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.