Author: UmmeSalama Bhatri, Manager – Market Entry Services, Indo-German Chamber of Commerce
The outbreak of the COVID-19 pandemic had a significant commercial impact not only on India but globally. It put a spanner on business travel and also on trade and commerce worldwide. Bilateral trade took a hit impacting business and employment in every sector, the notable exception being healthcare.
Despite the situation, the Government of India has been proactive in introducing key reforms, including to the Companies Act, in order to improve ease of doing business in India. As a result, India has risen in rank from 142 to 63 in the World Bank’s Ease of Doing Business rankings over the last five years. The government also introduced important labor reforms in a move to consolidate the country’s labor laws and streamline compliance requirements.
Despite national and local lockdowns, last year also saw multiple Indian states unveil new industrial policies and implement business-friendly reforms to attract greater investments and bolster local manufacturing ecosystems. As many as six states – Haryana, Uttar Pradesh, Andhra Pradesh, Gujarat, Karnataka and Maharashtra unveiled new industrial policies.
Now a year later, despite the ongoing outbreak, there is some optimism as vaccination have rolled out and businesses adapt to the new normal.
This article aims to inform German enterprises about the formalities and procedures involved in the setting up an entity in India as well as the benefits that are now available to businesses in India, including start-ups.
At the outset, let us begin by exploring the types of entities that can be set up in India:
There are different types of entities to consider and depending on your business model, you can determine which would be best.
- A private limited company is a popular option offering flexibility in terms of permitted activities.
- The other option is setting up a limited liability partnership in which the management-ownership divide inherent in a company is not present, thus offering more organizational flexibility. Moreover, the LLP has fewer compliances as compared to a Private Limited Company.
There are other types of businesses such as a liaison office and branch office:
- A Liaison office cannot undertake any business activity and acts as a communication channel between its principal office abroad and companies in India. It has a limited role and is allowed to collect information about market opportunities in India and relay it to its principal office out of India. It cannot enter into any business contracts on its own and cannot earn any business income in India.
- A Branch Office is set up by the foreign parent company to perform similar business at a different location. This office can enter into negotiations, conclude contracts and earn income on its own. However, it is treated as a foreign company in India and subject to a higher rate of income tax than a public or private limited company and hence is not a preferred option.
The process of a company formation can boradly be divided into four steps. A brief outline of the four processes (for a private limited company) can be found in the following.
- Applying for a DSC (Digital Signature Certificate) for the proposed directors of the company.
A DSC can now be easily obtained by making an online application. A video verification process through a secure online portal eliminates the need for submission of certified hard copies of identification documents. - Applying for name availability
One can select a name indicative of the main business of the company. The options are to be submitted online to the Registrar of Companies (ROC) for approval. The proposed name should not resemble the name of an already registered company and should not violate the provisions of the Name Availability Guidelines issued by the Ministry of Corporate Affairs (MCA). - Drafting of the Memorandum of Association (MOA) & Articles of Association (AOA) of the company
The MOA contains fundamental information of the company such as its name, its registered office, objects, etc., while the AOA are rules and regulations governing the company’s day-to-day to functioning. - Application for incorporation approval
Applying for approval is now simplified by the Indian Government. It can be carried out online through the SPICe+ (Simplified Proforma For Incorporating Company Electronically Plus) form. This simplified process enables the ROC to incorporate the company and along with that it also allots the Permanent Account Number (PAN) and Tax Deduction and Collection Account number (TAN). These numbers enable a company to file their tax returns with the regulatory authorities.
The Government with an aim of simplifying doing business in India has also launched e-form AGILEPRO which when submitted with SPICe+ will enable businesses obtain the following registrations:
- Goods & Services Tax registration (GSTIN) – GST is an indirect tax on the sales and services effected by the company
- Registration with Employees Provident Fund Organization (EPFO) – an organization regulating the social security benefits of employees and
- Registration with Employees State Insurance Corporation (ESIC) – an organization providing financial aid to employees in sickness, disablement or death due to employment injuries.
Thus, by filing just 2 forms, a company is almost ready to start its business operations in India.
[Note: The timeline and ease of getting a company registered is subject to the accuracy of documents submitted]
While the application process is streamlined and is now carried out online, the process still requires submission and collation of a number of documents. This includes (but is not limited to) chartered documents of the shareholding companies and identification documents, affidavits and declarations from the proposed directors of the Indian company and authorized representatives of the shareholding companies.
Indian Taxation
In India, a company is subjected to direct taxes and indirect taxes.
Direct Tax (Tax on income)
A company’s tax rate (tax on net profits) is 26% which is quite competitive by international standards for a yearly turnover of up to INR 4,000 million. On income between Rs 10 million and Rs 100 million, there is a surcharge on income tax of 7% and on income above 10 million there is a surcharge of 12%. This effectively translates into a tax rate of 27.82% for income between Rs 10 million to Rs 100 million and a tax rate of 29.12% for income above Rs 100 million.
Indirect Tax
GST is essentially a tax on value addition at each stage of the supply chain; every supplier who is the person supplying the goods and/ or services can claim credit for the taxes included in his sourced goods and services. Thus, the business pays GST only on the value addition of its output. A company whose turnover exceeds INR 4 million has to register for Goods and Services Tax (GST) which is an indirect tax on supply of goods and services. GST is akin to VAT in European countries. Under GST, most of the products and services are liable to be taxed at 18%. Apart from this, depending on the commodity or service, the tax rate could be NIL, 5%, 12% and 28%.
RECENT POLICIES BY THE GOVERNMENT OF INDIA TO ATTRACT FOREIGN INVESTMENT:
- REDUCED TAX RATE FOR COMPANIES REGISTERED AFTER 1st OCTOBER, 2019
With a view to attracting foreign investment and encouraging new companies to start businesses in India, the Government of India has further reduced the tax rate to 17.16% for companies registered after 1st October, 2019 if they commence manufacturing before 1st October, 2023 (Benefit granted as per section 115BAB of the Income Tax Act, 1961). The company has to opt to be granted the benefit under section 115BAB. If it choses so, the company can then claim only actual expenses incurred in earning that income and it cannot claim any additional tax benefit granted under any other incentivized sections of the Act. The tax rates referred to above are for domestic companies. - ADDITIONAL TAX INCENTIVES FOR START-UPS UNDER THE GOVERNMENT OF INDIA’S “START-UP INDIA PLAN”
A company which works towards innovation, development or improvement of products or processes or services, or which has a scalable business model with a high potential of employment generation or wealth creation may be considered as a start-up. In order to be recognized as a start-up an online application is to be made over the mobile app or portal set-up by the Department for Promotion of Industry and Internal Trade recognition (DPIIT). This will help the start-up to avail benefits like access to high quality Intellectual Property services and resources and self-certification under labour and environmental laws amongst others. The turnover of such company should not be more than INR 1 billion. Such a company can get 100% tax rebate on its profits for a total period of 3 years within a block of 10 years.
In conclusion, the changes brought about by the Indian Government along with India’s sound financial system, comfortable foreign exchange reserves, strong industrial infrastructure and logistical base make it an attractive investment destination.
References: https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf