brief presentation on financial and legal aspects for setting up of business in india

How to Set-up Your Own Business in India

Financial and Legal Requirements

Sameer Mittal

File Number EWG- CONFIDENTIAL

Structures available in India to set up a Business

Form of Entities

Sole Proprietorship Partnership Company

Private Limited Company

Public Limited Company

Limited Liability Partnership (LLP)


Sole Proprietorship

Definition

Single individual owns, manages and controls the whole business.

Features

• No legal agreement and registration of firm is not necessary.

• Profit and loss – borne solely by the proprietor.

• No legal existence separate from the owner.

• Unlimited Liability - extends beyond capital invested.


Partnership

Definition

• Relation between two or more persons who have agreed to share profits and

losses of a business carried on by them or any of them acting for all.

• Owners of firm individually known as ‘Partners’ and collectively known as

‘Firm’.

Features

• Easy to form as no cumbersome legal formalities are required – registration is

also not essential.

• Minimum partners must be 2 while maximum can be 10 in case of banking

and 20 in case of all other businesses.


Partnership

Features

• No separate legal existence of its own, i.e., the firm and partners are one in

the eyes of law.

• Unlimited liability of partners. Partners are jointly and severally liable for the

liabilities of the firm.

• Restrictions on transfer of interest of the firm.

• The firm has limited span of life, i.e., legally the firm must be dissolved on the

retirement , bankruptcy or death of any partner or in the event one of the

partners becomes insane.



Background

• Government proposed LLP in January 2009 by passing LLP Act, 2008.

• Act propose LLP as a new corporate form of business to organize and operate

in a flexible, innovative and efficient manner.

Features of LLP Act, 2008

• LLP is a body corporate and legal entity, which has perpetual succession and

is separate from its partners.

• Liability of partners is limited to their agreed contribution to the LLP.

• End of Joint- Liability Concept - No partner is liable on account of the

independent or unauthorized actions of other partner.



Features

• Provides for provisions pertaining to the maintenance of the annual accounts,

corporate actions ( such as mergers), winding up etc.

• LLP Rules, 2009 comprises of provisions and procedures pertaining to

incorporation, financial disclosures, conversion into LLPs etc.


Company

Background

• Companies incorporated in India and foreign corporations with presence in

India are regulated by the provisions of the Companies act, 1956.

• Companies may be broadly classified as Public and Private Companies.

• A company established for a charitable purpose is allowed to be formed under

the provisions of Section 25 of the Companies act.

• A company can be registered with its liability as Limited and Unlimited.


Company

PARTICULARS PRIVATE COMPANY PUBLIC COMPANY

Minimum / Maximum

Shareholders

Two/Fifty Seven/Number of shares

Minimum / Maximum Directors Two /Seven Three / Twelve ( Can be increased with

CG approval)

Liability of Shareholders In both the cases, limited to the extent they have subscribed to the share capital

unless agreed otherwise.

Minimum Paid – up Capital INR 100,000 INR 500,000

Basic Features - No offer can be made to public to

subscription to its shares

- Right to transfer shares is restricted

-- Cannot invite or accept deposits from

public other than its members,

directors or their relatives.

No such restrictions but subject to some

other compliances.

When it can Start Business On incorporation On obtaining certificate of commencement

of business from ROC after incorporation.

Suitability Closely held entity with minimum

procedural, reporting, compliances, etc.

- For widely held entity.

- If planning to go for a public issue.

- Listing of shares.

Managerial Remuneration Payable without CG approval Approval of CG if remuneration exceeds

limits prescribed under the act.


Entry options in India for Foreign Companies

Liaison Office

Project Office

Branch Office

Wholly Owned Subsidiary / Joint Venture


• Prior approval from the Reserve Bank of India (RBI) is required.

• Normally initial permission is granted for 3 years.

• Can undertake only liaison and related activities on behalf of its parent entity,

like:

– Representing the parent/group companies in India.

– Promoting export /import from/to India.

– Promoting technical/financial collaborations between parent/group

companies and Indian companies.

• Expenses are to be met entirely by inward foreign remittances.

• Not liable to pay income tax in India.

• Required to submit annual activity report from its Chartered Accountant to

RBI.

• Formation time: 4-6 weeks after receipt of relevant information.

Liaison Office


• A foreign entity may open a project office in India to execute a contract

awarded to it by an Indian Company.

• Such companies can open project offices under RBI General permission.

• It can execute only that specific project for which permission is granted.

