Starting Business In India

A liaison office is the most basic form of business presence that a foreign company can have in India. Permission to open a liaison office in India is granted by RBI, the apex exchange control authority. Liaison offices are normally established by foreign companies to promote their business interests by spreading awareness of their product(s) and exploring opportunities for business and investment in India. Foreign insurance companies have a general permission to establish a liaison office in India provided they have obtained permission from the Insurance Regulatory Development Authority of India and they comply with certain prescribed conditions.

Under the current exchange control regulations, a liaison office is permitted to:

• Represent the parent/group companies in India ;
• Promote exports and imports from/to India;
• Promote technical /financial collaborations between parent/group companies and companies in India ;
• Act as a communication channel between parent/group companies and companies in India. Typically, a liaison office is not permitted to :
• Earn any income;
• Undertake any industrial, trading or commercial activity;
• Enter into any agreement on behalf of the head office;
• Borrow or lend money for any commercial activity;
• Charge any fee or commission or otherwise earn any income, in respect of liaison activities carried on in India.

An application in the prescribed form has to be submitted to RBI for establishing a liaison office in India. The lead time for processing a liaison office approval typically ranges from three to four weeks, unless the application is referred to the administrative ministry concerned within the Government of India for its comments, which may lead to an increase in the processing time.

As stated above, a liaison office cannot earn any income in India (except for interest on surplus funds lying in its local bank account subject to certain conditions). Therefore, all expenses of the liaison office have to be met out of inward remittances from the head office. Any balance in the liaison office account can typically be repatriated, only at the time of closure of the liaison office.

As stated above, liaison offices are not permitted to carry on any industrial, trading or commercial activities, nor to earn any income in India. However, sec 139(1) requires all companies to furnish a return of income. Hence, liaison offices would also be required to file their return of income in India.

Closure of a liaison office normally involves a time frame of five to six weeks. An application enclosing the prescribed documentation is required to be made to the requisite regional office of RBI.

In case a foreign company wishes to establish a business presence in India for the limited purpose of executing a project, it may establish a project office for its Indian operations. The objective behind establishment of a project office is to enable a foreign company to establish a temporary base in India for executing specific projects/contracts.

A foreign company may open a project office in India for executing a contract secured by an Indian company without the prior permission of RBI provided the following conditions are satisfied:

• The project is funded directly by inward remittance from abroad;
• The project is funded by a bilateral or multilateral international Financing Agency;
• The project has been cleared by an appropriate authority;
• A company or entity in India awarding the contract has been granted term loan by a public financial institution or a bank in India for the project.

In all other cases, prior approval of the RBI is required to establish a project office in India.

A project office is permitted to open and operate a bank account including a foreign currency account in India. Typically, expenses of the project office in India can be met only out of inward remittances from the head office, or rupee amounts received locally under the approved contract(s).Outward remittances from the bank account are permitted subject to certain compliance requirements.

A project office is considered as an extension of a foreign company in India. Therefore, income earned by the project office is taxable in India in accordance with the taxation provisions applicable to foreign companies under the Income-tax Act, 1961 (“Act”).

Being a restricted business presence in India, the process for closure of a project office is straightforward, and normally involves a time frame of five to six weeks. An application enclosing the prescribed documentation has to be made to the regional office of RBI in case the project office was established under the approval route and to the Authorized Dealer in case the project office was established under the general permission.

In the case where a foreign company wishes to undertake trading or commercial activities in India without establishing/investing into an Indian company, it may establish a branch office in India, with the prior approval of RBI, for undertaking certain specified activities.

Branch offices are permitted to undertake only those activities, as approved by RBI, that typically enable them to:

• Undertake the export and import of goods;
• Render professional or consultancy services;
• Carry out research work in which the parent company is engaged;
• Promote technical and financial collaborations between Indian companies and parent/overseas group companies;
• Represent the parent company in India and act as buying and selling agents;
• Render services in information technology and development of software in India;
• Render technical support to the products supplied by the parent/group companies;
• Operate as a foreign airline/shipping company.

100% FDI is allowed in setting up a stand -alone branch in a SEZ. A branch has to be set up on a stand-alone basis, i.e. such branch office will be isolated and restricted to the SEZ alone and no business activity/transaction will be allowed outside the SEZ (this includes branches/subsidiaries of its parent office in India).Approval process An application in the prescribed form has to be submitted to RBI for establishing a branch office in India. The lead time for processing a branch office approval typically ranges from four to five weeks, unless the application is referred to the administrative ministry concerned (such as in the case of banking entities) within the Government of India for comments which may lead to an increase in processing time. As per the provisions of the SEZ Act, no prior approval of RBI is required to set up a branch in a SEZ.

The RBI approval for establishing a branch office permits the opening of a bank account for meeting expenses related to Indian activities, as well as crediting proceeds/income generated in India. Branches are permitted to repatriate profits generated in India on an ongoing basis, after complying with certain procedural requirements.

A branch office is considered as an extension of a foreign company in India. Therefore, income earned by the branch office is taxed in India in accordance with the taxation provisions applicable to foreign companies under the Act.

In case the provisions of a tax treaty between India and the country of which the foreign company is resident, are more beneficial than the Act, then it is open to the foreign company to elect being taxed under the provisions of the relevant tax treaty.