India is a most diverse nation in the world. In area it is the seventh largest country in the world having most populous democracy in the world. India is a federal constitutional republic governed under a parliamentary system consisting of 29 states and 7 union territories. India is a pluralistic, multilingual, and a multi-ethnic society.
India is one of the fastest growing economies in the world and holds a strong position on the world map. India is a home to almost a sixth of the global population. India's demographics are very attractive with approximately 65% of the total population falling in the age group of 15 to 64 years. The country's GDP has been growing at an average rate of 7.6% since 2004. It is today emerged as a key destination for foreign investors and has rich natural resources and strong macroeconomic fundamentals. According to the International Monetary Fund (IMF), as of 2013, the Indian economy is nominally worth US$1.842 trillion; it is the eleventh-largest economy by market exchange rates, and is, at US$4.962 trillion, the third-largest by purchasing power parity. During the next four decades, Indian GDP is expected to grow at an annualised average of 8%, making it potentially the world's fastest-growing major economy until 2050.
Following market-based economic reforms in 1991, India became one of the fastest-growing major economies; it is considered a newly industrialised country. However, it continues to face the challenges of poverty, corruption, malnutrition, inadequate public healthcare, and terrorism. A nuclear weapons state and a regional power, it has the third-largest standing army in the world and ranks eighth in military expenditure among nations.
By 2020, India would be the world's third largest middle class market behind China and USA and likely to exceed both countries with an aggregated consumer spend of nearly US $13 trillion.
How to enter Indian Market
The ways a foreign Investor can enter Indian market are through setting of entity as an entry vehicle, such as a Company, Limited Liability Partnerships (LLP), Liaison office, Project Office and Branch office. A foreign investor planning to set up business operations in India has the options of entering as an INDIAN COMPANY OR an INDIAN LLP OR as a FOREIGN COMPANY.
As an Indian Company
A foreign company can commence operations in India by incorporating a company under the Indian Companies Act through:
Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the requirements of the investor, subject to equity caps in respect of the area of activities under the Foreign Direct Investment (FDI) policy.
Joint Venture with an Indian Partner, Foreign Companies can set up their operations in India by forging strategic alliances with Indian partners.
Joint Venture may entail the following advantages for a foreign investor:
Established distribution/ marketing set up of the Indian partner
Available financial resource of the Indian partners
Established contacts of the Indian partners which help smoothen the process of setting up of operations
Wholly Owned Subsidiary Company
Foreign companies can also to set up wholly-owned subsidiary in sectors where 100% foreign direct investment is permitted under the FDI policy.
Once a company has been duly registered and incorporated as an Indian company, it is subject to Indian laws and regulations as applicable to other domestic Indian companies.
As compared with entering as a foreign company i.e. as a Project/Branch office; a subsidiary company or JV company has maximum flexibility, but exit procedure are quite cumbersome
Features of a Indian Subsidiary / JV company
No approval required for repatriation dividends
Funding mechanisms available are : Equity , Debt (Foreign and Local) and Internal accruals
Indian Transfer pricing regulation apply
Treated as Indian company for all applicable laws and income tax purposes.
Taxed at lower rate of 30 % as compared to a foreign company which is taxed at 40%.
Subject to 16.995% dividend distribution tax (DDT)
As an Indian LLP
The Indian LLP regulation, allows foreign national and foreign LLP's to become partner in Indian LLP
Ownership and management of LLPs:
Determination of Designated Partner: The LLP regulations provide that at least one designated partner shall be person resident in India.
Body Corporate as Designated Partner: In case of LLP having Foreign Direct Investment (FDI) and a body corporate is a designated partner, than the body corporate should only be a company registered under the Indian Companies Act and not any other body, such as an LLP or a trust.
Compliance of Foreign Direct Investment (FDI) Policy: The designated partners will be responsible for compliance with the above conditions and liable for all penalties imposed on the LLP for their contravention.
Conversion into LLP: Any conversion of a company with FDI into an LLP will be allowed only if the company is engaged in sectors/activities where 100% FDI is allowed, through the automatic route and there are no FDI-linked performance related conditions and prior approval of FIPB/Government is obtained.
Foreign direct Investment (FDI) is allowed in LLP subject to certain conditions
As A Foreign Company
Foreign Companies can set up their operations in India through
Liaison Office/Representative Office
Such offices can undertake any permitted activities. Companies have to register themselves with Registrar of Companies
Liaison Office/Representative Office
Liaison office acts as a channel of communication between the principal place of business or head office and entities in India. Liaison office can not undertake any commercial activity directly or indirectly and cannot, therefore, earn any income in India. Its role is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers. It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company and companies in India. Approval for establishing a liaison office in India is granted by Reserve Bank of India (RBI). Foreign insurance companies can establish liaison offices in India after obtaining approval from the IRDA , without specific approval from Reserve Bank of India
Foreign Companies are allowed to set up Branch Offices in India. Permission for setting up branch offices is granted by the Reserve Bank of India (RBI).
Foreign Companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for the following purposes:
Export/Import of goods
Rendering professional or consultancy services
Carrying out research work, in which the parent company is engaged.
Promoting technical or financial collaborations between Indian companies and 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/ group companies.
Foreign airline/shipping company.
A branch office is not allowed to carry out manufacturing (except within SEZ) or processing activities on its own but is permitted to subcontract these to an Indian manufacturer. Branch Offices established with the approval of RBI, may remit outside India profit of the branch, net of applicable Indian taxes and subject to RBI guidelines
Branch Office on "Stand Alone Basis"
Such Branch Offices are isolated and restricted to the Special Economic zone (SEZ) alone and no business activity/transaction will be allowed outside the SEZs in India, which include branches/subsidiaries of its parent office in India.
No approval shall be necessary from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities subject to specified conditions.
Foreign Companies planning to execute specific projects in India can set up temporary project/site offices in India. RBI has now granted general permission to foreign entities to establish Project Offices subject to specified conditions.
Such offices can not undertake or carry on any activity other than the activity relating and incidental to execution of the project. Project Offices may remit outside India the surplus of the project on its completion, general permission for which has been granted by the RBI.
Like a branch office, a project office is also treated as an extention of foreign company and taxed at a higher rate applicable to foreign company.
Foreign Direct Investment (FDI) Policy
FDI under automatic route is now allowed in mostly all sectors, including the services sector, except a few sectors where the existing and notified sect oral policy does not permit FDI beyond a ceiling.
FDI through Automatic Route
No prior approval is required for FDI under the Automatic Route, only information to be send to RBI.
FDI through Government Approval Route
Government Approvals might be required in certain cases involving foreign direct investments.
Foreign Investment proposed not covered under the 'Automatic Route' are considered for Governmental Approval on the recommendations of the Foreign Investment Promotion Board (FIPB)
Taxation In India
India is moving towards reforming its tax policies and systems so as to facilitate globalization of economic activities. The corporate tax rate for foreign companies is 40% and for domestic companies and LLP's the tax rate is 30%. The net tax rate is far lower than this on account of various deductions and exemptions available under the tax laws. Tax holidays are available in Special Economic Zones set up to make industry globally competitive. Infrastructure Sector Projects enjoy special tax treatment/holidays. A user friendly tax administration has been introduced with round the clock electronic filing of documents
Every type of entity has its advantages, limitation and disadvantages. Do get back to us to know which entry vehicle entity would be most suitable to your entry strategy and business.