Chindia chamber of commerce and industryjan 2013

Doing Business in India 2013 —— How to register a company in India

INDEX• India and its Culture

P3 • Country Overview

P4• Business Culture

P7• Employing People

P10• Entry and Residence

P13

• Choosing a Business Format P15

• Liaison Office P16

• Branch P22

• Company Limited by Shares P28

• Project Office P34

• Limited Liability Partnership P40

2

India: The country and its Culture

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India: Country OverviewClassical Indian culture was formed under a series of civilizations in the last three thousand years BC; the Gupta dynasty in the 4th to 6th centuries AD saw a flowering of Indian science, art, and culture. The Delhi Sultanate in the 10th and 11th centuries followed a Moorish invasion; later the Mughal dynasty ruled India from 1500 to 1800.European powers began to infiltrate India from the 17th century onwards, initially for trading purposes. The British East India Company ran what amounted to its own government in India during the 18th century and the first part of the 19th century. By degrees Britain became the dominant power in India, and by the middle of the 19th century India was counted as a part of the British Empire. A (mostly) non-violent independence movement led by Gandhi and Nehru brought about the creation of a separate, independent Indian state in 1947, although a substantial part of the peninsula became Pakistan. Wars between India and Pakistan led to the eventual creation of Bangladesh out of what had been East Pakistan. Both India and Pakistan have nuclear weapons.

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India: Country OverviewThe climate of India varies from tropical in the south to temperate in the hillier north. India has rich agricultural resources, and its mineral reserves include coal, iron ore, manganese, mica, bauxite, rare earth elements, titanium ore, chromite, natural gas, diamonds, petroleum and limestone. The population is approximately 1.2 billion, second only to China, and is growing at 1.34% per year. The two largest cities are Delhi, the political capital, with 22m inhabitants, and Mumbai (Bombay), the commercial capital, with 20m inhabitants. There are twenty official languages in India, testifying to its fragmented past; Hindi is the most widely spoken, being used by 41% of the population. For political, economic and commercial communication, English is very widely used. Literacy is only 61%, largely due to the exclusion of women from formal education in many regions. India is a federal republic divided into 28 states and seven union territories. There is a bicameral parliament. The president and vice-president are elected by the members of the legislature; but real power resides with the Prime Minister, who is elected by the members of the largest political party. Currently the prime minister is Manmohan Singh and he has been in power since 2004.

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India: Country OverviewThe legal system is based on English common law and precedents play a large part in the judicial process, as they do in other common law countries. There is a Supreme Court; justices are appointed by the president and remain in office until they reach the age of 65.India's economy was held back for a long time by protectionist, autarkic tendencies verging on cronyism. Liberalization began in the 1990s and large parts of the economy can now be described as open. Although agriculture is still the dominant sector, incentive policies have underpinned the growth of IT and other technology-based industries. Outsourcing has been a major growth sector. Growth has averaged 7% for the last ten years, and the economy bounced back strongly from the financial crisis to clock up 10% growth in 2010. The deficit was on the high side at 6.8% in 2010 and inflation has been a problem. With low GDP per head of only USD3,400 there is ample scope for further rapid growth. The currency is the Indian rupee. Currently, 1 Indian rupee = 0.022104 US dollars (45 rupees to the dollar).

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India: Business CultureThe key to understanding Indian business culture is hierarchy, as a result of the caste system, in which every person knows his or her place to a degree which is surprising and even offensive to egalitarian Westerners. Although some evening out of the caste system has taken place, you should not over-estimate that. In a typical Indian organization, many tasks can only be performed by people of the appropriate caste; boss figures, who normally come from a higher caste, will not consider tasks that are reserved to lower caste members. It would be inappropriate, therefore, for a manager to make coffee for subordinates or move a table. Unsurprisingly, this can lead to inflexibility and delay. The role of a manager is as prescriptive as the role of a cleaner: bosses must manage, and must do so in an authoritarian and complete manner. If working with Indian staff, very little should be left to the discretion or initiative of underlings. If you don't make it precisely clear what you want, the result will be confusion, and inaction.In India guests are treated with utmost respect and courtesy. International travelers can expect to enjoy the Indian hospitality. At the same time culturally and as a mark of politeness, Indians have difficulty in saying no, this could be a stumbling block in negotiations and in closing contracts. The notion of time, time management, punctuality is still an anathema in India. It is more to do with the mindset and ingrained in the Indian culture. It would not be surprising if meetings are postponed, re scheduled, cancelled or organized at a very short notice. Bureaucratic hurdles and a laidback approach to work in the government circles could result in delays in processing, overload of paperwork and a general lack of confidence in the system. Therefore immense patience is very much necessary for any business transaction in India..

