India is 63rd on the World Bank’s list of business destinations which is a significant improvement by 14 points.Apart from that, recent digital advancements and the availability of a skilled workforce have further enhanced India’s position as a prime business destination.

Thus, it makes foreign companies’ taxation in India favorable for company owners to handle.Additionally, with the tax advantages posed by India, companies also have a lot of flexibility to run business using different models like liaison office, subsidiary company, joint venture, or acquiring an Indian company.

Let us see about the taxation of foreign companies in India and considerations before business set-up in detail.

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Taxation of Foreign Companies in India

As per section 139 of the Income Tax Act or IT Act, every company both foreign or domestic should mandatorily produce their tax returns for yearly assessment.

After a continued debate on whether foreign companies should be taxed, the amendment made in 2017 favored taxation. There are different corporate tax slabs for foreign and domestic companies in India. The rates in these tax slabs vary as per the company’s turnover or profits exclusively from the Indian market.

A company or firm’s residence is also important for estimating the tax that needs to be paid. If the company is deemed resident in India, a maximum of up to 40% of tax must be paid.

The corporate tax for foreign companies in India is mainly based on the profits or business success in India. Thus, any foreign company operating from India only gives a tax on the income generated from India.

There is also a 10% surcharge which is applicable where the total taxable income of the companies exceeds approx  USD 0.12 million (INR 10 million). Additionally, foreign companies' taxation in India also includes a health and education cess applicable at 4%.

The rates of interest are inclusive depending on regulations with the DTAA. DTAA is an acronym for Double Taxation Avoidance Agreements which India has signed with many countries.

DTAA is helpful and an attractive opportunity for foreign companies to avoid paying taxes both in India and their home country.

Types of Taxes Applicable

For starting a business in India, the companies need to adhere to business taxation India rules set by the Government. Some of these tax brackets and their ranges are explained below:

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Corporate Tax

The corporate tax for foreign companies is based on Corporate Income Tax (CIT) rates. These rates vary as per the government's new regulations, and the types of income the companies have.

Moreover, the tax slabs in India are based on the profits accrued over a period. The corporate income tax (CIT) rates for companies conducting trade in India are outlined in the table below:

These tax rates are designed to be progressive, ensuring that companies with higher profits contribute more to the tax system.

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Goods and Services Tax (GST)

As per section 24 of the CGST Act, any person or entity that is not a resident of India but supplies goods or services must mandatorily have a GST registration.

Foreign companies or business owners must fill out a GSTR-1 & GSTR-3B form to register with Indian markets.

The rates of GST vary as per the nature of the business and the types of products or services sold by the foreign companies.

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Withholding Tax

Withholding tax is a government regulation under which a percentage of the payment made is cut at the source and paid to the government. It is one of the common business taxations in India specified under Chapter XVII-B of the Income Tax Act.

Section 195 allows the person liable for payment to deduct taxes before transferring the money.

The current rate of withholding taxes is as follows:

●   Interests: 20% of Gross Amount

●   Dividends: 10 %

●   Royalties: 20 %

●   Companies or Corporations: 40% of their total income.

Permanent Establishment (PE)

When considering a permanent establishment in India it is generally a concept in which a foreign entity can be taxed only in the state where it is operating.

Tax rates and Obligations for PEs

We have already mentioned the permanent establishment tax rates in the table, which is nearly 40% of the profits of the companies. Every foreign company needs to follow the tax compliance India specified under the Income Tax to avoid penalties.

Additionally, the permanent establishments in India should adhere to the following laws:

1. Labor and Employment Laws
2. Environmental Laws
3. Anti-Trust Regulations
4. IPR

These regulations are important for the permanent establishment in India which are being taxed as per the applicable slabs.

Transfer Pricing Regulations

Transfer pricing is a practice of accounting where one division of a company charges another division for goods and related services. Thus, transfer pricing allows for exchange of the goods in the same companies and at arm-length price

Rules for Intercompany Transactions

The rules that are required to be followed for intercompany transaction records are as follows:

1. Draft formal agreements to outline the terms and agreements of intercompany transactions.
2. Create invoices or billing statements to document the transactions that are happening between the companies.
3. Intercompany reconciliations are also necessary for balancing the records and resolving any discrepancies that arise.
4. Due to intercompany transactions, there might be constant shuffling of funds from one point to another. Intercompany netting must be settled within a month or on a timely basis.

Documentation and Compliance Requirements

As per OECD (Organisation for Economic Cooperation and Development), there has to be a three-tiered documentation approach:

Master File: The master file (MF) is a document that contains high level information about the global business operations and TP policy of an MNE group.

Local File: The local file (LF) is similar to the TP documentation already prepared in the local jurisdictions of members of an MNE group. The LF provides more detailed information and analysis about the local entity's intercompany transactions and is expected to be filed with the tax authority in that jurisdiction. 

CBC Report (Country-by-Country): A document that contains certain information related to income and taxes along with the location and economic activity of the Multinational Enterprise Group.

Considerations for Setting up Business in India

Before setting up a business in India one must decide the type of structure they are looking forward to. For foreign companies that are trying to penetrate the Indian market, available entry strategies are:

1. Wholly Owned Subsidiaries

A company may easily start a wholly owned subsidiary by allowing 100% FDI. However, one must note the regulations of the Reserve Bank of India for such automatic routes of transfers.

