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Guide to Setting up operations in India

setting up business operations in India

Christopher Columbus wanted to find India not to conquer but to trade. He desired to cut off the middleman and to directly trade in the valuable spices, fine cloth, gold and diamonds that originated from the Indian shores. This was back when India was one of the two largest economies in the world.

Fast forward to now and the Indian economy continues its rapid ascent back towards the upper echelons of global economies. Even though it is the fifth largest economy in the world, the country retains the title of the fastest growing economy in the world.

This growth will continue unabated per observers thanks to India’s growing consumer classes, continued expenditure on infrastructure and the overwhelming desire of a billion people to improve their standards of living.

A strengthening dollar makes the case of setting up Indian operations even stronger, as do current wage standards which are low by most global standards. It can be summarized that the Indian economy makes a compelling case as a global manufacturing and services hub. It is a no brainer therefore that any business looking to grow over the next decades should be looking at INDIA as either a market, a manufacturer or as a service supplier. There is a new generation of Columbuses trying to seek Indian shores, some will succeed and some may not. Here is how you can stop navigating in the dark and set up your operations in India.

Dipping your toes

For foreign businesses looking to test out the Indian market or to source/sell goods in the Indian market on a limited scale there are a number of unincorporated entities that can be set up. These entities generally have:

  • a limited life span
  • are considered extensions of the parent companies
  • restrictions in terms of what they can and cannot do

These entities are Liaison offices, Branch offices and Project offices. We shall discuss each in detail as follows.

Liaison Office

What is a liaison office?

A liaison office is technically defined as an extension of the parent entity which works to represent the parent company/companies in India and acts as a communication channel between the parent entities and Indian customers/suppliers

The role of a liaison office is limited to promoting Export/Import of goods and services between Indian enterprises and the rest of the world.

Who is eligible to set up a liaison office?

To set up a liaison office in India the parent entity needs to have :

  • a profit making track record in the preceding three financial years, and
  • A net worth of not less than fifty thousand dollars

How to set up a liaison office (LO) in India?

An LO in India is set up through an intermediary bank also called an Authorised dealer (AD). An application along with the specified set of documents has to be submitted by the foreign entity to the designated AD for the purposes of set up of an LO. The AD bank on its part will conduct due diligence into the bonafides and eligibility of the application and inform the RBI about the proposed LO.

The RBI on its part will issue a Unique Identification Number (UIN) to each approved LO and this in turn will be used by the AD bank to set up banking operations for the LO in India.

Permission to set up Liaison offices is initially granted for a period of 3 years except in the case of Non-Banking Finance Companies (NBFCs) and other entities engaged in construction and development sectors where the validity period is only two years. The validity period of an LO can be extended from time to time by the Authorised Dealer in whose jurisdiction the office is set up.

Compliances required for Liaison offices (LO)?

  • Liaison offices have to get their accounts duly audited in India
  • Liaison offices have to file an Annual Activity Certificate (AACs) duly certified by their auditors ( In India) stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India.
  • Annual returns also have to be filed by a Liaison office with the Registrar of companies (ROC) and the Income tax Department

Branch office

What is a branch office?

Like a Liaison office, a branch office is technically defined as an extension of the parent entity which is much greater in scope and ability as compared to a liaison office and can actually execute projects, provide services etc in India.  The activities that a branch office can perform are:

Export / Import of goods.

  • Rendering professional or consultancy services.
  • Carrying out research work, in areas in which the parent company is engaged.
  • Promoting technical or financial collaborations between Indian companies and parent or overseas group company.
  • Representing the parent company in India and acting as buying / selling agent in India.
  • Rendering services in information technology and devel­opment of software in India.
  • Rendering technical support to the products sup­plied by parent/group companies.
  • Foreign airline / shipping company

A foreign entity can set up a branch office in India for manufacturing and services activities only if :

  • The BO is set up in an Special economic Zone (SEZ)
  • The BO is functioning in a sector where 100% Foreign Direct Investment (FDI) is permitted
  • The BO complies with Chapter XXII of the Companies Act 2013
  • The BO functions on a stand alone basis

Who is eligible to set up a Branch office

To set up a branch office in India the parent entity needs to have :

  • a profit making track record in the preceding five financial years, and
  • A net worth of not less than One hundred thousand dollars

How to set up a Branch office (BO) in India?

As in the case of an LO, A BO in India is set up through an intermediary bank also called an Authorised dealer (AD). An application along with the specified set of documents has to be submitted by the foreign entity to the designated AD for the purposes of set up of an BO. The AD bank on its part will conduct due diligence into the bonafides and eligibility of the application and inform the RBI about the proposed BO.

