Regulatory Compliance & Taxation for Foreign Companies in India
Navigating regulatory compliance and taxation in India is crucial for foreign companies aiming to establish and operate successfully in the market. Here’s an overview of the key aspects:
- Regulatory Compliance:
- Company Registration: Foreign companies must comply with the regulations set by the Ministry of Corporate Affairs (MCA) for company registration, including obtaining a Digital Signature Certificate (DSC) and Director Identification Number (DIN).
- Sector-Specific Regulations: Depending on the industry, companies must adhere to additional regulations, such as those from the Drug Controller General of India (DCGI) for pharmaceuticals or the Reserve Bank of India (RBI) for financial services.
- Foreign Investment Policies: Compliance with the Foreign Exchange Management Act (FEMA) and obtaining approvals from the Foreign Investment Promotion Board (FIPB) or the Department for Promotion of Industry and Internal Trade (DPIIT) is essential for foreign investments.
- Local Licenses and Permits: Businesses must obtain relevant local licenses and permits based on their industry and operational requirements.
- Taxation:
- Corporate Tax: Foreign companies are subject to corporate tax on their income generated in India. The current tax rate is competitive, with potential benefits under the Indian tax regime and applicable double taxation avoidance agreements (DTAAs) with other countries.
- Goods and Services Tax (GST): GST is applicable to most goods and services. Companies must register for GST and comply with its requirements, including filing regular returns and maintaining proper documentation.
- Transfer Pricing: Companies engaging in international transactions must adhere to transfer pricing regulations to ensure that transactions between related entities are conducted at arm’s length and documented properly.
- Withholding Tax: Foreign companies must comply with withholding tax requirements on payments made to non-residents, such as royalties, interest, and technical fees, in accordance with Indian tax laws and international agreements.
Tecnova India supports foreign companies in navigating these regulatory and taxation complexities by providing expert guidance on compliance, assisting with company registration, and offering strategic advice on tax planning. With its deep understanding of Indian regulations and tax policies, Tecnova helps businesses ensure smooth operations, optimize tax strategies, and maintain compliance with local laws.
Regulatory Compliance & Taxation for Foreign Companies – Complete Guide
Currently, India is one of the fastest-growing economies in the world. By 2027, this country is predicted to become the 3rd largest economy. Additionally, the country’s growing consumer market, developing infrastructure and logistics scenario, improving manufacturing capabilities, and supportive government policies make this market a goldmine of opportunities for multinational businesses.
However, to set up operations, there are several rules on compliance and taxation for foreign companies that they must be aware of and adhere to. Keep reading this blog for detailed insight.
Legal Framework for Foreign Companies in India
To understand compliance and taxation for foreign companies in India, organizations must first know the legal structures under which they can establish a business. They are as follows:
a) Joint Venture
Under joint ventures, foreign firms can partner with an Indian organization to establish a new company. This will help them benefit from the Indian entity’s expertise in the local market, their customer base, resources, and strategies to establish a successful business.
In this regard, regulatory compliances include drafting a detailed agreement that highlights partnership terms, addressing governance issues, and compliance with competition laws.
b) Wholly-Owned Subsidiary
In the case of a wholly-owned subsidiary, foreign businesses will have full ownership and control over their operations in India. This legal structure facilitates limited liability protection, easier compliance management, and flexible decision-making.
However, foreign businesses must ensure compliance with the required incorporation procedures. Additionally, they must appoint directors, acquire Director Identification Numbers (DINs), and adhere to all the share capital requirements.
c) Branch Office
Multinational businesses can also establish a branch office in India.
Compliance obligations include getting approvals from the Reserve Bank of India (RBI), complying with the reporting obligations, and adhering to the tax and other statutory requirements.
d) Liaison Office
Foreign companies can establish a liaison office or representative office in case of the following:
- Representing the parent company/group companies in India.
- Promoting export/import from/to India.
- Promoting technical/ financial collaborations between parent/group companies and companies in India.
- Acting as a communication channel between the parent company and Indian companies.
Now, setting up liaison offices in India will require foreign businesses to adhere to specific compliance requirements. They include the following:
• Revenue generation limitations.
• Commercial activities restrictions.
• Periodically reporting to the applicable regulatory authorities.
To select an appropriate entity structure, foreign companies must assess their business objectives, compliance capabilities, and market strategy. Furthermore, they must ensure compliance with the following laws:
• Foreign Exchange Management Act (FEMA)
• Companies Act, 2013
• RBI Guidelines
• Sector-Specific Regulations
Taxation Policies and Procedures
When it comes to tax laws for foreign companies in India, it depends on their residential status. Entities that are residents of the country will be taxed based on their global income, whether it is earned in or outside India.
Alternatively, non-resident companies are taxable as per their income which arises, accrues or receives in the country. Now, according to Section 6(3) of the Income Tax Act, a company can only gain Indian resident status for the previous year if it satisfies the following criteria:
• The business is an Indian organization.
• The entity’s place of effective management (P.O.E.M) for that year is located in India.
However, companies with an annual turnover of up to USD 6 million within a financial year will not be applicable for the provisions mentioned under Section 6(3)(ii).
Thus
1) Section 6(3)(II)- Non-resident organization with a turnover exceeding USD 6 million- Deemed as an India resident if POEM is in India- Global income will be taxable.
2) Section 6(3)(II)- Non-resident organization with a turnover up to USD 6 million- Residential status will be decide by AO- If Non-resident then Income which arises, accrues, and received in India will be taxable.
Taxation Rates
The taxation rates for foreign or non-resident companies in India are:
• 40% of their total income.
