Brief presentation on Financial and Legal aspects for setting up of Business in India


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Brief presentation on Financial and Legal aspects for setting up of Business in India

  1. 1. How to Set-up Your Own Business in India Financial and Legal Requirements Sameer Mittal
  2. 2. File NumberEWG- 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)
  3. 3. File NumberEWG- CONFIDENTIAL 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.
  4. 4. File NumberEWG- CONFIDENTIAL 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.
  5. 5. File NumberEWG- CONFIDENTIAL 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.
  6. 6. File NumberEWG- CONFIDENTIAL Limited Liability Partnership (LLP) 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.
  7. 7. File NumberEWG- CONFIDENTIAL Limited Liability Partnership (LLP) 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.
  8. 8. File NumberEWG- CONFIDENTIAL 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.
  9. 9. File NumberEWG- CONFIDENTIAL 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.
  10. 10. File NumberEWG- CONFIDENTIAL Entry options in India for Foreign Companies Liaison Office Project Office Branch Office Wholly Owned Subsidiary / Joint Venture
  11. 11. File NumberEWG- CONFIDENTIAL • 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
  12. 12. File NumberEWG- CONFIDENTIAL • 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
  13. 13. File NumberEWG- CONFIDENTIAL • 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
  14. 14. File NumberEWG- CONFIDENTIAL • 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
  15. 15. File NumberEWG- CONFIDENTIAL 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
  16. 16. File NumberEWG- CONFIDENTIAL • Income Tax for corporate assesses, known as Corporate Tax; • Minimum Alternate Taxes (MAT) ; • Dividend Distribution Taxes (DDT) • Wealth Tax (WT) Direct Taxes
  17. 17. File NumberEWG- CONFIDENTIAL 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 millionINR 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.
  18. 18. File NumberEWG- CONFIDENTIAL • 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
  19. 19. File NumberEWG- CONFIDENTIAL • 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
  20. 20. File NumberEWG- CONFIDENTIAL • 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
  21. 21. File NumberEWG- CONFIDENTIAL
  22. 22. File NumberEWG- CONFIDENTIAL Thank you! Sameer Mittal Mobile : +91 97113 12453 E-mail: Office Address G-139 Pushkar Enclave, Paschim Vihar New Delhi-63
  23. 23. File NumberEWG- CONFIDENTIAL 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.