The RBI on its part will issue a Unique Identification Number (UIN) to each approved BO and this in turn will be used by the AD bank to set up banking operations for the BO in India.

Compliances required for a Branch offices (BO)

  • Branch offices have to get their accounts duly audited in India
  • Branch offices have to file an Annual Activity Certificate (AACs) duly certified by their auditors ( In India) stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India.
  • Annual returns also have to be filed by a Branch office with the Registrar of companies (ROC) and the Income tax Department
  • Since Branch offices can have locally generated incomes they are subject to taxation at the rate applicable for foreign companies i.e. 40%

Project office

What is a Project office?

A project office is an unincorporated entity formed for Execution of a contract which the parent company has won from an Indian counterpart, provided the project is funded directly by inward remittance from abroad, or the project is funded by a bilateral or multilateral International Financing Agency; or the project has been cleared by an appropriate authority; 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.

Who is eligible to set up a project office

Project offices can be set up by non resident companies which have secured contracts from an Indian company to execute projects in India. The said project must have:

  • Obtained the required regulatory clearances
  • Should be funded directly by inward remittance from Abroad or
  • Been funded by a bilateral or multilateral international financing agency or
  • The company awarding the project in India must have been granted a term loan by a public financial institution or a bank in India for the project.

How to set up a Project office (PO) in India?

The process for set up of a Project office is more of less the same as the process required to set up a LO or a BO in India.

Compliances required for Project offices (PO)

  • Project offices have to get their accounts duly audited in India
  • Project offices have to file an Annual Activity Certificate (AACs) duly certified by their auditors ( In India) stating that the Liaison Office has undertaken only those activities permitted by Reserve Bank of India.
  • Annual returns also have to be filed by a Project office with the Registrar of companies (ROC) and the Income tax Department
  • Since Project offices can have locally generated incomes they are subject to taxation at the rate applicable for foreign companies i.e. 40%
setting up office in India

Here to Stay : Setting up a subsidiary / joint venture company in India

Once you figure that you wish to stay in India and sell to or from India. It can be useful to set up an incorporated entity which would provide you an Indian domicile and the associated tax benefits that flow from it, namely a reduced rate of taxation ( between 25-30% for eligible companies versus 40% for foreign companies)

Here are ways you can set up operations in India as an incorporated entity.

Setting up a Company ( wholly owned subsidiary/Joint Venture)

What can a foreign owned company incorporated in India do?

A company with foreign direct investments can undertake All activities which are not on the exclusion list of the FDI policy as well activities on the approval list with prior approval of the relevant sanctioning agencies.

Activities which companies with foreign ownership cannot undertake are :

  • Gambling and Betting
  • Lottery business (including government/ private lottery, online lotteries etc)
  • Activities /sectors not open to private sector investment (eg, atomic energy /railways)
  • Retails trading (expect single-brand product retailing)
  • Business of chit fund
  • Nidhi company
  • Real estate business or construction of farm houses
  • Trading in transferable development rights (TDRs)
  • Manufacturing of tobacco, cigars, cheroots , cigarallos, cigarettes and other tobacco substitutes
  • Agriculture (excluding floriculture, horticulture, apiculture and cultivation of vegetables and mushrooms under controlled conditions, the development and production of seeds & planting materials, animals husbandry including the breeding of dogs, viniculture & aquaculture under controlled conditions and services related to the agro and allied sector)

Who is eligible to set up a company in India.

All global entities are eligible to invest in permitted sectors in India with the exception of entities based in Bangladesh and Pakistan who much seek government approval before any investments can be made by them.

How to Set up a company in India?

To set up a company in India one requires a minimum of two shareholders and directors. To set up a public company at least 7 shareholders and 3 directors are required. To set up the company an application has to be made before the registrar of companies for reservation of name. Once such name is approved, other related documentation is submitted to the Registrar of companies (ROC) for approval.

Compliances required for companies in India

Companies registered in India need to, among other compliances,  :

  • Have their books audited by a statutory auditors
  • File annual returns with the ROC
  • Fulfill annual reporting obligations with the Reserve bank of India (RBI)

Small companies with turnover up to 250 Million rupees are eligible to pay taxes at the rate of 25% all other companies must pay tax at 30%. Surcharges and cess’s are applicable in addition to the base rate depending upon income.

For any regulatory and structuring assistance in setting up your business in India please do not hesitate to contact us

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