Modes for Setting up Business in India

Modes of Setting up Business in India

For a foreign company three modes of setting up business in India are available, these are

Liaison Office – This kind of office is setup wherein only liaison / Marketing work is undertaken by the entity in India and all transactions whether related to Sale/ Purchase/ Provision of any services and even receipts and payment of money is undertaken directly by the parent company. Liaison office is not authorized to undertake any type of commercial activity accept liaison.

Foreign Branch Office – This kind of office setup is one step ahead of Liaison Office. In this type of setup trading transactions i.e. sale / purchase of goods and provision of services is allowed directly by the Foreign Branch Office itself but there are restrictions with regard to manufacturing and providing training.

Wholly Owned Subsidiary – This type of setup is allowed to undertake all kinds of commercial transaction.

After deciding on the mode for setting up business in India as mentioned above necessary permission of either the Reserve Bank of India (RBI) or Foreign Investment Promotion Board (FIPB) is required. In most of the activities 100% foreign equity participation is allowed on automatic route, in such cases there is no requirement for permission. For others permission is required from either FIPB or RBI before registration.

After obtaining permission of Reserve Bank of India (RBI) or Foreign Investment Promotion Board (FIPB) company / branch office / liaison office is required to be registered with the Registrar of Companies under the Companies Act also. This finishes the process of incorporation of an organisation in India.

Foreign Branch Office as well as Wholly Owned Subsidiary are allowed to work subject to general or specific restrictions imposed by the Reserve Bank of India (RBI) or Foreign Inward Promotion Board (FIPB). They are required to file necessary returns with various taxation and legal authorities as a separate entity from its parent.

Liaison Office Vs Branch Office Vs Wholly Owned Subsidiary – Pros and Cons

1. Setting Up

A wholly owned subsidiary is easier to setup than a liaison / branch office and does not require RBI approval. Whereas, A Liaison / Branch Office requires prior approval of RBI and it takes around 1-6 months for formation.

2. Cost Involved

Setting up a wholly owned subsidiary costs less than setting up a branch / liaison office in India.

3. Tax Liability

Income Tax liability of Branch Office is higher than that of a wholly owned subsidiary. A Liaison Office is not chargeable to tax. The rates of income tax for branch office are

Income Tax          40% of total income
Surcharge             2.5% of income tax if total income tax exceeds INR1,00,00,000/-

Education Cess@3% of Income tax and surcharge (if any).

Income Tax Rates for Wholly Owned Subsidiary are:

Income Tax        30% of total income
Surcharge          10% of income tax if total income tax exceeds INR1,00,00,000/-

Education Cess@3% of Income tax and surcharge (if any).

Further, in case of wholly owned subsidiary Dividend Distribution Tax @15% is applicable in case of remittance/repatriation of profits as dividend.

4. Closure

Liaison / Branch office is easier to close as compared to wholly owned subsidiary. A wholly owned company has to undertake liquidation proceedings as described under the Companies Act or has to be closed under the Fast Track Closure Scheme.

Legal Compliances in India

Liaison Office, Branch office and WOS (wholly owned subsidiary) are required to comply with various other legal compliance for working in India. A brief details of the same are given below

Income Tax Compliance
– Annual Income Tax returns
– Advance Tax calculation and deposit (Not Applicable to Liaison Office)
– Quarterly Tax Deducted at Source Compliance (Not Applicable to Liaison Office)

Sales Tax Compliance (In case of sale of goods) (Not Applicable to Liaison Office)
– Periodical returns
– statutory forms
– compliance with various provisions

Service Tax Compliance (in case of provision of taxable service) (Not Applicable to Liaison Office)
– Periodical returns
– compliance with various provisions
– periodical calculation and deposit of taxes

Registrar of Companies Compliance
– Annual Statutory Audit
– Filing of Annual Returns
– Filing of forms for various changes to company / branch office

Labour Laws Compliance
– Mainly two laws Provident Fund and Employees State Insurance
– Periodical returns and compliance with provisions of the laws
– maintenance of prescribed records

The above list is not exhaustive, and various other laws may be applicable depending on the actual working of the company.

MCA ROC Portal now working satisfactorily. Or Is it?

As everybody is aware the Ministry of Corporate Affairs (MCA) portal which is used for filing all compliance forms with the Registrar of Companies (ROC) was in non working condition recently due to change of service provider for the portal. The portal is now working satisfactorily with some minor glitches here and there. The Ministry has also informed regarding the same.

Now, the stakeholders can file the necessary compliance and other documents with ROC. The MCA has also decided to provide relief to companies who were unable to file documents during the non-working period of online portal on a case to case basis.

Update: 27th February, 2013

The portal is running smooth for users but in the backend the process seems to be taking very long. I filed a Form 1A for Name Approval of a company on 20th February and even after more than 7 days there is no update on the same and the status is showing as “Assigned” for the last 6 days. I am sorry to say that the MCA Portal is in a very bad state as of now and is reminding me of the earlier ROC where all the things happened on Snail Pace. The Ministry of Corporate Affairs officials have at this time done a major bungling and even after more than one month are unable to run the portal and backend smoothly which is causing lots of heartburn for its users and businesses.