• Transactions are subject to Transfer Pricing Regulations.

• It is required to be registered with the Registrar of Companies (ROC) in India.

• Can remit profits earned by it.

• Required to submit annual activity report from its Chartered Accountant to

RBI.

• Treated as an extension of the foreign entity and liable to pay Income tax.

Project Office


• Companies engaged in manufacturing or trading activities are allowed to set

up Branch Offices in India with specific approval of the Reserve Bank.

• Branch offices are permitted to represent parent/group companies and

undertake the following activities:

– Export/Import of goods. Rendering of professional or consultancy

services.

– Carrying out of research work

– To act as buying/selling agent in India.

• Branches are not allowed to undertake retail trading, manufacturing and

processing activities.

• Funding is possible from the receipts from the parent company and from the

Indian business operations.

• Branch offices have also advantages like easy operations, less formalities &

simple exit process.

Branch Office


• Foreign entity may set up subsidiary companies in India which can be private

or public limited, with or without limited liability.

• Subsidiaries can either be wholly owned or in joint venture with some Indian

partner, as per RBI (FDI) rules. Except in few sectors where foreign direct

investment cap is applicable, foreign entity can have 100% subsidiary.

• Can undertake all types of business activities.

• No RBI approval is needed where 100% direct investment is permissible.

• Companies are incorporated and regulated under the provisions of the

Companies Act, 1956 Individual directors are required to obtain DIN (Directors

Unique Identification Number) from the Ministry of Company Affairs.

Wholly Owned Subsidiary / Joint Venture


Direct Taxes

• Are charged on income/wealth/ expenditure.

• Are outflow from profits.

Indirect Taxes

• Are charged on imports/ production/ sales/ services

• Are not an item of expense but added to the cost of Production and recovered

from the customers

Indian Taxation System


• Income Tax for corporate assesses, known as Corporate Tax;

• Minimum Alternate Taxes (MAT) ;

• Dividend Distribution Taxes (DDT)

• Wealth Tax (WT)

Direct Taxes


Direct Taxes

Particulars

Tax rate (inclusive of surcharge &

Education Cess)

Subsidiary/Domestic Company Foreign Company (PO & BO)

Where total

income is equal

to or less than

10 million INR

Where total

income exceeds

10 million INR

Where total

income is

equal to or

less than 10

million INR

Where total income

exceeds 10 million

INR

Income Tax 30.9% 32.445% 41.2% 42.23%

Minimum Alternate Tax (MAT) 19.055% 20.007% 19.52% 19.52%

Dividend Distribution Tax (DDT) 16.608% Nil

Notes:

LO is not liable to pay income tax, as it is not expected to make any income.

Dividend is not taxable in the hands of shareholders.


• Service Tax (ST)

• Central Sales Tax (CST) & State Value Added Tax (VAT), (Service tax and

VAT planned to be merged into GST by 2012).

• Customs Duty

• Excise Duty

Indirect Taxes


• Permanent Account Number (PAN): Income tax law requires every assesse to

apply and obtain PAN which is a unique tax identification number.

• Tax Deduction Account Number (TAN): India has tax deduction at source and

withholding rules. Every company, branch, project and liaison office while

making payments/expenses is required to deduct tax and deposit it with the

Govt. It is a unique tax identification number for TDS purposes.

• Service Tax Code (STC): It is a PAN based service tax code which every

company providing taxable services is required to obtain. It is a unique service

tax identification number of the Company

• Value Added Tax (VAT)/ Sales/Works Contract Tax: The entity will also be

required to obtain such number, if it enters into sale and purchase of physical

goods.

Registrations Required


• Import Export Number: It is required before entering into import or export of

goods.

• Shop & Establishment Act: In certain states entities are required to register

their offices with the State Govt. under the rules.

• Other Registrations: May be required in future under different laws like

Employees State Insurance, Provident Fund, etc. which will depend on

various factors.

Registrations Required


Thank you!

Sameer Mittal Mobile : +91 97113 12453 E-mail: [email protected] Office Address G-139 Pushkar Enclave, Paschim Vihar New Delhi-63


This PPT is prepared by Vox & Vive to provide general information about the options available for setting up a business entity. Permanent Establishment (PE) in India and brief introduction of their regulatory and tax aspects. It contains relevant rules prevailing in India in March 2011.

The information contained in this article is not our comprehensive or exhaustive study but for the general information of the readers. It is not meant to address any particular set of circumstances. We strongly recommend readers to seek professional advice before taking any decision.