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India: Business CultureHandshakes are normal when meeting people, but it is also possible to use the 'namaste', in which the palms of the hands are brought together at chest level with a slight inclination of the head. People should normally be addressed by their titles (Dr, Professor, Minister), with or without their personal names. Business cards are de rigeur on first meeting with an Indian businessperson. Although women have a lowly place in many Indian communities, they are perfectly well accepted in business situations, where apparent rank will count for more than gender. Meetings should be well prepared, and should be conducted in a way that recognizes the relative seniority of the people present. If a senior manager is absent from a meeting without obvious cause, this can be taken as a sign that nothing much is to be expected from that meeting. During meetings, and other Indian business encounters, be prepared for a much higher level of chit-chat than in an equivalent Western situation. It is normal for an Indian to break off a meeting to take a personal phone call or socialize with colleagues.In Indian work-culture, people do not accept change easily; lot of resistance is encountered in order to implement change.

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India: Business CultureWhile it may be difficult at first to understand the relative positions of individuals in the group with which you are negotiating or dealing, there are some pointers. It is highly probable that the members of a team will enter a room in the order of their relative importance, especially in the presence of a foreigner; and junior members of the team will constantly defer to their seniors in conversation and in bodily behavior. As in most Asian civilizations, confrontational tactics are not likely to be successful. There is also a bias against direct speaking: if an Indian uses phrases such as 'we'll see' you can probably take that as a 'no'. It is normal to give gifts to Indians during a negotiation process; they should be wrapped and will not be opened during a meeting. Black or white wrapping paper should not be used; and one should avoid alcohol or foodstuffs unless you are sure of the religion of the recipient.

.In India, Companies follow the hierarchical system and decision making is usually from the top to bottom. It could at times be time consuming, International companies show respect to this. The relationship between the boss and subordinates is believed to be more formal and hierarchical in India.

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India: Employing PeopleDespite a considerable body of law relating to employment, in practice it is quick and easy to find and hire staff in India, although there are certain sectors, such as outsourcing, where rapid growth has led to shortages. Overall statistics on employment and unemployment are next to useless, such is the regional and sectoral diversity of this enormous country. Generally speaking, there is a large pool of available labor for office staff for managerial, supervisory, technical and clerical roles. Wage rates are generally very low compared with Western levels, although in certain specializations they may be comparable. Recruitment agencies flourish, and may well be the best first port of call for an intending employer. It is potentially misleading to quote figures, but an average office worker might expect to receive an annual salary equivalent to USD6,000; graduates would expect more; and it would be less in country areas. A 'dearness' or cost-of-living allowance can add significantly to the cost of lower-paid workers. Almost all educated Indians (a minority of the population) speak English to an acceptable level. The Indian constitution allows both the central government and state governments to legislate on employment matters, leading to potential confusion as to applicable law in a given situation. Business practices also vary widely between regions.

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India: Employing PeopleSome of the more important federal laws governing employment are as follows: The Workmen's Compensation Act, 1923, providing compensation for industrial accidents and occupational diseases. The Payment of Wages Act, 1936, and the Minimum Wages Act, 1948, requiring timely payment of wages, and setting up sectoral bodies to determine minimum wage. The Industrial Disputes Act, 1947, allowing reinstatement of workers by a court; there are grievance procedures; and establishments with more than 100 workers must establish codes of working conditions. A business employing more than 50 people needs government permission to make anyone redundant. The Industrial Employment (Standing Orders) Act, 1959, requiring some types of plant to define conditions of employment. The Maternity Benefit Act, 1961, doing what it says on the tin. The Payment of Gratuity Act, 1972, requiring employers to pay a 'gratuity' to some low-paid workers on termination. The Equal Remuneration Act, 1976, establishing equality in remuneration for men and women. The Child Labor (Prohibition and Regulation) Act, 1986, regulating child labor. The Trade Unions Act, 1926 providing for the registration of trade unions, but there is no requirement for employers to consult or involve them. Only 2% of the work-force is unionized. The Employees Provident Fund Act applies to establishments with more than 20 workers; 12% of pay up to Rupees 6,500 per month is applied to pension provision.Working hours: Maternity leave of 12 weeks is provided under the Maternity Benefit Act, 1961.The Industrial Employment (Standing Orders) Act, 1946 requires industrial establishments with 100 (number may vary by state) or more employees to establish standing orders that specify working conditions (hours, shifts, annual leave, sick pay, termination rules, etc.). These orders must meet minimum state standards and may be changed only with the consent of the workers or the trade unions and only to augment benefits.

