An entrepreneur willing to expand his/her business abroad must abide by the tax laws of the home country as well as of the particular foreign country and accordingly pay the required taxes. Taxes (or duties) are defined as the financial charges levied by the Government upon an individual or an organisation or property in return for the government services received by them.
These taxes may be broadly classified into direct and indirect taxes. Direct taxes are those where the tax payer pays the taxes directly to the imposing authority like income tax and corporate tax. Whereas, indirect taxes are those which are not paid directly to the imposing authority but paid to someone else who acts as an intermediary link between the tax payer and the tax levying authority like customs duty and service tax. In India, the power to levy taxes and duties is distributed among the three tiers of Government, in accordance with the provisions of the Constitution.
The most important tax which an entrepreneur is subjected to is the ‘customs duty’ which is a type of indirect tax levied on goods imported into India as well as on goods exported from India. In India, the basic law for levy and collection of customs duty is Customs Act, 1962. It provides for levy and collection of duty on imports and exports, import/export procedures, prohibitions on importation and exportation of goods, penalties, offences, etc. The Central Board of Excise & Customs (CBEC) is the apex body for customs matters. It is a part of the Department of Revenue under the Ministry of Finance, Government of India.
But due to different tax laws and rules prevailing in different countries, a businessmen faces the problem of ‘double taxation’. Double taxation refers to a situation where the same income becomes taxable in the hands of the same company or individual (tax-payer) in more than one country. This puts unnecessary and prohibitive burden on the tax-payer. In India, the liability under the Income tax Act arises on the basis of the residential status of the assessee during the previous year. Hence, if the assessee is resident in India, he/she has to pay tax not only on the income which is received in India but also on that income which accrues, arises outside India or received outside India. Thus he becomes liable to pay double taxes. The relief against such double taxation in India has been provided through, bilateral relief and unilateral relief.
Companies / Business having operations in countries other than india can set up wholly-owned subsidiary in India under those sectors where in 100% foreign direct investment is permitted under the Foreign Direct Investment Policy issued by Government of India. A foreign company or business can start their wholly-owned subsidiary in India may be either of the following business types like, Private Limited Company, Public Limited Company. These companies have to register their subsidiary companies with Registrar of Companies which can undertake any permitted business activities.
It is vital to choose the right kind of business consultant who have expertise in starting a subsidiary company in india which best suits its purposes and takes care of liability issues and tax planning issues.
The Companies Act 2013 brings a lot of new features, compliances, disclosures for foreign companies operating in India in any mode. The Central Government of India is promoting foreign investment in India and by coming out with a law, which is based on the principle of “Self Regulation Heavy Penalties”, it seems that corporate culture and discipline will improve in the system. The government has liberalized many provisions in the act and given powers to the Board and shareholders to take a conscious and compliant decision without intervention of the Central Government in the best interest of company and its stakeholders.
1. Modes of entry for foreign Residents desiring to setup business in India
Foreign company can carry on business in India by the formation of a wholly owned subsidiary, subsidiary, a joint venture or a place of business as branch/liaison/project office after obtaining permission from Reserve Bank of India, if applicable. Below are different types of options with a foreign entity to operate their business in India which are permissible under Companies Act, 2013 read with the provisions of Foreign Exchange Management Act, 1999.
1.1 Company under the provisions of Companies Act 2013
1.1.1 Wholly Owned Subsidiaries
Wholly-owned subsidiaries are the result of the parent company owning all (100%) of the subsidiary’s shares. Since the parent company owns all of the subsidiary’s shares, it has the right to appoint the subsidiary’s board of directors, which controls the subsidiary. Wholly owned subsidiaries may be part of the same industry as the parent company or part of an entirely different industry. A company operating in more than one country may choose to operate a business through a wholly owned subsidiary. The Investment is subject to compliance of FDI Policy.
A foreign company can open up a subsidiary company in India. This can be done either by acquiring the majority of shares (more than 50%) of the company or by controlling the composition of board of directors of the company. Both holding and subsidiary companies are separate legal entities and they are related to each other by virtue of subsidiary –holding company relationship. The Investment is subject to compliance of FDI Policy.
1.1.3 Joint Venture
A foreign company can enter into India by forming a strategic alliance with an Indian partner. In general parlance, it is defined as a business agreement in which the parties agree to develop, for a finite time, a new entity and new assets by contributing equity. The ratio of foreign party in shareholding can be anywhere between 0 to 50%. By mutual agreement they may exercise control over the enterprise and consequently share revenues, expenses, assets & liabilities. It can be incorporated either as private limited company or public limited company which has to be registered under the Companies Act, 2013 and subject to exchange control regulations and Foreign Direct Policy of the Government of India. The Investments are subject to compliance of FDI Policy.
2.1 Limited Liability Partnership under Limited Liability Partnership Act, 2008
LLP is a hybrid between a corporate and partnership structure as it encircles elements of both. A corporate business vehicle that enables professional expertise and entrepreneurial initiative to combine and operate in a flexible, innovative and efficient manner, providing benefits of limited liability while allowing its members the flexibility for organizing their internal structure as a partnership. This entity has to get registered under the Limited Liability Act, 2008. No foreign investment can be made in LLP unless prior approval of Foreign Investment Promotion Board is obtained.
