Doing Business in India

Read this summary to gain a better idea of India's business structure and see how it can be a potential country for your business.

Establishing an entity

Investors may establish a business or presence in India either as a Foreign Company, Foreign Limited Liability Company, or as an Indian Company.

A Foreign Company is one that has been incorporated outside of India and conducts business in India. The structures available include branch office, representative (liaison) office or project office. The latter can be set up for specific projects with the approval of the Reserve Bank of India. Each of these structures represents an extension of the parent company.

A foreign investor may incorporate a company under the Indian Companies Act of 2013. Foreign equity ownership in such Indian companies can be up to 100% depending on the business plan, prevailing government investment policies and receipt of the requisite approvals. Operations through an Indian company may be established via a joint venture or wholly-owned subsidiary.

Every Indian company having a paid-up share capital of INR 50 million or more is required to appoint a qualified person as Company Secretary.

Foreign business restrictions

Foreign investment is prohibited in a number of activities, including, but not limited to: Chit funds, Nidhi companies, agricultural or plantation activities, media, real estate (with the main exception being construction or development), construction of farm houses, trading in Transferable Development Rights (TDR), manufacturing of cigars, cigarettes or of tobacco substitutes and atomic energy and railway operations.

Investment incentives

Tax incentives are available for investment in India. India has a number of Special Economic Zones (SEZ). SEZs are considered as foreign territories in all that concerns taxes and customs. Companies in a SEZ are eligible for a full tax exemption for the first 5 years and a 50% exemption from the tax due for the next five years. Entrepreneurs who supply infrastructure resources in a SEZ are eligible for a 10-year tax exemption. Deduction in SEZ is available, if operations have been commenced on or before 1 April 2020.

100% deduction of profits and gains are available for a company or LLP which is engaged in the business involving innovation, development, deployment or commercialisation of new products, processes or services driven by technology or intellectual property and turnover is less than INR 250 million. This deduction is available at the option of the assessee for any 3 consecutive years out of 7 years starting from the date of incorporation.

A new section has been inserted to provide for 100% deduction in respect of profits and gains of eligible housing projects of affordable residential units from Financial Year 2016-2017. The section applies to assessees engaged in developing and building housing projects approved by the competent authority after 1 June 2016 but before 1 April 2019 subject to certain conditions.

Companies whose main objective is scientific and industrial research are also eligible for a 100% exemption from tax for 10 years starting from 1 April 2007.

Industries located in North East India or in the state of Sikkim are entitled to a 10-year tax exemption for activities performed between 1 April 2007 and 1 April 2017.

Taxation

Indirect taxes (like service tax, VAT, etc.) have been replaced with single tax known as Goods and Services Tax (GST) with effect from 1 July 2017.

There are several tax bands for GST, based on the classification of goods and services.

GST returns must be submitted on a monthly basis based on the turnover of the company and sales tax payments must be paid before the 20th day of the following month, depending on the date when the tax invoice was raised.

GST registration is required for businesses with service/turnover volumes in excess of INR 2 million.

Withholding tax is income-tax deducted at source from certain types of payments (e.g. rental, advertising, professional, technical or consultancy services, royalties and interest). Withholding tax is a mode of tax recovery. The person/company from whose payment tax is withheld depends upon the category of service provided and the tax status of the recipient. Rates range from 1% to 10% if the Permanent Account Number (PAN) of the payee is available. In case the payee’s PAN is not available, tax may be withheld at 20%.

Tax withheld must be submitted within the 7th day of the following month and will be offset against the final corporation tax liability. The withholding tax returns are filed on a quarterly basis. Along with advance tax payments, this is the way in which income tax is collected. For all foreign payments, the entire tax component is withheld at source, where income is liable to tax in India.

Equalisation levy is a tax to be withheld at a rate of 6% if the payment has been made to a non-resident in respect of services in the nature of online advertisement, providing digital advertising space, any other service for the purpose of online advertisement. Tax withheld must be submitted within the 7th day of the following month and statement of services prescribed for the financial year should be submitted on or before 30th June of the immediately following financial year.