Health insurance: The Employee’s Compensation Act, 1923 provides compensation for industrial accidents and occupational diseases resulting in disability and death. The minimum compensation payable by the employer is INR 120,000 for death and INR 140,000 for permanent total disability. The maximum is INR 914,160 for death and INR 1,096,992 for total disability.

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India: Employing PeopleUnder the Factories Act, 1948, a six-day 48-hour working week is normal; but in practice office employees work a five-day week of 37-38 hours. Work past nine hours a day counts as overtime, usually at double pay. There is no statutory requirement for a written contract, but there are statutory norms which apply in the absence of a contract. There are laws requiring sik pay, maternity leave, bonuses and other benefits for workers, but they are not universally applied.

Labor-management relations With some exceptions, India has company unions rather than trade unions. These are often affiliated with national labor organizations. Various trade unions are promoted by political parties. In manufacturing and other companies, prior discussions between management and labor leaders often help to forestall strikes. When strikes or disputes occur, they are usually settled by negotiation or through conciliation boards. It is common practice in many foreign-owned manufacturing companies to avert strikes by employing a labor welfare officer to act as a go- between for labor and management. By law, manufacturing companies with 500 or more workers must have one or more welfare officers who act as personnel manager, legal adviser on labor law and promote relations between factory management and workers.

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India: Entry and ResidenceForeign nationals (except citizens of the countries of Nepal and Bhutan) require a valid passport or travel document and a valid visa to enter India. The Indian embassy or consulate in your country of residence will issue a visa. Tourist visas last for up to six months and their holders have no right to work in India; they are not extensible. Transit visa allow a stay of up to 15 days while en route to another destination. Business visas lasts for between three months and five years; an invitation letter from a resident Indian company is required, plus a request letter from the individual's company. They can be single- or multiple-entry. Employment visas (work permits) are necessary to live and work in India, and are usually obtained by the prospective employer, but the rules are not clear. It usually takes about three months to obtain a work permit and they allow the issuance of an annual 'stay permit'. Student visas are issued on request by an Indian educational institution. Medical visas permit an individual to enter India for medical treatment and last for up to one year; they are extensible.

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India: Entry and ResidenceThe Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. The family members of an individual holding a work permit are also permitted to work. Indian Consulates issue work permits and visas prior to arrival. Normally a foreigner employed by a foreign or Indian establishment will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by liaison offices in India and for supervision of the individuals during their stay. Registration with the police is required within 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos. On-citizens of Indian origin may take advantage of the 'Persons Of Indian Origin' or 'Overseas Citizenship Of India' schemes, under which PIO or OCI cards are issued permitting long-term residence in India, without obtaining Indian citizenship as such.

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India:Choosing a Business Format

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Types of Business FormatThe following are the main types of business format used in India:- Liaison Office- Branch- Company Limited by Shares- Project Office- Limited Liability Partnership- General Partnership- Sole Partnership- Cooperative Society. Most international businesses are conducted using the first five.

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Summary for a Liaison OfficeThe liaison office is often the initial route chosen by a foreign company interested in the Indian market. A liaison office will not be taxable in India provided that it limits its activities to representing its parent, and carrying out promotional and, indeed, 'liaison' activities on behalf of its parent. Companies without a significant profits record and/or a reasonable amount of capital may find it hard to get permission for a liaison office. The Reserve Bank of India, the apex bank grants permission to open a Liaison office. The entire process, can take anywhere from a few weeks to a few months depending on the industry and India’s relations with the nationality of the parent company. The RBI involves the Ministry of Finance, the Ministry of External Affairs and the Interior Ministry, and only after they have given permission will the RBI issue a letter of 'no objection' allowing the office to be opened. This process will typically take two to three months if there are no problems. Welcome to the world of Indian bureaucracy! A liaison office is required to file annual audited financial statements with the RBI and the Registrar of Companies; tax returns also have to be filed, even though no tax is going to be due. Liaison offices can hire local and foreign staff. Normally a foreigner employed by a liaison office will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. If a liaison office receives no income, then nominally it will not have to pay tax. If, however, income is attributed to the office, tax will be due at 40% plus surcharges and education 'cess' (totaling 42.23%).There are a number of ways in which a liaison office may be found liable to pay corporate tax. The most basic situation is one in which the liaison office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, leading to an apportionment of the parent company's income to its Indian activities.