MCA Levies Fees on some additional forms

Ministry of Corporate Affairs vide its General Circular No. 14/2012 dated June 21,2012 has levied fees for filing forms on MCA portal, which were till now being filed for free of cost. The effective date of circular is July 22nd, 2012. The forms which are under the domain of this Circular are as follows:

A.     Form 1 of Investor Education Protection Fund Rule (Awareness and Protection of investors) Rules, 2001

Every company which is required by the Companies Act, 1956 to credit to Investor Education and Protection Fund any amount as per the relevant section of the Act, has to file a statement of amounts credited to the Fund in this form.

Earlier, the form was filed free of cost, but now it has to be filed with the concerned Registrar of Companies through MCA 21, as per the fees mentioned in Schedule X of the Companies Act, 1956.

B.     Form 23B

Every statutory auditor appointed by the company in the Annual General Meeting under section 224(1) of the Companies Act, 1956 in this form has to intimate whether he has accepted the appointment or not to the concerned Registrar of Companies, , within 30 days of the intimation received from the company by the auditor.

Earlier, the form was filed free of cost, but now it has to be filed through MCA 21, as per the fees mentioned in Schedule X of the Companies Act, 1956

C.     Form 24A

This form is filed by the company under different sections of the Act for many purposes mentioned here under.

Rectification of name of a company under Section 22 of the Companies Act, 1956
Application for issue of license under Section 25 of the Companies Act, 1956
Appointment of auditor by Central Government, when no auditor is appointed or reappointed at AGM under Section 224(3) of the Companies Act, 1956
Removal of auditor of the Company under Section 224(7) of the Companies Act, 1956
Approval for entering into contract of sale, purchase, supply of goods, materials and services and for underwriting of shares or debentures with related parties under Section 297 of the Companies Act,1956

Earlier, fees was paid for purposes mentioned at (a), (b) and (e) as per Companies (Fee on Application) Rules, 1999 and not in cases mentioned at points (c) and (d), but now fees also has to be paid as per the Rules on these purposes also.

D.     Form 36

This form is filed by receiver or manager for filing the abstract of receipts and payments, pursuant to section 424 read with 421 and also pursuant to section 600 of the Companies Act, 1956.

Earlier, the form was filed free of cost, but now, the form has to be filed with fees prescribed in Schedule X of the Companies Act, 1956.

E.     Form 61

This form is filed by the company, making an application to concerned Registrar of Companies for the following purposes:

Extension of period of Annual General Meeting under section 166(1) of the Companies Act,1956
Extending of financial year beyond 18 months under section 210(4) of the Companies Act,1956
Filing of Scheme of Amalgamation and reconstruction of companies under section 394 of the Companies Act,1956
Declaring a Company as defunct company under section 560 of the Companies Act,1956
Compounding of offences under section 621A of the Companies Act,1956

Earlier, companies could file this form for any of the aforementioned purposes, without any fees, but now fees has to be paid as per Companies (Fee on Application) Rules, 1999

F.     Form 62

This form, if being filed for filing Form 154, Form 157 and Form 158 of the Companies (Court) Rules, 1959, will now attract fees as per Schedule X of the Companies Act, 1956

G.     Form 65

The company is required to file this form, making an application to the Central Government for the following purposes

Application pursuant to rule 2 of the Companies (application for extension of time or exemption under subsection (8) of section 58A) Rules, 1979

Now the form may be filed as per Companies (Fee on Application) Rules, 1999
Others- To submit any application or document with Central Government, where no other form has been prescribed

The form, now may be filed as per Companies (Fee on Application) Rules, 1999

Non-Xbrl Companies allowed to file annual filing form 23AC & 23ACA till 15th September 2012 without additional fee

This year New Schedule VI has been made applicable on companies to prepare its financial statements. The ROC is in the process of finalising new Form 23AC & 23ACA incorporating the changes. In view of the same non-xbrl companies are permitted to file Annual Balance Sheet and Profit & Loss Account in Form 23AC & 23ACA without any additional fees or penalty by 15th September, 2012 if the due date of filing is before 15th September. After 15th September the normal rules will apply. The text of the notification is provided below for your reference.

General Circular No 21/2012

File No. 17/160/2012-CL-V; Government of India; Ministry of Corporate Affairs; Dated02/08/2012

All the Regional Directors, All the Registrar of Companies

Sub: Filling of Balance Sheet and Profit and Loss Account by Companies in Non- XBRL for accounting year commencing on or after 01.04.2011.

Notification no. S.O-447 (E) dated 28.02.2011 on revised schedule VI is effective from  1st April 2011. The current year filing is based on revised schedule VI is due for filing. The revised form 23AC & ACA is under finalization and will be notified shortly on the MCA website.

All companies who are required to file non XBRL eform 23AC & ACA as per revised schedule VI be allowed to file their financial statement without any additional fee/penalty upto 15th September 2012 or within 30 days from the date of their AGM, whichever is later.

Sanjay Kumar Gupta

(Deputy Director)