Setting up a business in India

An overseas business will first need to determine the appropriate structure for its Indian operations.

Depending on the nature and scale of the proposed activities, options may include:

• establishing an Indian private limited company, potentially as a wholly owned subsidiary
• establishing a branch, liaison or project office, where appropriate
• initially employing individuals through an Employer of Record (EOR) while the business assesses the market.

For many global businesses wishing to employ staff and conduct ongoing commercial operations in India, a private limited company is likely to be the most appropriate route.

An Indian subsidiary is a separate legal entity from its overseas parent and will generally be incorporated as a private limited company under the Companies Act 2013.

The establishment process typically requires consideration of:

• the proposed ownership and capital structure
• appointment of directors
• registered office requirements
• company incorporation
• Permanent Account Number (PAN)
• Tax Deduction Account Number (TAN)
• opening an Indian bank account
• GST registration where required
• payroll and employer registrations
• foreign investment and exchange-control reporting.

Documents originating overseas may also need to be appropriately notarised, legalised or apostilled for use in the Indian incorporation process.

Importantly, businesses should consider the proposed operating model at the same time as the legal structure. An Indian company established principally to employ a software development team, for example, may require a very different tax and transfer-pricing model from an Indian company selling directly to customers in the local market.

Foreign investment into an Indian business is regulated under India's foreign-exchange and FDI framework.

Many sectors permit 100% foreign ownership under the automatic route, but sector-specific restrictions, investment caps or government approval requirements can apply.

Global groups should consider at an early stage how the Indian operation will be funded. This may include:

• initial share capital
• further equity injections
• intercompany loans or other financing
• operating cash requirements
• foreign investment reporting
• repatriation of future profits.

This can be particularly important for start-ups and rapidly growing businesses because the Indian operation may initially be loss-making and dependent upon overseas parent-company funding.

Tax, regulatory and foreign-exchange consequences should therefore be considered before funds are transferred, rather than simply when the Indian entity requires additional cash.

An Indian incorporated subsidiary is subject to Indian corporate income tax.

Qualifying domestic companies can elect into a concessional regime providing a 22% base corporate tax rate, subject to the applicable conditions. Once surcharge and health and education cess are included, this can result in an effective rate of approximately 25.17%.

The headline corporate tax rate, however, is only one part of the tax position.

Global businesses should also consider:

• transfer pricing
• deductibility of intercompany expenses
• withholding taxes
• permanent establishment exposure
• royalties, interest and service fees
• utilisation of tax losses
• repatriation of profits
• the application of the relevant double taxation agreement.

These issues are particularly important where an Indian subsidiary provides services predominantly or exclusively to overseas group companies.

Transfer pricing should ideally be considered when the Indian business is established rather than waiting until the first financial year-end.

Transactions between an Indian subsidiary and overseas related parties can fall within India's transfer-pricing regime.

Common examples include:

• software development and engineering services
• management and support services
• sales and marketing support
• intellectual property and technology arrangements
• intercompany loans and interest
• staff and other cost recharges.

For example, a global technology business may establish an Indian development centre whose principal activity is providing services to its overseas parent. The functions performed by the Indian company, risks assumed, assets used and resulting remuneration model need to be considered to determine an appropriate arm's-length return.

Appropriate intercompany agreements and transfer-pricing documentation should support the arrangement.

India operates a Goods and Services Tax (GST) system.

Whether an Indian company needs to register, the applicable rate and how individual transactions are treated will depend upon matters including:

• the nature of the goods or services
• location of the company and customer
• turnover
• whether supplies are domestic or cross-border
• whether an exemption or zero-rating provision applies.

The GST position can be particularly important where an Indian subsidiary provides services to an overseas parent or another global group company.

It is therefore advisable to establish the GST treatment before intercompany invoicing commences.

India's Tax Deducted at Source (TDS) regime is an important feature of the country's tax system.

An Indian business can have an obligation to deduct tax when making various types of payment, including certain payments to suppliers and employees.

Cross-border payments can require particular attention. Payments of management or service charges, royalties, interest or other amounts to an overseas group company may need to be considered under:

• Indian domestic tax legislation
• the relevant double taxation agreement
• withholding tax requirements.

TDS should consequently form part of the company's normal accounts payable and payroll processes from an early stage.

For many global businesses, access to talent is one of the primary reasons for establishing operations in India.

Before employing the first individual, companies should consider:

• employment contracts
• payroll setup and processing
• income tax withholding
• Provident Fund
• Employee State Insurance, where applicable
• gratuity
• Professional Tax
• employee benefits
• applicable labour legislation and employment requirements.

Requirements can differ according to employee numbers, salary levels and the state in which employees are working.

The location of the workforce should therefore be part of the planning process rather than simply a recruitment decision.

Global businesses should also consider how their global reward strategy will interact with Indian payroll and tax requirements.

This can include:

• bonuses
• private medical and other employee benefits
• pension and retirement benefits
• share options
• Restricted Stock Units (RSUs)
• Employee Stock Purchase Plans (ESPPs)
• Other globally operated equity plans.

For start-ups in particular, equity participation may represent a significant part of an employee's overall remuneration. Where employees in India receive shares or options in an overseas parent company, the Indian tax, payroll, reporting and foreign-exchange implications should therefore be reviewed as part of implementing the plan.

Incorporating the company is only the start of the compliance process.

An Indian subsidiary can have recurring obligations covering a number of regulatory areas, including:

• bookkeeping and statutory accounts
• statutory audit
• corporate filings
• corporate income tax
• GST
• TDS
• payroll
• transfer pricing
• foreign investment and exchange-control reporting.

Global businesses should therefore establish their finance and compliance processes shortly after incorporation rather than waiting for the first financial year-end.

This is particularly important for businesses that also need the Indian company's financial information to meet group consolidation, investor or overseas reporting deadlines.

Some global businesses enter India initially using an Employer of Record (EOR), particularly where the immediate requirement is to recruit a small number of employees.

This can enable an organisation to establish an initial workforce without immediately creating its own entity.

However, the arrangement should be considered as part of the wider global tax and operating model. As the Indian workforce and activities increase, the organisation should assess whether having employees operating in India creates wider corporate tax, permanent establishment, regulatory or employment implications.

Businesses intending ultimately to establish an Indian subsidiary should also consider how employees, benefits, payroll and employment arrangements will transition from the EOR to the new entity.