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Summary for a Branch OfficeBranch offices can be set up in India both by foreign companies and by existing domestic companies. Domestic companies simply need to pass a Board resolution; foreign companies must undertake an approval process with the Reserve Bank of India. Once permission has been obtained, the branch office can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax collection number). Visas for foreign staff can now be issued and bank accounts opened. Branch offices are restricted to trading activities and are not permitted to engage in manufacturing, although it is permissible to employ Indian sub-contractors for production purposes. Branch offices may remit their profits outside India, net of applicable Indian taxes and subject to RBI guidelines. They need not retain any profits as reserves in India. In certain cases, where income is deemed to have originated in India and such income includes royalties, fees for technical services, interest and capital gains, branch offices may repatriate profits to their Head Office without obtaining prior approval from RBI.A branch office is required to file annual audited financial statements with the RBI and the Registrar of Companies; tax returns also have to be filed, even if no tax is going to be due. Branch offices can hire local and foreign staff. Normally a foreigner employed by a branch office will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. If a branch office receives no income, then nominally it will not have to pay tax. If, however, income is attributed to the office, tax will be due at 40% plus surcharges and education 'cess' (totalling 42.23%).

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Summary for a Company Limited by Shares

Companies limited by shares are formed under the Companies Act 1956 and may be public or private. This section is concerned only with private companies. Such a company has a minimum share capital of INR100,000, must restrict the right to transfer its shares, may not have more than 50 members and may not invite or accept subscriptions to its shares from members of the public. Formation of a limited company in India can be a lengthy and bureaucratic procedure. Once incorporation has been completed, the company can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax collection number). Visas for foreign staff can now be issued and bank accounts opened. All companies incorporated under the Companies Act must file audited accounts annually with the Registrar of Companies. If turnover exceeds INR6m, a separate tax audit must be carried out. Limited companies can hire local and foreign staff. Normally a foreigner employed by a limited company will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. Indian companies are taxed on the previous year's income. Thus, for resident companies, income in the 2010/2011 financial year is assessed to tax in the 2011/2012 assessment year (beginning in April 2011) at 30% plus a 7.5% surcharge plus 3% education 'cess' for a total of 33.22%.Companies with taxable income below INR10m are exempt from the surcharge. No-resident companies are taxed at 40% plus surcharge and 'cess' giving a total of 42.23%.

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Summary for a Project Office

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Foreign companies sometimes set up a temporary project office to undertake projects in India awarded to the parent company. It is essentially a branch office set up for the limited purpose of executing a specific project. Approval for project offices is generally accorded for executing government supported construction projects or where the projects are financed by Indian and international financial institutions and multilateral organizations. In exceptional cases, approval is also given for private projects. Upon completion of the project, project offices may remit outside Indian the surplus of the project, after meeting tax liabilities.

Summary for a Limited Liability Partnership

The Limited Liability Partnership (LLP) was introduced in India in 2010; the previous General Partnership form was not much used since its members were too easily able to escape their liabilities by dissolving the partnership. The LLP however has legal personality while still preserving a limitation on liability for individual members. There must be an LLP agreement which specifies the contributions of all members. There must be at least one 'designated member' who has responsibility for managerial and procedural aspects of the partnership. The LLP Agreement needs to be filed with the Registrar of Companies, who must also verify availability of the name of the LLP, and will issue a Certificate of Incorporation. An LLP must maintain annual accounts reflecting a true and fair view of its affairs. A statement of accounts and solvency must be filed with the Registrar of Companies every year. Limited Liability Partnerships can hire local and foreign staff. Normally a foreigner employed by an LLP will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. LLPs, like Indian companies, are taxed on the previous year's income. Thus, income in the 2010/2011 financial year is assessed to tax in the 2011/2012 assessment year (beginning in April 2011) at 30% plus a 7.5% surcharge plus 3% education 'cess' for a total of 33.22%.LLPs with taxable income below INR10m are exempt from the surcharge. Profit remaining after tax is distributed to members in proportion to their contributions or according to the LLP Agreement and is not taxed further.

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Liaison Office- Nature- Formation- Ongoing Formalities- Employing Staff- Taxation

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Nature of a Liaison OfficeThe liaison office is often the initial route chosen by a foreign company interested in the Indian market. A liaison office will not be taxable in India provided that it limits its activities to representing its parent, and carrying out promotional and, indeed, 'liaison' activities on behalf of its parent. Permission must be obtained from the Reserve Bank of India. A liaison office that earns revenue in India will be in breach of its permission and may be taxed heavily. There have been a number of cases which have determined the limits of permissible activity for a liaison office, some of them yielding surprising results which might seem to contradict the law; so it is necessary to be very careful and take local legal advice before following this route. Companies without a significant profits record and/or a reasonable amount of capital may find it hard to get permission for a liaison office.

