Sensing India's high performance and huge potential, an NRI business consultant wants to set up an office to earn big money. He wants to know what his options are to establish his company's presence in India.
A corporate lawyer, who is also a qualified chartered accountant, can best shed light in the murky legal tangles governing company formation in India. Such a professional, Rajan D Gupta, a partner with a reputed law firm, Khaitan & Co, outlined three run-of-the-mill options and came up with an innovative one.
A branch of a foreign company has less legal formalities in setting up; a lawyer or a practising accountant can register the company name and other particulars. Companies selling 'services' are permitted to operate in India through a branch office. Indians cannot become partners in these ventures but can be employees or consultants. The foreign company must remit the full cost of establishing the operations and running costs to India. Later, running costs are paid from income and profits remitted abroad. Income is taxed at 41.82 per cent (including education cess of 2 per cent).
Partnership with an Indian requires a Partnership Deed setting out the terms and conditions of partnership including capital contribution, duties and responsibilities of the partners and how the partnership can be dissolved or exit route.
Foreigners are normally not permitted to hold more than 50 per cent shareholding. The partners share both profits and losses, as their liability is not limited. The taxable income of a partnership firm is at 33.66 per cent.
Engaging an independent consultant in India provides a viable take off during the initial period of operations. The foreign company employs a suitable person to act as a sub-contractor or consultant in India on a non-exclusive basis. The consultancy fees include a retainer ship and reimbursement of expenses incurred on behalf of the foreign company on travel, entertainment and sundries.
To top it, an agreed 'Success Fee' or a commission is payable for the business secured. The amount of both fees depends upon the business opportunities and potential in India for that particular sector and can be re-negotiated after the start-up period. All terms and conditions are agreed upon and included in a Consultancy Agreement signed before the start of the venture. The foreign company pays a Service Tax of 12.24 per cent on the consultancy fees but this is waived if it is proved that the consultancy services are 'exported' as per Indian service tax laws.
The foreign company has a major benefit: whatever is earned from India is income tax free in the absence of its business presence in India.
A Private Limited Company is suitable for large-scale enterprises in business, commerce, services and industry with a huge potential for growth. It enables new directors to be included on the board of directors to bring in additional venture capital or other inputs. The banks favour these companies for loans. However, the Indian Companies Act and the Registrar of Companies have laid down strict compliance procedures. These include procedures for Board Meetings, recording of minutes, accounting systems, filing of detailed annual returns and any changes in company organisation among other regulations.
In addition to this massive red tape, a major problem arises when the company is closed down. In India, this procedure can take up to 10 years as the high court has to give permission in many cases. In the case of foreign shareholding, the Reserve Bank of India has also to give its approval for remittances abroad. The income of a company in India is liable to 33.66 per cent income tax. In addition, the company has to pay 14.025 per cent tax on amount of dividend distributed by it. However, the dividends are then tax-free for shareholders.
Before a limited liability company is registered in partnership with Indians, the promoters agree and sign a Joint Venture Agreement. This agreement details the shareholding, capital contribution, duties and responsibilities of the directors in the conduct of business and how the company can be dissolved or Exit Route. Based on this agreement, a legally binding Memorandum of Association and Articles of Association for the proposed company is drawn up. After an approval is obtained for its name from the Registrar of Companies, it is incorporated or registered with the Registrar. All this takes a good two or three months.
Since foreign companies usually establish offices in rented premises, they need a permanent address in India. In many cases, these companies give the address of their corporate lawyers for registering their business. Of paramount importance in any business organisation, the Exit Route must be worked out and included in any agreement between partners, consultants and the company or directors.
Top rank lawyers do not come cheap anywhere including in India. Company or partnership registration can cost anything up to $1,000-1,500 while registering a Private Limited Company can cost anything up to $4,000 or more depending on the paid-up capital and other particulars. So depending on one's needs and investment, an NRI can select any one of the four options for entering the Indian market.
(A media consultant to a UN Agency, Kul Bhushan previously worked abroad as a newspaper editor and has travelled to over 55 countries. He lives in New Delhi and can be contacted at: firstname.lastname@example.org)