• Additional 2% surcharge if total income is between USD 120,134 and USD 1,201,345.
• Additional 5% surcharge if total income exceeds USD 1,201,345.
• 4% health and education cess.
Now, the additional surcharge is applicable for marginal relief based on the following conditions:
• If total income crosses USD 120,134 but does not exceed USD 1,201,345, the total payable amount (including surcharge and income tax) will not exceed the total sum on the income of USD 120,134 by the income amount exceeding USD 120,134.
• In cases where total income exceeds USD 1,201,345, the total payable (including surcharge and income tax) shall not exceed the total amount payable on income of USD 1,201,345 by the amount of income exceeding USD 1,201,345.
Minimum Alternate Tax
Foreign companies are liable to pay 15% of the minimum alternate tax (MAT) on their book profits, along with the applicable additional surcharge and health and education cess. However, it is only applicable if the organization’s normal tax liability is less than 15% of its book profit.
There are certain types of income on which companies are not liable to pay MAT in case their payable income tax (including surcharge and health and education cess) is less than 15%.
Here they are:
• Dividend
• Capital gains from the transfer of securities
• Royalty
• Interest
• Technical services fees
Additionally, minimum alternate tax shall not be applicable for foreign companies in the following cases:
• Assesse is the resident of a nation or specific territory with a Double Taxation Avoidance Agreement (DTAA) with India.
• India’s Central Government has made an agreement under Section 90A’s sub-section (1) and the company does not have a permanent establishment in the country.
• The organization belongs to a country that does not have a DTAA with India and does not need to seek registration under any law relating to companies for the time being.
Now, any foreign company involved in supplying goods and services to Indian consumers but does not have a fixed place of business in the country is liable for obtaining GST registration. For detailed information on this matter, consulting firms providing company formation and incorporation services in India are recommended.
Compliance Requirements
Next in the context of compliance and taxation for foreign companies, let’s take a look at the mandatory compliance requirements:
a) Form FC-1
Companies must file this form within 30 days of incorporating their subsidiary in India. It needs to be accompanied by other files and certifications as specified by the regulatory bodies in India.
b) Document Authentication and Translation
Organizations must validate all the documents by a practicing lawyer in India before they send them to the Registrar of Companies (ROC). Furthermore, before submission, they must get them translated into English.
c) Form FC-3
Foreign businesses must submit this form to the respective ROC based on where they are located in India. It must also contain the area’s details as well as the company’s financial records.
d) Financial Statements
All financial statements concerning the entity’s business and operations in India must be submitted within the last 6 months of the financial year. They need to contain the following:
• Transfer of funds
• Earnings repatriated
• Sales
• Purchases
• Transfer of property
e) Form FC-4
This form deals with the company’s annual returns and must be filed within 60 days from the preceding financial year’s end.
f) Audit of Accounts
All the accounts of the foreign company in India need to be audited by a practicing Chartered Accountant. They also need to be properly arranged and submitted at the time of auditing.
Additionally, corporate tax and regulatory compliance for foreign companies also include adherence to the following laws:
i. Labor and Employment Laws:- Running operations in India also involves adherence to its labor and employment laws. Moreover, these regulations are present at both state and central levels, making it difficult for companies to implement them in their operations.
Furthermore, they have to obtain all the necessary registrations and submit all the proper documents.
ii. Environmental Laws:- There are several regulations in India promoting environmental conservation and sustainable practices, that foreign companies need to abide by. Here they are:
• Water (Prevention and Control of Pollution) Act, 1974
• Indian Forest Act, 1927
• Environment (Protection) Act, 1986
• Manufacture, Storage, and Import of Hazardous Chemical Rules, 2000
• Hazardous Wastes (Management, Handling and Trans-boundary Movement) Rules, 2008
Additionally, companies earning above a certain profitability range need to abide by the Corporate Social Responsibility (CSR) guidelines. They encourage activities related to community welfare and sustainable practices.
iii. Anti-Trust Regulations:- The Competition Act, 2002 deals with anti-trust issues. It encourages companies to function in the market independent of competitive forces and bars them from abusing their dominant market positions and entering anti-competitive agreements like bid-rigging, tie-in agreements, etc.
Furthermore, this Act proscribes specific combinations that exceed a certain limit and requires businesses to gain approval from the Competition Commission of India.
iv. IPR:- Understanding the intellectual property rights (IPR) applicable in India is also essential for foreign companies. It will help protect their inventions, company name, design, and logo from being copied and misused by competitors.
Now, there are several other regulatory and legal compliances that companies need to keep in mind to operate in the Indian market. Failure to adhere to these laws may lead to unnecessary lawsuits which can severely hamper their business activities.
Thus, partnering with management consulting firms like Tecnova – providing company formation and incorporation services is essential. They have legal professionals who can help clients understand compliance and taxation for foreign companies in India and suggest the best practices to avoid non-compliance issues.
Conclusion
In the last decade, India’s GDP has grown at an average of 5.5%. By 2030, surveys state this country’s GDP may reach a valuation of USD 7.5 trillion. Thus, establishing a business in the Indian market can be an ideal choice for companies seeking long-term growth.
However, India has several rules regarding compliance and taxation for foreign companies which they must adhere to. Non-compliance can lead to unnecessary legal hassles, fines, and even imprisonment.
Thus, hiring management consulting firms like Tecnova which provides company formation and incorporation services is advisable. They can suggest the best ways to meet compliance requirements, mitigate challenges and efficiently run business operations.
Seek professional advice from Tecnova today and stay updated on the latest compliance regulations!
Reference
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