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Formation of a Liaison OfficeThe Reserve Bank of India, the apex bank grants permission to open a Liaison office. The entire process, can take anywhere from a few weeks to a few months depending on the industry and India’s relations with the nationality of the parent company. Approval is generally granted for a period of one to three years, upon expiry of which the foreign company can apply for a renewal. The following documents have to be submitted to the Reserve Bank of India (RBI):Three copies of Form FNC1;A notarized English version of the certificate of incorporation and the Statutes of the parent company (Memorandum and Articles of Association);The applicant's latest audited balance sheet; A letter from a senior official of the applicant stating the purpose of the intended liaison office; A banker's reference; A letter or board minute from the applicant authorizing the local representative; Proof of residence and passport copies for the proposed personnel of the liaison office; A letter of request for the opening of a 'QA22C' bank account (one that only permits incoming funds from abroad).The RBI involves the Ministry of Finance, the Ministry of External Affairs and the Interior Ministry, and only after they have given permission will the RBI issue a letter of 'no objection' allowing the office to be opened. This process will typically take two to three months if there are no problems. Welcome to the world of Indian bureaucracy! Armed with the letter of 'no objection', the liaison office can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax collection number). Visas for foreign staff can now be issued and bank accounts opened.

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Ongoing Formalities for a Liaison Office

A liaison office is required to file annual audited financial statements with the RBI and the Registrar of Companies; tax returns also have to be filed, even though no tax is going to be due.

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Employing Staff for a Liaison OfficeLiaison offices can hire local and foreign staff. The Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. Indian Consulates issue work permits and visas prior to arrival. Normally a foreigner employed by a liaison office will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by liaison offices in India and for supervision of the individuals during their stay. Registration with the police is required within 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos. Visas can be extended, through another set of bureaucratic procedures.

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Taxation of a Liaison OfficeIf a liaison office receives no income, then nominally it will not have to pay tax. If, however, income is attributed to the office, tax will be due at 40% plus surcharges and education 'cess' (totaling 42.23%). The Direct Taxes Code, which may or may not come into force in April, 2012, would reduce the tax rate on non-resident business to 30%, but would impose a 15% branch profits tax, thus worsening the existing position for foreign companies, since there is little scope to set foreign expenses against the income attributed to a local operation. If a liaison office pays its staff, it must comply with withholding tax and social security obligations. There are a number of ways in which a liaison office may be found liable to pay corporate tax. The most basic situation is one in which the liaison office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, leading to an apportionment of the parent company's income to its Indian activities. The governing legislation is section 9(1)(i) of the Income Tax Act, and provided that the liaison office stays strictly within this wording, if will probably be immune from taxation. But the authorities are quite aggressive in their interpretation of the Act, and advance rulings may be advisable if there is any danger that the liaison office can be associated with significant Indian-source income, even though it does not pass through the bank accounts of the liaison office. There are a number of relevant cases, including Angel Garment Ltd (287 ITR 341), Motorola Inc. and Others v DCIT (95 ITD 269), Gutal Trading Est (278 ITR 643), Western Union Financial Services Inc. (101 TTJ 56), IAC v Mitsui and Co Ltd (39 ITD 59) and UAE Exchange Centre LLC (268 ITR 9). Most of these support the immunity of liaison offices from taxation, but the last one in particular is worrying.

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Branch Office- Nature- Formation- Ongoing Formalities- Employing Staff- Taxation

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Nature of a Branch OfficeBranch offices can be set up in India both by foreign companies and by existing domestic companies. It is expected that the branch office will carry on substantially the same business and activity as is carried out by its Head Office. Domestic companies simply need to pass a Board resolution; foreign companies must undertake an approval process with the Reserve Bank of India. From a taxation perspective, a branch of a foreign company is deemed to be a 'business connection' of its parent, and thereby constitutes a taxable permanent establishment of the foreign enterprise. There is only very limited deductibility of head office expenses. For a domestic company, the financial results of a branch will be consolidated into the profit and loss account of its parent. Foreign companies engaged in manufacturing and trading activities abroad are allowed to set up branch offices in India for the following purposes: Undertaking export or import of goods; Rendering professional or consultancy services; Carrying out research work, in which the parent company is engaged (provided that the results of the research work are made available to Indian companies);Promoting technical or financial collaborations between Indian companies and the parent or overseas group company; Representing the parent company in India and acting as buying/selling agents in India; Rendering services in information technology and development of software in India; Rendering technical support to the products supplied by the parent/overseas group companies. Branch offices are restricted to trading activities and are not permitted to engage in manufacturing, although it is permissible to employ Indian sub-contractors for production purposes.