Rate of Taxes in respect of various assesses (including surcharge, education cess and secondary and higher secondary education cess) below:

		Total income
	Assessee	Up to 5 million	Up to 10 million	Above 10 million up to 100 million	Above 100 million
1	Individual	30.90%	33.99%	35.535%	35.535%
2	Firms and LLP	30.90%	30.90%	34.608%	34.608%
3	Domestic company set-up and registered after March 1, 2016 engaged in the business of manufacture or production and research of any article or thing and is not engaged in any other business and does not claim any benefits prescribed under Income Tax Act (i.e. deduction of additional or accelerated depreciation, investment allowance or expenditure on scientific re-search, etc.)	25.75%	25.75%	27.553%	28.84%
4	Domestic company whose turnover is less than 50 million in FY 2015-2016	25.75%	25.75%	27.553%	28.84%
5	Other domestic companies	30.90%	30.90%	33.063%	34.608%
6	Foreign companies	41.20%	41.20%	42.024%	43.260%

Where the tax payable is less than 18.5% of the company’s booked profits, a Minimum Alternate Tax (MAT) is levied at 18.5%. The surcharge and cess is also applied. Companies must make advance payments of their corporation tax, on a quarterly basis, based on estimated annual income. Business losses and capital losses may be carried forward to 8 years. Companies are also liable to pay Dividend Distribution Tax at the effective rate of 20.92%.

With a view to simplify tax compliance for small assesses, the tax law provides that an individual or partnership firm engaged in business whose turnover does not exceed INR 20 million can opt for a presumptive regime of taxation whereby they need to compute the taxable income at 8% of turnover and for receipts received by any mode other than cash at 6% of such receipts. Similarly, professionals whose gross receipts in the financial year does not exceed INR 5 million can opt for presumptive regime of taxation, whereby, they compute their taxable income at 50% of gross receipts.

Work permits and visas

All foreign residents entering India must have a visa. The main classes of visas in India are:

Tourist Visa

This visa is given to a foreigner who intends to visit India solely for purposes of tourism or other non-business related purposes; a maximum period of 6 months is granted under multiple entry regime without any authorisation for an extension.

Transit Visa

Valid for a period of 15 days for the sole purpose of enabling the holder to travel through India to reach his/her ultimate destination.

Business Visa

This visa is intended for instances in which a foreign resident visits India for business purposes, including opening a business. The visa can be granted up to a period of 5 years under the multiple entry regime with the facility of a visa extension in India. However, the period of stay in India (for each visit) under this category is limited to 6 months only.

Employment Visa

This visa is granted to a foreign resident who intends to work in India. A letter of invitation from the employer in India should be provided. It is normally granted for a period of 1 year depending upon the period of contract. An employment visa also provides multiple entries and also carries the facility of an extension in India.

The visas are usually issued by the Indian representative offices in a foreign country. Applications may be made to the Ministry of Home Affairs in India for an extension of an existing visa.

Foreign residents who wish to live in India for over 180 days must register with the Registration Office within 15 days of their entry into India. Residential permits in India are issued for a period that corresponds with the period of the employment visa, it is not necessary to obtain a work permit.

Audit and accounting

Statutory audit of all companies is mandatory in India. Furthermore, entities with turnover exceeding INR 10 million per annum (or INR 5 million in the case where a profession is conducted) require a tax audit.

Indian GAAP is broadly aligned to IFRS, although some of the more complex standards such as IAS39 Financial Instruments are yet to be adopted. Convergence with IFRS (known as Ind-AS) is being phased in from 1 April 2016; though a company may voluntarily adopt Ind-AS with effect from 1 April 2015.

Country quirks

Statutory Audit of all companies is mandatory.
Entities with turnover exceeding INR 10 million (INR 5 million in the case where a profession is conducted) per annum require a tax audit.
Every company with a paid-up capital of more than INR 50 million or more needs to appoint a full-time Company Secretary who must be a member of The Institute of Company Secretaries of India.