2. Branch Office

If a foreign company wants to expand into India, creating a branch office becomes an effective strategy. The branch office is an extension of the foreign company that engages in commercial business as a representative of the parent company.

3. Liaison Office

A liaison office is responsible for being a communication link between the parent company, place of business, or head offices in India.

These liaison offices are not allowed to undertake any business activity in India. The expenses of the business liaison are covered through remittances received by the company externally.

Legal and Regulatory Compliance

Foreign companies that are expanding their operations in India need to adhere to some fixed regulatory and compliance frameworks.

The key laws that a foreign business must adhere to are:

1. Companies Act, 2013: which states that a company must register itself with the Registrar of Companies in India within 30 days of setting up business in the country.

2. Foreign Direct Policy: Where the FDI is allowed through direct routes in some sectors.

3. SEBI Guidelines: These guidelines must be followed by any company looking to expand its market in India.

Understand the regulatory compliance in India adequately before establishing a foreign company in India.

Successful India Market Entry Strategy

There are a lot of business entry strategies in India available for foreign companies. They are:

1. Greenfield investment vs. acquisitions: Greenfield investments require a completely new investment whereas acquisitions are comparatively less cost intensive.
2. Strategic Partnerships and Joint Ventures: In strategic partnerships, each company works together without a new legal entity. However, in a joint venture, two or more legal entities create a single legal entity.

Market penetration strategies in India help foreign companies to attain greater growth and attain success.

Moreover, understanding a titbit about Indian culture also helps the businesses to acquire the market. The concept of gaining knowledge about the culture is also termed as localization of products.

Compliance Requirements

The foreign companies in India hoping to start their business must meet the following compliance requirements:

1. Employment and Labor laws of India.
2. Taxation laws are updated regularly by the Government of India.
3. Intellectual Property Rights and enforcement of the same in India.
4. Registration as per the Companies Act, 2013. In addition, RBI-related applicable guidelines and master circulars, in particular, related to reporting requirements also need to be complied with.

Therefore, the companies must meet the regulatory and compliance requirements to set up a business.

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Tax Planning and Mitigation Strategies

Several tax incentives in India are directed towards the overall economic growth of India. Some of the key benefits and incentives applicable for foreign companies in India are:

a. Production Linked Incentive Schemes

Some of the specific sectors in India can get rewards of production-linked incentives. These incentives are targeted to help India attain higher growth and support foreign revenue.

b. SEZ Benefits in India

SEZ or Special Economic Zone developers can get huge tax exemptions. The tax exemption available for foreign companies is 100% in the first year on profits and from the subsequent years, it is 50%.

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Helping Foreign Companies Navigate Legal and Regulatory Compliance in India

Tecnova is a leading Indian Entry Management Consulting Firm, offering a full suite of services to help foreign companies successfully enter and operate in the Indian market. With extensive experience in legal advisory, taxation, and regulatory compliance services, we provide expert guidance across all stages of market entry. Below are the key services we offer:

●   Legal Advisory and Corporate Structuring
Providing expert legal counsel on the establishment and structuring of businesses in India, including joint ventures, subsidiaries, and partnerships.

●   Taxation Advisory and Planning
Offering guidance on corporate tax, GST, and withholding taxes to help businesses navigate India's complex tax system, optimize liabilities, and ensure compliance.

●   Regulatory Compliance and Risk Mitigation
Assisting companies with compliance to Indian laws and regulations, while identifying and mitigating potential risks that could hinder business operations.

●   Business Registration and Licensing
Facilitating the registration process with Indian authorities, ensuring all necessary licenses and permits are obtained for smooth operations.

●   Foreign Direct Investment (FDI) Strategy
Advising on FDI regulations and helping businesses choose the right route for foreign investments in India, ensuring adherence to government policies.

●   Intellectual Property Rights (IPR) Protection
Helping businesses protect their intellectual property by assisting with trademark, patent, and copyright registrations, and ensuring compliance with IPR laws in India.

●   Government Liaison and Approvals
Acting as an intermediary with Indian government authorities, securing the necessary approvals and permits for business operations.

●   Labor and Employment Law Compliance
Offering insights and advice on labor laws, including hiring practices, wage regulations, and employee benefits, to ensure compliance with Indian employment regulations.

●   Special Economic Zones (SEZ) and Tax Incentives
Providing advice on tax exemptions and other incentives available through Special Economic Zones (SEZs), helping businesses maximize their growth potential.

●   Continuous Regulatory Updates
Keeping businesses informed about changes in Indian regulations, ensuring ongoing compliance with evolving legal frameworks.

●   Market Entry Strategy and Penetration
Helping businesses create a tailored strategy for entering the Indian market, including market research, competition analysis, and product localization.

●   End-to-End Market Entry Support
Offering a comprehensive, step-by-step approach from market research and entry strategy development to operational setup and post-entry support, ensuring a seamless business entry into India.

With Tecnova’s expertise and client-centric approach, foreign companies can confidently navigate the complexities of the Indian market, ensuring a smooth, compliant, and successful entry and operation.

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Reference Links

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Regulatory Compliances for Companies Investing in India

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