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Formation of a Branch OfficeThe Reserve Bank of India, the apex bank grants permission to open a Liaison office. The entire process, can take anywhere from a few weeks to a few months depending on the industry and India’s relations with the nationality of the parent company. Approval is generally granted for a period of one to three years, upon expiry of which the foreign company can apply for a renewal. The following documents have to be submitted to the Reserve Bank of India (RBI):Three copies of Form FNC1;A notarized English version of the certificate of incorporation and the Statutes of the parent company (Memorandum and Articles of Association);The applicant's latest audited balance sheet; A letter from a senior official of the applicant stating the purpose of the intended liaison office; A banker's reference; A letter or board minute from the applicant authorizing the local representative; Proof of residence and passport copies for the proposed personnel of the liaison office; A letter of request for the opening of a 'QA22C' bank account (one that only permits incoming funds from abroad).The RBI involves the Ministry of Finance, the Ministry of External Affairs and the Interior Ministry, and only after they have given permission will the RBI issue a letter of 'no objection' allowing the office to be opened. This process will typically take two to three months if there are no problems. Welcome to the world of Indian bureaucracy! Armed with the letter of 'no objection', the liaison office can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax collection number). Visas for foreign staff can now be issued and bank accounts opened.

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Ongoing Formalities for a Branch Office

A liaison office is required to file annual audited financial statements with the RBI and the Registrar of Companies; tax returns also have to be filed, even though no tax is going to be due.

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Employing Staff for a Branch OfficeLiaison offices can hire local and foreign staff. The Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. Indian Consulates issue work permits and visas prior to arrival. Normally a foreigner employed by a liaison office will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by liaison offices in India and for supervision of the individuals during their stay. Registration with the police is required within 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos. Visas can be extended, through another set of bureaucratic procedures.

32

Taxation of a Branch OfficeIf a liaison office receives no income, then nominally it will not have to pay tax. If, however, income is attributed to the office, tax will be due at 40% plus surcharges and education 'cess' (totaling 42.23%). The Direct Taxes Code, which may or may not come into force in April, 2012, would reduce the tax rate on non-resident business to 30%, but would impose a 15% branch profits tax, thus worsening the existing position for foreign companies, since there is little scope to set foreign expenses against the income attributed to a local operation. If a liaison office pays its staff, it must comply with withholding tax and social security obligations. There are a number of ways in which a liaison office may be found liable to pay corporate tax. The most basic situation is one in which the liaison office is deemed to be a 'business connection' of its foreign parent, which effectively constitutes it as a permanent establishment, leading to an apportionment of the parent company's income to its Indian activities. The governing legislation is section 9(1)(i) of the Income Tax Act, and provided that the liaison office stays strictly within this wording, if will probably be immune from taxation. But the authorities are quite aggressive in their interpretation of the Act, and advance rulings may be advisable if there is any danger that the liaison office can be associated with significant Indian-source income, even though it does not pass through the bank accounts of the liaison office. There are a number of relevant cases, including Angel Garment Ltd (287 ITR 341), Motorola Inc and Others v DCIT (95 ITD 269), Gutal Trading Est (278 ITR 643), Western Union Financial Services Inc (101 TTJ 56), IAC v Mitsui and Co Ltd (39 ITD 59) and UAE Exchange Centre LLC (268 ITR 9). Most of these support the immunity of liaison offices from taxation, but the last one in particular is worrying.

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Company Limited by Shares- Nature- Formation- Ongoing Formalities- Employing Staff- Taxation

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Nature of a Company Limited by Shares

Companies limited by shares are formed under the Companies Act 1956 and may be public or private. This section is concerned only with private companies. Such a company has a minimum share capital of INR100,000, must restrict the right to transfer its shares, may not have more than 50 members and may not invite or accept subscriptions to its shares from members of the public. It is governed according to its Memorandum and Articles of Association by a board of directors. There must be at least two members and two directors. The liability of the shareholders is limited to the amount of share capital subscribed by them.

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Formation of a Company Limited by Shares

Formation of a limited company in India can be a lengthy and bureaucratic procedure. The key steps are as follows: Prospective directors should obtain DINs (Director's Identification Number) from the Registrar of Companies; Selection of name for the proposed company on Form 1A. Application is made to the Registrar of Companies, giving six alternative proposed names. The approved name remains available for six months. Filing of required documents with the Registrar of Companies: Memorandum and Articles of Association; list of subscribers; e-Form 1; Power of Attorney issued by the subscribers in favor of authorized person; e-Form 18 (location of registered office; e-Form 32 (particulars of Directors);Issuance of the Certificate of Incorporation, normally within seven days of filing of documents; business may then be commenced. Once incorporation has been completed, the company can then register with the tax and customs authorities, obtaining a PAN (permanent account number) and a TAN (tax collection number). Visas for foreign staff can now be issued and bank accounts opened.

