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June 16, 2020

How can a Non Resident start business in India and what are legal compliances?

by Rubina Dsouza in Income Tax

How can a Non Resident start business in India and what are legal compliances?

Why is India a preferred destination for foreign investment?

India is currently one of the fastest economy in the world. Foreign investors have been bullish on financial services, IT, pharma and FMCG. Private banks are preferred over public banks due to superior margin, asset quality resilience and higher capitalization. With manufacturing sector gathering momentum backed by skilled and cheap labour, consumption demand remains strong in the country making it an attractive investment destination.

What basic requirement is to be followed by a foreign national to enter India?

Foreign nationals intending to enter India are required to possess a valid passport issued in their country along with valid Indian visa.  

How can NRI’s Incorporate Entity in India?

NRIs and Foreign Nationals may choose to invest or start a:-

  1. Private Limited Company
  2. Public Limited Company

NRIs and Foreign Nationals are not allowed to invest or start a Proprietorship or Partnership or One Person Company in India. FDI in LLP requires prior approval from the Reserve Bank of India.

What would be an ideal option for investment / Startup for NRI’s?

The most ideal entity for NRIs and Foreign Nationals to invest or start a business in India would be a Private Limited Company, due to the following reasons:-

  1. Limited Company can incorporated by the Foreign promoter if the number of investors in the venture would be more than 7 and the company would have to raise equity funds from a number of shareholders. While, a Private limited company can be started with as less as two shareholders.
  2. Private limited companies are seen as particularly ideal for Non Resident Indians due to the nature of its legal and capital requirements.
  3. Compliances of a private limited company are much simpler compared to that of a Public limited company.

There is no requirement of prior approval from the Government or the Reserve Bank of India for directing foreign investments into a private limited company.

What is required to be a director by a foreign national?

1.Digital Signature

i. A digital signature of the directors needs to be created and registered since most forms are submitted electronically.

ii. Digital signatures are obtained after paying fees online and can be renewed after expiry of validity.

iii. To obtain a Digital Signature Certificate, the foreign national or NRI must submit a self-attested and notarized copy of his/her Passport and an address proof (Driver’s License, Utility Bill, Residency Card).

2. Director Identification Number (DIN)

i. To become a Director of an Indian Company, the person must first obtain a DIN after obtaining Digital Signature Certificate.

ii. DIN is a unique number allotted by the central government to a person appointed as a director in a company.

iii. It is obtained by applying under Form – DIR 3 pursuant to section 153 & 154 of the  Companies Act, 2013.

iv. The form is digitally signed and needs to be attested by a Company Secretary after payment of requisite fees.

What are the shareholding requirements to be followed?

Companies Act, 2013 requires that a Private Limited Company have a minimum of 2 shareholders and a maximum of 200 shareholders. Limited Company can be incorporated if the minimum number of investors is 7 while the maximum number of shareholders is unlimited.

What is the procedure for incorporation of a company by a foreign national?

The procedure for Incorporation of a Company with NRIs is similar to that of an incorporation of a private limited company with Indian Directors and Indian Shareholders. Notarization of foreign identity proof, address proof and other documents of foreign origin is to be complied with while incorporating a company with NRIs or Foreign Entities.

Are foreign nationals required to obtain a PAN before incorporating a company in India?

A company is a separate legal entity. Therefore, it needs to have its own Permanent Account Number (PAN) for the purposes of calculating Income tax liabilities. A Tax Deduction and Collection Account Number (TAN) number is used by companies that reduce TDS (Tax Deducted at Source) while making payments.

Can all the directors of a company incorporated in India be foreign nationals?

According to Companies Act 2013 there must be at least 1 Resident Director in the Board of an Indian Company. Resident director is defined as a citizen of India who has resided in India for at least 180 days in a calendar year.

Is there a minimum capital requirement for an NRI to start a company in India?

There is no minimum required share capital that an NRI is required to invest in a company in India.

What registration compliances should a NRI keep in mind while incorporating a business in India?

Once the business is registered, following activities need to be completed:

  1. Obtain Permanent Account Number (PAN), Tax Account Number (TAN)
  2. Open a Bank Account in desired local or MNC Bank
  3. Registration under the Goods and Service Tax Act
  4. Register under Shops & Establishment: Location based registration in few states

How are companies categorized for tax purposes in India?

For the purpose of calculation of taxes under Income tax act, the companies can be categorized as under:

  1. Domestic Company: This is a company which is registered under the Companies Act of India and also includes the company registered in the foreign countries having control and management wholly situated in India (includes private as well as public companies)
  2. Foreign Company: This Company is not registered under the Companies act of India and has control & management located outside India.

What are the tax rates applicable to a company in India?

For domestic companies (AY 2020-21):-

 Rates
Where its total turnover or gross receipt during the previous year 2019-20 does not exceed Rs. 400 crore25%
Any other domestic company30%

For foreign companies (AY 2020 – 21):-

 Rates
Royalty received from Government or an Indian concern or fees for rendering technical services where such agreement has, in either case, been approved by the Central Government50%
Any other income40%

Are TDS provisions applicable on payments to Directors?

  1. If the foreign national is employed in India, the employer is required to deduct TDS from the remuneration payable to him in accordance with Sec 192 of the Income Tax Act.
  2. In case any payment to non-resident other than remuneration in accordance with section 195, TDS of 10% has to be deducted.

What is the tax liability on dividends received by non-residents?

  1. In the case of dividends paid to non-resident shareholders, taxes are to be deducted at rates in force under Section 195 of the IT Act.
  2. The Finance Act provides for withholding tax rate of 20% (plus applicable surcharge and cess) for dividends paid to non-residents.
  3. However, where the non-resident shareholder is a resident of a jurisdiction with which India has entered into Double Taxation Avoidance Agreement (DTAA), and the non-resident is eligible to the benefit from the provisions of such DTAA, the withholding tax rate prescribed in the relevant DTAA for taxing dividend would be applicable.

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