Starting Business in India - (for Foreign Nationals / NRI’s )- An Overview

India is increasingly gaining a global importance as a major market hub for investments all over the world. The booming Indian economy has a lot to offer for foreign investors to leverage vast pool of natural, human and intellectual resources of rich Indian economy apart from various attractive investment opportunities.Government of India is striving to bring greater transparency in policies and procedures to provide an investor friendly platform.
It is to be noted that the capital to be invested by the Foreign National / NRI shall be classified as ‘Foreign Direct Investment’ (FDI) in India. Before the economic liberalization in India in the 1990s, there were a high number of restrictions for FDI in India. Gradually, the restrictions have been watered down to a great extent and currently the restrictions are in place for only those business activities that are strategic to the interests of the country or are politically sensitive issues.
It can be noted that FDI is not allowed in India in the form of sole proprietorship or partnership businesses except that NRIs are allowed to do so on non-repatriable basis.However it may not be advisable to opt for that route. Also, FDI is not allowed in trusts and non-governmental organizations except that of Venture Capital trusts.
Various forms of organizations / structures that can be used for starting a business in India are discussed below :

Limited Companies

The most common and the best route for Foreign Nationals and NRI’s to conduct business in India is to setup a public or private limited company in India.Recently the Government has allowed Foreign Direct Investment through Limited Liability Partnerships (LLPs).
Following are few points to be considered while investing in India :
  • FDI will be allowed only in those companies where 100% FDI is allowed through the automatic route and there are no FDI-linked performance related conditions.
  • Automatic approval route means no prior permission from the Government/ FIPB is required. FDI-linked performance related conditions meant that in sectors, where conditions like minimum capitalization, compulsory disinvestment after a few years etc are prescribed; even though 100% FDI is allowed under automatic route, LLP’s will not be allowed to bring FDI with the approval of Government of India.
  • No FDI shall be allowed in agricultural/plantation activity, print media or real estate business.

Branch Office

A branch office in India can execute most of the tasks that a Limited Company can execute except manufacturing. A Branch Office acts as a branch of the foreign company, be its permanent establishment under the tax laws and can earn income from business operations. Recently the RBI has tightened the norms regarding who can open a branch office in India. One of the criteria is that the Foreign Company intending to open a branch office in India should have a track record of at least 5 years of profit making.

Project Office

A Project office is like a temporary branch office set up for a particular project.

Liaison office

Liaison offices aremainly set up as a communication medium between the Foreign Company and its existing customers in India. The role of liaison office is limited to collecting information about possible market opportunities and providing information about the overseas parent company and its products to prospective Indian customers.Any foreign company intending to open a Liaison Office in India is required to obtain prior approval from the RBI, the apex foreign exchange management authority in India. Approval is usually granted for three years and can be renewed on expiry thereof. The biggest advantage is in income taxes where the provisions of Permanent Establishment and Transfer Pricing may not be much of a concern since the Liaison office does not earn any income as such.

Our services in relation to starting a business venture in India are listed below :

  • Advisory on various options to choose from for doing business in India
  • Advising on location to be preferred for setting up a business in India - This will mainly depend on any locational advantages such as concessional taxes (direct / indirect taxes) for any location in India, checking whether any incentive from local government bodies is available for setting a business at a particular location
  • Incorporation of a entity - A company or LLP or any other type of organization
  • Obtaining statutory registrations such as Application for PAN, TAN,ServiceTax, Excise and Sales Tax, Filing of returns for TDS and Service Tax
  • Valuation of Shares for submission to RBI
  • Certification of Annual Compliance for submission to RBI
  • Accounting and Tax Support
  • Auditing of books of Accounts and other statutory compliances

Starting a New Business in India - Statutory and other compliances

Every entrepreneur aims at starting a business and building it into a successful enterprise. The whole process of starting a business begins with writing a business plan. A good business plan is the key to setting up a successful business. Once a plan is prepared, the entrepreneur faces various challenges while implementing the plan.
Starting a new business is also a learning curve, where you learn every day. For example, if you want to open an advertising agency, you need a detailed business plan. This plan should include everything from the budget to arranging office space, workforce, working capital and sourcing of inputs and other material. Once you have decided to start a business, an important consideration to look into is the various government guidelines for setting up a factory, seeking permits from various departments (including electricity, water, environment, etc) and filing registrations along with necessary fee, necessary taxation, etc.
A Quick Overview of Guidelines and Procedures for starting a new business in given below :

Register your company / Partnership firm / Trust

  • Companies Act, 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company, directors, and dissolution of a company.
  • The law relating to a partnership firm is contained in the Indian Partnership Act, 1932. Under Section 58 of the Act, a firm may be registered at any time ( not merely at the time of its formation but subsequently also ) by filing an application with the Registrar of Firms of the area in which any place of business of the firm is situated or proposed to be situated.

Obtain a PAN No.

Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued in the form of a laminated card, by the Income Tax Department. It is mandatory to quote PAN in all documents pertaining to the following financial transactions :
  • Sale or purchase of any immovable property valued at five lakh rupees or more
  • Sale or purchase of a motor vehicle or vehicle, [the sale or purchase of a motor vehicle or vehicle does not include two wheeled vehicles, inclusive of any detachable side-car having an extra wheel, attached to the motor vehicle]
  • A time deposit, exceeding fifty thousand rupees, with a banking company
  • A deposit, exceeding fifty thousand rupees, in any account with Post Office Savings Bank
  • A contract of a value exceeding one lakh rupees for sale or purchase of securities
  • Opening a bank account
  • Making an application for installation of a telephone connection (including a cellular telephone connection)
  • Payment to hotels and restaurants against their bills for an amount exceeding twenty-five thousand rupees at any one time
  • Payment in cash for purchase of bank drafts or pay orders or banker’s cheques for an amount aggregating fifty thousand rupees or more during any one day
  • Deposit in cash aggregating fifty thousand rupees or more with a bank during any one day
  • Payment in cash in connection with travel to any foreign country of an amount exceeding twenty-five thousand rupees at any one time

Apply for TAN

TAN or Tax Deduction and Collection Account Number is a 10 digit alpha numeric number required to be obtained by all persons who are responsible for deducting or collecting tax. It is compulsory to quote TAN in TDS/TCS return (including any e-TDS/TCS return), any TDS/TCS payment challan and TDS/TCS certificates.
All those persons who are required to deduct tax at source or collect tax at source on behalf of Income Tax Department are required to apply for and obtain TAN.

Open a current account with Bank

Requirements may vary with each bank. However some general documents required by the bank are listed below.
  • Basic Common Documentation
    • Proof of Identity : PAN Card, Voter Id Card, Passport, Driving License
    • Proof of Address : Latest Telephone Bill or Electricity Bill
  • Public or Private Limited Companies
    • Certificate of Incorporation and Commencement of Business
    • Memorandum and Articles of Association
    • Board resolution authorising the opening and operation of the account
    • PAN or GIR No. or completed Form 60
    • List of Directors with residential addresses
  • Partnership Firms
    • Partnership Deed and Registration Certificate
    • Shop and Establishment Certificate
    • Letter from partners approving the persons concerned to open and operate the account.\
  • Proprietorship Concerns
    • Certificate from State Govt or Statutory Body or Trade License or Sales Tax Certificate or Shop and Establishment Certificate
    • Letter of proprietorship, duly signed by the proprietor in his or her individual capacity (with a rubber stamp)Hindu Undivided Family
    • Letter of HUF duly signed by Karta and all Co-Parceners
    • PAN or GIR No. or completed Form 60
    • Names of Karta and Co-parceners with residential addresses
    • Latest passport-size photographs of all the authorized signatories
  • Trusts
    • Copy of the trust deed
    • Copy of the registration certificate
    • Copy of the resolution by the trustees authorising the members concerned to open and operate the account
    • List of Trustees with residential addresses
    • Photographs of the members operating the account Associations or Clubs
    • Bye-laws of the association or club
    • Certificate of Registration
    • Copy of the resolution by the Board authorising the members concerned to open and operate the account
    • Photographs of the members operating the account

Register for Service Tax

Service Tax is an indirect Tax levied on services. At present, the effective rate of Service Tax is 12.36% on the value of the taxable service. The above effective rate comprises of Service Tax @12% payable on the “gross value of taxable service”, Education Cess @ 2% on the service tax amount, and Secondary and Higher Education Cess @ 1% on the service tax amount. Every service Tax provider for specified services having turnover above an amount specified, is required to apply for service Tax number.

Register for VAT / Sales Tax

  • VAT is a multi-point destination based system of taxation, with tax being levied on value addition at each stage of transaction in the production/ distribution chain. The entire design of VAT with input tax credit is crucially based on documentation of tax invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, needs to issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice is to be signed and dated by the dealer or his regular employee, showing the required particulars. For identification/ registration of dealers under VAT, the Tax Payer's Identification Number (TIN) is used. TIN consists of 11 digit numerals throughout the country. Its first two characters represent the State Code and the set-up of the next nine characters can vary in different States.
  • Sales tax is levied on the sale of a commodity, which is produced or imported and sold for the first time. If the product is sold subsequently without being processed further, it is exempt from sales tax. A state Sales Tax ID number is essentially a business version of your Social Security number, under which you collect and pay tax for any service or product you sell, which in turn, qualifies for taxation in your state.

Excise Duty

Indirect tax levied on those goods which are manufactured in India and are meant for home consumption. Certain industries are exempted from payment of Excise Duty. Sales Tax is different from the Excise duty as former is a tax on the act of sale while the latter is a tax on the act of manufacture or production of goods.
  • What categories of persons are required to obtain registration with the Central Excise department :
    Subject to specified conditions, generally the following categories of persons are required to get themselves registered with the Central Excise department :
    • Every manufacturer of dutiable excisable goods
    • First and second stage dealers or importers desiring to issue Cenvatable invoices
    • Persons holding bonded warehouses for storing non-duty paid goods
    • Persons who obtain excisable goods for availing end-use based exemption
  • Procedure for obtaining registration :
    Apply to the nearest Central Excise Division Office in Form A.1 along with a self-attested copy of the PAN issued by the Income Tax Department. After post verification, a regular Registration certificate in form RC is normally issued immediately, as far as possible.

Customs Duty

Customs Duty is Indirect Tax levied on Imports as well as Exports.

Employee State Insurance (ESI) Scheme

The Act is applicable to non-seasonal factories employing 10 or more persons. The Scheme has been extended to shops, hotels and restaurants, cinemas including preview theatres, road-motor transport undertakings and newspaper establishments employing 20 or more persons.

Employee’s Provident Fund

Applicable for establishments employing 20 or more persons and engaged in industry notified under Section 6 of Act.