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Ongoing Formalities for a Company Limited by Shares

All companies incorporated under the Companies Act must file audited accounts annually with the Registrar of Companies. If turnover exceeds INR6m, a separate tax audit must be carried out.

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Employing Staff for a Company Limited by Shares

Limited companies can hire local and foreign staff. The Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. Indian Consulates issue work permits and visas prior to arrival. Normally a foreigner employed by a limited company will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by limited companies in India and for supervision of the individuals during their stay. Registration with the police is required within 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos. Visas can be extended, through another set of bureaucratic procedures.

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Taxation of a Company Limited by Shares

Indian companies are taxed on the previous year's income. Thus, for resident companies, income in the 2009/2010 financial year is assessed to tax in the 2010/2011 year, at a rate of 30% plus surcharge (10%) and education 'cess', for a total of 33.99%.Income in the 2010/2011 financial year is assessed to tax in the 2011/2012 assessment year (beginning in April 2011) at 30% plus a 7.5% surcharge plus 3% education 'cess' for a total of 33.22%.Companies with taxable income below INR10m are exempt from the surcharge. Non-resident companies are taxed at 40% plus surcharge and 'cess' giving a total of 42.23%.The Direct Taxes Code, which may come into force in April 2012, would put in place a flat 30% rate of corporate income tax for both resident and non-resident companies; but foreign-owned companies would pay a 15% 'branch profits tax'. There is a Minimum Alternative Tax which bears on companies declaring taxable profit of less than 10% of accounting profit, at a rate of approximately 18%, increasing to approximately 18.5% in the current year, and to 20% next year. Dividend distributions to shareholders are subject to a 15% final withholding tax (plus surcharges).

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Project Office- Nature- Formation- Ongoing Formalities- Employing Staff- Taxation

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Nature of a Project OfficeA foreign corporation, which has secured a contract from an Indian company to execute a project in India, is allowed to establish a project office in India without obtaining prior permission from RBI. Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. The exchange control regulations prescribe certain additional requirements for setting up project office sans its approval. The foreign corporation which sets up such a project office is required to furnish a prescribed report to the concerned regional office of RBI under whose jurisdiction the project office is set up. On completion of the project, the PO has to be closed. It is completely treated as a foreign company in India and is liable for project offices liabilities in India. A PO has relatively less compliances than a subsidiary.

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Formation of a Project OfficeReserve Bank has granted general permission to foreign companies to establish Project Offices in India, provided they have secured a contract form an Indian company to execute a project in India, and(a) the project is funded directly by inward remittance from abroad; or(b) the project is funded by bilateral or multilateral International Financing Agency; or(c) the project has been cleared by an appropriate authority; or(d) a company 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.The RBI will provide approval and can grant general permission for foreign entities to establish project offices, subject to certain conditions. These dictate that the foreign investor has secured a contract from an Indian company to execute a project in India. However, if the above criteria are not met, the foreign entity has to approach RBI to obtain approval. If the parent entity is established in Pakistan, Bangladesh, Sri Lanka, Afghanistan, Iran or China, such applications have to be forwarded to Central Offices of the foreign exchange department of the Reserve Bank at Mumbai for approval.The general permission is granted by the Reserve bank of India Vide Notification No FEMA 95/2003-RB dated July 2, 2003 to foreign companies to open project offices in India provided they have secured from an Indian company, a contract to execute a project in India under the points mentioned above.

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Ongoing Formalities for a Project Office

Banks can open non-interest bearing foreign currency account for project offices in India subject to the following:A: The project office has been established in India, with the general/specific permission of Reserve Bank, having the requisite approval from the concerned project Sanctioning Authority,B: The contract under which the project has been sanctioned, specifically provides for payment in foreign currency.C: Each project has only one foreign currency account.D: The permissible debits to the account shall be payment of project related expenditure and credits shall be foreign currency receipts from the project sanctioning authority, and remittances from parent/group company abroad or bilateral/multilateral international financing agency.E: The foreign currency account has to be closed at the completion of the project.

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Employing Staff for a Project OfficeProject offices can hire local and foreign staff. The Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. Indian Consulates issue work permits and visas prior to arrival. Normally a foreigner employed by a project office will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by project offices in India and for supervision of the individuals during their stay. Registration with the police is required within 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos. Visas can be extended, through another set of bureaucratic procedures.

