
In case of Mining companies engaged in mining of Iron Ore & other metals
b) Equity upto 51% -
In case of companies engaged in Agricultural production, plantation, food products,
textile products, paper and paper products, basic chemicals, machinery and equipment etc.
c) Equity upto 74% -
In case of companies engaged in Mining Services, Metals & Alloys industries etc.
d) Equity upto 100% -
In case of companies engaged in generation and transmission of electrical energy through
thermal and hydro electric power plants.
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What are the tax provisions for a subsidiary of a foreign
company ?
(a) The company is
subject to tax at 35% on its net profits. Related business expenses, subject to the
limitations as per the tax laws, are allowed to be deducted to calculate the net taxable
income.
(b) In case of a
company engaged in the business of software, the minimum alternate tax will not apply to
such a company. The company is entitled to a tax holiday period of five years and is also
eligible for a deduction upto 100% of profits derived from the business of exporting
software out of India.
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What are the limitations for distribution of profits by such a
subsidiary ?
Foreign-owned Indian
incorporated company is treated at par with any other Indian company. Accordingly that
company enjoys complete day to day operational freedom, within the limits laid down in its
Memorandum of Association.
The Companies Act,
1956 requires that any domestic company declaring dividend should first transfer a
prescribed percentage, ranging between 2.5% and 10% (depending upon the rates of dividends
) of its current profits to reserves. As such, the reserves requirements has to be
deducted from the post tax profits to arrive at the distributable profits.
There are statutory
restrictions of funds transferred to reserves. Broadly, the reserves can be used for issue
of bonus shares or for declaring dividends in non profit year subject to certain
conditions.
Recently new scheme of
taxation of dividends has been introduced which requires the Indian company to deposit an
additional tax @ 10% of the dividends distributed by it. The Tax so deposited is the final
liability on the dividends. The dividends is not taxable in the hands of the shareholders.
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What are the advantages and disadvantages of each form of
organization ?
All the forms have
their own advantages and disadvantages since each of the structures has relevance of its
own. They cannot be strictly called as options open to the foreign company for its
operations in India. For example for executing one project, the foreign company will be
permitted to open a Project Office but not a wholly owned subsidiary.
However, the two major
forms of organization are branch office and subsidiary of a foreign company. A comparison
as follows of both the forms of organizations is needed to evaluate the importance of each
form of organization :
1. Foreign Owned
Indian incorporated company is treated at par with any other Indian company. Accordingly
all mentions of Indian company below are applicable to the companies which are foreign
owned. It enjoys complete day to day operational freedom, within the limits laid down in
its Memorandum of association.
2. An Indian company
enjoys a lower taxation rate of 35%, as compared to 48% of the Branch Office.
3. An Indian company
can borrow from local sources whereas Branch /Project Office cannot.
4. No government
approvals are required for an Indian company for entering into business arrangements with
other Indian residents.
5. All transaction
requiring foreign currency outflow from India require permission from RBI. This is
applicable to all entities in India.
6. Procedures for
disinvestment and exit operations are relatively more complex and time consuming in the
case of an Indian company as compared to the Branch.
7. Setting up a
company entails higher set up costs as compared to a Branch.
8. An Indian company
engaged in the business of software exports is entitled to tax holiday as well as the
deduction of 100% of profits after the expiration of tax holiday period. The Branch enjoys
only the tax holiday period for the first five year of its operations .
9. The provisions of
MAT are not applicable in the case of Indian company engaged in the business of software
exports whereas they are applicable to a branch after the tax holiday period.
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Partnerships
What
are the procedures to be followed for investing in partnership/proprietorship?
No separate permission
is required for setting up a partnership/proprietorship in India. NRIs can invest in
partnerships/ proprietorships in India engaged in any industrial, trading or commercial
activity other than agricultural/plantation/real estate business on non repatriable basis.
The amount to be invested in India should be remitted from abroad through normal banking
channel or by transfer of funds held in investor’s bank account in India. Moreover,
the amount invested and income thereon, are payable only in India in non-convertible
rupees.The firm has to file a declaration in RBI within 90 days from the receipt of
investment from NRI.
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Locational
Advantages
Are there any special locations where it is advantageous to
set up an establishment ?
Various tax benefits
can be availed if the establishment is located in certain specified areas :
(i) In case of an
industrial undertaking located in backward /rural area
(ii) In case of a
hotel located in a hilly or a rural area or in a pilgrimage place.
(iii) In case of an
industrial undertaking located in Export Processing Zone or Technology Park
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What are the differences between an Export Processing Zone
& a Technology Park?
The following are the
basic differences among an Export Processing Zone and Technology Park in brief.
Please note that all
such units can be set up by any Indian company irrespective of the extent of Foreign
Investment in the equity.
(a) Export
Processing Zone (EPZ)
Certain areas have
been designated as free trade or export processing zones (EPZs). Currently, there are
eight such zones in operation, located at Cochin (Kerala), Falta (Near Calcutta), Kandla
and Surat (Gujrat), Madras, Noida (near Delhi), Santa Cruz (near Mumbai) and
Vishakhapatnam (Andhra Pradesh). All these zones, except the one at Santa Cruz, are
multiple-product zones. The EPZ at Santa Cruz is intended exclusively for electronics and
gems and jewellery units.
(b) Technology Park
Technology Park means
any park set up for either in acordance with Hardware Technology scheme or software
technology scheme. Technology Parks can be Electronic Hardware Technology Park (EHTP) or
Software Technology Park (STP).
Software Technology
Parks (STPs) have been set up at various locations, of which seven are already
operational, i.e. Bangalore (Karnataka), Bhubneshwar (Orissa), Gandhinagar (Gujrat),
Hyderabad (Andhra Pradesh), Noida (near Delhi) , Pune (Maharashtra) and Thriruvananthpuram
(Kerala). Under the STP scheme, the unit can be set up either in the designated software
technology parks or as a stand alone unit in any part of the country.
However,
operations must be carried out in bonded premises and export obligation undertaken must be
met. Industries set up in EPZ and STP areas that fulfill the required conditions are
eligible for various concessions, exemptions and benefits concerning customs duty, sales
tax, foreign equity participation, importation and industrial-licensing regulations. They
may also be allowed to sell a part of their production in the local market. Similar
incentives are also available to 100 percent export oriented units EOUs set up elsewhere
in India (i.e. in domestic tariff area).
