Business Formation in India for Foreign Investors
How can Foreign Investors enter the Indian Market?
A Foreign Company has a number of options to establish its direct as well as indirect presence in India when it comes to setting up business operations. This article explains in brief.
There are broadly two ways to show the presence in India. These are:
- Direct Presence
- Indirect Presence
Mode of Direct Presence: As an Incorporated Entity
A Foreign Company can establish its direct presence in India by incorporating a company under the Companies Act, 1956 which can be done by either of the following ways:
- Joint Venture Company
- Wholly owned subsidiary Company
The foreign equity in such Indian companies can range upto 100% in terms of both shareholding and foreign capital investment. This depends on the equity caps and sectoral limits which are prescribed under the FDI policy on the business activity which is to be carried out by such company in India and it also depends on the requirements of the investor.
There are ways other than the mentioned above to enter the Indian market which can be discussed under the “Mode of Indirect Presence.”
Mode of Indirect Presence: As an unincorporated Entity
A Foreign Company can establish its indirect presence in India by opening up the below-mentioned offices:
- Liaison Office
- Project Office
- Branch Office
Liaison Office: The Liaison office is allowed to carry out limited operations only. The basic role of this office is to promote the business of the Foreign Company in India. It requires approval from the Reserve Bank of India before set up can be done.
The Liaison does not have permission to carry out any business activity in India, therefore it is not expected to earn taxable profits. Due to this, the activities of a Foreign Company via its Liaison Office does not become taxable in India, based on the condition that certain crucial board decisions are not taken in India. However, if its activities in contravention to rules and approvals in India leads to taxable profit generation, it would be charged 40% excluding surcharge and education cess. This rate is the same rate which is applicable to a foreign company.
Project Office: A Foreign Company can set up project office to execute specific project or to carry out activities related to that project only. General permission to set up such offices is granted by the government of India, which is subject specified conditions. Once the project gets completed, the surplus of the project can be remitted outside India after meeting the tax liabilities.
Branch Office: The requirement to open up Branch office in India is to take approval from the Foreign Exchange Department, Reserver Bank of India and thereafter registration of the respective Branch office with the registrar of Companies, Ministry of Corporate Affairs as Foreign Company under Section 592 of the Companies Act, 1956.
Branch Office in comparison to a liaison office is allowed to carry out more activities and is regulated by Transfer Pricing regulations when it comes to transactions with the parent company or any associated company outside India. Subject to the RBI guidelines, the branch office can remit the profit outside India, that is, net after paying applicable taxes.
Branch office on the Stand-Alone Basis in SEZ (Special Economic Zones): these are restricted to Special Economic Zones only (SEZ/Tax heaven zone). These offices are not allowed to carry out any business activities outside these zones. Approval to set up these offices from the RBI is not required to undertake manufacturing and service sectors which is subject to the following conditions:
- Such activity should come under sectors where 100% FDI is permitted.
- Compliance with sections from 592 to 602 of the Companies Act, 1956 is necessary.
- It should function on a stands alone basis.
- The branch should approach an authorized dealer in foreign exchange in the case of winding up of business and for remittance of winding up proceeds with the documents required as per FEMA.
How to set up Special Economic Zones and Export Oriented Units?
- SEZ is a specifically delineated Tax Heaven/ Duty Free Enclave is deemed to be foreign territory for purposes of trade operations, duties and tariffs. Goods and services which are going into the SEZ from DTA are treated as exports and goods coming from the SEZ area to DTA are treated as imports.
- Subject to the SEZ Act, 2005 and the Foreign Trade Policy, 100% FDI is permitted under automatic route for setting up SEZs and Free Trade Warehousing Zones (FTWZ). Press note. No.2 (2005) does not restrict FDI in setting up of SEZ and units in SEZ.