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Taxation of a Project OfficeThe project office is treated as an extension of the foreign corporation in India and is taxed at the rate applicable to foreign corporations. The Income is attributable to Indian operations taxable in India. Income is taxable at effective rate of 42.024% on net income basis. Tax compliances are broadly similar to those applicable to corporation. There is no tax on repatriation of profits to the head office and the liability if any, could extend to the foreign company.

Profits attributable to PO ( Permanent Establishment (“PE”)) taxable on a “net income basis” either in accordance with the provisions of the Indian tax laws or the India China tax treaty; whichever is more beneficial. Deduction for executive and general administrative expenses may be claimed to the extent of 5% of total income as per the provisions of Indian tax laws.

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Limited Liability Partnership- Nature- Formation- Ongoing Formalities- Employing Staff- Taxation

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Nature of a Limited Liability Partnership

The Limited Liability Partnership (LLP) was introduced in India in 2010; the previous General Partnership form was not much used since its members were too easily able to escape their liabilities by dissolving the partnership. The LLP however has legal personality while still preserving a limitation on liability for individual members. A minimum of two partners is required, but there is no maximum number. Unlike the General Partnership, which was not open to foreigners, foreign individuals and companies can be members of an LLP. Two persons, individual or corporate, are required to be partners as a minimum. A corporate partner must nominate an individual as a representative. Domestic or foreign individuals or companies may be partners.

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Formation of a Limited Liability Partnership

Every partner must contribute towards an LLP in some manner; the value of non-monetary contributions must be certified by a practicing accountant. The liability of an individual partner is limited to their contribution. There must be an LLP agreement which specifies the contributions of all members. There must be at least one 'designated member' who has responsibility for managerial and procedural aspects of the partnership. Each designated partner must obtain a DPIN (Designated Partner Identification (Number) from the government, but an existing DIN (Director Identification Number) will do instead. Various forms needing to be filed, including those involved during incorporation, are electronic, and at least one of the Designated Partners must therefore have a DSC (Digital Signature Certificate).The LLP Agreement needs to be filed with the Registrar of Companies, who must also verify availability of the name of the LLP, and will issue a Certificate of Incorporation.

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Ongoing Formalities for a Limited Liability Partnership

An LLP must maintain annual accounts reflecting a true and fair view of its affairs. A statement of accounts and solvency must be filed with the Registrar of Companies every year. Audit of the accounts is required only if the value of capital contributions exceeds INR25 lakhs or annual turnover exceeds INR40 lakhs.

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Employing Staff for a Limited Liability Partnership

Limited Liability Partnerships can hire local and foreign staff. The Ministry of Foreign Affairs is responsible for the issuance of work permits (employment visas) under the Foreigners Act. They are normally necessary for foreigners, although people with Indian ancestry may be exempted from the need for a visa. Indian Consulates issue work permits and visas prior to arrival. Normally a foreigner employed by an LLP will require an Employment Visa, although if only short visits are being made a Business Visa may be sufficient. The local Foreigners Regional Registration Office (FRRO), an agency of the Home Ministry, is responsible for registering the visas of foreigners employed by LLPs in India and for supervision of the individuals during their stay. Registration with the police is required within 14 days of arrival in India (which may or may not be the same as registration with the FRRO in a given region). Documents required include a registration form in quadruplicate and a registration permit booklet, copies of passport and visa, a copy of the employment contract, copies of a letter of recommendation from the parent company, six passport photos.. Visas can be extended, through another set of bureaucratic procedures.

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Taxation of a Limited Liability Partnership

LLPs, like Indian companies, are taxed on the previous year's income. Thus, income in the 2009/2010 financial year is assessed to tax in the 2010/2011 year, at a rate of 30% plus surcharge (10%) and education 'cess', for a total of 33.99%.Income in the 2010/2011 financial year is assessed to tax in the 2011/2012 assessment year (beginning in April 2011) at 30% plus a 7.5% surcharge plus 3% education 'cess' for a total of 33.22%.LLPs with taxable income below INR10m are exempt from the surcharge. The Direct Taxes Code, which may come into force in April 2012, would put in place a flat 30% rate of corporate income tax for LLPs. The salaries and expenses of members of the LLP are allowed as deductions from income before taxation, subject to certain limits, but are taxed in the hands of the members. Profit remaining after tax is distributed to members in proportion to their contributions or according to the LLP Agreement and is not taxed further. In this respect, the LLP has a tax advantage over the regular limited company, whose dividends are subject to withholding tax.

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Thank you !For further information, kindly contact us at:Chindia Chamber of Commerce and Industry Email: admin@chindiachamber.orgTel: +91-11-41014288Address: D-38, Anand Niketan, New Delhi -110021,Url: chindiachamber.org

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