3.1 Place of Business under Companies Act 2013 with the permission of RBI
3.1.1 Branch Office- A branch office refers to an establishment, which carries on substantially the same business and activity as is carried out by its Head Office. Such offices help the company in spreading its business to diverse locations and thus help in increasing the customer base and bringing its product closer to the customers by increasing their accessibility to it. Such Branch office can be opened only with the prior approval of RBI.
3.1.2 Liaison/ Representative Office– Foreign companies can also start their Indian operations by setting up a liaison (representative) office in India. The role of liaison office is limited to collecting information about possible market opportunities in India and providing information about the parent company and its products to the prospective Indian customers. It acts as a communication channel between the parent company and Indian companies. Such Liaison office can be opened only with the prior approval of RBI.
3.1.3 Project Office-‘Project Office’ means a place of business to represent the interests of the foreign company executing a project in India but excludes a Liaison Office. Foreign companies planning to execute specific projects in India can set up temporary project and site offices for this purpose. The RBI has granted general permission to a foreign entity for setting up a project office in India, subject to the fulfillment of certain conditions
3.1.4 Place of Business in electronic mode- A new dimension under Companies Act, 2013 The Companies Act 2013 has also widened the definition of foreign companies to include those having a place of business in India via an agent or through electronic mode, which means online services provided by foreign companies without opening a physical office in India also covered under the provisions of companies Act 2013. This would require foreign companies to comply with the maintenance of financial records and reporting requirements in India.
4.1 Other Important & Material changes under Companies Act, 2013
- Foreign companies will now have an option to form private or public limited companies in India at their choice without any limitation like sec 4(7) of the companies Act 1956;
- The Articles of Association may contain entrenchments provisions, regarding the alteration of specified provisions of articles, which means that they may be altered only if conditions restrictive than special resolution are met. So there is indirect recognition to veto powers provisions as contained in articles of association for protecting the interest of minority.
- The subscribed capital has to be received by company within 180 days of such subscription.
- Shares of a public company are freely transferable, provided any contract or arrangement between two or more persons in respect of transfer of securities shall be enforceable as a contract, which means “Tag along” or “Drag Along” rights as mentioned in shareholders’ agreement will be enforceable as contract.
- The minimum number of directors in case of public company and private company are same , however the Act, introduced a concept of One Person Company, where minimum 1 (one) director is mandatory, however as per rules no foreign resident can form a One Person company in India.
- Mandatory one woman director on the board of every listed company and as per rules every other public company having a paid-up share capital of INR 100 crore or more or turnover of INR 300 or more.
- Each Company to have at least one resident director who has stayed in India for a minimum period of 182 in previous calendar year.
- Participation of director through video conferring is the welcome steps, which allow directors to attend the meeting from anywhere in the world, however it is also been stated that every director has to attend at least one board meeting physically in each 12 months.
- The Board may appoint alternate director, if authorized by its articles or by a resolution passed by company in general meeting, not being a person holding any alternate directorship for any other director in the company, during the absence of a director, for a period of not less than three months from India.
- Director Responsibility Statement in Board report shall state that they had devised proper systems to ensure compliance with the provisions of all applicable laws and that such system were adequate and operating effectively.
- CEO and CFO has been defined in the Act and covered in the category of KMP with wider responsibilities and liabilities.
- The company can maintain its book of accounts in electronic mode.
- A consolidated financial statement shall be produced at the Annual General Meeting, if the company has any subsidiary, associate company, joint venture in India or abroad along with the financial statement of the company and also attach with it a statement containing salient features of the financial statement of its subsidiary or subsidiaries.
- The definition of financial year has been provided under the Act, where a company has to adopt a financial year starting form 1 April to 31 March. A period of two years as a transitional phase has been provided under the Act to comply with this provision, however companies having foreign subsidiary or are subsidiary of body corporate have an option to maintain different financial year to match the same with holding or subsidiary company with the permission of Tribunal.
- An audit firm cannot be appointed for more than 2 consecutive terms of five years and individual auditor has to be rotated after the expiry of period of 5 years.
- Cross Border Merger, means amalgamation of Indian Company with foreign company or vice versa has been allowed as per provisions of Companies Act 2013 subject to certain conditions.
- Registered Valuer, with such qualification as prescribed by the Central Government, shall be appointed to do the valuation of property, stocks, shares, debentures, securities or goodwill or any other assets or net worth of a company or its liabilities.
- Class Action Suit under which a prescribed class of members or deposit holders will have the right to file a Class Action suit with the Tribunal.
- Where a company is formed and registered under this Act for a future project or to hold an asset or intellectual property and has no significant accounting transaction such a company or an inactive company may make an application to the Registrar in such manner as may be prescribed for obtaining the status of Dormant company.
- A document may be served on a Company by sending it to the registered office of the company by registered post, speed post, courier service, leaving it at its registered office, electronic means any other mode as may be prescribed.
- A company with net worth of Rs. 500 crores or more or turnover of Rs 1000 crores or more or net profit of Rs 5 crores or more during any financial year shall have to constitute a CSR committee and implement CSR policies. Such companies will have to spend at least 2% of the average net profits made by the company in the preceding three financial years in accordance with the CSR policy.
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